<PAGE>
Prospectus supplement to prospectus dated June 28, 2000
$115,000,000
DELTA FUNDING HOME EQUITY LOAN TRUST 2000-4
Home Equity Loan Asset-Backed Certificates, Series 2000-4
DELTA FUNDING CORPORATION
Seller
COUNTRYWIDE HOME LOANS, INC.
Servicer
You should carefully consider the risk factors beginning on page S-7 in this
prospectus supplement.
The certificates are obligations only of the trust.
The mortgage loans are not insured or guaranteed by any governmental agency or
by any other person.
Certificates Offered
o Classes of asset backed certificates listed below
Assets
o Fixed and adjustable rate, first and second lien, subprime residential
mortgage loans
Credit Enhancement
o Excess interest and overcollateralization
o Subordination
o For the senior certificates only, a financial guaranty insurance policy
issued by
[LOGO]
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the attached prospectus is accurate or complete.
Making any contrary representation is a criminal offense.
<TABLE>
<CAPTION>
=================================================================================================================================
Initial Class Underwriting Proceeds
Certificate Balance Certificate Rate(1) Price to Public Discount to Seller
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A ...................... $ 98,600,000.00 7.06% 99.984375% 0.30000% 99.684375%
---------------------------------------------------------------------------------------------------------------------------------
Class IO ..................... Notional 9.25% (2) (2) (2)
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Class M-1 .................... $ 6,000,000.00 7.15% 96.421875% 0.50000% 95.921875%
---------------------------------------------------------------------------------------------------------------------------------
Class M-2 .................... $ 5,500,000.00 7.15% 92.765625% 0.63000% 92.135625%
---------------------------------------------------------------------------------------------------------------------------------
Class B ...................... $ 4,900,000.00 7.15% 79.984375% 0.80714% 79.177232%
---------------------------------------------------------------------------------------------------------------------------------
Total ....................... $115,000,000.00 $113,391,250.00 $400,000.00 $112,991,250.00
=================================================================================================================================
</TABLE>
(1) The certificate rates on the offered certificates, other than the class IO
certificates, are subject to an interest rate cap and will increase after
the optional termination date.
(2) The Class IO certificates will be offered by Greenwich Capital Markets,
Inc. in negotiated transactions at prices prevailing at the time. Proceeds
to the seller from the sale of the class IO certificates will be
approximately $6,168,902 before expenses. See "Underwriting" in this
prospectus supplement.
Subject to the satisfaction of specific conditions, the underwriters named
below will purchase the offered certificates from the seller. The offered
certificates will be issued in book-entry form only on or about December 14,
2000.
GREENWICH CAPITAL MARKETS, INC. COUNTRYWIDE SECURITIES CORPORATION
DECEMBER 13, 2000
<PAGE>
Important notice about information presented in this prospectus supplement
and the prospectus
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the prospectus, which provides general information, some of which may not
apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus supplement
differs from the related description in the prospectus, you should rely on the
information in this prospectus supplement.
Table of Contents
<TABLE>
<CAPTION>
Prospectus Supplement Prospectus
Page Page
---- ----
<S> <C> <C> <C>
Summary . . . . . . . . . . . . . . . . 0S-3 Incorporation of Certain Documents by
Risk Factors . . . . . . . . . . . . . 0S-7 Reference . . . . . . . . . . . . . 02
Delta Funding Corporation . . . . . . . S-13 The Seller . . . . . . . . . . . . . 03
Description of the Mortgage Loans . . . S-19 Description of the Securities . . . . 14
Prepayment and Yield Considerations . . S-33 The Trust Funds . . . . . . . . . . . 24
Description of the Certificates . . . . S-43 Enhancement . . . . . . . . . . . . . 32
The Certificate Insurer . . . . . . . . S-57 Servicing of Loans . . . . . . . . . 34
Countrywide Home Loans, Inc . . . . . . S-60 The Agreements . . . . . . . . . . . 43
The Pooling and Servicing Agreement . . S-61 Certain Legal Aspects of the Loans . 54
Use of Proceeds . . . . . . . . . . . . S-74 Use of Proceeds . . . . . . . . . . . 64
Federal Income Tax Considerations . . . S-74 Federal Income Tax Considerations . . 64
ERISA Considerations . . . . . . . . . S-78 State Tax Considerations . . . . . . 93
Legal Investment Considerations . . . . S-82 ERISA Considerations . . . . . . . . 94
Underwriting . . . . . . . . . . . . . S-82 Legal Investment . . . . . . . . . . 94
Experts . . . . . . . . . . . . . . . . S-83 Plan of Distribution . . . . . . . . 95
Legal Matters . . . . . . . . . . . . . S-83 Legal Matters . . . . . . . . . . . . 95
Ratings . . . . . . . . . . . . . . . . S-84
Annex I . . . . . . . . . . . . . . . I-1
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset-Backed Certificates, Series
2000-4 in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Home Equity Loan Asset-Backed Certificates, Series 2000-4
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Home Equity Loan Asset-Backed Certificates, Series 2000-4
will be required to deliver a prospectus supplement and prospectus until March
13, 2001.
S-2
<PAGE>
Summary
This section gives a brief summary of the information contained in this
prospectus supplement. The summary does not include all of the important
information about the offered certificates. We recommend that you review
carefully the more detailed information in this prospectus supplement and in
the prospectus.
Title of Certificates ............ Home Equity Loan Asset-Backed
Certificates, Series
2000-4.
Issuer ........................... Delta Funding Home Equity Loan Trust
2000-4.
Seller ........................... Delta Funding Corporation.
Servicer ......................... Countrywide Home Loans, Inc.
Trustee .......................... Wells Fargo Bank Minnesota, National
Association.
Custodian ........................ Bank One Trust Company, N.A.
Certificate Insurer .............. Financial Security Assurance Inc.
Cut-off date ..................... The close of business on December 1,
2000, except that the cut-off date for
any mortgage loan originated after
December 1, 2000 will be the date of
origination of that mortgage loan.
Closing date ..................... On or about December 14, 2000.
Distribution dates ............... The 15th day of each month or, if that
day is not a business day, the next
business day, beginning in January 2001.
Record dates ..................... The last business day of the month before
the month in which the applicable
distribution date occurs.
Final scheduled distribution dates The final scheduled distribution date for
each class of offered certificates is as
follows:
Final Scheduled
Class Distribution Date
----- ----------------
Class A February 2031
Class IO December 2003
Class M-1 February 2031
Class M-2 February 2031
Class B February 2031
S-3
<PAGE>
Designations
Each class of certificates will have different characteristics. Some of those
characteristics are reflected in the following general designations. These
designations are used in this prospectus supplement and the prospectus to
provide a better understanding to potential investors.
Book-Entry Certificates
All classes of offered certificates.
Notional Amount Certificates
Class IO certificates.
Senior Certificates
Offered certificates other than subordinate certificates.
Subordinate Certificates
Class M-1, class M-2 and class B certificates.
Offered Certificates
Ratings
The offered certificates will not be issued unless they receive the respective
ratings set forth below from Standard & Poor's Ratings Services, Moody's
Investors Service and Fitch, Inc.:
Standard &
Class Poor's Moody's Fitch
------------------------------ --------- ------- -----
A AAA Aaa AAA
IO AAA Aaa AAA
M-1 AA -- AA
M-2 A -- A
B BBB -- BBB
See "Ratings" in this prospectus supplement.
Certificate Rates
The interest rate for each class of offered certificates is set forth on the
cover page of, or described in, this prospectus supplement. Each interest
rate, other than the interest rate for the class IO certificates, is limited
by a maximum rate cap that will be determined based on the weighted average of
the interest rates, net of specified fees and expenses, on the mortgage loans.
The certificate rate on each class of offered certificates, other than the
class IO certificates, will increase after the optional termination date.
Interest Distributions
On each distribution date, each class of offered certificates will be entitled
to interest in an amount equal to
o the applicable certificate rate, multiplied by
o the applicable class principal balance or notional amount on the day
before that distribution date, multiplied by
o 1/12 minus
o the pro rata share of civil relief act interest shortfalls, plus
o any unpaid interest amounts from prior distribution dates, plus
o 30 days' interest on unpaid interest amounts at the applicable certificate
rate.
Interest Accrual Period
The calendar month preceding the month in which a distribution date occurs.
Interest Calculations
30/360 for all offered certificates.
Class Principal Balances
The initial class principal balances of the offered certificates are set forth
on the cover page of this prospectus supplement. The notional amount of the
class IO certificates on any distribution date will equal the lesser of
o the amount for that distribution date set forth under "Description of the
Certificates" in this prospectus supplement
or
o the aggregate principal balances of the mortgage loans at the close of
business on the first day of the month prior to the month of the
applicable distribution date.
Principal Distributions
The trustee will distribute principal of the classes of offered certificates
in the priority discussed under the caption "Description
S-4
<PAGE>
of the Certificates--Principal priorities" in this prospectus supplement.
Minimum Denominations
$25,000.
Form
Book-Entry.
SMMEA Eligibility
The offered certificates will not be mortgage related securities.
ERISA Eligibility
The offered certificates may be eligible for purchase by persons investing
assets of employee benefit plans or similar arrangements. See "ERISA
Considerations" in this prospectus supplement.
Other Certificates
The trust will issue senior class P certificates, subordinated class BIO
certificates and Residual certificates. The seller is not offering these
classes to the public pursuant to this prospectus supplement and the
prospectus. The seller is including information about the class BIO
certificates and the Residual certificates because they provide credit
enhancement to the offered certificates.
The Mortgage Loans
The statistic calculation mortgage loans.
Set forth below is selected information about the mortgage loans that existed
at the close of business on the statistic calculation date of December 1,
2000. On the closing date, additional mortgage loans may be delivered to the
trust.
Number of loans 1,115
Aggregate principal balance $75,461,058.87
Range of principal balances $5,881.77 to $299,932.02
Average principal balance $67,678.08
Range of interest rates 8.39% to 15.99%
Weighted average interest rate 12.481%
Range of CLTV 10.00% to 90.00%
Weighted average CLTV 70.21%
Range of original terms to maturity (months) 60 to 360
Weighted average original term to maturity
(months) 326.64
Range of remaining terms to maturity (months) 58 to 360
Weighted average remaining term to maturity
(months) 325.52
Range of loan ages (months) 0 to 3
Weighted average loan age (months) 1.12
Subject to prepayment penalties (as % of
principal balance) 75.42%
Adjustable Rate Mortgage Loans
Range of gross margins 4.29% to 8.74%
Weighted average gross margin 6.907%
Range of lifetime caps 17.44% to 22.54%
Weighted average lifetime cap 19.988%
3/27 loans (by principal balance) 100.00%
Weighted average periodic cap (first adjustment
date) 3.00%
Weighted average periodic cap (subsequent
adjustment dates) 1.00%
Subsequent Loans
On the closing date, the seller may deposit approximately $25,107,631 into a
pre-funding account. The trust will use this amount to buy mortgage loans from
the seller after the closing date.
Credit Enhancement
Credit enhancement refers to a mechanism that is intended to protect the
holders of specific classes of certificates against losses due to defaults by
the borrowers under the mortgage loans.
The offered certificates, other than the class B certificates, have the
benefit of two types of credit enhancement:
o the use of excess interest to cover losses and to create
overcollateralization
o subordination of distributions on the class or classes of certificates
with lower relative payment priorities
The class B certificates, which have the lowest relative payment priority,
have the benefit of only the first form of credit enhancement.
The senior certificates also will have the benefit of a financial guaranty
insurance policy issued by the certificate insurer. The financial guaranty
insurance policy will guarantee timely payment of interest and ultimate
payment of principal on the senior certificates.
S-5
<PAGE>
Optional Termination by the Servicer
The servicer may, at its option, terminate the trust on any distribution date
when the aggregate principal balance of the mortgage loans is less than 10% of
the sum of the aggregate principal balances of the mortgage loans delivered on
the closing date and the amount deposited in the Pre-Funding Account on that
date.
Federal Income Tax Considerations
The trust will make separate elections to treat segregated pools of its assets
as "real estate mortgage investment conduits," creating a tiered REMIC
structure. The offered certificates, excluding any rights to receive net rate
cap carryover, will be designated as "regular interests" in a REMIC and, will be
treated as debt instruments of a REMIC for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax Considerations"
in this prospectus supplement and in the prospectus.
S-6
<PAGE>
Risk Factors
An investment in the offered certificates involves significant risks.
Before you decide to invest in the offered certificates, we recommend that you
carefully consider the following risk factors. Unless otherwise specified, all
references to percentages and dollar amounts of mortgage loans refer to the
statistic calculation mortgage loans, which are the mortgage loans that
existed at the close of business on the statistic calculation date of December
1, 2000.
You may have difficulty selling your certificates
The offered certificates will not be listed on any securities exchange. As
a result, if you wish to sell your certificates, you will have to find a
purchaser that is willing to purchase your certificates. The underwriters
intend to make a secondary market for the offered certificates. The
underwriters may do so by offering to buy the offered certificates from
investors that wish to sell. However, the underwriters will not be obligated
to make offers to buy the offered certificates and may stop making offers at
any time. In addition, the prices offered, if any, may not reflect prices that
other potential purchasers, were they to be given the opportunity, would be
willing to pay. There have been times in the past where there have been very
few buyers of similar asset backed securities, and there may be similar times
in the future. As a result, you may not be able to sell your certificates when
you wish to do so or you may not be able to obtain the price you wish to
receive.
Certain features of the mortgage loans may result in losses or cash flow
shortfalls
There are a number of features of the mortgage loans that create risks of
loss, including the following:
o The borrowers have less than perfect credit and may be more likely to
default. The seller's underwriting standards are less restrictive
than those of Fannie Mae or Freddie Mac with respect to a
borrower's credit history and other factors. A derogatory credit
history or a lack of credit history will not necessarily prevent
the seller from making a loan but may reduce the size and the
loan-to-value ratio of the loan the seller will make. As a result
of these less restrictive standards, the trust may experience
higher rates of delinquencies, defaults and losses than if the
mortgage loans were underwritten in a more traditional manner.
o Newly originated mortgage loans may be more likely to default which may
cause losses. Defaults on mortgage loans tend to occur at higher
rates during the early years of the mortgage loans. Substantially
all of the mortgage loans will have been originated within 12
months prior to the sale to the trust. As a result, the trust may
experience higher rates of default than if the mortgage loans had
been outstanding for a longer period of time.
o Defaults on second lien mortgage loans may result in more severe losses.
Based on the cut-off date principal balances of the statistic
calculation mortgage loans, approximately 10.76% of the statistic
calculation mortgage loans are secured by second liens on the
related property. If a borrower on a mortgage loan secured by a
second lien defaults, the trust's rights to proceeds on
liquidation of the related property are subordinate to the rights
S-7
<PAGE>
of the holder of the first lien on the related property. There may
not be enough proceeds to pay both the first lien and the second
lien, and the trust would suffer a loss.
o Additional and subsequent mortgage loans may have characteristics that
differ from those of the statistic calculation mortgage loans
which may reduce your yield to maturity. Following the transfer of
the additional and subsequent mortgage loans to the trust, the
characteristics of the mortgage loans may differ from the
information presented in this prospectus supplement. The
characteristics that may differ include, among others, the
composition of the mortgage loans and of the borrowers of the
mortgage loans, the credit quality of the mortgage loans, the
distribution by interest rate, the distribution by principal
balance, the distribution by loan-to-value ratio and the
distribution by remaining term to stated maturity. We recommend
that you consider potential variances when making your investment
decision concerning the offered certificates.
o The concentration of mortgage loans in specific geographic areas may
increase the risk of loss. Economic conditions in the states where
borrowers reside may affect the delinquency, loss and foreclosure
experience of the trust with respect to the mortgage loans. Based
on the cut-off date principal balances of the statistic
calculation mortgage loans, approximately 27.76%, 10.07% and 9.87%
of the statistic calculation mortgage loans are secured by
properties in New York, Pennsylvania and New Jersey, respectively.
These states may suffer economic problems or reductions in market
values for residential properties that are not experienced in
other states. Because of the concentration of mortgage loans in
these states, those types of problems may have a greater effect on
the offered certificates than if borrowers and properties were
more spread out in different geographic areas.
Your yield to maturity may be reduced by prepayments and defaults
The pre-tax yield to maturity on your investment is uncertain and will
depend on a number of factors, including the following:
o The rate of return of principal is uncertain. The amount of distributions
of principal of the offered certificates and the time when those
distributions are received depend on the amount and the times at
which borrowers make principal payments on the mortgage loans.
Those principal payments may be regularly scheduled payments or
unscheduled payments resulting from prepayments or defaults of the
mortgage loans. The rate of prepayment may be affected by the
credit standings of the borrowers. If a borrower's credit standing
improves, that borrower may be able to refinance his existing loan
on more favorable terms. If a borrower's credit standing declines,
the borrower may not be able to refinance.
All of the adjustable rate statistic calculation mortgage loans
have fixed interest rates for three years and then adjust. Those
mortgage loans may
S-8
<PAGE>
have higher prepayments as they approach their first adjustment
dates because the borrowers may want to avoid periodic changes to
their monthly payments.
o Subsequent mortgage loan funding may result in prepayments. If the seller
is unable to originate or purchase, and deliver a sufficient
amount of eligible subsequent mortgage loans to the trust by
January 15, 2001, the excess funding amount will be distributed on
the first distribution date thereafter as a prepayment to the
owners of the class A certificates.
o You may be unable to reinvest distributions in comparable investments.
Asset backed securities, like the offered certificates, usually
produce more returns of principal to investors when market
interest rates fall below the interest rates on the mortgage loans
and produce less returns of principal when market interest rates
rise above the interest rates on the mortgage loans. If borrowers
refinance their mortgage loans as a result of lower interest
rates, you will receive an unanticipated payment of principal. As
a result, you are likely to receive more money to reinvest at a
time when other investments generally are producing a lower yield
than that on the offered certificates, and are likely to receive
less money to reinvest when other investments generally are
producing a higher yield than that on the offered certificates.
You will bear the risk that the timing and amount of distributions
on your offered certificates will prevent you from attaining your
desired yield.
o Limitations on certificate rates will affect your yield to maturity. The
rate at which interest accrues on each class of offered
certificates, other than the class IO certificates, is subject to
a rate cap. The rate cap for those offered certificates, is based
on the weighted average of the interest rates on the mortgage
loans, net of specified fees and expenses. If mortgage loans with
relatively higher loan rates prepay, the rate cap on the classes
of offered certificates will be lower than otherwise would be the
case.
o Owners of class IO certificates may not recover their initial
investments. An investment in the class IO certificates is risky
because the return of the investment depends solely on the
payments of interest by borrowers under the mortgage loans. If the
borrowers prepay their mortgage loans, no further interest
payments will be made. If borrowers prepay their mortgage loans
very fast, investors in the class IO certificates may not recover
their initial investments. In addition, the class IO certificates
are not entitled to any distributions after the 36th distribution
date.
S-9
<PAGE>
The subordinate certificates will absorb cash shortfalls before the senior
certificates
The subordinate certificates will not receive any distributions of interest
until the senior certificates receive their interest distributions and will
not receive any distributions of principal until the senior certificates
receive their principal distributions. If the available funds are insufficient
to make all of the required distributions on the offered certificates, one or
more classes of subordinate certificates will not receive all of their
distributions. In addition, losses due to defaults by borrowers, to the extent
not covered by the amount of overcollateralization and excess interest at that
time, will be allocated first to the subordinate certificates in the reverse
order of payment priority. Any allocation of a loss to a class of subordinate
certificates will reduce the amount of interest and, to the extent not
reimbursed from future excess interest, principal they will receive.
Distributions to the subordinate certificates are made in the following order:
to the class M-1 certificates, then to the class M-2 certificates and then to
the class B certificates, and losses are allocated to the subordinate
certificates in the reverse order, commencing with the class B certificates.
The class M-1 certificates receive distributions before, and are allocated
losses after, the other classes of subordinate certificates. Conversely, the
class B certificates receive distributions after, and are allocated losses
before, the other classes of subordinate certificates. As a result, the class
B certificates will be affected to a larger degree by any losses on the
mortgage loans.
The subordinate certificates are not covered by the financial guaranty
insurance policy.
The transfer of primary servicing may result in higher delinquencies and
defaults which may adversely affect the yield on your certificates
Countrywide Home Loans, Inc. will be the servicer under the pooling and
servicing agreement. However, Delta Funding Corporation will continue to
service the mortgage loans on an interim basis pending the transfer of primary
servicing obligations to Countrywide Home Loans, Inc. Although we expect the
transfer to be completed by February 1, 2001, we cannot assure you that it
will be completed by that date. All transfers of servicing involve the risk of
disruption in collections due to data input errors, misapplied or misdirected
payments, system incompatibilities and other reasons. As a result, the rate of
delinquencies and defaults are likely to increase at least for a period of
time. We cannot assure you as to the extent or duration of any disruptions
associated with the transfer of servicing or as to the resulting effects on
the yield on your certificates.
Environmental conditions affecting the mortgaged properties may result in
losses
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a
property may give rise to a lien on the property to assure the costs of clean-
up. In several states, this type of lien has priority over the lien of an
existing mortgage or owner's interest against real property. In addition,
under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, a lender may
be liable, as an owner or operator, for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks liability on
foreclosure of the mortgaged property.
S-10
<PAGE>
Violations of consumer protection laws may result in losses
Applicable state laws generally regulate interest rates and other charges
and require specific 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 mortgage loans.
The mortgage loans are also subject to federal laws, including:
(1) the federal Truth in Lending Act and Regulation Z promulgated under
the Truth in Lending Act, which require particular disclosures to the
borrowers regarding the terms of the mortgage loans;
(2) the Equal Credit Opportunity Act and Regulation B promulgated under
the Equal Credit Opportunity Act, 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;
(3) 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
(4) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
The seller will represent that none of the mortgage loans will be subject
to the Home Ownership and Equity Protection Act of 1994.
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 mortgage loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the trust, as owner of
the mortgage loans, to damages and administrative enforcement.
If payments on the mortgage loans are insufficient, you will incur a loss
All distributions on the offered certificates will be made from payments by
borrowers under the mortgage loans or, in the case of the senior certificates,
payments under the financial guaranty insurance policy. The trust has no other
assets to make distributions on the offered certificates. The mortgage loans
are not insured or guaranteed by any person.
The trust is the only person that is obligated to make distributions on the
offered certificates. The offered certificates are not insured by any
governmental agency.
Insolvency of the seller may cause losses
The seller intends that its transfer of the mortgage loans to the trust
will constitute a sale, and the seller and the trust will agree to treat each
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 a sale as a loan by the trust to the seller secured by a pledge
of the mortgage loans. If an attempt were to be successful, holders of the
offered
S-11
<PAGE>
certificates could receive a prepayment of their certificates. Any prepayment
could adversely affect the yield on the offered certificates. Even if an
attempt were to be unsuccessful, holders of the offered certificates could
experience delays in distributions which would adversely affect the yield on
the offered certificates.
Withdrawal or downgrading of initial ratings will reduce the prices for
certificates
A security rating is not a recommendation to buy, sell or hold securities.
Similar ratings on different types of securities do not necessarily mean the
same thing. We recommend that you analyze the significance of each rating
independently from any other rating. Any rating agency may change its rating
of the offered certificates after those offered certificates are issued if
that rating agency believes that circumstances have changed. Any subsequent
withdrawal or downgrade in rating will likely reduce the price that a
subsequent purchaser will be willing to pay for your certificates.
Legal actions are pending against Delta Funding Corporation
Because the nature of the seller's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the seller is subject to numerous claims and legal actions in
the ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to claims
and actions, and an adverse judgment in a claim or action may have a
significant adverse financial effect on the seller, the seller believes that
the aggregate amount of liabilities will not result in monetary damages which
in the aggregate would have a material adverse effect on the financial
condition or results of the seller.
Several class-action lawsuits have been filed against a number of consumer
finance companies alleging violations of various federal and state consumer
protection laws. The seller has been named in several lawsuits styled as class
actions and has entered into settlement agreements with various governmental
agencies following investigations of the seller's lending practices. See
"Delta Funding Corporation" in this prospectus supplement for a description of
these lawsuits and settlement agreements.
The offered certificates are not suitable investments for all investors
The offered certificates are not suitable investments for any investor that
requires a regular or predictable schedule of payments or payment on any
specific date. The offered certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax
and legal advisors, have the expertise to analyze the prepayment,
reinvestment, default and market risk, the tax consequences of an investment,
and the interaction of these factors.
S-12
<PAGE>
Delta Funding Corporation
The seller's lending practices have been the subject of several lawsuits
styled as class actions and of investigations by various regulatory agencies
including the Office of the Attorney General of the State of New York (the
"NYOAG"), the Banking Department of the State of New York (the "NYBD") and the
United States Department of Justice (the "DOJ"). The current status of these
actions are summarized below.
Consumer lawsuits
A. In or about November 1998, the seller received notice that it had been
named in a lawsuit filed in the United States District Court for the Eastern
District of New York. In December 1998, plaintiffs filed an amended complaint
alleging that the Seller had violated the Home Equity and Ownership Protection
Act ("HOEPA"), the Truth in Lending Act ("TILA") and New York State General
Business Law ss. 349. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory judgment permitting rescission, (c) unspecified
actual, statutory, treble and punitive damages (including attorneys' fees),
(d) certain injunctive relief, and (e) declaratory judgment declaring the loan
transactions void and unconscionable.
On December 7, 1998, plaintiff filed a motion seeking a temporary
restraining order and preliminary injunction, enjoining the seller from
conducting foreclosure sales on 11 properties. The district court judge ruled
that in order to consider such a motion, plaintiff must move to intervene on
behalf of these 11 borrowers. Thereafter, plaintiff moved to intervene on
behalf of 3 of these 11 borrowers and sought the injunctive relief on their
behalf. The seller opposed the motions. On December 14, 1998, the district
court judge granted the motion to intervene and on December 23, 1998, the
district court judge issued a preliminary injunction enjoining the seller from
proceeding with the foreclosure sales of the three intervenors' properties.
The seller has filed a motion for reconsideration of the December 23, 1998
order.
In January 1999, the seller filed an answer to plaintiff's first amended
complaint. In July 1999, plaintiffs were granted leave, on consent, to file a
second amended complaint. In August 1999, plaintiffs filed a second amended
complaint that, among other things, added additional parties but contained the
same causes of action alleged in the first amended complaint. In September
1999, the seller filed a motion to dismiss the complaint which was opposed by
plaintiffs and in June 2000 was granted in part and denied in part by the
Court. Also in September 1999, plaintiffs filed a motion for class
certification which was opposed by the seller in February 2000, and is now
fully briefed and filed pending hearing. In or about October 1999, plaintiffs
filed a motion seeking an order preventing the seller, its attorneys and/or
the NYBD from issuing notices to certain of the seller's borrowers, in
accordance with a settlement agreement entered into by and between the seller
and the NYBD. In or about October 1999 and November 1999, respectively, the
seller and the NYBD submitted opposition to plaintiffs' motion. In March 2000,
the court issued an order that permits the seller to issue an approved form of
notice. The seller believes that it has meritorious defenses and intends to
defend this suit, but cannot estimate with any certainty its ultimate legal or
financial liability, if any, with respect to the alleged claims.
B. In or about March, 1999, the seller received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York, New
York County, alleging
S-13
<PAGE>
that the seller had improperly charged certain borrowers processing fees. The
complaint seeks (1) certification of a class of plaintiffs, (2) an accounting,
and (3) unspecified compensatory and punitive damages (including attorneys'
fees), based upon alleged (a) unjust enrichment, (b) fraud, and (c) deceptive
trade practices. In April 1999, the seller filed an answer to plaintiff's
complaint. In September 1999, the seller filed a motion to dismiss the
complaint, which was opposed by plaintiffs and in February 2000, the court
denied the motion to dismiss. In April 1999, the seller filed a motion to
change venue and plaintiffs opposed the motion. In July 1999, the court denied
the motion to change venue. The seller appealed and in March 2000, the
appellate court granted the seller's appeal to change venue from New York
County to Nassau County. In August 1999, the plaintiffs filed a motion for
class certification, which the seller opposed in July 2000. In or about
September 2000, the court granted plaintiffs' motion for class certification.
The seller believes that it has meritorious defenses and intends to defend
this suit, but cannot estimate with any certainty its ultimate legal or
financial liability, if any, with respect to the alleged claims.
C. In or about July 1999, the seller received notice that it had been named
in a lawsuit filed in the United States District Court for the Western
District of New York, alleging that amounts collected and maintained by it in
certain borrowers' tax and insurance escrow accounts exceeded certain
statutory (RESPA) and/or contractual (the respective borrowers' mortgage
agreements) ceilings. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory relief finding that the seller's practices violate
applicable statutes and/or the mortgage agreements, (c) injunctive relief, and
(d) unspecified compensatory and punitive damages (including attorneys' fees).
In October 1999, the seller filed a motion to dismiss the complaint. In or
about November 1999, the case was transferred to the United States District
Court for the Northern District of Illinois. In February 2000, the plaintiff
opposed the seller's motion to dismiss. In March 2000, the court granted the
seller's motion to dismiss in part, and denied it in part. The seller believes
that it has meritorious defenses and intends to defend this suit, but cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims.
D. In or about April 2000, the seller received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York, Nassau
County, alleging that the seller has improperly charged and collected from
borrowers certain fees when they paid off their mortgage loans with the
seller. The complaint seeks (a) certification of a class of plaintiffs, (b)
declaratory relief finding that the payoff statements used include
unauthorized charges and are deceptive and unfair, (c) injunctive relief and
(d) unspecified compensatory, statutory and punitive damages (including legal
fees), based upon alleged violations of Real Property Law 274-a, unfair and
deceptive practices, money had and received and unjust enrichment, and
conversion. The seller answered the complaint in June 2000. In or about
September 2000, the plaintiffs filed a motion for class certification, which
the Seller anticipates opposing after class discovery is completed. The seller
believes that it has meritorious defenses and intends to defend this suit, but
cannot estimate with any certainty its ultimate legal or financial liability,
if any, with respect to the alleged claims.
S-14
<PAGE>
Regulatory actions
In or about August 1999, the NYOAG filed a lawsuit against the seller
alleging violations of (a) RESPA (by paying yield spread premiums), (b) HOEPA
and TILA, (c) ECOA, (d) New York Executive Law ss. 296-a, and (e) New York
Executive Law ss. 63(12). In September 1999, the seller and the NYOAG settled
the lawsuit, as part of a global settlement by and among the seller, the NYOAG
and the NYBD, evidenced by that certain (a) Remediation Agreement by and
between the Seller and the NYBD, dated as of September 17, 1999 and (b)
Stipulated Order on Consent by and among the seller, Delta Financial
Corporation and the NYOAG, dated as of September 17, 1999. As part of the
settlement, the seller has, among other things, implemented agreed upon
changes to its lending practices; is providing reduced loan payments
aggregating $7.25 million to certain borrowers identified by the NYBD; and
created a fund of approximately $4.75 million to be financed by the grant of
525,000 shares of Delta Financial Corporation's common stock valued at a
constant assumed price of $9.10 per share, which approximated book value. The
proceeds of the fund will be used, for, among other things, to pay borrowers
and to pay for a variety of consumer educational and counseling programs. As a
result, the NYOAG lawsuit has been dismissed against as the seller. The
Remediation Agreement and Stipulated Order on Consent supersede the seller's
previously announced settlements with the NYOAG and the NYBD. In March 2000,
the seller finalized a settlement agreement with the United States Department
of Justice, the Federal Trade Commission and the Department of Housing and
Urban Renewal, to complete the global settlement it had reached with the NYSBD
and NYOAG. The Federal agreement mandates some additional compliance efforts
for the seller, but it does not require any additional financial commitment.
Other information
In November 1999, Delta Financial Corporation received notice that it had
been named in a lawsuit filed in the United States District Court for the
Eastern District of New York, seeking certification as a class action and
alleging violations of the federal securities laws in connection with its
initial public offering in 1996 and its reports subsequently filed with the
Securities and Exchange Commission. The complaint alleges that the scope of
the violations alleged recently in the consumer lawsuits and regulatory
actions indicate a pervasive pattern of action and risk that should have been
more thoroughly disclosed to investors in its common stock. In May 2000, the
District Court consolidated this case and several other lawsuits that
purportedly contain the same or similar allegations and in August 2000,
plaintiffs filed their consolidated amended complaint. In October 2000, Delta
Financial Corporation filed a motion to dismiss the consolidated amended
complaint which plaintiffs opposed in November 2000. Delta Financial
Corporation believes that is has meritorious defenses and intends to defend
these suits, but has not answered yet and cannot estimate with any certainty
its ultimate legal or financial liability, if any, with respect to the alleged
claims.
On June 30, 2000, Standard and Poor's Ratings Service downgraded Delta
Financial Corporation's senior debt rating and long-term counterparty credit
rating from "B" to "B-", citing its concern over the uncertainty of Delta
Financial Corporation's ability to
S-15
<PAGE>
repay or refinance its 9 1/2% Senior Notes due 2004, given its view of Delta
Financial Corporation's current performance and the unreceptiveness of the
public debt market to sub-prime specialty mortgage companies.
In August 2000, Delta Financial Corporation announced an agreement to
restructure (the "Debt Restructuring") its outstanding $150 million aggregate
principal amount of 9 1/2% senior notes due 2004 (the "Senior Notes"). With the
consent of more than fifty percent of its senior note holders, a negative
covenant in the senior notes indenture that prevented Delta Financial
Corporation from encumbering, or otherwise obtaining financing against, any of
its residual assets has been modified. In consideration for the Senior Note
holders' consent to modify this restriction, Delta Financial Corporation has
agreed to offer current Senior Note holders the option of exchanging in an
exchange offering (the "Exchange Offer") their existing securities for new
senior notes (the "New Notes"), to be secured by at least $165 million of the
Delta Financial Corporation's residual assets. The New Notes will have the
same coupon, face amount, and maturity date as the Senior Notes. Note holders
of the New Notes will receive ten-year warrants to buy approximately 1.6
million shares, at an initial exercise price of $9.10 per share, subject to
upward or downward adjustment in certain circumstances. Delta Financial
Corporation expects that this Exchange Offer will be completed by December 31,
2000. All of the other terms of the New Notes will be substantially similar to
the terms of the Senior Notes.
In August 2000, the seller also announced that it was streamlining its
operations to improve efficiencies and increase profitability by reducing its
workforce, consolidating some of its offices and reducing the compensation of
its senior management and some of its general staff.
In August 2000, Moody's Investors Service downgraded Delta Financial
Corporation's senior debt rating from "B3" to "Caa2", citing its concern over
the uncertainty of Delta Financial Corporation's ability to repay or refinance
its 9 1/2% Senior Notes due 2004, unless Delta Financial Corporation obtains a
significant capital infusion.
In August 2000, Moody's Investors Service downgraded the Class B-1F and
Class B-lA certificates of the seller's 1997-3 securitization to "Ba3" from
"Baa3." Moody's Investors Service stated that the principal reason for the
downgrade is the failure of the deal to maintain its overcollateralization
targets and the consequent exposure of those classes to potential losses.
In August 2000, Fitch, Inc. downgraded Delta Financial Corporation's senior
debt rating and long-term counterparty credit rating from "B" to "CCC+",
citing its concern about Delta Financial Corporation's challenges to compete
as a niche player in the competitive subprime home equity market and that
Delta Financial Corporation will need to demonstrate that it can generate
positive operating cash flow on a consistent basis.
Delinquency and loss experience
All of the mortgage loans will have been originated by the seller. The
following table sets forth information relating to the delinquency and loss
experience of the seller for its servicing portfolio of mortgage loans
including mortgage loans serviced for others, for the periods indicated.
S-16
<PAGE>
The information in the table below has not been adjusted to eliminate the
effect of the significant growth in the size of the servicer'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 many of the mortgage
loans in the seller's mortgage loan portfolio are not fully seasoned, the
delinquency and loss information for 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.
Delta Funding Corporation's Historic Servicing Portfolio Information
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------- ----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Total Outstanding Principal Balance (end of period) ...................... $2,950,434,922 $3,631,830,267 $3,574,789,725
Average Outstandings(1) .................................................. $2,436,343,233 $3,362,377,138 $3,715,636,178
DELINQUENCY
30-59 Days:
Principal Balance ....................................................... $ 153,726,410 $ 208,301,639 $ 235,990,446
Percent of Delinquency by Dollar(2) ..................................... 5.2% 5.7% 6.6%
60-89 Days:
Principal Balance ....................................................... $ 50,034,005 $ 83,000,117 $ 106,973,806
Percent of Delinquency by Dollar(2) ..................................... 1.7% 2.3% 3.0%
90 Days or More:
Principal Balance ....................................................... $ 47,886,542 $ 56,435,361 $ 69,826,958
Percent of Delinquency by Dollar(2) ..................................... 1.6% 1.6% 2.0%
Total Delinquencies:
Principal Balance ....................................................... $ 251,646,956 $ 347,737,118 $ 412,791,211
Percent of Delinquency by Dollar(2) ..................................... 8.5% 9.6% 11.5%
FORECLOSURES
Principal Balance ....................................................... $ 145,678,781 $ 185,843,344 $ 207,029,423
Percent of Foreclosures by Dollar(2) .................................... 4.9% 5.1% 5.8%
REO
Principal Balance ....................................................... $ 18,811,007 $ 36,662,789 $ 51,421,274
Percent of REO by Dollar(2) ............................................. 0.6% 1.0% 1.4%
Gross Losses ............................................................. $ (10,324,682) $ (16,327,384) $ (19,447,170)
Recoveries ............................................................... $ 1,620,479 $ 1,605,618 $ 687,890
Net Losses on liquidated loans(3) ........................................ $ (8,704,203) $ (14,721,765) $ (18,759,280)
Percentage of Net Losses on liquidated loans
(based on Average Outstanding Principal Balance)(4) ..................... 0.36% 0.44% (0.67)%
</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.
(4) Annualized.
S-17
<PAGE>
The seller believes that it will continue to see a higher trend in Percent
of Delinquencies by Dollar and Percent of Losses by Dollar for the foreseeable
future primarily due to a combination of (a) the continued seasoning of its
servicing portfolio and (b) a continued reduction, on a relative basis in the
size of the increase in its servicing portfolio. This latter trend is due to
both a lower absolute dollar amount of loan originations and a lower absolute
dollar amount of its servicing portfolio due to the transfer of servicing for
this and the prior series 2000-2 and 2000-3 certificates.
While the above delinquency and foreclosure and loss experiences reflect
the seller's experiences for the periods indicated, there can be no assurance
that the delinquency and foreclosure and loss experiences on the mortgage
loans will be similar. Accordingly, this information should not be considered
to reflect the credit quality of the mortgage loans included in the trust, or
as a basis of assessing the likelihood, amount or severity of losses on the
mortgage loans. The statistical data in the table is based on all of the loans
in the seller's servicing portfolio. The mortgage loans in the trust may be
more recently originated than, and are likely to have other characteristics
which distinguish them from, the majority of the mortgage loans in the
seller's servicing portfolio.
Additional information regarding the seller's servicing portfolio is set
forth in the prospectus under the caption "The Seller--Delinquency and loss
experience."
S-18
<PAGE>
Description of the Mortgage Loans
General
The mortgage loans will include:
(a) the mortgage loans identified as of December 1, 2000 and described
in this prospectus supplement, called the statistic calculation mortgage
loans,
(b) additional closed-end fixed and adjustable rate home equity loans
that may be delivered on the closing date, referred to as the additional
mortgage loans, and together with the statistic calculation mortgage loans,
called the initial mortgage loans, and
(c) subsequent mortgage loans to be purchased by the trust from the
seller from time to time on or prior to January 15, 2001, called the
subsequent mortgage loans, and together with the initial mortgage loans,
called the mortgage loans.
Each mortgage loan will bear interest at a fixed rate or an adjustable rate
that is calculated on the "actuarial basis." The fixed rate mortgage loans are
secured by first or second liens, and the adjustable rate mortgage loans,
called ARMs, are secured by first liens, primarily on one- to four-family
residential properties, called the mortgaged properties.
The interest rate, also referred to as the loan rate, borne by each ARM is
subject to adjustment on the date set forth in the related promissory note,
each called a mortgage note, and at regular intervals thereafter, each
referred to as a change date, to equal the sum of (a) the applicable loan
index and (b) the number of basis points set forth in that mortgage note,
called 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.
For all of the statistic calculation mortgage loans that are ARMs, the loan
index is the London interbank offered rate for six-month United States dollar
deposits, 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 the loan index is determined is set forth in the
related mortgage note. All of the statistic calculation mortgage loans that
are ARMs have initial change dates that are 36 months after origination,
referred to as the 3/27 loans. The periodic cap for all of the ARMs,
subsequent to the first change date, is 1.00%. However, the periodic cap for
the initial change date for the 3/27 loans is 3.00%.
As of the cut-off date, substantially all of the statistic calculation
mortgage loans that are ARMs 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 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.
S-19
<PAGE>
Approximately 3.01%, by principal balance of the statistic calculation
mortgage loans have repair escrows that are being held by the seller. The
appraisals for these mortgage loans were based on the conditions of the
mortgaged properties without the repairs, that is, the appraisals were not
"subject to" appraisals. The repairs are typically completed within 30 to 60
days after the loan closes. The related mortgage loan documents give the
seller the right to apply the escrowed amounts to prepayment of the mortgage
loan if the repairs are not completed.
Approximately 75.42%, by principal balance of the statistic calculation
mortgage loans provided for payment by the mortgagor of a prepayment charge on
specific prepayments as provided in the related mortgage note.
Approximately 7.61%, by principal balance of the fixed rate mortgage loans
included in the statistic calculation mortgage loans provide that if the
borrower makes the first 12 payments on or before their due dates, beginning
in the thirteenth month the loan rate on the borrower's mortgage loan will be
reduced by 50 basis points (0.50%). If a borrower qualifies for the first rate
reduction, that borrower can qualify for a second reduction of 50 basis points
(0.50%) in the 25th month by making each of the 13th through 24th payments on
or before their due dates.
Credit scores
"Credit scores" are obtained by many lenders in connection with mortgage
loan applications to help assess a borrower's credit-worthiness. Credit scores
are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a borrower's credit
history at a single point, using objective information currently on file for
the borrower at a particular credit reporting organization. Information
utilized to create a credit score may include, among other things, payment
history, delinquencies on accounts, level of outstanding indebtedness, length
of credit history, types of credit, and bankruptcy experience. Credit scores
range from approximately 400 to approximately 800, with higher scores
indicating an individual with a more favorable credit history compared to an
individual with a lower score. However, a credit score purports only to be a
measurement of the relative degree of risk a borrower represents to a lender,
that is, a borrower with a higher score is statistically expected to be less
likely to default in payment than a borrower with a lower score. In addition,
it should be noted that credit scores were developed to indicate a level of
default probability over a two-year period, which does not correspond to the
life of a mortgage loan. Furthermore, credit scores were not developed
specifically for use in connection with mortgage loans, but for consumer loans
in general, and assess only the borrower's past credit history. Therefore, a
credit score does not take into consideration the differences between mortgage
loans and consumer loans generally or the specific characteristics of the
related mortgage loan including, for example, the LTV or CLTV, the collateral
for the mortgage loan, or the debt to income ratio. There can be no assurance
that the credit scores of the mortgagors will be an accurate predictor of the
likelihood of repayment of the related mortgage loans.
S-20
<PAGE>
Statistical information
Set forth below is approximate statistical information as of the cut-off
date (except as otherwise noted) regarding the statistic calculation mortgage
loans. On the closing date, additional mortgage loans may be delivered to the
trust. In addition, prior to the closing date, statistic calculation mortgage
loans may be removed and other mortgage loans may be substituted for the
removed loans. The seller believes that the information set forth in this
prospectus supplement with respect to the statistic calculation mortgage loans
is representative of the characteristics of the initial mortgage loans at the
closing date, although some characteristics of the initial mortgage loans may
vary. The sum of the percentage columns in the following tables may not equal
100% due to rounding.
As of the cut-off date, approximately 1.82%, of the statistic calculation
mortgage loans by principal balance, have payments which, as of November 30,
2000, are 30 to 59 days delinquent.
S-21
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Range of Cut-Off Date Statistic Calculation Statistic Calculation Statistic Calculation
Principal Balances Mortgage Loans Principal Balance Principal Balance
----------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
$ 0.01-$050,000.00 ................................ 534 $17,285,430.30 22.91%
$ 50,000.01-$100,000.00 ................................ 369 26,282,014.21 34.83
$100,000.01-$150,000.00 ................................ 138 17,034,570.17 22.57
$150,000.01-$200,000.00 ................................ 42 7,226,489.35 9.58
$200,000.01-$250,000.00 ................................ 21 4,646,110.99 6.16
$250,000.01-$300,000.00 ................................ 11 2,986,443.85 3.96
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
S-22
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Geographic Area Mortgage Loans Principal Balance Principal Balance
-------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Arizona ................................................ 2 $ 103,683.19 0.14%
Arkansas ............................................... 10 417,291.11 0.55
California ............................................. 2 94,089.72 0.12
Colorado ............................................... 4 276,372.74 0.37
Connecticut ............................................ 33 2,582,592.07 3.42
Delaware ............................................... 8 527,983.05 0.70
District of Columbia ................................... 4 333,478.53 0.44
Florida ................................................ 45 2,523,773.20 3.34
Georgia ................................................ 29 1,641,345.08 2.18
Illinois ............................................... 79 6,168,818.28 8.17
Indiana ................................................ 31 1,621,406.51 2.15
Kansas ................................................. 3 97,128.16 0.13
Kentucky ............................................... 5 250,015.92 0.33
Louisiana .............................................. 22 995,408.54 1.32
Maine .................................................. 3 177,047.24 0.23
Maryland ............................................... 39 2,044,924.49 2.71
Massachusetts .......................................... 29 2,728,846.45 3.62
Michigan ............................................... 42 1,689,170.31 2.24
Mississippi ............................................ 18 725,302.25 0.96
Missouri ............................................... 32 1,914,370.77 2.54
Nebraska ............................................... 1 53,990.48 0.07
New Hampshire .......................................... 5 364,927.23 0.48
New Jersey ............................................. 77 7,450,836.74 9.87
New York ............................................... 224 20,946,701.29 27.76
North Carolina ......................................... 41 2,857,608.74 3.79
Ohio ................................................... 108 5,883,249.52 7.80
Oklahoma ............................................... 1 25,000.00 0.03
Oregon ................................................. 1 74,683.45 0.10
Pennsylvania ........................................... 159 7,597,563.56 10.07
Rhode Island ........................................... 10 638,120.68 0.85
South Carolina ......................................... 7 324,466.13 0.43
Tennessee .............................................. 20 1,193,594.65 1.58
Vermont ................................................ 1 104,951.06 0.14
Virginia ............................................... 14 763,889.88 1.01
Washington ............................................. 1 35,000.00 0.05
West Virginia .......................................... 5 233,427.85 0.31
----- -------------- ------
Total ................................................. 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
---------------
(1) Determined by property address so designated in the related mortgage.
S-23
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
Range of Original Combined Number of Cut-Off Date % of Cut-Off Date
Loan-to-Value Ratios Statistic Calculation Statistic Calculation Statistic Calculation
------------------- Mortgage Loans Principal Balance Principal Balance
-------------------- -------------------- --------------------
<S> <C> <C> <C>
15.00% and less ........................................ 1 $ 13,000.00 0.02%
15.01% to 20.00%. ...................................... 1 19,917.02 0.03
20.01% to 25.00%. ...................................... 6 172,469.32 0.23
25.01% to 30.00%. ...................................... 13 489,307.71 0.65
30.01% to 35.00%. ...................................... 7 339,058.01 0.45
35.01% to 40.00%. ...................................... 24 993,590.46 1.32
40.01% to 45.00%. ...................................... 24 1,196,566.72 1.59
45.01% to 50.00%. ...................................... 55 3,210,964.85 4.26
50.01% to 55.00%. ...................................... 57 3,706,495.62 4.91
55.01% to 60.00%. ...................................... 104 5,231,053.59 6.93
60.01% to 65.00%. ...................................... 118 8,254,988.51 10.94
65.01% to 70.00%. ...................................... 182 13,126,127.19 17.39
70.01% to 75.00%. ...................................... 185 14,793,209.13 19.60
75.01% to 80.00%. ...................................... 207 13,922,405.88 18.45
80.01% to 85.00%. ...................................... 84 6,283,069.34 8.33
85.01% to 90.00%. ...................................... 47 3,708,835.52 4.91
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
---------------
(1) The original combined loan-to-value ratios, referred to as CLTVs, shown
above are equal, with respect to each statistic calculation mortgage
loan, to (x) the sum of (a) the original principal balance of the
mortgage loan at the date of origination plus (b) in the case of a second
lien mortgage loan, the remaining balance of the senior lien(s), if any,
at the date of origination of the mortgage loan (y) divided by the value
of the related mortgaged property, based upon the lesser of the appraisal
made at the time of origination of the mortgage loan or the purchase
price of the mortgaged property, where the proceeds are used to purchase
the mortgaged property. No assurance can be given that the values of
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 mortgage
loans together with, in the case of a second lien mortgage loan, 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-24
<PAGE>
CUT-OFF DATE LOAN RATES
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Range of Cut-Off Date Statistic Calculation Statistic Calculation Statistic Calculation
Loan Rates Mortgage Loans Principal Balance Principal Balance
--------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
8.001%- 8.500% ........................................ 1 $ 96,000.00 0.13%
8.501%- 9.000% ........................................ 5 334,321.00 0.44
9.001%- 9.500% ........................................ 11 1,201,866.58 1.59
9.501%-10.000% ........................................ 28 2,379,557.08 3.15
10.001%-10.500% ........................................ 25 2,108,944.07 2.79
10.501%-11.000% ........................................ 73 5,186,644.26 6.87
11.001%-11.500% ........................................ 79 5,462,994.22 7.24
11.501%-12.000% ........................................ 155 11,396,146.93 15.10
12.001%-12.500% ........................................ 128 8,379,931.16 11.10
12.501%-13.000% ........................................ 184 12,725,498.74 16.86
13.001%-13.500% ........................................ 114 7,735,390.84 10.25
13.501%-14.000% ........................................ 128 8,758,672.03 11.61
14.001%-14.500% ........................................ 99 5,695,536.10 7.55
14.501%-15.000% ........................................ 72 3,519,912.89 4.66
15.001%-15.500% ........................................ 7 231,145.04 0.31
15.501%-16.000% ........................................ 6 248,497.93 0.33
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
As of the cut-off date, the weighted average current loan rate of the mortgage
loans was approximately 12.481% per annum.
S-25
<PAGE>
ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Range of Original Terms Statistic Calculation Statistic Calculation Statistic Calculation
to Stated Maturity (in months) Mortgage Loans Principal Balance Principal Balance
----------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
60- 90 ................................................ 6 $ 169,554.99 0.22%
91-150 ................................................ 48 2,026,126.31 2.68
151-210 ................................................ 164 8,141,018.09 10.79
211-270 ................................................ 60 3,472,666.40 4.60
271-330 ................................................ 18 1,486,644.36 1.97
331-360 ................................................ 819 60,165,048.72 79.73
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Range of Remaining Months Statistic Calculation Statistic Calculation Statistic Calculation
to Stated Maturity Mortgage Loans Principal Balance Principal Balance
----------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
58- 90 ................................................ 6 $ 169,554.99 0.22%
91-150 ................................................ 48 2,026,126.31 2.68
151-210 ................................................ 164 8,141,018.09 10.79
211-270 ................................................ 60 3,472,666.40 4.60
271-330 ................................................ 18 1,486,644.36 1.97
331-360 ................................................ 819 60,165,048.72 79.73
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Range of Months Statistic Calculation Statistic Calculation Statistic Calculation
Since Origination Mortgage Loans Principal Balance Principal Balance
---------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
less than 0 ............................................ 266 $16,995,006.01 22.52%
1-3 ................................................... 849 58,466,052.86 77.48
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
S-26
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Property Type Mortgage Loans Principal Balance Principal Balance
------------ -------------------- -------------------- --------------------
<S> <C> <C> <C>
Single Family .......................................... 812 $48,735,340.82 64.58%
Two-Four Family ........................................ 135 9,947,356.42 13.18
Mixed Use .............................................. 73 7,832,224.50 10.38
Five-Eight Family ...................................... 62 6,790,517.13 9.00
Condominium ............................................ 33 2,155,620.00 2.86
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
DOCUMENTATION PROGRAM
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Documentation Program Mortgage Loans Principal Balance Principal Balance
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Full Documentation ..................................... 768 $49,871,328.40 66.09%
No Income Documentation ................................ 202 16,533,901.10 21.91
Limited Documentation .................................. 124 7,487,812.14 9.92
Stated Income Documentation ............................ 21 1,568,017.23 2.08
----- -------------- ------
Total:............................................... 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
OCCUPANCY TYPE(1)
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Occupancy Type Mortgage Loans Principal Balance Principal Balance
------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Owner Occupied ......................................... 890 $58,338,215.09 77.31%
Non-Owner Occupied ..................................... 225 17,122,843.78 22.69
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
(1) Based upon representations made by the borrowers at the time of
origination of such mortgage loans.
S-27
<PAGE>
CREDIT GRADE
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Credit Grade Mortgage Loans Principal Balance Principal Balance
----------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
A ...................................................... 537 $42,387,144.97 56.17%
B ...................................................... 202 12,526,728.92 16.60
C ...................................................... 214 12,269,712.54 16.26
D ...................................................... 162 8,277,472.44 10.97
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
CREDIT SCORES
<TABLE>
<CAPTION>
Number of Cut-Off Date % of Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Range of Credit Scores Mortgage Loans Principal Balance Principal Balance
--------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Not Available .......................................... 80 $ 3,306,151.83 4.38%
351-400 ................................................ 1 36,495.19 0.05
401-450 ................................................ 21 1,337,847.42 1.77
451-500 ................................................ 154 9,050,562.51 11.99
501-550 ................................................ 293 18,744,101.32 24.84
551-600 ................................................ 269 18,653,842.78 24.72
601-650 ................................................ 164 12,675,740.55 16.80
651-700 ................................................ 80 6,699,025.11 8.88
701-750 ................................................ 46 4,005,945.92 5.31
751 and greater ........................................ 7 951,346.24 1.26
----- -------------- ------
Total................................................ 1,115 $75,461,058.87 100.00%
===== ============== ======
</TABLE>
S-28
<PAGE>
GROSS MARGIN--ARMs
<TABLE>
<CAPTION>
Number of Cut-Off Date % of ARMs Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Range of Gross Margins Mortgage Loans Principal Balance Principal Balance
--------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
4.500% or less ........................................ 1 $ 93,564.15 1.67%
4.501%-5.000% ......................................... 1 69,971.82 1.25
5.001%-5.500% ......................................... 4 270,357.17 4.83
5.501%-6.000% ......................................... 7 619,140.56 11.07
6.001%-6.500% ......................................... 11 1,080,138.56 19.31
6.501%-7.000% ......................................... 7 579,128.24 10.35
7.001%-7.500% ......................................... 25 1,382,529.32 24.71
7.501%-8.000% ......................................... 24 990,173.69 17.70
8.001%-8.500% ......................................... 4 216,669.04 3.87
8.501%-9.000% ......................................... 4 293,348.98 5.24
-- ------------- ------
Total............................................... 88 $5,595,021.53 100.00%
== ============= ======
</TABLE>
LIFETIME CAP--ARMs
<TABLE>
<CAPTION>
Number of Cut-Off Date % of ARMs Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Range of Lifetime Caps Mortgage Loans Principal Balance Principal Balance
--------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
17.500% or less ....................................... 1 $ 69,971.82 1.25%
17.501%-18.000% ....................................... 4 468,732.46 8.38
18.001%-18.500% ....................................... 5 399,294.00 7.14
18.501%-19.000% ....................................... 8 806,133.50 14.41
19.001%-19.500% ....................................... 5 375,579.36 6.71
19.501%-20.000% ....................................... 10 743,067.07 13.28
20.001%-20.500% ....................................... 5 221,922.40 3.97
20.501%-21.000% ....................................... 16 844,351.08 15.09
21.001%-21.500% ....................................... 19 938,412.84 16.77
21.501%-22.000% ....................................... 13 650,221.20 11.62
22.001%-22.500% ....................................... 1 45,843.88 0.82
22.501%-23.000% ....................................... 1 31,491.92 0.56
-- ------------- ------
Total............................................... 88 $5,595,021.53 100.00%
== ============= ======
</TABLE>
S-29
<PAGE>
LIFETIME FLOOR--ARMs
<TABLE>
<CAPTION>
Number of Cut-Off Date % of ARMs Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Range of Lifetime Floors Mortgage Loans Principal Balance Principal Balance
----------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
10.500% or less ....................................... 1 $ 69,971.82 1.25%
10.501%-11.000% ....................................... 4 468,732.46 8.38
11.001%-11.500% ....................................... 5 399,294.00 7.14
11.501%-12.000% ....................................... 8 806,133.50 14.41
12.001%-12.500% ....................................... 5 375,579.36 6.71
12.501%-13.000% ....................................... 10 743,067.07 13.28
13.001%-13.500% ....................................... 5 221,922.40 3.97
13.501%-14.000% ....................................... 16 844,351.08 15.09
14.001%-14.500% ....................................... 19 938,412.84 16.77
14.501%-15.000% ....................................... 13 650,221.20 11.62
15.001%-15.500% ....................................... 1 45,843.88 0.82
15.501%-16.000% ....................................... 1 31,491.92 0.56
-- ------------- ------
Total............................................... 88 $5,595,021.53 100.00%
== ============= ======
</TABLE>
MONTH OF NEXT CHANGE DATE--ARMs
<TABLE>
<CAPTION>
Number of Cut-Off Date % of ARMs Cut-Off Date
Statistic Calculation Statistic Calculation Statistic Calculation
Month of Next Change Date Mortgage Loans Principal Balance Principal Balance
------------------------ -------------------- -------------------- ---------------------
<S> <C> <C> <C>
September 2003 ........................................ 39 $2,322,026.66 41.50%
October 2003 .......................................... 44 2,857,691.35 51.08
November 2003 ......................................... 5 415,303.52 7.42
-- ------------- ------
Total............................................... 88 $5,595,021.53 100.00%
== ============= ======
</TABLE>
As of the cut-off date, the weighted average number of months to the next
change date for the 3/27 loans was 35 months.
S-30
<PAGE>
Conveyance of subsequent mortgage loans
On the closing date, cash in an amount of approximately $25,107,631 called
the pre-funded amount, may be deposited into a segregated account maintained
with the trustee on behalf of the trust, called the pre-funding account. The
maximum amount of subsequent mortgage loans to be transferred to the trust
that have loan rates which are fixed or adjustable is approximately
$20,774,762 and $4,332,869, respectively, each called an original pre-funded
amount. Amounts on deposit in the pre-funding account will be withdrawn to
purchase subsequent mortgage loans from the seller during the funding period
from the closing date until the earliest to occur of
(1) the date on which the amount on deposit in the pre-funding account is
less than $100,000,
(2) the date on which an event of default occurs under the pooling and
servicing agreement or
(3) the close of business on January 15, 2001.
The purchase price for the subsequent mortgage loans will equal the
outstanding principal balances of those mortgage loans 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 trust. 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 is subject to the following requirements in
addition to other requirements set forth in the pooling and servicing
agreement:
o the subsequent mortgage loan may not be 30 or more days contractually
delinquent as of the related cut-off date
o the remaining term to stated maturity of the subsequent mortgage loan will
not exceed 30 years for fully amortizing loans or 15 years for fixed rate
balloon loans
o the subsequent mortgage loan will be secured by a mortgage in a first lien
position for ARMs or a first or second lien position for fixed rate
mortgage loans
o the subsequent mortgage loan will not have a loan rate less than 8.40%
o the subsequent mortgage loans will not be subject to the Home Ownership
and Equity Protection Act of 1994
o the addition of the subsequent mortgage loans will not result in the
withdrawal or downgrading of the ratings assigned to the offered
certificates without regard to the financial guaranty insurance policy.
S-31
<PAGE>
Following the addition of the additional and the subsequent mortgage loans,
the mortgage loans in the trust will have the following characteristics:
Weighted Average Loan Rate ....... At least 12.32%
Weighted Average Remaining Term to
Stated Maturity ................. At least 320 months
Weighted Average Original Combined
Loan-to-Value Ratio ............. Not more than 72%
Weighted Average Credit
Score (FICO) ................... At least 570
Balloon Loans .................... Not more than 1%
Principal Balance ................ Not more than $500,000
State concentration .............. Not more than 30%
Zip code concentration ........... Not more than 2%
Investor properties .............. Not more than 24%
Second liens ..................... Not more than 10%
C credit grade borrowers ......... Not more than 18%
D credit grade borrowers ......... Not more than 13%
S-32
<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 primarily to the rate and timing
of payments of principal on the mortgage loans. 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
purchases by the servicer. The mortgage loans may be prepaid by the mortgagors
at any time. However, a majority of the mortgage loans are subject to a
prepayment charge.
The certificate rates
The certificate rate for each class of offered certificates, other than the
class IO certificates, is subject to the available funds cap. The available
funds cap on any distribution date is determined, in part, by reference to the
weighted average loan rate of the mortgage loans minus the expense fee rate,
which equals the net loan rate, in effect at the beginning of the related due
period. The expense fee rate is 0.71% per annum. If mortgage loans bearing
higher loan rates were to prepay at rates faster than mortgage loans with
lower loan rates, the available funds cap would be lower than otherwise would
be the case.
The yield to investors in the certificates also will be sensitive to, among
other things, the levels of the loan index on the ARMs. All of the statistic
calculation mortgage loans that are ARMs are 3/27 loans which will bear
interest at fixed loan rates for 36 months after origination of the mortgage
loans. The additional mortgage loans and subsequent mortgage loans that are
ARMs will be either 3/27 loans or 2/28 loans--that is ARMs that bear interest
at a fixed loan rate for 24 months after the origination date. Although each
of the ARMs bears interest at an adjustable rate, this 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 the caps. In this event, the related loan rate
will be less than would have been the case in the absence of the 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. 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" in this prospectus supplement. Although the holders of the
offered certificates, other than the class IO certificates, will be entitled
to receive the related net rate carryover to the extent funds are available
for that purpose as described and in the priority set forth in this prospectus
supplement, there is no assurance that sufficient funds will be available. The
financial guaranty insurance policy does not cover, and the ratings on the
certificates do not address the likelihood of, the payment of any net rate
carryover.
Subordinate certificates
The subordinate certificates provide credit enhancement for the senior
certificates and may absorb losses on the mortgage loans. The weighted average
lives of, and the yields to
S-33
<PAGE>
maturity on, the subordinate certificates, in reverse order of their relative
payment priorities, will be progressively more sensitive to the rate and
timing of mortgagor defaults and the severity of ensuing losses on the
mortgage loans. If the actual rate and severity of losses on the mortgage
loans is higher than those assumed by a holder of a subordinate certificate,
the actual yield to maturity on the holder's certificate may be lower than the
yield expected by the holder based on that assumption. Realized losses on the
mortgage loans will reduce the class principal balance of the class of
subordinate certificates then outstanding with the lowest relative payment
priority if and to the extent that the aggregate of the class principal
balances of all classes of certificates, following all distributions on a
distribution date, exceeds the pool balance. As a result of these reductions,
less interest will accrue on the 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 the net
proceeds are less than the unpaid principal balance of the liquidated mortgage
loan, the pool balance will decline more than the aggregate class principal
balance of the offered certificates, thus reducing the overcollateralization
amount. If this difference is not covered by the overcollateralization amount
or the application of excess interest, the class of subordinate certificates
then outstanding with the lowest relative payment priority will bear the loss.
In addition, the subordinate certificates will not be entitled to any
principal distributions prior to the stepdown date or during the continuation
of a trigger event, unless all of the certificates with a higher relative
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 may bear a disproportionate
percentage of the realized losses on the mortgage loans.
For all purposes, the class B certificates will have the lowest payment
priority of any class of subordinate certificates.
The subordinate certificates are not covered by the financial guaranty
insurance policy.
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 in this prospectus supplement. 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 in this prospectus
supplement, of the mortgage loans to a greater degree than holders of the
other classes of offered certificates. However, except in the case of very
rapid prepayment rates, the notional amount will decline in accordance with a
pre-determined schedule. Thus, the yield sensitivity of the notional amount
certificates is likely to be more stable than if the notional amount were
calculated based on the amortization of the underlying mortgage loans
directly. However, there can be no assurance that this will be the case.
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
S-34
<PAGE>
remaining mortgage loans in connection with the termination of the trust, in
each case as described in this prospectus supplement, will result in
distributions on the offered certificates then entitled to distributions of
principal which would otherwise be distributed over the remaining terms of the
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 the rate or the rate of principal prepayments. The extent to which
the yield to maturity of a class of offered certificates may vary from the
anticipated yield will depend upon the degree to which a certificate of a
class is purchased at a discount or premium, and the degree to which the
timing of payments on that certificate is sensitive to prepayments,
liquidations and purchases of the mortgage loans.
Holders of the offered certificates should consider, in the case of any
certificates purchased at a discount, and particularly the subordinate
certificates, the risk that a slower than anticipated rate of principal
payments on the mortgage loans could result in an actual yield that is lower
than the anticipated yield and, in the case of any offered certificates
purchased at a premium, the risk that a faster than anticipated rate of
principal payments on the mortgage loans could result in an actual yield that
is lower than the anticipated yield. The timing of losses on the mortgage
loans 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.
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, they 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 these
provisions, unless 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.
The rate of prepayment on fixed rate mortgage loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk
level. When the market interest rate is below the applicable loan rate,
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.
S-35
<PAGE>
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 these 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 will result in acceleration of the offered
certificates then entitled to principal distributions, relative to the
amortization of the mortgage loans, particularly in the early months of the
transaction. This acceleration feature creates overcollateralization which
equals the excess of the pool principal balance over the aggregate class
principal balance of the certificates. Once the required level of
overcollateralization 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"
in this prospectus supplement. The final scheduled distribution date for the
notional amount certificates is the 36th distribution date. The final
scheduled distribution date for the class A, class M-1, class M-2 and class B
certificates is the distribution date immediately following the month of the
last due date of the latest maturing statistic calculation mortgage loan plus
one month. It is expected that the last actual distribution date for each
class of offered certificates will occur significantly earlier than the final
scheduled distribution dates but the final distribution date could occur later
than the applicable final scheduled distribution date.
Payment delay feature
The effective yield to the certificateholders of each class of offered
certificates will be lower than the yield otherwise produced by the
certificate rate for each class and the purchase price of these certificates
because distributions will not be payable to the certificateholders until the
15th day of the month following the month of accrual, without any additional
distribution of interest or earnings on that certificate in respect of the
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 certificates will receive an
additional distribution allocable to principal in an amount equal to the
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.
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
S-36
<PAGE>
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 the 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 is
called the prepayment assumption and 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 the mortgage loans. With respect to the fixed
rate mortgage loans, a 100% prepayment assumption assumes a constant
prepayment rate, referred to as a CPR, of 4% per annum of the outstanding
principal balance of the fixed rate mortgage loans in the first month of the
life of such mortgage loans and an additional amount of approximately
1.454545%, precisely 16/11 percent per annum, in each month thereafter until
the twelfth month; beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, a constant prepayment rate of 20% per
annum each month is assumed. With respect to the ARMs, a 100% prepayment
assumption assumes a constant prepayment rate of 4% per annum of the
outstanding principal balance of the ARMs in the first month of the life of
such mortgage loans and an additional amount of approximately 1.068966%,
precisely 31/29 percent per annum, in each month thereafter until the 30th
month; beginning in the 30th month and in each month thereafter during the
life of the mortgage loans, a constant prepayment rate of 35% per annum each
month is assumed. As used in the table below, 50% prepayment assumption
assumes prepayment rates equal to 50% of the applicable prepayment assumption.
Correspondingly, 150% prepayment assumption assumes prepayment rates equal to
150% of the applicable prepayment assumption, and so forth. Neither prepayment
assumption purports 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 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.
The tables set forth under the heading "--Decrement tables" reflect various
combinations of the prepayment assumptions for the fixed rate mortgage loans
and the adjustable rate mortgage loans. For purposes of the Decrement tables,
the following prepayment scenarios were used:
<TABLE>
<CAPTION>
Prepayment Scenarios
----------------------------------------------------
Type of Loans I II III IV V VI VII VIII
------------ - -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate mortgage loans .................... 0% 50% 75% 100% 115% 150% 175% 200%
Adjustable rate mortgage loans ............... 0% 35% 50% 75% 100% 125% 150% 200%
</TABLE>
S-37
<PAGE>
Structuring assumptions
For the purposes of the tables below, it is assumed that:
(1) the mortgage loans consist of pools of loans with the level-pay
characteristics as set forth below,
(2) the amount of interest accrued on the mortgage loans is reduced by
amounts sufficient to pay the trustee fee and servicing fee,
(3) the closing date is December 14, 2000,
(4) the settlement date is December 18, 2000
(5) distributions on the offered certificates are made on the 15th 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 in this prospectus supplement,
(6) 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 on January 1, 2001,
(7) all prepayments are prepayments in full received on the last day of
each prepayment period commencing in the calendar month following delivery
of the related mortgage loans with 30 days of accrued interest,
(8) the mortgage loans prepay in accordance with the applicable
prepayment scenario,
(9) the optional termination is not exercised except in the calculation
of weighted average life to call,
(10) each class of offered certificates has the respective certificate
rate and initial class principal balance or notional amount as set forth in
this prospectus supplement,
(11) the overcollateralization levels are set initially as specified in
this prospectus supplement, and thereafter decrease in accordance with the
provisions specified in the agreement,
(12) the loan index is 6.58125% on each change date,
(13) the maximum amount of subsequent mortgage loans are included in the
trust by the first distribution date,
(14) there is a deposit to the initial interest coverage account of
$235,000, and no reinvestment income was assumed,
(15) all of the ARMs have change dates every six months after their
initial change dates,
(16) fixed rate mortgage group numbers 9, 10, 11, 12, 13, 14, 15 and 16,
which are mortgage loans that can qualify for a loan rate reduction pursuant
to "Description of the Mortgage Loans," do qualify for such loan rate
reduction, and
(17) the premium is determined as provided in the pooling and servicing
agreement.
The foregoing assumptions are referred to in this prospectus supplement
collectively as the structuring assumptions.
S-38
<PAGE>
Fixed Rate Mortgage Loans
<TABLE>
<CAPTION>
Mortgage Original
-------- Term to Remaining Term Original
Group Principal Loan Maturity to Maturity Amortization
Number Balance ($) Rate (%) (months) (months) Term (months)
<S> <C> <C> <C> <C> <C>
--------------------------- -------------- -------- -------- ------------- ------------
Level Pay 01 .................... $ 2,246,868.75 11.12604% 115 114 115
Level Pay 02 .................... 7,872,123.06 11.69386 181 180 181
Level Pay 03 .................... 3,308,376.81 11.69231 245 244 245
Level Pay 04 .................... 51,122,289.47 12.50250 359 357 359
Level Pay 05 .................... 896,739.06 11.12604 115 115 115
Level Pay 06 .................... 3,141,812.44 11.69386 181 181 181
Level Pay 07 .................... 1,320,393.41 11.69231 245 245 245
Level Pay 08 .................... 20,403,218.29 12.50250 359 359 359
Level Pay 09 .................... 39,525.00 13.34000 120 120 120
Level Pay 10 .................... 296,498.07 14.14355 180 179 180
Level Pay 11 .................... 314,895.32 14.15892 240 238 240
Level Pay 12 .................... 4,665,460.86 13.95340 359 358 359
Level Pay 13 .................... 15,774.67 13.34000 120 120 120
Level Pay 14 .................... 118,334.19 14.14355 180 180 180
Level Pay 15 .................... 125,676.65 14.15892 240 240 240
Level Pay 16 .................... 1,862,013.95 13.95340 359 359 359
--------------
Total ........................... $ 97,750,000
==============
</TABLE>
Adjustable Rate Mortgage Loans
<TABLE>
<CAPTION>
Remaining
Mortgage Original Term Original Gross
Group Term to to Amortization Coupon
Number Principal Loan Maturity Maturity Term Gross Lifetime Life
------ Balance ($) Rate (%) (months) (months) (months) Margin (%) Cap (%) Floor (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
----------------- ------------- -------- -------- --------- ------------ --------- -------- --------
Level Pay 17.......... $2,322,026.66 12.92280% 360 358 360 6.89483% 19.92280% 12.92280%
Level Pay 18.......... 3,272,994.87 13.03439 360 359 360 6.91576 20.03439 13.03439
Level Pay 19.......... 4,837,009.22 12.92280 360 360 360 6.89483 19.92280 12.92280
Level Pay 20.......... 6,817,969.25 13.03439 360 360 360 6.91576 20.03439 13.03439
-------------
Total ................ $ 17,250,000
=============
<CAPTION>
Number of Periodic Periodic
Mortgage Months to Rate Rate Cap
Group Next Cap (First (Subsequent
Number Change Change Change
------ Date Date) (%) Dates) (%)
<S> <C> <C> <C>
--------------------------------------- -------- --------- -----------
Level Pay 17................................ 34 3.00000% 1.00000%
Level Pay 18................................ 35 3.00000 1.00000
Level Pay 19................................ 36 3.00000 1.00000
Level Pay 20................................ 36 3.00000 1.00000
Total ......................................
</TABLE>
S-39
<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, other than the class IO certificates, that would be
outstanding after each of the dates shown under the various prepayment
scenarios 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 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-40
<PAGE>
Percent of Initial Class Principal Balance Outstanding
at the Following Prepayment Scenarios(1)
<TABLE>
<CAPTION>
Class A Class M-1
------------------------------------------------------------ ---------------------
I II III IV V VI VII VIII I II III
----- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
----------------
Initial Percent ........................ 100 100 100 100 100 100 100 100 100 100 100
December 15, 2001 ...................... 97 90 86 83 80 75 72 68 100 100 100
December 15, 2002 ...................... 96 78 70 62 56 46 39 31 100 100 100
December 15, 2003 ...................... 94 67 56 44 37 25 17 9 100 100 100
December 15, 2004 ...................... 93 57 43 33 28 20 15 9 100 100 100
December 15, 2005 ...................... 92 49 35 26 21 13 9 6 100 100 90
December 15, 2006 ...................... 90 41 29 20 16 9 6 4 100 100 75
December 15, 2007 ...................... 88 35 24 16 12 6 4 2 100 91 62
December 15, 2008 ...................... 86 31 20 12 9 4 2 1 100 80 52
December 15, 2009 ...................... 84 27 17 9 6 3 1 0 100 70 43
December 15, 2010 ...................... 82 24 14 7 5 2 1 0 100 61 35
December 15, 2011 ...................... 80 21 11 6 4 1 0 0 100 54 29
December 15, 2012 ...................... 77 18 9 4 3 1 0 0 100 47 24
December 15, 2013 ...................... 74 16 8 3 2 0 0 0 100 41 20
December 15, 2014 ...................... 71 14 6 3 1 0 0 0 100 35 16
December 15, 2015 ...................... 67 12 5 2 1 0 0 0 100 30 13
December 15, 2016 ...................... 65 10 4 2 1 0 0 0 100 26 11
December 15, 2017 ...................... 62 9 3 1 0 0 0 0 100 23 9
December 15, 2018 ...................... 59 8 3 1 0 0 0 0 100 20 7
December 15, 2019 ...................... 55 7 2 0 0 0 0 0 100 17 6
December 15, 2020 ...................... 51 6 2 0 0 0 0 0 100 14 5
December 15, 2021 ...................... 47 5 1 0 0 0 0 0 100 12 2
December 15, 2022 ...................... 43 4 1 0 0 0 0 0 100 10 0
December 15, 2023 ...................... 38 3 1 0 0 0 0 0 98 8 0
December 15, 2024 ...................... 35 3 0 0 0 0 0 0 89 7 0
December 15, 2025 ...................... 30 2 0 0 0 0 0 0 78 5 0
December 15, 2026 ...................... 26 2 0 0 0 0 0 0 66 3 0
December 15, 2027 ...................... 20 1 0 0 0 0 0 0 51 0 0
December 15, 2028 ...................... 14 0 0 0 0 0 0 0 36 0 0
December 15, 2029 ...................... 7 0 0 0 0 0 0 0 18 0 0
December 15, 2030 ...................... 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)(2)
To Maturity ........................... 18.78 6.93 5.06 3.88 3.36 2.61 2.20 1.84 26.89 13.09 9.53
To Call ............................... 18.74 6.57 4.72 3.61 3.12 2.42 2.05 1.70 26.79 12.21 8.74
<CAPTION>
Class M-1
-----------------------------------
IV V VI VII VIII
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Distribution Date
----------------
Initial Percent ............................................ 100 100 100 100 100
December 15, 2001 .......................................... 100 100 100 100 100
December 15, 2002 .......................................... 100 100 100 100 100
December 15, 2003 .......................................... 100 100 100 100 100
December 15, 2004 .......................................... 85 72 51 38 59
December 15, 2005 .......................................... 66 54 34 24 16
December 15, 2006 .......................................... 52 40 23 15 9
December 15, 2007 .......................................... 40 30 16 9 5
December 15, 2008 .......................................... 31 22 11 6 0
December 15, 2009 .......................................... 24 17 7 2 0
December 15, 2010 .......................................... 19 12 5 0 0
December 15, 2011 .......................................... 15 9 1 0 0
December 15, 2012 .......................................... 11 7 0 0 0
December 15, 2013 .......................................... 9 5 0 0 0
December 15, 2014 .......................................... 7 2 0 0 0
December 15, 2015 .......................................... 5 0 0 0 0
December 15, 2016 .......................................... 3 0 0 0 0
December 15, 2017 .......................................... 0 0 0 0 0
December 15, 2018 .......................................... 0 0 0 0 0
December 15, 2019 .......................................... 0 0 0 0 0
December 15, 2020 .......................................... 0 0 0 0 0
December 15, 2021 .......................................... 0 0 0 0 0
December 15, 2022 .......................................... 0 0 0 0 0
December 15, 2023 .......................................... 0 0 0 0 0
December 15, 2024 .......................................... 0 0 0 0 0
December 15, 2025 .......................................... 0 0 0 0 0
December 15, 2026 .......................................... 0 0 0 0 0
December 15, 2027 .......................................... 0 0 0 0 0
December 15, 2028 .......................................... 0 0 0 0 0
December 15, 2029 .......................................... 0 0 0 0 0
December 15, 2030 .......................................... 0 0 0 0 0
Weighted Average Life (years)(2)
To Maturity ............................................... 7.21 6.20 4.96 4.53 4.45
To Call ................................................... 6.59 5.65 4.54 4.18 4.15
</TABLE>
---------------
(1) The prepayment scenarios for the fixed rate and adjustable rate mortgage
loans are as set forth under "Weighted average lives" herein.
(2) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance
of the certificate to the related distribution date, (b) adding the
results, and (c) dividing by the highest related class principal balance
of the class of certificates.
S-41
<PAGE>
Percent of Initial Class Principal Balance Outstanding
at the Following Prepayment Scenarios (Continued)(1)
<TABLE>
<CAPTION>
Class M-2 Class B
------------------------------------------------------------- ---------------------
I II III IV V VI VII VIII I II III
----- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
----------------
Initial Percent ....................... 100 100 100 100 100 100 100 100 100 100 100
December 15, 2001 ..................... 100 100 100 100 100 100 100 100 100 100 100
December 15, 2002 ..................... 100 100 100 100 100 100 100 100 100 100 100
December 15, 2003 ..................... 100 100 100 100 100 100 100 100 100 100 100
December 15, 2004 ..................... 100 100 100 85 72 51 38 27 100 100 100
December 15, 2005 ..................... 100 100 90 66 54 34 24 16 100 100 90
December 15, 2006 ..................... 100 100 75 52 40 23 15 9 100 100 75
December 15, 2007 ..................... 100 91 62 40 30 16 9 2 100 91 62
December 15, 2008 ..................... 100 80 52 31 22 11 3 0 100 80 52
December 15, 2009 ..................... 100 70 43 24 17 7 0 0 100 70 43
December 15, 2010 ..................... 100 61 35 19 12 1 0 0 100 61 35
December 15, 2011 ..................... 100 54 29 15 9 0 0 0 100 54 29
December 15, 2012 ..................... 100 47 24 11 6 0 0 0 100 47 24
December 15, 2013 ..................... 100 41 20 9 1 0 0 0 100 41 19
December 15, 2014 ..................... 100 35 16 5 0 0 0 0 100 35 13
December 15, 2015 ..................... 100 30 13 1 0 0 0 0 100 30 8
December 15, 2016 ..................... 100 26 11 0 0 0 0 0 100 26 5
December 15, 2017 ..................... 100 23 9 0 0 0 0 0 100 23 2
December 15, 2018 ..................... 100 20 7 0 0 0 0 0 100 18 0
December 15, 2019 ..................... 100 17 3 0 0 0 0 0 100 14 0
December 15, 2020 ..................... 100 14 1 0 0 0 0 0 100 10 0
December 15, 2021 ..................... 100 12 0 0 0 0 0 0 100 7 0
December 15, 2022 ..................... 100 10 0 0 0 0 0 0 100 4 0
December 15, 2023 ..................... 98 8 0 0 0 0 0 0 98 1 0
December 15, 2024 ..................... 89 6 0 0 0 0 0 0 89 0 0
December 15, 2025 ..................... 78 2 0 0 0 0 0 0 78 0 0
December 15, 2026 ..................... 66 0 0 0 0 0 0 0 66 0 0
December 15, 2027 ..................... 51 0 0 0 0 0 0 0 51 0 0
December 15, 2028 ..................... 36 0 0 0 0 0 0 0 36 0 0
December 15, 2029 ..................... 18 0 0 0 0 0 0 0 15 0 0
December 15, 2030 ..................... 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)(2)
To Maturity .......................... 26.88 13.02 9.44 7.13 6.13 4.86 4.34 4.07 26.85 12.67 9.11
To Call .............................. 26.79 12.21 8.74 6.59 5.65 4.49 4.04 3.80 26.79 12.21 8.74
<CAPTION>
Class B
-----------------------------------
IV V VI VII VIII
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Distribution Date
----------------
Initial Percent ............................................ 100 100 100 100 100
December 15, 2001 .......................................... 100 100 100 100 100
December 15, 2002 .......................................... 100 100 100 100 100
December 15, 2003 .......................................... 100 100 100 100 100
December 15, 2004 .......................................... 85 72 51 38 27
December 15, 2005 .......................................... 66 54 34 24 12
December 15, 2006 .......................................... 52 40 23 11 2
December 15, 2007 .......................................... 40 30 12 3 0
December 15, 2008 .......................................... 31 22 4 0 0
December 15, 2009 .......................................... 24 14 0 0 0
December 15, 2010 .......................................... 17 7 0 0 0
December 15, 2011 .......................................... 11 2 0 0 0
December 15, 2012 .......................................... 5 0 0 0 0
December 15, 2013 .......................................... 2 0 0 0 0
December 15, 2014 .......................................... 0 0 0 0 0
December 15, 2015 .......................................... 0 0 0 0 0
December 15, 2016 .......................................... 0 0 0 0 0
December 15, 2017 .......................................... 0 0 0 0 0
December 15, 2018 .......................................... 0 0 0 0 0
December 15, 2019 .......................................... 0 0 0 0 0
December 15, 2020 .......................................... 0 0 0 0 0
December 15, 2021 .......................................... 0 0 0 0 0
December 15, 2022 .......................................... 0 0 0 0 0
December 15, 2023 .......................................... 0 0 0 0 0
December 15, 2024 .......................................... 0 0 0 0 0
December 15, 2025 .......................................... 0 0 0 0 0
December 15, 2026 .......................................... 0 0 0 0 0
December 15, 2027 .......................................... 0 0 0 0 0
December 15, 2028 .......................................... 0 0 0 0 0
December 15, 2029 .......................................... 0 0 0 0 0
December 15, 2030 .......................................... 0 0 0 0 0
Weighted Average Life (years)(2)
To Maturity ............................................... 6.88 5.90 4.66 4.12 3.77
To Call ................................................... 6.59 5.65 4.46 3.96 3.63
</TABLE>
---------------
(1) The prepayment scenarios for the fixed rate and adjustable rate mortgage
loans are as set forth under "Weighted average lives" herein.
(2) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance
of the certificate to the related distribution date, (b) adding the
results, and (c) dividing by the highest related class principal balance
of the class of certificates.
S-42
<PAGE>
Description of the Certificates
General
The property of the trust will consist of, to the extent provided in the
pooling and servicing agreement:
(a) the mortgage loans;
(b) payments received after the cut-off date, other than payments of
principal and interest on the initial mortgage loans due on or before
December 1, 2000;
(c) mortgaged properties relating to the mortgage loans that are acquired
by foreclosure or deed in lieu of foreclosure together with all collections
on and proceeds of the mortgaged properties;
(d) the collection account and the distribution account and any assets
deposited in these accounts from time to time and any investment proceeds of
these accounts; and
(e) the initial interest coverage account and the pre-funding account and
funds on deposit in these accounts, if any.
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, on any distribution date is equal to the applicable class
principal balance on the closing date reduced by the
o aggregate of amounts actually distributed as principal to the holders of
the class of certificates prior to the applicable date and
o in the case of a subordinate certificate, any reductions in the class
principal balance of the subordinate certificate due to realized losses
as described in this prospectus supplement.
The notional amount certificates do not have a class principal balance but
will have a notional amount which for any distribution date prior to the 37th
distribution date will equal the lesser of
(a) the pool balance as of the end of the second preceding due period and
S-43
<PAGE>
(b) the applicable amount set forth below:
Distribution Dates Notional Amount
------------------ ---------------
1-3............................... $33,427,027
4-9............................... 32,518,919
10-12............................. 30,270,270
13-15............................. 29,405,405
16-18............................. 28,540,541
19-21............................. 26,378,378
22-24............................. 23,351,351
25-27............................. 19,459,459
28-30............................. 17,297,297
31-33............................. 14,702,703
34-36............................. 12,972,973
On and after the 37th distribution date, the notional amount of the notional
amount certificates will be zero.
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 the 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 initial interest
coverage account, the pre-funding account and the net rate cap fund, created
by the pooling and servicing agreement will include multiple segregated asset
pools, each of which will be treated as a separate REMIC, creating a tiered
REMIC structure. The offered certificates, excluding any rights to receive net
rate cap carryover, will be designated as regular interests in a REMIC.
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., referred to as Cede,
the nominee of the Depository Trust Company, referred to as DTC. Persons
acquiring beneficial ownership interests in the offered certificates will hold
their certificates through DTC in the United States, or Clearstream,
Luxembourg or the Euroclear System, referred to as Euroclear, in Europe, if
they are participants of these systems, or indirectly through organizations
which are participants in these systems. Clearstream, Luxembourg and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear's names on the
books of their respective depositaries which in turn will hold positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank, N.A., referred to as Citibank, will act as depositary for
Clearstream, Luxembourg and The Chase Manhattan Bank, referred to as Chase,
will act as depositary for Euroclear. Collectively these entities are referred
to as the European depositaries.
S-44
<PAGE>
Investors may hold 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 of the notional
amount of $25,000. One certificate of each class of offered certificates may
be issued in a different principal amount to accommodate the remainder of the
initial principal amount of the certificates of the class. 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" in this prospectus supplement and
"Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I to this prospectus
supplement.
None of the seller, the servicer or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to beneficial ownership interests.
Distribution dates
Distributions on the certificates will be made by the trustee on the 15th
day of each month or, if that day is not a business day, on the first business
day thereafter, commencing in January 2001, each called a distribution date,
to the persons in whose names the certificates are registered, each called a
certificateholder, as of the related record date. The record date for any
distribution date is the last business day of the calendar month preceding the
month of the applicable distribution date. Distributions will be made (1) in
immediately available funds by wire transfer or otherwise, to the account of
the certificateholder at a domestic bank or other entity having appropriate
facilities for distribution, if the certificateholder has so notified the
trustee five business days prior to the related distribution date, or (2) by
check mailed to the address of the person entitled to the distribution as it
appears on the certificate register maintained by the trustee as certificate
registrar. Notwithstanding the foregoing, the final distribution on any
certificate will be made in like manner but only upon presentment and
surrender of the certificate at the office or agency appointed for that
purpose.
S-45
<PAGE>
Glossary
For purposes of describing the cash flow structure of the trust, the
following terms have the respective meanings set forth below:
Available Funds: As to any distribution date, the sum, without duplication
of the following amounts with respect to the mortgage loans:
(1) scheduled payments of principal and interest on the mortgage loans
due during the related Due Period and received by the servicer on or prior
to the determination date, net of amounts representing the servicing fee
with respect to each mortgage loan and reimbursement for related monthly
advances and servicing advances;
(2) 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 and unscheduled payments of principal and interest on the
mortgage loans received by the servicer during the related Prepayment
Period, net of amounts representing the servicing fee with respect to each
mortgage loan and reimbursement for related monthly advances and servicing
advances;
(3) the purchase price for repurchased defective mortgage loans with
respect to the loan group and any related substitution adjustment amounts;
(4) 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;
(5) 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 offered certificates; and
(6) on the distribution date immediately following the funding period,
any Excess Funding Amount.
Available Funds Cap: As to any distribution date, a rate per annum equal to
(1) the weighted average net loan rate of the mortgage loans minus (2) the
product of (x) the certificate rate on the notional amount certificates and
(y) a fraction, the numerator of which is the notional amount of the notional
amount certificates and the denominator of which is the Pool Balance as of the
last day of the second preceding due period minus (3) the premium payable to
the certificate insurer on the senior certificates, expressed as a per annum
rate.
Basic Principal Amount: As to any distribution date, an amount equal to the
sum of the following amounts, without duplication, with respect to the
mortgage loans:
(1) each payment of principal on a mortgage loan due during the related
Due Period and received by the servicer on or prior to the determination
date;
(2) the Net Liquidation Proceeds allocable to principal and all full and
partial principal prepayments received by the servicer during the related
Prepayment Period;
(3) the portion of the purchase price allocable to principal of all
repurchased defective mortgage loans with respect to the Due Period;
S-46
<PAGE>
(4) any substitution adjustment amounts received on or prior to the
previous determination date and not yet distributed;
(5) any monthly advances with respect to scheduled payments of principal
due during the related due period; and
(6) any Excess Funding Amount.
Civil Relief Act Shortfalls: Reductions in the amount of interest due from
borrowers as a result of the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
Class B Principal Distribution Amount: As to any distribution date on or
after the Stepdown Date and as long as a Trigger Event is not in effect, the
excess of:
(1) the sum of
(A) the aggregate class principal balance of the senior certificates,
after taking into account distributions of the Senior Principal
Distribution Amount for the applicable distribution date,
(B) the class principal balance of the class M-1 certificates, after
taking into account distribution of the Class M-1 Principal
Distribution Amount for the applicable distribution date,
(C) the class principal balance of the class M-2 certificates, after
taking into account distribution of the Class M-2 Principal
Distribution Amount for the applicable distribution date, and
(D) the class principal balance of the class B certificates immediately
prior to the applicable distribution date over
(2) the lesser of
(A) 95.50% of the Pool Balance as of the last day of the related due
period and
(B) the Pool Balance as of the last day of the related due period minus
the OC Floor,
provided, however, that after the class principal balances of the senior,
class M-1 and class M-2 certificates are reduced to zero, the Class B
Principal Distribution Amount for the applicable distribution date will equal
100% of the Principal Distribution Amount.
Class Interest Carryover Shortfall: As to any class of certificates and any
distribution date, an amount equal to the sum of (1) the excess of the related
Class Monthly Interest Amount for the preceding distribution date and any
outstanding Class Interest Carryover Shortfall with respect to that class on
the preceding distribution date, over the amount in respect of interest that
is actually distributed to the holders of the class on the preceding
distribution date plus (2) one month's interest on the excess, to the extent
permitted by law, at the related certificate rate.
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 that class
of certificates for the applicable distribution date.
Class M-1 Principal Distribution Amount: As to any distribution date on or
after the Stepdown Date, (x) 100% of the Principal Distribution Amount if the
class principal
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balance of the senior certificates has been reduced to zero and a Trigger
Event exists, or (y) if a Trigger Event is not in effect, the excess of
(1) the sum of
(A) the class principal balance of the senior certificates, after
taking into account distributions of the Senior Principal
Distribution Amount for the applicable distribution date, and
(B) the class principal balance of the class M-1 certificates
immediately prior to the applicable distribution date over
(2) the lesser of
(A) 77.41% of the Pool Balance as of the last day of the related due
period and
(B) the Pool Balance as of the last day of the related due period minus
the OC Floor.
Class M-2 Principal Distribution Amount: As to any distribution date on or
after the Stepdown Date, (x) 100% of the Principal Distribution Amount if the
aggregate class principal balance of each of the senior and class M-1
certificates has been reduced to zero and a Trigger Event exists, or (y) if a
Trigger Event is not in effect, the excess of
(1) the sum of
(A) the class principal balance of the senior certificates, after
taking into account distributions of the Senior Principal
Distribution Amount for the applicable distribution date,
(B) the class principal balance of the class M-1 certificates, after
taking into account distribution of the class M-1 Principal
Distribution Amount for the applicable distribution date, and
(C) the class principal balance of the class M-2 certificates
immediately prior to the applicable distribution date over
(2) the lesser of
(A) 86.98% of the Pool Balance as of the last day of the related due
period and
(B) the Pool Balance as of the last day of the related due period minus
the OC Floor.
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
minus the pro rata portion of any Civil Relief Act Shortfalls during the
related due period, based on the amount of interest to which the class would
otherwise be entitled in the absence of the shortfall.
Class Principal Carryover Shortfall: As to any class of subordinate
certificates and any distribution date, the excess, if any, of (1) the sum of
(x) the amount of the reduction in the class principal balance of that class
of subordinate certificates on the applicable distribution date as provided
under "-Allocation of Realized Losses" below and (y) the amount of any
reductions on prior distribution dates over (2) the amount distributed in
respect of the class of subordinate certificates on prior distribution dates.
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Cumulative Loss Event: The occurrence of rates of cumulative losses during
particular periods of time as specified in the pooling and servicing
agreement.
Delinquency Amount: As to any distribution date, the aggregate principal
balance of the mortgage loans that are (a) 60 or more days delinquent plus (b)
in bankruptcy or foreclosure and REO properties as of the last day of the
related Prepayment Period.
Delinquency Event: A Delinquency Event shall have occurred and be
continuing, if at any time, (x) the three-month rolling average of the
percentage equivalent of a fraction, the numerator of which is the Delinquency
Amount and the denominator of which is the Pool Balance as of the last day of
the related due period exceeds (y) 50% of the Senior Enhancement Percentage.
Due Period: With respect to each distribution date for scheduled payments
of both interest and principal, the period from and including the second day
of the month preceding the month of the applicable distribution date to and
including the first day of the month of that distribution date.
Excess Funding Amount: The portion, if any, of the Pre-Funded Amount which
remains on deposit in the pre-funding account at the end of the funding
period.
Excess Interest: As to any distribution date, the Available Funds remaining
after the application of payments pursuant to clauses 1. through 8. under
"--Distribution Priorities," below.
Excess Overcollateralization Amount: As to any distribution date, the
lesser of (1) the Aggregate Principal Amount for the applicable distribution
date and (2) the excess, if any, of (x) the Overcollateralization Amount,
assuming 100% of the Basic Principal Amount is distributed on the offered
certificates, over (y) the Required Overcollateralization Amount.
Interest Period: For any distribution date 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.
Interest Remittance Amount: As to any distribution date, the portion of the
Available Funds that constitutes amounts in respect of interest.
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 pooling and servicing agreement, as of the end of
the preceding Prepayment Period, that all liquidation proceeds which it
expects to recover with respect to that mortgage loan, including the
disposition of the related REO, have been received.
Net Liquidation Proceeds: With respect to any Liquidated Mortgage Loan,
liquidation proceeds, net of unreimbursed servicing fees, servicing advances
and monthly advances with respect to the related Liquidated Mortgage Loan.
Net Rate Cap Carryover: As to any distribution date and the certificates,
other than the class IO certificates, the sum of
(a) the excess, if any, of the related Class Monthly Interest Amount,
calculated at the applicable certificate rate, without regard to the
Available Funds Cap, over the Class Monthly Interest Amount for the
applicable distribution date,
(b) any Net Rate Cap Carryover remaining unpaid from prior distribution
dates and
(c) 30 days' interest on the amount in clause (b) calculated at the
applicable certificate rate, without regard to the Available Funds
Cap.
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OC Floor: An amount equal to 0.50% of the aggregate class principal balance
of the offered certificates as of the closing date.
Overcollateralization Amount: As to any distribution date, the excess, if
any, of (1) the Pool Balance as of the end of the related due period over (2)
the aggregate class principal balance of the offered certificates after giving
effect to the distribution of the Principal Distribution Amount on the
applicable distribution date.
Pool Balance: As of any date of determination, the aggregate of the
principal balances of the mortgage loans as of the applicable date.
Pre-Funded Amount: As to any date of determination, the original Pre-Funded
Amount minus the aggregate principal balance of subsequent mortgage loans
purchased by the trust prior to the applicable date.
Prepayment Period: As to any distribution date, the preceding calendar
month.
Principal Balance: As to any mortgage loan and any date of determination,
the unpaid principal balance of the mortgage loan as of the related cut-off
date after deduction of payments of principal due on or before that date,
minus all amounts credited against the Principal Balance prior to the date of
determination.
Principal Distribution Amount: As to any distribution date, the lesser of
(a) the aggregate class principal balance of the offered certificates
immediately preceding the applicable distribution date and (b) the sum of (1)
the Basic Principal Amount minus the Excess Overcollateralization Amount and
(2) the Subordination Increase Amount.
Required Overcollateralization Amount: As to any distribution date (a)
prior to the Stepdown Date, the product of (x) 2.25% and (y) the aggregate
original class principal balance of the offered certificates; and (b) on and
after the Stepdown Date, the greater of (1) the lesser of (x) the product of
2.25% and the aggregate original class principal balance of the offered
certificates and (y) the product of 4.50% and the Pool Balance as of the end
of the related due period and (2) the OC Floor; provided, however, that on
each distribution date during the continuance of (a) a Cumulative Loss Event,
the Required Overcollateralization Amount will equal 2.25% of the aggregate
original class principal balance of the offered certificates or (b) a
Delinquency Event, provided that a Cumulative Loss Event is not then
continuing, the Required Overcollateralization Amount will equal the Required
Overcollateralization Amount in effect as of the distribution date immediately
preceding the date on which the Delinquency Event first occurred.
Senior Enhancement Percentage: As to any distribution date, the percentage
equivalent of a fraction, the numerator of which is the sum of (1) the
aggregate class principal balance of the subordinate certificates and (2) the
Overcollateralization Amount, in each case, after taking into account the
distribution of the Principal Distribution Amount on the applicable
distribution date, and the denominator of which is the Pool Balance as of the
last day of the related due period.
Senior Principal Distribution Amount: As to (a) any distribution date prior
to the Stepdown Date or during the continuation of a Trigger Event, the lesser
of (1) 100% of the Principal Distribution Amount and (2) the class principal
balance of the senior certificates, and (b) any other distribution date, an
amount equal to the lesser of (1) the Principal Distribution Amount and (2)
the excess, if any, of (x) the class principal balance of the senior
certificates immediately prior to the applicable distribution date over (y)
the lesser of
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(A) 66.98% of the Pool Balance as of the last day of the related due period
and (B) the Pool Balance as of the last day of the related due period minus
the OC Floor.
Stepdown Date: The later to occur of (x) the earlier to occur of (A) the
distribution date in January 2004 and (B) the distribution date on which the
class principal balance of the senior certificates is reduced to zero, and (y)
the first distribution date on which the Senior Enhancement Percentage,
assuming 100% of the Principal Distribution Amount is distributed on the
offered certificates, is at least equal to 33.02%.
Subordination Deficiency: As to any distribution date, the excess, if any,
of (x) the Required Overcollateralization Amount for the applicable
distribution date over (y) the Overcollateralization Amount for that
distribution date after giving effect to the distribution of the Basic
Principal Amount on that distribution date.
Subordination Deficit: As to any distribution date, the excess, if any, of
(x) the class principal balance of the senior certificates over (y) the Pool
Balance as of the end of the related due period.
Subordination Increase Amount: As to any distribution date, the lesser of
(x) the Subordination Deficiency and (y) the Excess Interest.
Trigger Event: The existence of either a Cumulative Loss Event or a
Delinquency Event.
Distribution priorities
On each distribution date the trustee will withdraw (x) any payments made
under the financial guaranty insurance policy and (y) from the distribution
account the Available Funds and apply this amount in the following order of
priority, in each case, to the extent of the funds remaining; provided that
payments under the financial guaranty insurance policy may only be applied to
make the Guaranteed Distributions:
1. Concurrently, to the trustee and the certificate insurer, the
trustee fee and the premium, respectively, for the applicable
distribution date.
2. Concurrently, to each class of senior certificates, the related
Class Interest Distribution for the applicable distribution date.
3. Sequentially, to the class M-1, class M-2 and class B certificates,
in that order, the related Class Monthly Interest Amount for the
applicable distribution date.
4. To the class A certificates, the Senior Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount.
5. To the certificate insurer, any amounts owing to the certificate
insurer under the insurance agreement.
6. To the class M-1 certificates, the Class M-1 Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount.
7. To the class M-2 certificates, the Class M-2 Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount.
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8. To the class B certificates, the Class B Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount.
9. To the offered certificates, the Subordination Increase Amount for
the applicable distribution date, allocated in the same order as other
principal distributions.
10. To the class M-1 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
11. To the class M-2 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
12. To the class B certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
13. To the class BIO certificates for deposit in the carryover reserve
fund; as required by the pooling and servicing agreement.
14. Sequentially, to the class A, the class M-1, class M-2 and class B
certificates, in that order, the related Net Rate Cap Carryover, from the
net rate cap fund.
15. To the class BIO certificates, the amount required by the pooling
and servicing agreement.
16. To the trustee, reimbursement for expenses incurred by the trustee
relating to the transition of servicing functions to the trustee
following the resignation or termination of the servicer.
17. To the residual certificates, any remaining amounts.
On each distribution date, the Class Interest Distribution for each class
of senior certificates will be distributed on an equal priority and any
shortfall in the amount required to be distributed as interest will be
allocated between the classes pro rata based on the amount that would have
been distributed on each class in the absence of a shortfall.
On each distribution date, the holders of the class P certificates will be
entitled to all prepayment charges received with respect to the mortgage loans
during the related prepayment period, and these amounts will not be available
for distribution on the other classes of certificates.
Certificate rates
The certificate rate for each class of certificates is set forth on the
cover page or described in this prospectus supplement. The certificate rate
for each of the offered certificates, other than the class IO certificates,
is subject to the Available Funds Cap. The certificate rate on the class A,
class M-1, class M-2 and class B certificates will increase by 0.50% after the
optional termination date.
The Policy
The following summary of the terms of the policy does not purport to be
complete and is qualified in its entirety by reference to the policy. A form
of the policy may be obtained, upon request, from the trustee.
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Simultaneously with the issuance of the certificates, the certificate
insurer will deliver the policy to the trustee for the benefit of each
certificateholder of a senior certificate. Under the policy, the certificate
insurer unconditionally and irrevocably guarantees to the trustee for the
benefit of each senior certificateholder the full and complete payment of (i)
Guaranteed Distributions (as defined below) on the senior certificates and
(ii) the amount of any Guaranteed Distribution which subsequently is voided in
whole or in part as a preference payment under applicable law.
"Guaranteed Distributions" means the sum of (x) Class Monthly Interest
Amount on each class of senior certificates, plus (y) the Subordination
Deficit, plus (z) without duplication of clause (y) the outstanding class
principal balance of the class A certificates on their Final Scheduled
Distribution Date after giving effect to distributions thereon on that
distribution date, determined in accordance with the original terms of the
senior certificates when issued and without regard to any subsequent amendment
or modification of the senior certificates; payments which become due on an
accelerated basis do not constitute "Guaranteed Distributions," unless the
certificate insurer elects, in its sole discretion, to pay that principal due
upon acceleration, together with any accrued interest to the date of
acceleration.
Payment of claims on the policy made in respect of Guaranteed Distributions
will be made by the certificate insurer following Receipt by the certificate
insurer of the appropriate notice for payment on the later to occur of (x)
12:00 noon, New York City time, on the third Business Day following Receipt of
the notice for payment, and (y) 12:00 noon, New York City time, on the date on
which such payment was due on the senior certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made
under the policy, the certificate insurer shall cause the payment to be made
on the later of (a) the date when due to be paid pursuant to the Order
referred to below or (b) the first to occur of (1) the fourth Business Day
following Receipt by the certificate insurer from the trustee of
(A) a certified copy of the order (the "Order") of the court or other
governmental body which exercised jurisdiction to the effect that the
certificateholder is required to return principal or interest paid on the
senior certificates during the term of the policy because those payments were
avoidable as preference payments under applicable bankruptcy law,
(B) a certificate of the certificateholder that the Order has been entered
and is not subject to any stay, and
(C) an assignment duly executed and delivered by the certificateholder, in
a form as is reasonably required by the certificate insurer and provided to
the certificateholder by the certificate insurer, irrevocably assigning to the
certificate insurer all rights and claims of the certificateholder relating to
or arising under the senior certificates against the trust or otherwise with
respect to the applicable preference payment, or (2) the date of Receipt by the
certificate insurer from the trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to the date of Receipt,
the certificate insurer shall have Received written notice from the trustee that
the items were to be delivered on that date and that date was specified in the
applicable notice. The payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
trustee or any certificateholder directly,
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unless a certificateholder has previously paid the applicable amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case the applicable payment shall be disbursed to the
trustee, for distribution to such certificateholder upon proof of payment
reasonably satisfactory to the certificate insurer.
The terms "Receipt" and "Received," with respect to the policy, shall mean
actual delivery to the certificate insurer and to the fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on
a day that is not a Business Day or after 12:00 noon, New York City time,
shall be deemed to be Receipt on the next succeeding Business Day. If any
notice or certificate given under the policy by the trustee is not in proper
form or is not properly completed, executed or delivered, it shall be deemed
not to have been Received, and the certificate insurer or the fiscal agent
shall promptly so advise the trustee and the trustee may submit an amended
notice.
Under the policy, "Business Day" means any day other than (x) a Saturday or
Sunday or (y) a day on which banking institutions in New York, New York, or in
the city in which the corporate trust office of the trustee is located are
authorized or obligated by law or executive order to be closed.
The certificate insurer's obligations under the policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are
transferred to the trustee as provided in the policy whether or not those
funds are properly applied by the trustee.
The certificate insurer shall be subrogated to the rights of each senior
certificateholder to receive payments of principal and interest under the
senior certificates to the extent of any payment by the certificate insurer
under the policy. To the fullest extent permitted by applicable law, the
certificate insurer agrees under the policy not to assert, and waives, for the
benefit of each senior certificateholder, all its rights (whether by
counterclaim, setoff or otherwise) and defenses (including, without
limitation, the defense of fraud), whether acquired by subrogation, assignment
or otherwise, to the extent that those rights and defenses may be available to
the certificate insurer to avoid payment of its obligations under the policy
in accordance with the express provisions of the policy.
Claims under the policy constitute direct, unsecured and unsubordinated
obligations of the certificate insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the certificate insurer for
borrowed money. Claims against the certificate insurer under the policy and
claims against the certificate insurer under each other financial guaranty
insurance policy issued thereby constitute pari passu claims against the
general assets of the certificate insurer. The terms of the policy cannot be
modified or altered by any other agreement or instrument. The policy may not
be canceled or revoked prior to payment in full of the senior certificates.
The policy is not covered by the property/casualty insurance security fund
specified in Article 76 of the New York Insurance Law. The policy is governed
by the laws of the State of New York.
The seller and the certificate insurer will enter into the insurance
agreement pursuant to which the seller will agree to reimburse, with interest,
the certificate insurer for amounts paid pursuant to claims under the policy.
The seller will further agree to pay the certificate insurer all reasonable
charges and expenses which the certificate insurer may pay or incur relative
to any amounts paid under the policy or otherwise in connection with the
transaction and to indemnify the certificate insurer against certain
liabilities. Amounts
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owing by the seller under the insurance agreement will be secured by, and
payable solely from, the trust except as provided in the insurance agreement.
Except during the continuation of a certificate insurer default, the
certificate insurer will have the power to exercise all of the voting rights
of the holders of the senior certificates.
Overcollateralization provisions
On each distribution date, the Excess Interest will be applied to, among
other things, the accelerated amortization of the offered certificates then
entitled to distributions of principal until the Overcollateralization Amount
equals the Required Overcollateralization Amount. Subject to particular
floors, caps and triggers, the Required Overcollateralization Amount may
increase or decrease over time. An increase in the required level of
overcollateralization will result on the basis of cumulative realized losses
or the Delinquency Amount.
Allocation of realized losses
The Basic Principal Amount includes the Net Liquidation Proceeds in respect
of principal received upon liquidation of a Liquidated Mortgage Loan. If the
Net Liquidation Proceeds are less than the unpaid principal balance of the
related Liquidated Mortgage Loan, the Pool Balance will decline more than the
aggregate class principal balance of the offered certificates. If the
difference is not covered by the Overcollateralization Amount or the
application of Excess Interest, the class of subordinate certificates then
outstanding with the lowest relative payment priority will bear the loss.
If, following the distributions on a distribution date, the aggregate class
principal balance of the offered certificates exceeds the Pool Balance, that
is, the certificates are undercollateralized, the class principal balance of
the class of subordinate certificates then outstanding with the lowest
relative payment priority will be reduced by the amount of the excess. Any
reduction will constitute a Class Principal Carryover Shortfall for the
applicable class. Although a Class Principal Carryover Shortfall will not
accrue interest, this amount may be paid on a future distribution date to the
extent funds are available for distribution as provided above under "--
Distribution Priorities."
For all purposes of this prospectus supplement the class B certificates
will have the lowest payment priority of any class of subordinate
certificates.
Reports to certificateholders
Concurrently with each distribution to certificateholders, the trustee will
prepare and make available to each certificateholder a statement setting
forth, among other items the following, to the extent applicable to each class
of certificates:
(a) the aggregate amount of the distribution to each class of
certificates on the applicable distribution date;
(b) the amount of the distribution set forth in paragraph (a) above in
respect of interest and the amount of that distribution in respect of any
Class Interest Carryover Shortfall, and the amount of any Class Interest
Carryover Shortfall remaining;
(c) the amount of the distribution set forth in paragraph (a) above in
respect of principal;
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(d) the amount of Excess Interest for each loan group paid as principal;
(e) the servicing fee;
(f) the Pool Balance as of the close of business on the last day of the
preceding due period;
(g) the class principal balance of each class of certificates after
giving effect to payments allocated to principal above;
(h) the Overcollateralization Amount and the Required
Overcollateralization Amount as of the close of business on the distribution
date, after giving effect to distributions of principal on the applicable
distribution date;
(i) the number and aggregate Principal Balances of the mortgage loans as
to which the minimum monthly payment is delinquent for 30-59 days, 60-89
days, or 90 or more days, including mortgage loans in foreclosure, in
bankruptcy and real estate owned, each separately stated, respectively, as
of the end of the preceding month;
(j) whether a Cumulative Loss Event or a Delinquency Event has occurred
and is continuing and the calculations of those events;
(k) the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure;
(l) the amounts of realized losses for the applicable due period and the
cumulative amount of realized losses to date;
(m) the weighted average loan rate on the mortgage loans as of the first
day of the month prior to the distribution date;
(n) the amount of Net Rate Cap Carryover distributed to the offered
certificates and the amount of Net Rate Cap Carryover remaining for each
class;
(o) the amount of any Class Principal Carryover Shortfall paid with
respect to each class of subordinate certificates and any amounts remaining;
(p) the amount paid under the policy on that distribution date in respect
of interest and principal;
(q) during the funding period, the remaining Pre-Funded Amount and the
portion of this amount used to acquire subsequent mortgage loans since the
preceding distribution date; and
(r) during the funding period, the amount remaining in the initial
interest coverage account.
In the case of information furnished pursuant to clauses (b) and (c) above,
the amounts shall be expressed as a dollar amount per certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the trustee will
forward to each person, if requested in writing by that person, who was a
certificateholder during the prior calendar year a statement containing the
information set forth in clauses (b) and (c) above aggregated for the
applicable calendar year.
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The Certificate Insurer
The certificate insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The certificate insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
The certificate insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. Financial guaranty insurance provides
a guaranty of scheduled payments of an issuer's securities, thereby enhancing
the credit rating of those securities, in consideration for the payment of a
premium to the insurer. The certificate insurer and its subsidiaries
principally insure asset-backed, collateralized and municipal securities.
Asset-backed securities are typically supported by residential mortgage loans,
consumer or trade receivables, securities or other assets having an
ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities include general obligation bonds, special revenue bonds
and other special obligation of state and local governments. The certificate
insurer insures both newly-issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the
certificate insurer's underwriting criteria.
The certificate insurer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"). Holdings is an indirect subsidiary of
Dexia S.A., a publicly held Belgian corporation. Dexia S.A., through its bank
subsidiaries, is primarily engaged in the business of public finance in
France, Belgium and other European countries. No shareholder of Holdings or
the certificate insurer is obligated to pay any debts of the certificate
insurer or any claim under any insurance policy issued by the certificate
insurer or to make any additional contribution to the capital of the
certificate insurer.
The principal executive offices of the certificate insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Under an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the certificate insurer
or its domestic or Bermuda operating insurance company subsidiaries are
generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the certificate
insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various treaties and
on a transaction-by-transaction basis. This reinsurance is used by the
certificate insurer as a risk management device and to comply with statutory
and rating agency requirements; it does not alter or limit the certificate
insurer's obligations under any financial guaranty insurance policy.
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Ratings
The certificate insurer's financial strength is rated "Aaa" by Moody's and
"AAA" by Fitch. The certificate insurer's insurer financial strength is rated
"AAA" by Standard & Poor's Rating Services and Standard & Poor's (Australia)
Pty. Ltd. The certificate insurer's insurance financial strength is rated
"AAA" by Japan Rating and Investment Information, Inc. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
Capitalization
The following table sets forth the capitalization of the certificate
insurer and its subsidiaries as of September 30, 2000, on the basis of
accounting principles generally accepted in the United States of America:
<TABLE>
<CAPTION>
September 30, 2000
(In thousands)
-----------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)................................. $ 571,460
----------
Surplus Notes ................................................................................. 120,000
----------
Minority Interest ............................................................................. 35,692
----------
Shareholder's Equity:
Common Stock .................................................................................. 15,000
Additional Paid-In Capital .................................................................... 786,040
Accumulated Other Comprehensive Income (net of deferred income taxes) ......................... 17,569
Accumulated Earnings .......................................................................... 564,449
----------
Total Shareholder's Equity .................................................................... 1,383,058
----------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest and Shareholder's Equity ..... $2,110,210
==========
</TABLE>
For further information concerning the certificate insurer, see the
Consolidated Financial Statements of Financial Security Assurance Inc. and
Subsidiaries, and the notes thereto, incorporated by reference herein. The
certificate insurer's financial statements are included as exhibits to the
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed
with the Securities and Exchange Commission (the "Commission") by Holdings and
may be viewed at the EDGAR website maintained by the Commission and at the
Holdings website at http://www.FSA.com. Copies of the statutory quarterly and
annual financial statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of
New York Insurance Department.
Incorporation of certain documents by reference
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the financial statements of the
certificate insurer and subsidiaries included in, or as exhibits to, the
following documents which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this
prospectus supplement: the Annual Report on Form 10-K for the year
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ended December 31, 1999 , (b) the Quarterly Report on Form 10-Q for the
quarter ended March 30, 2000, (c) the Quarterly Report on 10-Q for the quarter
ended June 30, 2000 and (d) the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000.
All financial statements of the certificate insurer and subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this prospectus supplement and prior to the termination of the
offering of the offered certificates shall be deemed to be incorporated by
reference into this prospectus supplement and to be a part hereof from the
respective dates of filing such documents.
The seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the foregoing financial statements
incorporated in this prospectus supplement by reference. Requests for such
copies should be directed to 1000 Woodbury Road, Woodbury, New York 11797,
Attention: Corporate Secretary.
The seller on behalf of the trust hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
trust's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, and each filing of the financial statements
of the certificate insurer included in or as an exhibit to the annual report
of Holdings filed pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934, that is incorporated by reference in the registration
statement, as defined in the prospectus, shall be deemed to be a new
registration statement relating to the offered certificates offered hereby,
and the offering of those offered certificates at that time shall be deemed to
be the initial bona fide offering thereof.
Insurance regulation
The certificate insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the certificate insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, the certificate insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of a financial
guaranty insurer to writing financial guarantee insurance and related business
lines, requires each financial guaranty insurer to maintain a minimum surplus
to policyholders, establishes contingency, loss and unearned premium reserve
requirements for each financial guaranty insurer, and limits the size of
individual transactions and the volume of transactions that may be
underwritten by each financial guaranty insurer. Other provisions of the New
York Insurance Law, applicable to non-life insurance companies such as the
certificate insurer, regulate, among other things, permitted investments,
payment of dividends, transactions with affiliates, mergers, consolidations,
acquisitions or sales of assets and incurrence of liability for borrowings.
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Countrywide Home Loans, Inc.
General
Countrywide Home Loans, Inc., called Countrywide, will act as servicer
under the pooling and servicing agreement. During the servicing transfer
period expected to be completed by February 1, 2001, the seller will directly
service the mortgage loans as interim subservicer on behalf of Countrywide.
Upon completion of the servicing transfer, Countrywide will directly service
the mortgage loans. Both the seller, as interim subservicer, and Countrywide,
as servicer, will service the mortgage loans in accordance with the terms of
the pooling and servicing agreement.
Countrywide is a New York corporation and a subsidiary of Countrywide
Credit Industries, Inc. Countrywide is engaged primarily in the mortgage
banking business, and as such, originates, purchases, sells and services
mortgage loans. Countrywide originates mortgage loans through a retail branch
system and through mortgage loan brokers and correspondents nationwide.
Countrywide's mortgage loans are principally first-lien, fixed or adjustable
rate mortgage loans secured by single-family residences.
As of September 30, 2000, Countrywide provided servicing for mortgage loans
with an aggregate principal balance of approximately $273.9 billion,
substantially all of which are being serviced for unaffiliated persons. As of
September 30, 2000, Countrywide provided servicing for approximately $13.6
billion in subprime mortgage loans.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302. Its telephone number is (818) 225-3000.
Countrywide conducts operations from its headquarters in Calabasas and from
offices throughout the nation.
Loan servicing
Countrywide has established standard policies for the servicing and
collection of mortgages. Servicing includes, but is not limited to:
(a) collecting, aggregating and remitting mortgage loan payments,
(b) accounting for principal and interest,
(c) holding escrow (impound) funds for payment of taxes and insurance,
(d) making inspections as required of the mortgaged properties,
(e) preparation of tax related information in connection with the
mortgage loans,
(f) supervision of delinquent mortgage loans,
(g) loss mitigation efforts,
(h) foreclosure proceedings and, if applicable, the disposition of
mortgaged properties, and
(i) generally administering the mortgage loans, for which it receives
servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
Countrywide. The statement details all debits and credits and specifies the
payment due. Notice of
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changes in the applicable loan rate are provided by Countrywide to the
mortgagor with such statements.
Collection procedures
When a mortgagor fails to make a payment on a subprime mortgage loan,
Countrywide attempts to cause the deficiency to be cured by corresponding with
the mortgagor. Pursuant to Countrywide's subprime servicing procedures,
Countrywide generally mails to the mortgagor a notice of intent to foreclose
after the loan becomes 31 days past due (two payments due but not received)
and, within 30 days thereafter, if the loan remains delinquent, institutes
appropriate legal action to foreclose on the mortgaged property. Foreclosure
proceedings may be terminated if the delinquency is cured. Mortgage loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such loans, including any
deficiencies.
Once foreclosure is initiated by Countrywide, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
If foreclosed, the mortgaged property is sold at a public or private sale
and may be purchased by Countrywide. After foreclosure, Countrywide may
liquidate the mortgaged property and charge-off the loan balance which was not
recovered through liquidation proceeds.
Servicing and charge-off policies and collection practices with respect to
subprime mortgage loans may change over time in accordance with, among other
things, Countrywide's business judgment, changes in the servicing portfolio
and applicable laws and regulations.
The Pooling and Servicing Agreement
General
The certificates will be issued pursuant to the pooling and servicing
agreement. A form of pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus supplement and
the prospectus are a part. The following summaries together with the
information in this prospectus supplement 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
pooling and servicing 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 pooling and servicing agreement. Wherever particular
sections or defined terms of the pooling and servicing agreement are referred
to, these sections or defined terms are incorporated by reference in this
prospectus supplement.
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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 each mortgage loan, the related mortgage note, mortgages and other related
documents, collectively, referred to as the related documents, including all
payments received after the related cut-off date other than payments of
principal and interest on the mortgage loans due on or before the related
cut-off date. The trustee, concurrently with the transfer, will deliver the
certificates to the seller. Each mortgage loan transferred to the trust will
be identified on a mortgage loan schedule delivered to the trustee pursuant to
the pooling and servicing agreement. This 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 pooling and servicing agreement will require that, within the time
period specified in the agreement, the seller will deliver to the trustee, or
the custodian, as the trustee's agent for this purpose, the mortgage loans
endorsed to the trustee and the related documents. In lieu of delivery of
original mortgages, if the original is not available, the seller may deliver
true and correct copies of the original mortgages.
Under the terms of the pooling and servicing 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 related 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 certificate insurer and the rating agencies are delivered
to the trustee to the effect that recordation of the 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, the assignment will be prepared
and recorded within 30 days after receipt of this information, but in no event
later than one year after the closing date or subsequent transfer date, as the
case may be.
Within 45 days of the closing date with respect to the initial mortgage
loans and each subsequent transfer date with respect to the related 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 and the defect is not cured within 90 days following
notification of the defect to the seller by the trustee, the seller will be
obligated to either (a) substitute for the mortgage loan an eligible
substitute mortgage loan; however, this 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 the substitution will not disqualify any REMIC
as a REMIC or result in a prohibited transaction tax under the Internal
Revenue Code or (b) purchase the mortgage loan at a price equal to the
outstanding Principal Balance of the mortgage loan as of the date of purchase,
plus unpaid interest on the mortgage loan 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 servicing
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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
the 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 the obligation arises a
substitution amount equal to the excess of the Principal Balance of the
related defective mortgage loan over the Principal Balance of the 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 the
substitution,
o have an outstanding principal balance after deducting all scheduled
principal payments due in the month of the 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;
o 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 the defective
mortgage loan;
o have a mortgage of the same or higher level of priority as the mortgage
relating to the defective mortgage loan;
o 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
o comply with each representation and warranty as to the mortgage loans set
forth in the pooling and servicing agreement, deemed to be made as of the
date of substitution.
The seller will make representations and warranties as to the accuracy in
all material respects of information furnished to the trustee with respect to
each mortgage loan. In addition, the seller will represent and warrant, on the
closing date or subsequent transfer date, as applicable, that, among other
things: (a) 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 (b) 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 representation and warranty
which materially and adversely affects the value of, or 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 (x) substitute for the mortgage loan an eligible
substitute mortgage loan or (y) purchase the 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 to the defective mortgage loans will apply to the substitution or
purchase of a mortgage loan as a result of a breach of a
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representation or warranty in the pooling and servicing 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 collection account for the benefit of the holders of the
certificates. The collection account will be an eligible account, as defined
in this prospectus supplement. 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 principal and interest due on or
before December 1, 2000, the servicer will deposit these amounts in the
collection account. Amounts so deposited may be invested in eligible
investments, as described in the pooling and servicing agreement, maturing no
later than one business day prior to the date on which the amount on deposit
is required to be deposited in the distribution account or on the applicable
distribution date if approved by the rating agencies.
The trustee will establish a distribution account. No later than 1:00 p.m.
New York time on or before the business day prior to each distribution date,
the Available Funds for a loan group and that distribution date are required
to be deposited into the distribution account. The distribution account will
be an eligible account. Amounts on deposit in the distribution account may be
invested in eligible investments maturing on or before the business day prior
to the related distribution date or, if the eligible investments are an
obligation of the trustee or are money market funds for which the trustee or
any affiliate is the manager or the advisor, the eligible investments shall
mature no later than the related distribution date. Investment earnings from
amounts on deposit in the distribution account will not be part of Available
Funds.
An eligible account is a segregated account that is
1. maintained with a depository institution whose debt obligations at the
time of any deposit in the eligible account 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 Fund
or the Bank Insurance Fund of the Federal Deposit Insurance Corporation
established by the fund with a minimum long-term unsecured debt rating
of A by Standard & Poor's Ratings Services and A2 by Moody's Investor
Services, Inc. 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;
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2. 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
3. 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 offered certificates without regard to
the financial guaranty insurance policy.
Advances
The determination date for each distribution date is on the fourth business
day prior to that distribution date. On or prior to the business day before
each distribution date, the servicer will deposit in the collection account an
amount equal to each scheduled payment due on a mortgage loan during the
related due period but not received by the servicer as of the related
determination date, net of the servicing fee, called a monthly advance. The
obligation of the servicer continues with respect to each mortgage loan until
the mortgage loan becomes a Liquidated Mortgage Loan. So long as the servicer
is Countrywide Home Loans, Inc. or has long-term debt rated at least
investment grade, the servicer may fund monthly advances from amounts in the
collection account that are being held for future distribution but must
replace any of those funds so used prior to the next distribution date.
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
o the preservation, restoration and protection of the mortgaged properties,
o any enforcement or judicial proceedings, including foreclosures, and
o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
Each 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 any other amounts
as may be collected by the servicer from the related mortgagor or otherwise
relating to the mortgage loan in respect of which the unreimbursed amounts are
owed. The servicer's right to reimbursement for monthly advances is limited to
late collections on any mortgage loan and to liquidation proceeds and
insurance proceeds on the related mortgage loan. The servicer's right to
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 the 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 the
mortgage loan. In addition, if any servicing advance or monthly advance is
determined in good faith by the servicer to be non-recoverable from these
sources, the amount of the nonrecoverable advances may be reimbursed to the
servicer from other amounts on deposit in the collection account.
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Initial interest coverage account
On the closing date, cash may 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 on that amount, will be used
by the trustee, on the distribution dates during and immediately following the
funding period, to fund shortfalls in the interest collections attributable to
the pre-funding feature of the trust. Any amounts remaining in the initial
interest coverage account and not needed for this 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.
Pre-Funding account
On the closing date, the Original Pre-Funded Amount, will be deposited into
the pre-funding account. See "Description of the Mortgage Loans--Conveyance of
subsequent mortgage loans." Amounts in the pre-funding account may be used
only (a) to acquire subsequent mortgage loans, and (b) 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 holders of the class A certificates.
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.
Carryover reserve fund
The pooling and servicing agreement provides for a reserve fund, the net
rate cap fund, which is held by the trustee on behalf of the holders of the
certificates, other than the class IO certificates. To the extent amounts on
deposit are sufficient, holders of the applicable certificates will be
entitled to receive payments from the reserve fund equal to any Net Rate Cap
Carryover. The amount required to be deposited in the reserve fund on any
distribution date will equal any Net Rate Cap Carryover for the applicable
distribution date, or, if no Net Rate Cap Carryover, is payable on the
applicable distribution date, an amount that when added to other amounts
already on deposit in the reserve fund, the aggregate amount on deposit is
equal to $10,000. Any investment earnings on amounts on deposit in the reserve
fund will be paid to, and for the benefit of, the holders of the class BIO
certificates and will not be available to pay any Net Rate Cap Carryover. The
net rate cap fund will not be included as an asset of any REMIC.
Servicing procedures
The servicer will make reasonable efforts to collect all payments required
to be made under the mortgage loans and will, consistent with the terms of the
pooling and servicing agreement, follow the same collection procedures as it
follows with respect to comparable loans held in its own portfolio. Consistent
with the above and subject to the limitations set
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forth in the pooling and servicing agreement, the servicer may, in its
discretion, (a) waive any assumption fee, late payment charge, or other charge
in connection with a mortgage loan and (b) arrange with an obligor a schedule
for the liquidation of delinquencies by extending the due dates for scheduled
payments on the mortgage loans. In addition, the servicer has the right to
modify the terms of the mortgage loans if the modification would be made by
the servicer if the mortgage loan were held for the servicer's own account and
it first delivers to the trustee written notice of the modification together
with the calculations demonstrating that the modification is permitted by the
REMIC provisions of the Internal Revenue Code and applicable Treasury
regulations.
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 the interest payments
as a monthly servicing fee in the amount equal to 0.65% per annum, on the
Principal Balance of each mortgage loan as of the first day of each due
period. All assumption fees, late payment charges and other fees and charges,
excluding prepayment 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 prepayment period, the lesser of (a) the excess,
if any, of the sum of 30 days' interest on the Principal Balance of each
mortgage loan at the related loan rate, or at any lower rate as may be in
effect for the mortgage loan because of application of the Civil Relief Act,
minus the servicing fee for the mortgage loan, over the amount of interest
actually paid by the related mortgagor in connection with each principal
prepayment, with respect to all these mortgage loans, referred to as the
prepayment interest shortfall, and (b) an amount equal to 0.50% per annum
times the aggregate Principal Balance of the mortgage loans as of the first
day of the related 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 Shortfalls.
Evidence as to compliance
The pooling and servicing agreement provides for delivery on or before May
31 of each year beginning May 31, 2001, to the trustee, the certificate
insurer 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 pooling and servicing agreement throughout the preceding
fiscal year, except as specified in the statement.
On or before May 31 of each year beginning May 31, 2001, 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, the certificate insurer and the rating agencies to the effect that
the firm has examined particular documents and the records relating to
servicing of the mortgage loans under the Uniform Single Attestation Program
for Mortgage Bankers and the firm's conclusions.
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Certain matters regarding the servicer
The pooling and servicing agreement provides that the servicer may not
resign from its obligations and duties under that agreement, except in
connection with a permitted transfer of servicing, unless (1) these duties and
obligations are no longer permissible under applicable law as evidenced by an
opinion of counsel delivered to the trustee and the certificate insurer or (2)
upon the satisfaction of the following conditions:
(a) the servicer has proposed a successor servicer to the seller and the
trustee in writing and the proposed successor servicer is reasonably
acceptable to the seller and the trustee;
(b) the proposed successor servicer
o is the seller
or
o is an affiliate of Wells Fargo Bank Minnesota, National Association
that services similar collateral
or
o if the class principal balance of the senior certificates is greater
than 50% of the aggregate class principal balance of all the
certificates, the proposed successor servicer is approved by the
holders of certificates evidencing at least 51% of the voting rights
in the trust
or
o if the class principal balance of the senior certificates is 50% or
less than the aggregate class principal balance of all the
certificates, the proposed successor servicer is an approved servicer
by Standard & Poor's Ratings Services
and
(c) the rating agencies have confirmed to the trustee that the appointment
of the proposed successor servicer as the servicer will not result in the
reduction or withdrawal of the then current ratings of the offered
certificates.
No resignation will become effective until a successor servicer has assumed
the servicer's obligations and duties under the pooling and servicing
agreement.
The servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the servicer. Notwithstanding any arrangement, the
servicer will remain liable and obligated to the trustee and the
certificateholders for the servicer's duties and obligations under the pooling
and servicing agreement, without any diminution of these duties and
obligations and as if the servicer itself were performing the 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
pooling and servicing agreement, without the execution or filing of any paper
or any further act on the part of any of the parties to the pooling and
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servicing agreement, anything in the pooling and servicing agreement to the
contrary notwithstanding.
Events of default
Events of default will consist of:
o any failure by the servicer (a) to make any required monthly advance which
failure continues unremedied for one business day after the date due or
(b) to deposit in the collection account or the distribution account any
deposit required to be made under the pooling and servicing agreement,
which failure continues unremedied for two business days after the date
due;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the pooling and
servicing agreement which, in each case, materially and adversely affects
the interests of the certificateholders and continues unremedied for 60
days after knowledge or the giving of written notice of the failure to the
servicer by the trustee, or to the servicer and the trustee by
certificateholders evidencing at least 25% of the voting rights;
o any failure by the servicer to make any required servicing advance, which
failure continues unremedied for the lesser of the time at which the
failure would have a material adverse effect on the trust or for a period
of 60 days after knowledge or the giving of written notice of the failure
to the servicer by the trustee, or to the servicer and the trustee by
certificateholders evidencing at least 25% of the voting rights;
o particular events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the servicer and
particular actions by the servicer indicating insolvency, reorganization
or inability to pay its obligations; and
o cumulative losses or delinquency levels exceed the levels set forth in the
pooling and servicing agreement.
So long as an event of default remains unremedied, the trustee or holders
of certificates evidencing not less than 51% of the aggregate voting rights in
the trust may terminate all of the rights and obligations of the servicer as
servicer under the pooling and servicing agreement, other than its right to
recovery of expenses and amounts advanced pursuant to the terms of the pooling
and servicing agreement; provided, however, that in the case of the last event
of default listed above, those holders, in their sole discretion, must first
determine that the loss or delinquency levels were exceeded through the fault
of the servicer.
Notwithstanding anything to the contrary in the prospectus, pursuant to the
terms of the pooling and servicing agreement, within ninety (90) days of the
removal of the servicer, called the transition period, the trustee will be the
successor servicer and will assume all of the rights and obligations of the
servicer. Notwithstanding the foregoing sentence, the successor servicer will
be obligated to make monthly advances and servicing advances upon the removal
of the servicer unless it determines reasonably and in good faith that the
advances would not be recoverable. The successor servicer shall have no
responsibility or obligation (x) to repurchase or substitute for any mortgage
loan or (y) for any act or omission of a predecessor servicer during the
transition period. If, however, the trustee is
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unable or unwilling 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 as the successor servicer in the
assumption of all or any part of the responsibilities, duties or liabilities
of the servicer any established mortgage loan servicing institution meeting
the following requirements:
o having a net worth of not less than $25,000,000
o if the class principal balance of the senior certificates is greater than
50% of the aggregate class principal balance of all the certificates, the
proposed successor servicer is approved by the holders of certificates
evidencing at least 51% of the voting rights in the trust or
o if the class principal balances of the senior certificates is 50% or less
than the aggregate class principal balance of all the certificates, the
proposed successor servicer is an approved servicer by Standard & Poor's
Ratings Services
Pending the appointment, the trustee will be obligated to act in that capacity
unless prohibited by law. The successor servicer will be entitled to receive
the same compensation that the servicer would otherwise have received or the
lesser compensation as the trustee and that 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.
If an event of default occurs under the pooling and servicing agreement and
the defaulting servicer is not replaced by the successor servicer or another
person in accordance with the pooling and servicing agreement, the appointment
of the defaulting servicer shall be limited to 90 days. If the appointment is
so limited, the trustee will automatically renew the appointment for
successive 90-day terms unless directed in writing not to renew by the holders
of certificates evidencing at least 51% of the voting rights in the trust.
However, if the defaulting servicer is replaced, the succesor's appointment
will not be limited to 90 days unless and until an event of default exists
with respect to that successor.
Amendment
The pooling and servicing agreement may be amended from time to time by the
seller, the servicer and the trustee, subject in the case of any amendment
which affects any right, benefit, duty or obligation of the certificate
insurer, to the consent of the certificate insurer, without the consent of the
certificateholders, to
o cure any ambiguity,
o correct or supplement any provisions in the pooling and servicing
agreement which may be defective or inconsistent with any other provisions
of the pooling and servicing agreement,
o add to the duties of the servicer,
o comply with any requirements imposed by the Internal Revenue Code or any
regulation under the Internal Revenue Code, or to add or amend any
provisions of
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the pooling and servicing 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 rating, or
o add any other provisions with respect to matters or questions arising
under the pooling and servicing agreement which shall not be inconsistent
with the provisions of the pooling and servicing agreement,
provided that the action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any certificateholder;
provided, that any amendment will be deemed to not materially and adversely
affect the certificateholders and no opinion will be required to be delivered
if the person requesting the amendment obtains a letter from the rating
agencies stating that the amendment would not result in a downgrading of the
then current rating of the offered certificates.
The pooling and servicing agreement also may be amended from time to time
by the seller, the servicer and the trustee, subject in the case of any
amendment which affects any right, benefit, duty or obligation of the
certificate insurer, to the consent of the certificate insurer, with the
consent of certificateholders holding certificates evidencing at least 51% of
the voting rights of each class affected by the amendment, 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 amendment will (x) 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 (y) reduce the
aforesaid percentage required to consent to any amendment, without the consent
of the holders of all certificates of the affected class then outstanding.
Notwithstanding the foregoing, if the trustee is acting as the servicer at
the time of any proposed amendment and the senior certificates are still
outstanding, any proposed amendment will require the consent of the
certificate insurer.
Termination; purchase of mortgage loans
The trust will terminate on the distribution date following the later of
(x) payment in full of all amounts owing to the certificate insurer, unless
the certificate insurer otherwise consents, and (y) the earliest of
(a) the distribution date on which the aggregate class principal balance
of all the certificates has been reduced to zero,
(b) the final payment or other liquidation of the last mortgage loan in
the trust and
(c) the optional purchase of the mortgage loans, as described below.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, the servicer may, at its option,
terminate the pooling and servicing 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 the amount deposited in the pre-
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funding account on the closing date, called 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 the appraised value is less than the Principal
Balance of the related mortgage loan, as provided in the pooling and servicing
agreement, and accrued and unpaid interest on the related mortgage loan at the
weighted average of the loan rates through the end of the related due period
together with all amounts due to the certificate insurer.
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 the mortgage loan as of the date of purchase, plus all accrued and
unpaid interest on that principal balance computed at the loan rate.
Voting rights
Under the pooling and servicing agreement, the portion of the voting rights
allocated to the offered certificates will equal 100% minus the portion
allocated to the class BIO certificates and the Residual certificates, and the
portion of the voting rights allocated to the class BIO certificates and the
Residual certificates will equal the percentage equivalent of a fraction, the
numerator of which is the 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 the 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 the class on the basis of their respective percentage
interests.
The trustee
Wells Fargo Bank Minnesota, National Association will be named trustee
pursuant to the pooling and servicing agreement. Wells Fargo Bank Minnesota,
National Association, a direct, wholly-owned subsidiary of Wells Fargo & Co.,
is a national banking association originally chartered in 1872 and is engaged
in a wide range of activities typical of a national bank. Its principal office
is located at Wells Fargo Center, Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479-0113. It otherwise conducts its securities
administration services at its offices in Columbia, Maryland. Its address
there is 11000 Broken Land Parkway, Columbia, Maryland 21044-3562. The trustee
may make available each month, to any interested party, the monthly statement
to certificateholders via the trustee's website. The trustee's website will be
located at "www.ctslink.com". The trustee may have banking relationships with
the seller and the servicer. The trustee may appoint one or more co-trustees
if necessary to comply with the fiduciary requirements imposed by any
jurisdiction in which a mortgaged property is located.
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
pooling and servicing agreement or if the trustee becomes insolvent. Upon
becoming aware of these 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
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appointment by the successor trustee. If the successor trustee is to act as
the successor servicer under the pooling and servicing agreement, the
successor trustee must satisfy the conditions in clause (b) under the caption
"Certain matters regarding the servicer" above.
No holder of a certificate will have any right under the agreement to
institute any proceeding with respect to the pooling and servicing agreement
unless the 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 a proceeding
in its own name as trustee under the pooling and servicing agreement and have
offered to the trustee reasonable indemnity and the trustee for 60 days has
neglected or refused to institute any proceeding. The trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the pooling
and servicing agreement or to make any investigation of matters arising under
the pooling and servicing agreement or to institute, conduct or defend any
litigation under the pooling and servicing agreement or in relation to the
pooling and servicing agreement at the request, order or direction of any of
the certificateholders, unless the certificateholders have offered to the
trustee reasonable security or indemnity against the cost, expenses and
liabilities which may be incurred.
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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. This financing may have been provided by one
or more of the underwriters or their affiliates.
Federal Income Tax Considerations
Separate elections will be made to treat particular assets of the trust,
excluding the initial interest coverage account, the pre-funding account and
the net rate cap fund, as a real estate mortgage investment conduit, also
referred to as a REMIC, for federal income tax purposes under the Internal
Revenue Code of 1986, as amended, creating a tiered REMIC structure. The
offered certificates, excluding any associated rights to receive Net Rate Cap
Carryover, will be designated as "regular interests" in a REMIC, named REMIC
regular certificates. The REMIC regular certificates generally will be treated
as debt instruments issued by a REMIC for federal income tax purposes. Income
on the REMIC regular 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 REMIC
regular certificates may, depending on their issue price, be issued with
original issue discount, called OID, for federal income tax purposes. In this
event, holders of the 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 that income. The Treasury regulations relating to OID do not
contain provisions specifically interpreting Internal Revenue Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the trustee
intends to base its computation on Internal Revenue Code Section 1272(a)(6)
and the OID regulations as described in the prospectus. However, because no
regulatory guidance currently exists under Internal Revenue Code Section
1272(a)(6), there can be no assurance that the methodology represents the
correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the REMIC
regular certificates with OID will be the original yield to maturity of the
certificates, determined by assuming that the fixed rate and adjustable rate
mortgage loans will prepay in accordance with 115% and 100%, respectively, of
the applicable prepayment assumption. No representation is made as to the
actual rate at which the mortgage loans will prepay.
The REMIC regular certificates will be treated as regular interests in a
REMIC under section 860G of the Internal Revenue Code. Accordingly, the REMIC
regular certificates will be treated as (a) assets described in section
7701(a)(19)(C) of the Internal Revenue Code, and (b) "real estate assets"
within the meaning of section 856(c)(4)(A) of the Internal Revenue Code, in
each case to the extent described in the prospectus. Interest on the REMIC
regular 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
Internal Revenue Code to the same extent that the REMIC regular certificates
are treated as real estate assets. See "Federal Income Tax Considerations" in
the prospectus.
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Net rate cap carryover
The beneficial owners of the certificates, other than the class IO
certificates, and the related rights to receive Net Rate Cap Carryover, will
be treated for tax purposes as owning two separate assets: (a) the applicable
certificates without the rights to receive Net Rate Cap Carryover, which
constitute regular interests in a REMIC, and (b) the related rights to receive
Net Rate Cap Carryover. Accordingly, a purchaser of a certificate, other than
the class IO certificates, must allocate its purchase price between the two
assets comprising the related certificate. In general, the allocation would be
based on the relative fair market values of the assets on the date of purchase
of the certificates. No representation is or will be made as to the relative
fair market values. We recommend that all holders of applicable certificates
consult their tax advisors regarding the taxation of Net Rate Cap Carryover
which is generally governed by the provisions of the Internal Revenue Code and
Treasury regulations relating to notional principal contracts and possibly
those relating to straddles.
The rights to receive Net Rate Cap Carryover will not constitute
(a) a "real estate asset" within the meaning of section 856(c)(4)(A) of
the Internal Revenue Code for a real estate investment trust;
(b) a "qualified mortgage" or a "permitted investment" within the meaning
of section 860G(a)(3) and section 860G(a)(5), respectively, of the
Internal Revenue Code if held by a REMIC; or
(c) an asset described in section 7701(a)(19)(C)(xi) of the Internal
Revenue Code if held by a domestic building and loan association.
Further, the Net Rate Cap Carryover will not constitute income described in
section 856(c)(3)(B) of the Internal Revenue Code for a real estate investment
trust. Moreover, other special rules may apply to some investors, including
dealers in securities and dealers in notional principal contracts.
Backup withholding
Some 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 Internal Revenue Code, properly, or,
under specific 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 Internal Revenue
Service, 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, some
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 Internal
Revenue Service will receive tax and other information including the amount of
interest paid on the certificates owned from participants and indirect
participants rather than from the trustee. The trustee, however, will
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respond to requests for necessary information to enable participants, indirect
participants and other persons to complete their reports. Each non-exempt
certificate owner will be required to provide, under penalty of perjury, a
certificate on Internal Revenue Service 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 Internal Revenue Service as a credit against the
holder's federal income tax liability. These amounts will be deemed
distributed to the affected certificate owner for all purposes of the
certificates and the agreement.
Treasury regulations, called final withholding regulations, which are
generally effective with respect to payments made after December 31, 2000,
consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide particular presumptions regarding the status of
holders when payments to the holders cannot be reliably associated with
appropriate documentation provided to the payor. We recommend that all holders
consult their tax advisors regarding the application of the final withholding
regulations.
Federal income tax consequences to foreign investors
The following information describes the United States federal income tax
treatment of holders that are foreign investors. The term foreign investor
means any person other than
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a corporation or
partnership for United States federal income tax purposes organized in or
under the laws of the United States, any state thereof or the District of
Columbia,
o an estate the income of which is includible in gross income for United
States federal income tax purposes, regardless of its source, or
o 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 persons have the authority to control all substantial decisions of
the trust.
The Internal Revenue Code and Treasury regulations generally subject
interest paid to a foreign investor to a withholding tax at a rate of 30%,
unless this rate were changed by an applicable treaty. The withholding tax,
however, is eliminated with respect to particular "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 Internal Revenue 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
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owner an executed Internal Revenue Service Form W-8BEN signed under penalty of
perjury by the certificate owner stating that the certificate owner is a
foreign investor and providing the 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.
As indicated above, the final withholding regulations consolidate and
modify the current certification requirements and means by which a foreign
investor may claim exemption from United States federal income tax
withholding. All foreign investors should consult their tax advisors regarding
the application of the final withholding regulations, which are generally
effective with respect to payments made after December 31, 2000.
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 the offered certificate, provided that
o the gain is not effectively connected with a trade or business carried on
by the certificate owner in the United States,
o in the case of a certificate owner that is an individual, the certificate
owner is not present in the United States for 183 days or more during the
taxable year in which the sale, exchange or redemption occurs and
o in the case of gain representing accrued interest, the conditions
described in the second preceding paragraph are satisfied.
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ERISA Considerations
Any fiduciary of an employee benefit plan or other retirement arrangement
subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended, called ERISA, and/or Section 4975 of the Internal Revenue Code, which
proposes to cause the benefit plan or other retirement arrangement,
collectively called a plan, to acquire any of the offered certificates should
consult with its counsel with respect to the potential consequences, under
ERISA and the Internal Revenue Code, of the plan's acquisition and ownership
of the certificates. See "ERISA Considerations" in the prospectus.
The U.S. Department of Labor has granted an administrative exemption to
Greenwich Capital Markets, Inc. (Prohibited Transaction Exemption 90-59; which
was amended by Prohibited Transaction Exemptions 97-34 and 2000-58), called
the exemption, which exempts from the application of the prohibited
transaction rules transactions relating to (1) the acquisition, sale and
holding by plans of particular certificates representing an undivided interest
in mortgage and asset-backed pass-through trusts, with respect to which
Greenwich Capital Markets, Inc. 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 the mortgage and asset-backed
pass-through trusts, provided that the general conditions and other conditions
set forth in the exemption are satisfied. The exemption will apply to the
acquisition, holding and resale by a plan of the certificates backed by fully
secured mortgage loans such as the Mortgage Loans; provided that particular
conditions, some 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 certificates by a plan is on terms, including
the price for the 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 certificates acquired by the plan have received a rating at the
time of the acquisition that is at least "BBB-" from either S&P or Fitch or
"Baa3" from Moody's Investors Service;
(3) The sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the seller pursuant to the sale of the
mortgage loans to the trust represents not more than the fair market value
of the 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 with service;
(4) The trustee is not an affiliate of the underwriters, the seller, the
servicer, the insurer, 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; and
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(5) The plan investing in the 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 certificates by plans and that all conditions of the exemption other
than those within the control of the investors will be met.
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 the excluded plan. For
purposes of the offered certificates, an excluded plan is a plan sponsored by
the seller, the underwriters, the trustee, the securities administrator, 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 the trust or any affiliate of the parties,
called the restricted group. In addition, the fiduciary may not be an obligor
with respect to more than 5% of the fair market value of the loans. Also, no
plan's investment in any class of offered certificates may exceed 25% of all
of the certificates of the class outstanding at the time of the plan's
acquisition and after the plan's acquisition of the 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.
With respect to the offered certificates, the amendment generally allows a
portion of the mortgage 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, called the pre-funding period, instead of
requiring that all the 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, called the pre-
funding limit, must not exceed twenty-five percent (25%).
(2) All loans transferred after the closing date, referred to as
subsequent 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 the subsequent 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 average annual
percentage 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.
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(5) Either: (a) the characteristics of the subsequent loans must be
monitored by an insurer or other credit support provider which is
independent of the seller; or (b) an independent accountant retained by the
seller must provide the seller with a letter, with copies provided to the
rating agencies, the underwriters and the trustee, stating whether or not
the characteristics of the subsequent loans conform to the characteristics
described in the prospectus, prospectus supplement, private placement
memorandum, collectively, referred to as the offering documents, and/or
pooling and servicing agreement. In preparing the 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 some circumstances, if the amount on
deposit in the pre-funding account is reduced below the minimum level
specified in the agreement or an event of default occurs under the
agreement.
(7) Amounts transferred to any pre-funding account and/or initial
interest coverage account used in connection with the pre-funding may be
invested only in investments which are permitted by the rating agency and
(a) 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 of the United States, provided that the obligations are
backed by the full faith and credit of the United States; or (b) have been
rated, or the obligor has been rated, in one of the three highest generic
rating categories by the rating agency, referred to as permitted
investments.
(8) The offering documents must describe:
(a) any pre-funding account and/or initial interest coverage account
used in connection with a pre-funding account;
(b) the duration of the pre-funding period;
(c) the percentage and/or dollar amount of the pre-funding limit for
the trust; and
(d) that the amounts 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 agreement must describe the permitted investments for the pre-
funding account and initial interest coverage account and, if not disclosed
in the offering documents, the terms and conditions for eligibility of the
additional loans.
Whether the conditions of the exemption will be satisfied with respect to
the certificates will depend upon the relevant facts and circumstances
existing at the time a plan acquires the certificates. Plan investors should
make their own determination, in consultation with their counsel, before
acquiring certificates in reliance on the applicability of the exemption.
In the absence of the exemption, the purchase and holding of the class M-1,
class M-2 or class B certificates by a plan or by individual retirement
accounts or other plans subject to Section 4975 of the Internal Revenue Code
may result in prohibited transactions or the
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imposition of excise tax or civil penalties. Consequently, transfers of the
class M-1, class M-2 and class B certificates will not be registered by the
trustee unless the trustee receives:
(a) a representation from the transferee of the certificate, acceptable to
and in form and substance satisfactory to the trustee, to the effect that the
transferee is not an employee benefit plan subject to Section 406 of ERISA or
a plan or arrangement subject to Section 4975 of the Internal Revenue Code,
nor a person acting on behalf of any plan or arrangement nor using the assets
of any plan or arrangement to effect the transfer, called a benefit plan
investor;
(b) a representation that the purchaser is a benefit plan investor and
understands that the eligibility of the certificates for purchase is
conditioned upon the certificate being rated at least "BBB-" at the time of
acquisiton of the certificate by the benefit plan investor.
(c) if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing the certificates with
funds contained in an "insurance company general account", as the term is
defined in Section V(e) of Prohibited Transaction Class Exemption 95-60,
called PTCE 95-60, and that the purchase and holding of the certificates are
covered under Sections I and III of PTCE 95-60; or
(d) an opinion of counsel satisfactory to the trustee that the purchase or
holding of the certificate by a plan, any person acting on behalf of a plan or
using the 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 Internal Revenue Code, will not subject the
trustee to any obligation in addition to those undertaken in the agreement.
The representation as described above shall be deemed to have been made to
the trustee by the transferee's acceptance of a class M-1, class M-2 or class
B certificate in book-entry form. In the event that the representation is
violated, or any attempt to transfer to a plan or person acting on behalf of a
plan or using the plan's assets is attempted without the opinion of counsel,
the attempted transfer or acquisition shall be void and of no effect.
We recommend that any plan fiduciary considering whether to purchase any
offered certificates on behalf of a plan consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Internal Revenue Code to the 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
Internal Revenue Code should make its own determination as to the availability
of the exemptive relief provided in the exemption, and also consider the
availability of any other prohibited transaction exemptions.
S-81
<PAGE>
Legal Investment Considerations
The offered certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in the offered
certificates. See "Legal Investment" in the prospectus.
Underwriting
Subject to the terms and conditions set forth in the underwriting
agreement, dated December 13, 2000, among the seller and the underwriters
named below, 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 the underwriter's name.
<TABLE>
<CAPTION>
Countrywide
Class Greenwich Capital Securities
----- Markets, Inc. Corporation
---------------- -----------
<S> <C> <C>
Class A ............................................... $73,950,000 $24,650,000
Class M-1 ............................................. 4,500,000 1,500,000
Class M-2 ............................................. 4,125,000 1,375,000
Class B ............................................... 3,675,000 1,225,000
----------- -----------
Total ............................................. $86,250,000 $28,750,000
=========== ===========
</TABLE>
The seller has been advised that the underwriters propose initially to
offer the offered certificates to some dealers at the prices set forth on the
cover page of this prospectus supplement less a selling concession not to
exceed the applicable percentage of the certificate denomination set forth
below, and that the underwriters may allow and the dealers may reallow a
reallowance discount not to exceed the applicable percentage of the
certificate denomination set forth below:
<TABLE>
<CAPTION>
Class Selling Reallowance
----- Concession Discount
---------- -----------
<S> <C> <C>
Class A ........................................... 0.1800% 0.1200%
Class M-1 ......................................... 0.3000% 0.2000%
Class M-2 ......................................... 0.3780% 0.2520%
Class B ........................................... 0.4842% 0.3228%
</TABLE>
After the initial public offering, the public offering prices, concessions
and discounts may be changed.
Distribution of the notional amount certificates will be made by Greenwich
Capital Markets, Inc. 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 $6,168,902 plus accrued interest, before deducting a portion of
the total expenses payable by the seller which total is estimated to be
$500,000. In connection with the purchase and sale of the notional amount
certificates, Greenwich Capital Markets, Inc. may be deemed to have received
compensation from the seller in the form of underwriting discounts and
commissions.
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
S-82
<PAGE>
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 some selling group members to bid for and purchase the
offered certificates, other than the class IO certificates. As an exception to
these rules, the underwriters are permitted to engage in particular
transactions that stabilize the prices of the offered certificates, other than
the class IO certificates. These 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 these 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 related offered
certificates. In addition, neither the seller nor any of the underwriters
makes any representation that the underwriters will engage in these
transactions or that the 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 an affiliate of one of
the underwriters. The seller will apply a portion of the proceeds it receives
from the sale of the offered certificates to repay the financing.
The underwriting agreement provides that the seller will indemnify the
underwriters against particular civil liabilities, including liabilities under
the Securities Act of 1933, as amended.
Experts
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1999,
incorporated by reference in this prospectus supplement have been incorporated
in this prospectus supplement in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
Legal Matters
Certain legal matters with respect to the offered certificates will be
passed upon for the seller by Stroock & Stroock & Lavan LLP, New York, New
York, and for the underwriters by Brown & Wood LLP, New York, New York.
S-83
<PAGE>
Ratings
The offered certificates will be rated by Standard & Poor's Ratings
Services, referred to as S&P, Moody's Investors Service, referred to as
Moody's, and Fitch, Inc., referred to as Fitch, each called a rating agency.
It is a condition to the issuance of the offered certificates that they
receive ratings by the rating agencies as follows:
Class S&P Moody's Fitch
----- --- ------- -----
Class A AAA Aaa AAA
Class IO AAA Aaa AAA
Class M-1 AA - AA
Class M-2 A - A
Class B BBB - BBB
The ratings assigned by the rating agencies 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. The 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. The ratings on such
certificates do not, however, constitute a statement regarding frequency of
prepayments on the related 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 holders
of the notional amount certificates may fail to recoup their initial
investments or the likelihood that holders of the applicable certificates will
receive any related Net Rate Cap Carryover. Each securities rating should be
evaluated independently of similar ratings on different securities.
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
another rating agency. The rating assigned by another rating agency to the
offered certificates of any class could be lower than the respective ratings
assigned by the applicable rating agency.
S-84
<PAGE>
ANNEX I
Global Clearance, Settlement and Tax Documentation Procedures
Except in limited circumstances, the globally offered Home Equity Loan
Asset-Backed Certificates, Series 2000-4, referred to as the global
securities, will be available only in book-entry form. Investors in the global
securities may hold the global securities through any of The Depository Trust
Company, Clearstream, Luxembourg or Euroclear. The global securities will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the
ordinary way in accordance with their normal rules and operating procedures
and in accordance with conventional eurobond practice, i.e., seven calendar
day settlement.
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior home equity loan asset-backed
certificates issues.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC participants holding certificates will be effected on a delivery-
against-payment basis through the respective Depositaries of Clearstream,
Luxembourg and Euroclear, in this capacity, and as DTC participants.
Non-U.S. holders, as described below, of global securities will be subject
to U.S. withholding taxes unless the holders meet particular requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial settlement
All global securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Clearstream, Luxembourg
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold the 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 Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global securities will
be credited to the securities custody accounts on the settlement date against
payment in same-day funds.
I-1
<PAGE>
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 Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC Seller and Clearstream, Luxembourg or Euroclear
Purchaser. When global securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the respective depositary,
as the case may be, to receive the global securities against payment. Payment
will include interest accrued on the global securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
a 360-day year of twelve 30-day months. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
depositary of the DTC participant's account against delivery of the global
securities. After settlement has been completed, the global securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream, Luxembourg
participant's or Euroclear participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the global securities will accrue from, the value date,
which would be the preceding day when settlement occurred in New York. If
settlement is not completed on the intended value date, i.e., the trade fails,
the Clearstream, Luxembourg or Euroclear cash debt will be valued instead as
of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the global securities are
credited to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Cedelbank participants or Euroclear participants can
elect not to preposition funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Clearstream, Luxembourg participants
or Euroclear participants purchasing global securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the global
securities were credited to their accounts. However, interest on the global
securities would accrue from the value date. Therefore, in many cases the
I-2
<PAGE>
investment income on the global securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges,
although this result will depend on each Clearstream, Luxembourg participant's
or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending global securities
to the respective European depositary for the benefit of Clearstream,
Luxembourg participants or Euroclear participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
participants a cross-market transaction will settle no differently than a
trade between two DTC participants.
Trading between Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream,
Luxembourg participants and Euroclear participants may employ their customary
procedures for transactions in which global securities are to be transferred
by the respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear
participant at least one business day prior to settlement. In these cases
Clearstream, Luxembourg or Euroclear will instruct the respective depositary,
as appropriate, to deliver the global securities to the DTC participant's
account against payment. Payment will include interest accrued on the global
securities from and including the last coupon payment to and excluding the
settlement date on the basis of a 360-day year of twelve 30-day months. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment
will then be reflected in the account of the Clearstream, Luxembourg
participant or Euroclear participant the following day, and receipt of the
cash proceeds in the Clearstream, Luxembourg participant's or Euroclear
participant's account would be back-valued to the value date, which would be
the preceding day, when settlement occurred in New York. Should the
Clearstream, Luxembourg participant or Euroclear participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-
valuation will extinguish any overdraft incurred over that one-day period. If
settlement is not completed on the intended value date, i.e., the trade fails,
receipt of the cash proceeds in the Clearstream, Luxembourg participant's or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase global securities from DTC participants for delivery to Clearstream,
Luxembourg participants or Euroclear participants should note that these
trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
I-3
<PAGE>
(a) borrowing through Clearstream, Luxembourg or Euroclear for one day,
until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts, in accordance with the
clearing system's customary procedures;
(b) borrowing the global securities in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the global
securities sufficient time to be reflected in their Clearstream,
Luxembourg or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at least
one day prior to the value date for the sale to the Clearstream,
Luxembourg participant or Euroclear participant.
Certain U.S. federal income tax documentation requirements
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC if the holder has an
address outside the U.S., will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest, including original issue discount,
on registered debt issued by U.S. persons, unless (1) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between the beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (2) the beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial owners
of global securities that are non-U.S. persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (certificate of Foreign
Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If the information shown on Form W-8 changes,
a new Form W-8 or Form W-8BEN must be filed within 30 days of the change.
After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form 4224
or Form W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). After December
31, 2000, only Form W-8ECI will be acceptable.
I-4
<PAGE>
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001 or Form W-8BEN). Non-U.S. persons that are certificate owners
residing in a country that has a tax treaty with the United States can obtain
an exemption or reduced tax rate, depending on the treaty terms, by filing
Form 1001 (Ownership, Exemption or Reduced Rate certificate) or Form W-8BEN.
If Form 1001 is provided and the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8 or Form W-8BEN.
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 files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8, Form 1001 and Form 4224 are
effective for payments through December 31, 2000. Form W-8BEN and Form W-8ECI
are effective until the third succeeding calendar year from the date the form
is signed.
The term "U.S. person" means
(a) a citizen or resident of the United States,
(b) a corporation or partnership, or other entity treated as a corporation
or partnership for U.S. federal income tax purposes, organized in or under the
laws of the United States, any state thereof or the District of Columbia,
(c) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source or
(d) 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
persons 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.
I-5
<PAGE>
[This page intentionally left blank]
<PAGE>
Prospectus
$1,435,000,000
Asset Backed Notes
Asset Backed Certificates
________________
Delta Funding Corporation
Seller
________________
The securities are obligations only of the related trust and are not insured
or guaranteed by any governmental agency.
The securities involve significant risks. We recommend that you review the
information under "Risk Factors" in the related prospectus supplement.
This prospectus must be accompanied by a prospectus supplement for the
particular series.
Securities Offered
o asset backed notes, asset backed
certificates or a combination
o rated in one of four highest rating
categories by at least one nationally
recognized rating organization
o not listed on any trading exchange
Assets
o subprime mortgage loans secured by
first or second liens on
residential or mixed used properties
o securities backed by those types of
subprime mortgage loans
o may include one or more forms of enhancement
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Making any contrary representation is a
criminal offense.
The seller may offer securities through underwriters or by other methods
described under the caption "Plan of Distribution."
The date of this prospectus is June 28, 2000
<PAGE>
Incorporation of Certain Documents by Reference
The seller, as creator of each trust, has filed with the Securities and
Exchange Commission a Registration Statement under the Securities Act of 1933,
as amended, with respect to the notes and the certificates offered pursuant to
this prospectus. The Registration Statement includes information about the
securities which is not included in this prospectus. Prospective investors may
read the Registration Statement and make copies of it at the Commission's main
office located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade Center,
New York, New York 10048. Prospective investors also may obtain a copy of the
Registration Statement by paying a fee set by the Commission and requesting a
copy of the Registration Statement by paying a fee set by the Commission and
requesting a copy from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Prospective
investors who have access to the Internet also may read the Registration
Statement at the Commission's site on the World Wide Web located at http://
www.sec.gov.
Each trust will be required to file with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the securities Exchange Act of 1934, as amended,
(a) a Current Report on Form 8-K each month after the month of formation of
that trust and prior to the expiration of the calendar year in which that
trust was formed and (b) an annual report on Form 10-K within 90 days after
the end of the calendar year in which the trust was formed. Each Form 8-K will
include as an exhibit the monthly statement to securityholders of the related
series. The Form 10-K will include certain summary information about the
trust. Any reports and documents so filed by or on behalf of a trust before
the termination of the offering of the securities of that trust will be
incorporated in this prospectus. If the information incorporated in this
prospectus modifies or changes the information in this prospectus the modified
or changed information will control if any information incorporated by
reference in this prospectus is itself modified or changed by subsequent
information incorporated by reference, the latter information will control.
Any reports and documents that are incorporated in this prospectus will not be
physically included in this prospectus or delivered with this prospectus.
The servicer will provide without charge to each person, including any
beneficial owner of securities, to whom a copy of this prospectus is
delivered, on the written or oral request of any person, a copy of any or all
of the documents incorporated in this prospectus or in any related prospectus
supplement, other than exhibits to the documents unless these exhibits are
specifically incorporated by reference in the document. Written requests for
copies should be directed to Corporate Secretary, Delta Funding Corporation,
1000 Woodbury Road, Woodbury, New York 11797. Telephone requests for copies
should be directed to the servicer, at (516) 364-8500. In order to receive any
requested information in a timely fashion, prospective investors must make
their requests no later than five business days before they must make their
investment decisions.
2
<PAGE>
The Seller
Delta Funding Corporation, a New York corporation is a specialty consumer
finance company that has engaged in originating, acquiring, selling and
servicing home equity loans since 1982. Throughout its operating history, the
company has focused on lending to individuals who generally do not qualify for
conforming credit. The company makes loans to these borrowers for a variety of
purposes, for example debt consolidation, home improvement, refinancing or
education, and these loans are primarily secured by first mortgages on one- to
four-family residential properties.
The company primarily originates and purchases home equity loans through
three distribution channels. The company originates home equity loans through
licensed mortgage brokers who submit loan applications on behalf of the
borrower, through its retail subsidiary, Fidelity mortgage, and through its
in-house loan officers. Prior to July 1, 2000, the company purchased from
approved licensed mortgage bankers and financial institutions, loans that
conform to the company's underwriting guidelines ("Correspondent Channel").
Effective July 1, 2000, the company closed its Correspondent Channel. The
company believes that it has a competitive advantage in serving brokers and
retail borrowers 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
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 its history, enable the company to provide quality services
including preliminary approval of most loans from brokers within one day,
consistent application of its underwriting guidelines and funding 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
by servicing each one with a business development representative, a team of
experienced underwriters and 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 direct origination sources
and to expand its geographic presence, the company'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. This affiliate develops
retail loan leads primarily through its telemarketing system and its network
of 14 loan production centers located in Florida (3), Illinois, Indiana,
Missouri, North Carolina, Ohio (4), Pennsylvania (2) and Tennessee. In March
2000, the company decided to close a loan production center in Georgia.
During its first 12 years of operation, the company 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. The company has opened regional branch offices
which are typically staffed with a combination of experienced company
personnel and local employees to supplement its lending
3
<PAGE>
operations in some of its newer geographic regions. Currently, the company
maintains regional branch offices in the Southeast, Midwest and West. Final
underwriting approval is required from the Woodbury, NY headquarters or
Southeast branch office for all mortgage loans. The company is not dependent
on any single or affiliated group of brokers or correspondents.
The company's corporate headquarters is located in approximately 135,000
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. The
company's servicing operation is located in approximately 40,000 square feet
located at 99 Sunnyside Blvd., Woodbury, NY 11797. Its telephone number is
(516) 364-8500.
4
<PAGE>
Underwriting
All of the company's brokers and correspondents are provided with the
company's underwriting guidelines. Loan applications received from brokers and
correspondents are classified according to particular characteristics,
including but not limited to: ability to pay, credit history of the applicant,
loan-to-value ratio and general stability of the applicant in terms of
employment history, time in residence and condition and location of the
collateral. The company 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 the company, 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 the company's
underwriting staff in classifying loan applicants are set forth below.
Underwriting Criteria of Delta Funding Corporation
<TABLE>
<CAPTION>
"A" Risk "B" Risk
------- -------
<S> <C> <C>
Credit profile .......................... Excellent credit history Good overall credit
Existing mortgage history ............... Current at application time and a maximum Current at application time and a maximum
of two 30-day late payments in the last of four 30-day late payments in the last
12 months 12 months
Other credit ............................ Minor 30-day late items allowed with a Some slow pays allowed but majority of
letter of explanation; no open credit and installment debt paid as
collection accounts, charge-offs, agreed. Small isolated charge-offs,
judgments collections, or judgments allowed case-
by-case
Bankruptcy filings ...................... Discharged more than three years prior to Discharged more than two years prior to
closing and excellent reestablished closing and excellent reestablished
credit credit
Maximum loan-to-value ratio:
Owner-occupied ......................... Generally 80% (up to 90%*) for a one- to Generally 80% (up to 85%*) for a one- to
four-family residence four-family residence
Non-owner occupied ..................... Generally 75% (up to 80%*) for a one- to Generally 70% (up to 80%*) for a one- to
four-family residence four-family residence
Employment .............................. Minimum 2 years employment in the same Minimum 2 years employment in the same
field field
<CAPTION>
"C" Risk "D" Risk
------- -------
<S> <C> <C>
Credit profile .......................... Good to fair credit Fair to poor credit
Existing mortgage history ............... Up to 30 days delinquent at application 90 days delinquent or more
time and a maximum of four 30-day late
payments and one 90-day late payment in
the last 12 months
Other credit ............................ Slow pays, some open delinquencies Not a factor. Derogatory credit must be
allowed. Isolated charge-offs, collection paid with proceeds. Must demonstrate
accounts or judgments case-by-case ability to pay
Bankruptcy filings ...................... Discharged more than one year prior to May be open at closing, but must be paid
closing and good reestablished credit off with proceeds
Maximum loan-to-value ratio:
Owner-occupied ......................... Generally 75% (up to 80%*) for a one- to Generally 65% (up to 70%*) for a one- to
four-family residence four-family residence
Non-owner occupied ..................... Generally 65% (up to 75%*) for a one- to Generally 55% (up to 60%*) for a one- to
four-family residence four-family residence
Employment .............................. No minimum required No minimum required
</TABLE>
---------------
* On an exception basis
5
<PAGE>
The company 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 compensating factors are:
o low loan-to-value ratio,
o low debt ratio,
o long-term stability of employment and/or residence,
o excellent payment history on past mortgages, or
o a significant reduction in monthly expenses.
The mortgage loans originated by the company 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 the
company's mortgage loans are fully amortizing loans. The company primarily
purchases fixed rate loans which amortize over a period not to exceed 30
years. Loans that are not fully amortizing generally provide for scheduled
amortization over 30 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 the company generally range from a minimum of $10,000 to a
maximum of $350,000. The company generally does not acquire or originate any
mortgage loans where the combined loan-to-value ratio exceeds 90%. The
collateral securing loans acquired or originated by the company are generally
one- to four-family residences, including condominiums and townhomes, and
these properties may or may not be occupied by the owner. It is the company's
policy not to accept commercial properties or unimproved land as collateral.
However, the company will accept mixed-use properties such as a property where
a portion of the property is used for residential purposes and the balance is
used for commercial purposes and will accept small multifamily properties of 5
to 8 units, both at reduced loan- to-value ratios. The company does not
purchase loans where any senior mortgage contains open-end advance, negative
amortization or shared appreciation provisions.
The company's mortgage loan program includes:
o a full documentation program for salaried borrowers,
o a limited documentation program,
o a non-income verification program for self-employed borrowers and
o a stated income 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 is 50% or less of the borrower's monthly gross income.
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 the company's limited documentation
program, the company requires a job letter to be submitted which contains the
same information one would find on a standard verification of employment form:
o job position,
6
<PAGE>
o length of time on job,
o current salary, and
o the job letter should appear on the employer's letterhead.
For the company's non-income verification program, proof of self-employment
in the same business plus proof of current self-employed status is required.
The company's stated income program, which represents a very small percentage
of the company's loans, is only offered for better credit quality borrowers
where a telephone verification is done by an underwriter to verify that the
borrower is employed. The company usually requires lower combined loan-to-
value ratios with respect to loans made under programs other than the full
documentation program.
Assessment of an applicant's ability and willingness to pay is one of the
principal elements in distinguishing the company'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, the company 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.
The company has a staff of 96 underwriters with an average of five years of
non-conforming lending experience. With the exception of the company's
Atlanta, Georgia office, all underwriting functions for broker and
correspondent originations are centralized in its Woodbury, New York office.
All underwriting functions for retail originations are centralized in the
company's two retail underwriting "hubs," located in Cincinnati, Ohio and West
Palm Beach, Florida. The company does not delegate underwriting authority to
any broker or correspondent. The company's underwriting department functions
independently of its business development and mortgage origination departments
and does not report to any individual directly involved in the origination
process. No underwriter at the company is compensated on an incentive or
commission basis.
The company 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 some higher loan amounts requiring a third approval.
The company 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.
The company's underwriting of every loan submitted consists not only of a
thorough credit review, but also
o a separate appraisal review conducted by the company's appraisal review
department and
o 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.
7
<PAGE>
Appraisals are performed by third party, fee-based appraisers or by the
company's approved appraisers and generally conform to current Fannie Mae and
Freddie Mac secondary market requirements for residential property appraisals.
Each appraisal includes, among other things, an inspection of both the
exterior and interior of the subject property and data from sales within the
preceding 12 months of similar properties within the same general location as
the subject property.
The company performs an appraisal review on each loan prior to closing or
prior to purchasing. While the company recognizes that the general quality
control practices of conventional mortgage lenders is to perform only drive-by
appraisals after closings, the company 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:
o Multiple Listing Services in nine states;
o assessment and sales services, such as Comps, Inc., Pace, 1st American and
Transamerica;
o internet services such as Realtor.com; and
o 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. The company
actively tracks and grades, on criteria that it has developed over time, 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 the
company. The closing attorney or agent is responsible for completing the loan
closing transaction in accordance with applicable law and the company's
operating procedures. Title insurance that insures the company's interest as
mortgagee and evidence of adequate homeowner's insurance naming the company 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:
o obtaining a new drive-by appraisal for each property;
o running a new credit report from a different credit report agency;
8
<PAGE>
o reviewing loan applications for completeness, signatures, and for
consistency with other processing documents;
o obtaining new written verification of income and employment;
o obtaining new written verification of mortgage to re-verify any
outstanding mortgages; and
o 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
The company has been servicing loans since its inception in 1982, and has
serviced or is servicing substantially all of the loans that it 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 the current owners' rights with
respect to the loans, including, recovering delinquent payments, instituting
foreclosure and liquidating the underlying collateral.
The company services all loans out of its headquarters in Woodbury, New
York, utilizing a leading in-house loan servicing system called LSAMS, which
it purchased in 1995. LSAMS replaced the company's former service bureau loan
servicing system, and has provided the company with considerably more
flexibility to adapt the system to the company's specific needs as a
nonconforming home equity lender. As such, the company 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, the company
purchased a default management sub-servicing system 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
o detailed tracking of all key events in foreclosure and bankruptcy on a
loan-by-loan and portfolio-wide basis;
o the ability to track and account for all pre- and post-petition payments
received in bankruptcy from the borrower and trustee; and
o the ability to monitor, market and account for all aspects necessary to
liquidate an REO property after foreclosure.
The company's management information systems department also has created a
market value analysis program to run with LSAMS, which provides the company
with the ability to monitor its equity position on a loan-by-loan and
portfolio-wide basis.
Centralized controls and standards have been established by the company for
the servicing and collection of mortgage loans in its portfolio. The company
revises its policies and procedures from time to time in connection with
changing economic and market conditions and changing legal and regulatory
requirements.
The company's collections policy is designed to identify payment problems
sufficiently early to permit the company to quickly address delinquency
problems and,
9
<PAGE>
when necessary, to act to preserve equity in a preforeclosure property. The
company believes that these policies, combined with the experience level of
independent appraisers engaged by the company, 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
the company's automated servicing system using the company's proprietary
payment profiling software. 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 determined by the
proprietary software to be after the borrower's typical payment date. This
payment profiling allows the company to focus its collections efforts on those
borrowers who are delinquent and outside their typical payment date as opposed
to those borrowers who are delinquent but typically pay on or about a specific
date each month. These loans are automatically queued into LSAMS auto queue as
well as a Davox Predictive Dialer. The predictive dialer initiates the
telephone calls and transfers the calls to a collector when a borrower is
reached. If the predictive dialer determines a line is busy or receives a no
answer, it automatically cycles those calls through the same day at pre-
determined intervals. If the predictive dialer contacts an answering machine,
an automated message is left. The account remains in the queue unless and
until payment is received, at which point LSAMS automatically removes the loan
from the collector's auto queue until the next payment profile pattern is
broken. In the case of seriously delinquent accounts, collection calls can
begin as soon as two days after the payment due date.
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 and property inspections are performed on or about the
45th day of delinquency. The company's 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 the company's senior management.
On or about the ninety-first day of delinquency, the loan is referred to
the loss mitigation department. This department is comprised of the collectors
with the ability to negotiate payment plans, deeds in lieu, short sales, etc.
If their efforts have also been exhausted without success, the loss mitigation
representative responsible for the account recommends the loan be sent to
foreclosure at one of several foreclosure committee meetings held each month.
The foreclosure committee is comprised of the loss mitigation representative,
the foreclosure department manager and two members of the executive
department. This meeting is held to determine whether foreclosure proceedings
are appropriate, based upon the analysis of all relevant factors, including a
market value analysis, reason for default and efforts by the borrower to cure
the default.
10
<PAGE>
Regulations and practices regarding the liquidation of properties and the
rights of a borrower in default vary greatly from state to state. As a result,
all foreclosures are assigned to outside counsel, located in the same state as
the secured property. Bankruptcies filed by borrowers are similarly assigned
to appropriate local counsel. All aspects of foreclosures and bankruptcies are
monitored by the company through its sub-servicing loan system described above
and through monthly status reports from attorneys.
Prior to foreclosure sale, the company performs an in-depth market value
analysis on all defaulted loans. This analysis includes:
o a current valuation of the property obtained through a drive-by appraisal
or broker's price opinion conducted by an independent appraiser or a
broker from the company'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;
o an evaluation of the amount owed, if any, for real estate taxes;
o an evaluation of the amount owed, if any, to a senior mortgagee; and
o estimated carrying costs, brokers' fee, repair costs and other related
costs associated with real estate owned properties.
The company bases the amount it will bid at foreclosure sales on this
analysis.
If the company 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 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.
The company 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 that lapse and notifying the borrower that the company will obtain
force-placed insurance at the borrower's expense. The company also has an
insurance policy in place that provides coverage automatically for the company
in the event that the company fails to obtain force-placed insurance.
11
<PAGE>
Delinquency and loss experience
The following table sets forth information relating to the delinquency and
loss experience of the company 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 the company'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 the company's mortgage loan portfolio are not fully seasoned, the
delinquency and loss information for 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.
Delta Funding Corporation's Historic Servicing Portfolio Information
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance (end of
period) ....................................... $310,228,743 $468,846,079 $932,958,188 $1,840,150,403 $2,950,434,922
Average Outstandings(1) ....................... $300,678,046 $373,384,417 $667,368,565 $1,376,108,923 $2,436,343,233
DELINQUENCY
30-59 Days:
Principal Balance ............................ $ 22,569,938 $ 35,052,951 $ 54,582,550 $ 90,052,724 $ 153,726,410
Percent of Delinquency by Dollar(2)........... 7.28% 7.48% 5.9% 4.9% 5.2%
60-89 Days:
Principal Balance ............................ $ 6,398,055 $ 8,086,230 $ 14,272,587 $ 28,864,099 $ 50,034,005
Percent of Delinquency by Dollar(2)........... 2.06% 1.72% 1.5% 1.6% 1.7%
90 Days or More
Principal Balance ............................ $ 6,517,506 $ 6,748,506 $ 9,224,525 $ 17,695,594 $ 47,886,542
Percent of Delinquency by Dollar(2)........... 2.10% 1.44% 1.0% 1.0% 1.6%
Total Delinquencies:
Principal Balance ............................ $ 35,485,499 $ 49,887,687 $ 78,079,663 $ 136,612,417 $ 251,646,956
Percent of Delinquency by Dollar(2)........... 11.44% 10.64% 8.4% 7.4% 8.5%
FORECLOSURES
Principal Balance ............................ $ 20,768,336 $ 23,506,751 $ 34,765,638 $ 85,500,439 $ 145,678,781
Percent of Foreclosures by Dollar(2).......... 6.69% 5.01% 3.7% 4.7% 4.9%
REO
Principal Balance ............................ $ 1,926,922 $ 4,020,295 $ 5,672,811 $ 10,292,208 $ 18,811,007
Percent of REO by Dollar(2). ................. 0.6% 0.9% 0.6% 0.6% 0.6%
Gross Losses .................................. $ (693,902) $ (2,142,099) $ (3,223,525) $ (5,514,944) $ (10,324,682)
Recoveries .................................... $ 6,812 $ 0 $ 357,320 $ 529,406 $ 1,620,479
Net Losses on liquidated loans(3) ............. $ (687,090) $ (2,142,099) $ (2,866,204) $ (4,985,538) $ (8,704,203)
Percentage of Net Losses on liquidated loans
(based on Average Outstanding Principal
Balance) ...................................... 0.23% 0.57% 0.43% 0.36% 0.36%
</TABLE>
(footnotes on next page)
12
<PAGE>
(footnotes from previous page)
(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.
The company believes that the increase in Total Delinquencies, Percent of
Delinquency by Dollar, from 1997 to 1998 is attributable primarily to a
combination of (a) the seasoning of the loans in its servicing portfolio and
(b) the reduction, on a percentage basis, in the size of the increase in the
average servicing portfolio in 1998 (77% over 1997) from the increase in 1997
(106% over 1996).
While the above delinquency and foreclosure and loss experiences reflect
the company's experiences for the periods indicated, there can be no assurance
that the delinquency and foreclosure and loss experiences on the mortgage
loans in any trust will be similar. Accordingly, this information should not
be considered to reflect the credit quality of the mortgage loans included in
any trust, or as a basis of assessing the likelihood, amount or severity of
losses on the mortgage loans. The statistical data in the table is based on
all of the loans in the company's servicing portfolio. The mortgage loans in a
trust may, in general, be more recently originated than, and are likely to
have other characteristics which distinguish them from, the majority of the
mortgage loans in the company's servicing portfolio.
13
<PAGE>
Description of the Securities
General
Each series of notes will be issued pursuant to an indenture between the
related trust fund and the entity named in the related prospectus supplement
as trustee with respect to that 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 either a
separate pooling and servicing agreement or trust agreement among the seller,
the servicer, if the series relates to loans, and the trustee. A form of the
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 in this prospectus by reference as part of the
summaries.
Each series of securities will consist of one or more classes of
securities, one or more of which may have different payment characteristics. 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 the 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.
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. Payments will be made by check mailed to holders of the applicable
series, registered at the close of business on the record date specified in
the related prospectus supplement applicable to that distribution date at
their addresses appearing on the security register. However, payments may be
made by wire transfer which shall be at the expense of the holder requesting
payment by wire transfer in the circumstances described in the related
prospectus supplement. In addition, the final payment of principal in
retirement of each security will be made only upon presentation and surrender
of that 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 that security before the distribution date on which the final
principal payment is expected to be made to the holder of that 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.
14
<PAGE>
All payments with respect to the primary assets for a series, amounts
withdrawn from any reserve fund, and amounts available pursuant to any other
credit enhancement will be deposited directly into the collection account or
the certificate account. If provided in the related prospectus supplement, the
deposited amounts may be net of amounts payable to the servicer and any other
person specified in the prospectus supplement. These amounts may subsequently
be deposited into the distribution account and will be available to make
payments on the securities of the applicable series on the next applicable
distribution date.
Book-entry securities
If specified in the related prospectus supplement, one or more classes of
securities may be issued in book-entry form. Persons acquiring beneficial
ownership interests in the book-entry securities will hold their securities
through the Depository Trust Company in the United States, or Clearstream,
Luxembourg or the Euroclear System in Europe if they are participants of those
systems, or indirectly through organizations which are participants in those
systems. The Depository Trust Company is referred to as DTC, Clearstream,
Luxembourg is referred to as Clearstream and the Euroclear System is referred
to as Euroclear. The book-entry securities 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, referred to as Cede. Clearstream and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream's and Euroclear's names on the books of
their respective depositaries which in turn will hold the omnibus positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank N.A. will act as depositary for Clearstream and The Chase Manhattan
Bank will act as depositary for Euroclear. Except as described below, no
person acquiring a book-entry security will be entitled to receive a physical
certificate representing that security called 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.
Ownership of a book-entry security will be recorded on the records of the
brokerage firm, bank, thrift institution or other financial intermediary that
maintains the beneficial owner's account for that purpose. In turn, the
financial intermediary's ownership of that 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 be recorded on the
records of DTC, if the beneficial owner's financial intermediary is not a DTC
participant and on the records of Clearstream or Euroclear, as appropriate.
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, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts 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 beneficial owners have accounts with
respect to securities are
15
<PAGE>
similarly required to make book-entry transfers and receive and transmit
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
interests.
Beneficial 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, beneficial owners who are not participants may transfer ownership
of securities only through participants and indirect participants by
instructing those participants and indirect participants to transfer
securities, by book-entry transfer, through DTC for the account of the
purchasers of those securities, which account is maintained with their
respective participants. Under the rules of DTC 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 beneficial owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Those credits or any
transactions in the securities settled during processing will be reported to
the relevant Euroclear or Clearstream participants on that business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream participant or Euroclear participant to a DTC
participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream participants and Euroclear participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, those cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established European time
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream participants and Euroclear participants may not deliver
instructions directly to the European depositaries.
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
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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.
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its participating organizations
and facilitates the clearance and settlement of securities transactions
between Clearstream participants through electronic book-entry changes in
accounts of Clearstream participants, thus eliminating the need for physical
movement of certificates. Transactions may be settled in Clearstream in any of
28 currencies, including United States dollars. Clearstream provides to its
Clearstream participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. As a professional depository, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations. Indirect access to Clearstream is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants and
to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thus 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, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Morgan Guaranty
Trust Company of New York, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Morgan Guaranty Trust Company of
New York, not Euroclear Clearance Systems S.C. Euroclear Clearance Systems
S.C. 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.
Morgan Guaranty Trust Company of New York 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 Morgan Guaranty Trust
Company of New York are governed by the Terms and Conditions Governing Use of
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Euroclear and the related operating procedures of the Euroclear System and
applicable Belgian law. Terms and conditions and the related operating
procedures 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 Morgan Guaranty Trust Company of New York
acts under the terms and conditions and the related operating procedures 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 these payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing these payments to the owners that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the owners
that it represents.
Under a book-entry format, owners may experience some delay in their
receipt of payments, since payments will be forwarded by the trustee to Cede.
Distributions with respect to securities held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. These 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 book-entry securities, may be limited due
to the lack of physical certificates for book-entry securities. In addition,
issuance of the book-entry securities in book-entry form may reduce the
liquidity of these securities in the secondary market since 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 owners' book-entry securities 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 applicable 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 these actions are taken on behalf
of financial intermediaries whose holdings include book-entry securities.
Cedel or Morgan Guaranty Trust Company of New York, as the case may be, will
take any other action permitted to be taken by a holder under the applicable
agreement on behalf of a Clearstream participant or Euroclear participant only
in accordance with its relevant rules and procedures and subject to the
ability of the relevant depositary to effect actions on its behalf through
DTC. DTC may take actions, at the direction of the related
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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:
o 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,
o the seller, at its sole option, elects to terminate a book-entry system
through DTC, or
o after the occurrence of an event of default, 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 its
successor, 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 the 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 then recognize the holders of the definitive securities as
certificateholders or noteholders, as applicable, under the applicable
agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform these procedures and the 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 the beneficial ownership interests.
Valuation of the primary assets
If specified in the related prospectus supplement for a series of notes,
each mortgage loan or underlying security--sometimes called the primary
asset--included in the related trust fund for a series will be assigned an
initial asset value. 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:
o the stream of remaining regularly scheduled payments on the primary
assets, net of amounts payable as expenses, together with income earned
on each regularly 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
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interest rate on the notes of the related series over periods equal to
the interval between payments on the notes, and
o the then principal balance of the primary assets.
The initial asset value of the primary assets will be set forth in the
prospectus supplement and generally will be at least equal to the principal
amount of the notes of the related series at the date of issuance those notes.
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 that arrangement.
Payments of interest
The securities of each class by their terms entitled to receive interest
will bear interest calculated on the basis of a 360-day year and either the
actual number of days in the applicable accrual period or 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 the
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 that 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 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 of the
applicable zero coupon security on the related 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 the related distribution
date.
Payments of principal
On each distribution date for a series, principal payments will be made to
the holders of the securities of that series on which principal is then
payable, to the extent set forth in the related prospectus supplement.
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
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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 that 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 the principal
distribution. Thus, some holders of the applicable class of securities may
receive no principal distributions or a disproportionate amount of 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 the class.
Final scheduled distribution date
The final scheduled distribution date with respect to each class of notes
is the latest date by which the principal of that class will be fully paid and
with respect to each class of certificates will be the date on which the
entire aggregate principal balance of the class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to
the related series described in the related prospectus 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 of
principal of any 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 of principal 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.
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 a series may be subject to special redemption, in whole or in
part, on the day specified in the related prospectus supplement if, as a
result of prepayments on the primary assets 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 through the designated interest accrual date specified in the
related prospectus supplement is less than the amount of interest that will
have accrued on the securities to the designated interest accrual date. In
this event and as further described in the related prospectus supplement, the
trustee will redeem a sufficient principal amount of outstanding securities of
the series so that the available interest amount will equal the amount of
interest that will have accrued through the designated interest accrual date
for such series of securities outstanding immediately after this redemption.
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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 the trust fund on or after a date specified in the related prospectus
supplement, or on or after the time when 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 particular 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. 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 Internal Revenue Code of 1986, as amended.
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 that
security will be repaid to the investor. The weighted average life of a class
of the securities will be influenced by the rate at which the principal of the
related primary assets 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 a series, and the percentage of the original principal amount of
each class of securities of the series that would be outstanding on specified
distribution dates for the series, in each case based on the assumptions
stated in the related prospectus supplement, including assumptions that
prepayments on the loans or underlying loans relating to 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 the related 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
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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 the 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 for a series, these loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by these loans. In this regard, it should be noted that the loans
or underlying loans 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. If any loans or
underlying loans for a series have actual terms-to-stated maturity that are
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 dates, even in the
absence of prepayments and a reinvestment return higher than the assumed
reinvestment rate.
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The Trust Funds
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. Each trust fund will
include:
o the primary assets,
o amounts available from the reinvestment of payments on the primary assets
at the assumed reinvestment rate, if any, specified in the related
prospectus supplement,
o any credit enhancement or the rights to that credit enhancement,
o any mortgaged property that secured a mortgage loan but which is acquired
by foreclosure or deed in lieu of foreclosure or repossession, and
o 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 will serve as collateral only for that series of
securities. Holders of a series of notes may only proceed against collateral
securing that series of notes in the case of a default with respect to that
series of notes and may not proceed against any assets of the seller or the
related trust fund not pledged to secure the 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 between the
seller, the trust fund and the servicer, with respect to a series that
includes notes.
As used in this prospectus, 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 trust
agreement between the seller and the trustee of the related 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 in this prospectus and in the related prospectus supplement and
the proceeds of the primary assets and other contemplated assets, issuing
securities and making payments and distributions on the issued securities and
certain related activities. No trust fund is expected to have any source of
capital other than its assets and any related credit enhancement.
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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 applicable agreement may provide that additional loans may be added to
the trust fund if these loans were originated or acquired by the seller in the
ordinary course of its business, the inclusion of the loans will maintain or
increase the level of overcollateralization and the inclusion of the loans
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 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.
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 the 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 the loan multiplied by the home equity loan
rate on the loan 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 the
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 payment 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, including
one- to four-family residential housing, condominium units and cooperative
dwellings, five- to eight-family residential 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. Uses 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 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
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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 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 the cooperative dwelling and the
proprietary lease or occupancy agreement relating to the 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:
o 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
o 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.
The 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:
o the aggregate unpaid principal balance of the loans;
o 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;
o the range and average outstanding principal balance of the loans;
o 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;
o the range and weighted average of combined loan-to-value ratios or loan-
to-value ratios for the loans, as applicable;
o the percentage, by outstanding principal balance as of the cut-off date,
of loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the geographic distribution of the mortgaged properties securing the
loans;
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o 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;
o the lien priority of the home equity loans; and
o 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 Securities and
Exchange Commission within 15 days after the initial issuance of the related
securities.
Private securities
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 or
collateralized obligations secured by underlying loans. The pass-through
certificates or collateralized obligations will comply with the then-current
position of the Securities and Exchange Commission for inclusion in a re-
securitization transaction.
Private securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement. The seller/
servicer of the underlying loans will have entered into the applicable
agreement with a trustee. The trustee or its agent, or a custodian, will
possess the underlying loans. Underlying loans will be serviced by a servicer
directly or by one or more sub-servicers who may be subject to the supervision
of the private securities servicer.
The sponsor of the private securities 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 the established trusts, and selling
beneficial interests in these trusts. The obligations of the private
securities 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 private securities
trustee or the private securities servicer. The private securities sponsor or
the
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private securities 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 in the form of reserve funds, subordination of other private
securities issued under the applicable 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.
The prospectus supplement for a series for which the primary assets include
private securities will specify on an approximate basis and as of the date
specified in the related prospectus supplement, to the extent relevant and to
the extent information is reasonably available to the seller and the seller
reasonably believes the information to be reliable:
(a) the aggregate approximate principal amount and type of the private
securities to be included in the trust fund for the series;
(b) certain characteristics of the underlying loans including
o the payment features of the underlying loans, for example whether they
are fixed rate or adjustable rate and whether they provide for fixed
level payments or other payment features,
o the approximate aggregate principal balance, if known, of the
underlying loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying
loans;
(c) the maximum original term-to-stated maturity of the private
securities;
(d) the weighted average term-to-stated maturity of the private
securities;
(e) the pass-through or certificate rate or ranges this rate for the
private securities;
(f) the private securities sponsor, the private securities servicer and
the private securities trustee for private securities;
(g) certain characteristics of credit support if any, such as reserve
funds, insurance policies, letters of credit or guarantees relating to
the loans underlying the private securities or to the private
securities themselves;
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(h) 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
(i) the terms on which underlying loans may be substituted for those
originally underlying the private securities.
If information of the nature described above 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 Securities and
Exchange Commission within 15 days of the initial issuance of the 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 related primary assets. Amounts on deposit in the collection
account and amounts available pursuant to any credit 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 the funds are due to be deposited in the
distribution account or otherwise distributed and, in the case of funds in the
distribution account and the certificate account, than the day preceding the
next distribution date for the related series of securities.
Pre-funding and capitalized interest accounts
If specified in the related prospectus supplement, a trust fund will
include one or more segregated trust accounts, referred to in this prospectus
as a pre-funding account, established and maintained with the trustee for the
related series. If so specified, on the closing date for the related series, a
portion of the proceeds of the sale of the securities of the related series
not to exceed fifty percent of the aggregate principal amount of the series,
referred to as 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, referred to as the pre-funding period. Pending the purchase of
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, that 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. The
eligibility criteria will be determined in consultation with each rating
agency and/or any credit enhancer prior to the issuance of the related series
and are designed to ensure that if additional primary assets were included as
part of the initial primary assets, the credit quality of the initial primary
assets would be consistent with the initial rating of the securities of the
related series. The eligibility criteria will apply to the pool of primary
assets, including the subsequent primary
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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 credit 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 credit enhancer that the
conveyance of additional primary assets will result in a qualification,
modification or withdrawal of its then current rating of any class of notes or
certificates of the 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 the 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 may be established and maintained with the trustee for the related
series. On the closing date for the series, a portion of the proceeds of the
sale of the securities of that series will be deposited in the segregated
trust account and used to fund the excess, if any, of the sum of:
(a) the amount of interest accrued on the securities of the series, and
(b) if specified in the related prospectus supplement, fees or expenses
during the pre-funding period such as trustee fees and credit
enhancement fees, over
(c) the amount of interest available for these fees or expenses from the
primary assets in the trust fund.
If so specified in the related prospectus supplement, amounts on deposit in
the segregated trust account may be released to the seller prior to the end of
the pre-funding period subject to the satisfaction of tests specified in the
related prospectus supplement. Any amounts on deposit in the segregated trust
account at the end of the pre-funding period that are not necessary for these
purposes will be distributed to the person specified in the related prospectus
supplement.
Eligible investments
Each agreement generally will define eligible investments to include the
following:
(a) direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality of the United States, provided that these
obligations are backed by the full faith and credit of the United
States;
(b) repurchase agreements on obligations specified in clause (a) maturing
not more than three months from the date of their acquisition,
provided that the short-term unsecured debt obligations of the party
agreeing to repurchase these obligations
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are at the time rated by each rating agency in its highest short-term
rating category;
(c) 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 of the United States and
subject to supervision and examination by federal and/or state banking
authorities, provided that the unsecured short-term debt obligations
of the depository institution or trust company at the date of their
acquisition have been rated by each rating agency in its highest
unsecured short-term debt rating category;
(d) 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 of the United States which on the date of acquisition has
been rated by each rating agency in their highest short-term rating
categories;
(e) short-term investment funds sponsored by any trust company or national
banking association incorporated under the laws of the United States
or any state of the United States 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
(f) interests in any money market fund which at the date of acquisition of
the interests in that money market fund and throughout the time as the
interest is held in that money market 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 the
instrument or
(b) both principal and interest payments derived from obligations
underlying the instrument where the interest and principal payments
with respect to the 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 that instrument may be prepaid or called at a price
less than its purchase price prior to its stated maturity.
To the extent any investment would require registration of the trust fund
as an investment company, the investment will not constitute an eligible
investment.
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Enhancement
The amounts and types of credit enhancement arrangements and the provider
of credit enhancement, 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, credit 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 subsequently be unavailable to 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, credit
enhancement may include one or more of the following or any combination of the
following:
o Financial Guaranty Insurance Policy which will be issued by a monoline
insurance company and which, subject to the terms of the 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;
o 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 this excess or
may build over time from the application of excess cash amounts generated
by the primary assets to accelerate the amortization of the applicable
class or classes of securities;
o 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 excess
cash amounts generated by the primary assets. Draws may be made to cover
shortfalls 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;
o Cash Reserve Fund which may be partially or fully funded on the date of
issuance or may be funded over time from 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;
o Insurance Policies which may insure a portion of the loans or underlying
loans against credit losses, bankruptcy losses, fraud losses or special
hazard losses not covered by typical homeowners insurance policies;
o Subordinate securities which will be subordinated in the right to receive
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 that series. Subordination may be with respect to distributions
of interest, principal or both. In addition, all or portions of particular
types of losses on the primary assets may be allocated to one or more
classes of the subordinate securities prior to the allocation of those
losses to other
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classes of subordinate certificates and/or the senior securities of the
applicable series; or
o 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
derivative product will constitute or will be structured so as to be an
insurance policy or an exempt security.
The presence of credit enhancement is intended to increase the likelihood
of receipt by the certificateholders and the noteholders of the full amount of
principal and interest due on the applicable certificates and notes 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 credit
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 on a class of securities. If losses occur which exceed
the amount covered by any credit enhancement or which are not covered by any
credit enhancement, securityholders will bear their allocable share of
deficiencies. In addition, if a form of credit enhancement covers more than
one class of securities of a series, securityholders of that class will be
subject to the risk that the credit enhancement will be exhausted by the
claims of securityholders of other classes.
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Servicing of Loans
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. The servicer will
be Delta Funding Corporation or another entity identified in the related
prospectus supplement.
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 credit enhancement, follow the same
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, (a) waive any assumption fee, late payment charge, or other charge
in connection with a home equity loan and (b) arrange with an obligor a
schedule for the liquidation of delinquencies by extending the due dates for
scheduled payments on that loan.
The servicer, to the extent permitted by law, will establish and maintain
escrow or impound 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 these
payments under the related loan documents, in which case the servicer would
not be required to establish any escrow account with respect to the 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 the escrow account. The servicer will be responsible for the
administration of the escrow accounts and generally will make advances to
these accounts when a deficiency exists in any of these escrow accounts.
Deposits to and withdrawals from the collection account or the certificate
account
The trustee or the servicer will establish a separate account in the name
or for the benefit of the trustee. The collection account and/or certificate
account will be an account maintained:
o at a depository institution, the long-term unsecured debt obligations of
which at the time of any deposit in the account are rated by each rating
agency rating the securities of the related series at levels satisfactory
to each rating agency or
o in an account or accounts the deposits in which are insured to the maximum
extent available by the federal deposit insurance corporation, referred to
as 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.
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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
the related cut-off date:
(a) all payments on account of principal, including prepayments, on the
primary assets;
(b) all payments on account of interest on the primary assets after
deducting from these payments, 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 the primary assets;
(c) all amounts received by the servicer in connection with the
liquidation of primary assets or property acquired in respect of the
primary assets, whether through foreclosure sale, repossession or
otherwise, including payments in connection with the 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, 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 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;
(d) all proceeds under any title insurance, hazard insurance or other
insurance policy covering any 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;
(e) all amounts required to be deposited in the collection account from
any applicable reserve fund for the series pursuant to the related
agreement;
(f) all delinquency advances made by the servicer required pursuant to the
related agreement; and
(g) all repurchase prices of any 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:
(a) to reimburse itself for delinquency advances and servicing advances
for a 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 advance was made;
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(b) to reimburse itself for any delinquency advances and servicing
advances for a series that the servicer determines in good faith it
will be unable to recover from amounts liquidation proceeds or the
proceeds of insurance policies;
(c) 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 loan prior to the deposit of the
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 scheduled payment, late payment or
other recovery, to the extent permitted by the related agreement;
(d) to reimburse itself or the seller for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related
agreement;
(e) to pay to the applicable person with respect to each primary asset or
REO property acquired in respect of each primary asset that has been
repurchased or removed from the trust fund by the seller or the
servicer pursuant to the related agreement, all amounts received on
the primary asset and not distributed as of the date on which the
related repurchase price was determined;
(f) to make payments to the trustee of the related series for deposit into
the distribution account, if any, or for remittance to the holders of
the related series in the amounts and in the manner provided for in
the related agreement; and
(g) 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 in the collection account, it
may, at any time, withdraw that amount from the collection account.
Advances and limitations on advances
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. If specified in the related
prospectus supplement, the servicer will be obligated to make delinquency
advances, and this obligation may be limited in amount, or may not be
activated until a certain portion of a specified reserve fund is depleted.
Delinquency 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 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 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 loan or related property. The servicer will be
entitled to be reimbursed for any advances by the servicer to the extent
provided in the prospectus supplement. If an advance by the servicer is made
and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or liquidation proceeds from the related loan,
the servicer will be
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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.
Maintenance of insurance policies and other servicing procedures
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 under that policy and providing for extended coverage of the
standard form of fire insurance with extended coverage for certain other
hazards as is 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 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 of these policies are dictated by
respective state laws, and most policies typically do not cover any physical
damage resulting from any of the following:
o war,
o revolution,
o governmental actions,
o floods and other water-related causes,
o earth movement, including earthquakes, landslides and mudflows,
o nuclear reactions,
o wet or dry rot,
o vermin,
o rodents,
o insects or domestic animals,
o theft and,
o in some 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 loan, the applicable agreement requires the servicer to cause
to be maintained 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 loan balance of the applicable loan
the principal balance of any mortgage loan senior to that loan from time to
time.
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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, the co-insurance clause generally provides
that the insurer's liability in the event of partial loss does not exceed the
greater of:
(a) the replacement cost of the improvements less physical depreciation or
(b) the proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the
improvements.
Each obligor will be required to maintain, coverage in an amount at least
equal to the greater of:
(a) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or
(b) the outstanding principal balance of the related loan plus the balance
of any senior mortgage.
The servicer will also maintain on REO property that secured a defaulted
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 the 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 any
applicable laws and regulations as shall at any time be in force and shall
require additional insurance.
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 applicable 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 the 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 that 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 a foreclosure or other conversion, the
servicer will follow the practices and procedures as it
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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:
o 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 its expenses and
o the expenses will be recoverable by it either through liquidation proceeds
or the proceeds of insurance.
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 three years after the year of the acquisition of the
beneficial ownership of that 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 loan under the applicable "due-on-sale" clause, if any, unless
exercise of the servicer's rights is not permitted under applicable law or if
the enforcement of the due on sale clause would result in loss of coverage
under any primary mortgage insurance policy. In this event, the servicer is
authorized to accept from or enter into an assumption agreement with the
person to whom property has been or is about to be conveyed, pursuant to which
the person becomes liable under the loan. To the extent permitted by
applicable law, the assumption of liability 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 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
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.
The servicer will pay the 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 loan, less the servicing fee. If the aggregate amount
of shortfalls in a month exceeds the servicing fee for that month, a shortfall
to holders may occur.
The servicer will be entitled to reimbursement for servicing advances by
the servicer. The related holders will suffer no loss by reason of these
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 under the
applicable insurance policies has been exhausted, the related holders will
suffer a loss to the extent that liquidation proceeds, after reimbursement of
the servicing advances by the servicer, are less than the outstanding
principal balance of and unpaid interest on the related loan which would be
distributable to holders. The servicer is generally also entitled to
reimbursement from the collection account for servicing advances by the
servicer. In addition, the servicer will be entitled to reimbursement for
delinquency advances as described above under "--Advances and limitations on
advances."
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 by the servicer,
expenses or otherwise, are not subordinate to the rights of holders of that
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 the firm has examined certain documents and records
relating to the servicing of the loans by the servicer and that this
examination, which has been conducted substantially in compliance with either:
o the audit guide for audits of non-supervised mortgagees approved by the
department of housing and urban development or
o 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 the 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 that series of an annual statement signed by an officer of the
servicer to the effect that the servicer has fulfilled its material
obligations under the applicable agreement throughout the preceding calendar
year.
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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, events of default and the rights of the trustee upon an
event of default under the applicable 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 the assignment or delegation
(a) services similar loans in the ordinary course of its business,
(b) is reasonably satisfactory to the trustee for the related series,
(c) would not cause any rating agency's rating of the securities for the
series in effect immediately prior to the assignment, sale or transfer
to be qualified, downgraded or withdrawn as a result of that assignment,
sale or transfer and
(d) executes and delivers to the trustee and the credit enhancer, if any, an
agreement, in form and substance reasonably satisfactory to the trustee,
and the credit enhancer, if any, which contains an assumption by the
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 the related agreement.
No 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 affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above; however, in this 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 the 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 under the applicable agreement. Each
applicable 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
applicable 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 loan or
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loans, except any loss, liability or expense otherwise reimbursable pursuant
to the applicable 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 under the applicable agreement or
by reason of the servicer's reckless disregard of its obligations and duties
under the applicable agreement.
Each applicable 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 applicable agreement and that in its
opinion may involve it in any expense or liability. The servicer, however, in
its discretion, may undertake any action that it may deem necessary or
desirable with respect to the applicable agreement and the rights and duties
of the parties to that agreement and the interest of the securityholders and
the credit enhancer, if any, under that agreement. In this event, the legal
expenses and costs of an action and any liability resulting from the action
will be expenses, costs and liabilities of the trust fund and the servicer
will be entitled to be reimbursed for these expenses to the extent provided in
the applicable agreement. The servicer's right to indemnity or reimbursement
will survive any resignation or termination of the servicer with respect to
any losses, expenses, costs or liabilities arising prior to the servicer's
resignation or termination, or arising from events that occurred prior to any
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, officers, employees and agents.
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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, these provisions or terms are as specified in
the related agreements.
Assignment of primary assets
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. An 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 an 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,
o the mortgage note endorsed without recourse to the order of the trustee or
in blank,
o 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
o an assignment of the mortgage in recordable form.
The trustee or the custodian, will hold such documents in trust for the
benefit of the holders.
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,
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 assignments to the trustee to be so recorded within the time after
issuance of the securities as is specified in the related prospectus
supplement, in which event, the applicable agreement may require the seller to
repurchase from the trustee any loan the related mortgage of which is not
recorded within the specified time, at the price described below with respect
to repurchases by reason of defective documentation. 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 loan will be identified in a schedule appearing as an exhibit to the
related agreement. This schedule will specify with respect to each loan:
o the original principal amount and unpaid principal balance as of the cut-
off date;
o the current interest rate;
o the current scheduled payment of principal and interest;
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o the maturity date, if any, of the related mortgage note; and
o if the loan is an adjustable rate loan, the lifetime rate cap, if any, and
the index.
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. Each private security will be identified in a schedule appearing as
an exhibit to the related agreement, 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 applicable agreement, the seller will
represent and warrant to the trustee regarding the private securities that:
(a) the information contained in the applicable schedule is true and correct
in all material respects;
(b) immediately prior to the conveyance of the private securities, the
seller had good title to the private securities, and was the sole owner
of the private securities, subject to any retained interest;
(c) there has been no other sale by it of the private securities; and
(d) there is no existing lien, charge, security interest or other
encumbrance, other than any retained interest, on the 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 that defect within 90
days, or within any other period specified in the related prospectus
supplement, the seller will, not later than 90 days or within any 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 of the primary asset from the trustee at a price equal to
the outstanding principal balance of the primary asset and accrued and unpaid
interest to the date of the repurchase/substitution of the primary asset at
the rate set forth in the related agreement.
The seller may, rather than repurchase the primary asset as described
above, remove the primary asset from the trust fund and substitute in its
place one or more other primary assets provided, however, that:
(a) with respect to a trust fund for which no REMIC election is made, the
substitution must be effected within 120 days of the date of initial
issuance of the securities and
(b) 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 the 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 substitute primary asset will have, on the date of substitution,
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o 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,
o an interest rate not less than, and not more than 2% greater than, the
interest rate or margin of the removed primary asset,
o a remaining term-to-stated maturity not greater than, and not more than
two years less than, that of the removed primary asset, and
o 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 of the
representations and warranties in all material respects within the time period
specified in the related prospectus supplement after notification by the
trustee of the breach, and if the breach is of a nature that materially and
adversely affects the value of the primary asset, the seller is obligated to
repurchase the affected primary asset or, if provided in the related
prospectus supplement, provide a substitute primary asset for the affected
primary asset, 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
after the distribution date as is practicable, a statement setting forth, to
the extent applicable to any series, among other things:
(a) the amount of principal distributed to holders of the related securities
and the outstanding principal balance of the securities following the
distribution;
(b) the amount of interest distributed to holders of the related securities
and the current interest on the securities;
(c) the amounts of
o any overdue accrued interest included in the distribution,
o any remaining overdue accrued interest with respect to the securities
or
o any current shortfall in amounts to be distributed as accrued interest
to holders of the securities;
(d) the amounts of
o any overdue payments of scheduled principal included in the
distribution,
o any remaining overdue principal amounts with respect to the related
securities,
o any current shortfall in receipt of scheduled principal payments on
the related primary assets or
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o any realized losses or liquidation proceeds to be allocated as
reductions in the outstanding principal balances of the related
securities;
(e) the amount received under any related credit enhancement, the remaining
amount available under that credit enhancement and the amount reimbursed
to the enhancer, if any;
(f) the number and aggregate principal balance of loans that were delinquent
o one monthly payment,
o two monthly payments and
o three or more monthly payments,
as of the end of the prior collection period;
(g) the number and aggregate principal balance of loans in foreclosure, as
of the end of the prior collection period;
(h) the aggregate principal balance of loans which became REO during the
prior collection period;
(i) the book value of any REO property acquired by the related trust fund;
(j) the amount of losses realized during the prior collection period;
(k) the aggregate principal balance of loans repurchased during the prior
collection period;
(l) the amount of the servicing fee for the prior collection period;
(m) 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;
(n) during the pre-funding period, the amount remaining in the segregated
trust account; and
(o) any 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 the applicable calendar year the aggregate of amounts reported pursuant
to (a), (b), and (d)(1) above for that calendar year and any 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.
If so specified in the prospectus supplement for a series of securities,
the series or one or more classes of the series will be issued in book-entry
form. In this event, owners of beneficial interests in the securities will not
be considered holders and will not receive reports directly from the trustee.
The trustee will forward the reports only to the entity or its nominee which
is the registered holder of the global certificate which evidences book-entry
securities. Beneficial owners will receive their reports from the participants
and
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indirect participants of the applicable book-entry system in accordance with
the practices and procedures of the entities.
Events of default; rights upon event of default
Pooling and servicing agreement; Sale and servicing agreement. Events of
default under the pooling and servicing agreement or sale and servicing
agreement for each series of securities relating to loans will include
(a) any failure by the servicer to deposit amounts in the collection
account and/or certificate account and/or distribution account required
to be made under the applicable agreement, which failure continues
unremedied for three business days after the giving of written notice
of the failure to the servicer by the trustee for the related series,
or to the servicer and the trustee by the enhancer or by the holders of
the related series evidencing not less than 51% of the aggregate voting
rights of the securities for the series,
(b) 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 failure to the servicer by the trustee, or to the
servicer and the trustee by the enhancer or by the holders of the
related series evidencing not less than 51% of the aggregate voting
rights of the securities for the series, and
(c) 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, the
trustee for the series or holders of securities of the series evidencing not
less than 51% of the aggregate voting rights of the securities for that 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
expenses and amounts advanced pursuant to the terms of the applicable
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 the applicable agreement and will be
entitled to reasonable servicing compensation not to exceed the applicable
servicing fee, together with other servicing compensation in the form of
assumption fees, late payment charges or otherwise as provided in the
applicable 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 the applicable agreement.
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During the continuance of any event of default of the servicer under an
agreement for a series of securities, the trustee for the 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 the related 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 the series may direct the time, method and place of conducting
any proceeding for any remedy available to the trustee or exercising any trust
or power conferred upon that trustee. However, the trustee will not be under
any obligation to pursue any remedy or to exercise any trusts or powers unless
the holders have offered the trustee reasonable security or indemnity against
the cost, expenses and liabilities which may be incurred by the trustee in or
by pursuit of a remedy or exercise of any trusts or powers. The trustee may
decline to follow any 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. Events of default under the indenture for each series of notes
will include:
(a) a default for 30 days or more in the payment of any principal of or
interest on any note of a series;
(b) 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 of
the failure to perform is given in accordance with the procedures
described in the related prospectus supplement;
(c) any representation or warranty made by the seller or the trust fund in
the indenture or in any certificate or other writing delivered pursuant
to the indenture or in connection with the indenture with respect to or
affecting the series having been incorrect in a material respect as of
the time made, and the breach is not cured within 60 days after notice
of it is given in accordance with the procedures described in the
related prospectus supplement;
(d) some events of bankruptcy, insolvency, receivership or liquidation of
the seller or the trust fund; or
(e) 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 the 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, a 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 the series to be due and payable immediately.
This declaration may, under some circumstances, be rescinded and annulled by
the holders of a majority in aggregate outstanding amount of the notes of the
series.
If, following an event of default with respect to any series of notes, the
notes of that series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue
to apply distributions on the collateral as if there had been no declaration
of acceleration if the collateral continues to provide sufficient funds for
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the payment of principal of and interest on the notes of the related series as
they would have become due if there had not been 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 the series for 30 days or more,
unless
(a) the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to sale,
(b) the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the outstanding
notes of the series at the date of sale or
(c) the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as the payments would
have become due if these notes had not been declared due and payable,
and the trustee obtains the consent of the holders of 662/3% of the then
aggregate outstanding amount of the notes of the 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 liquidation for
unpaid fees and expenses. As a result, upon the occurrence of 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 an event of default.
If 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 of these notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal
amount of the notes less the amount of 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 the series, unless the holders
offered to the trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with a request or direction. Subject to the 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 the 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 the series, and the
holders of a majority of the then aggregate outstanding amount of the notes of
the series may, in some cases, waive any default with respect to the notes,
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the indenture that
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cannot be modified without the waiver or consent of all the holders of the
outstanding notes of the related series affected by the default in payment.
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 some 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 an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the trustee by the applicable agreement relating to the series will be
conferred or imposed upon the trustee and each 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 the separate trustee or co-
trustee who will exercise and perform the 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 the appointment; provided that the trustee
will continue to be responsible for its duties and obligations under the
applicable 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 applicable agreement, the securities or of any primary
asset or related documents. If no event of default has occurred, the trustee
is required to perform only those duties specifically required of it under the
applicable 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 documents furnished to it by the holders or the
servicer under the applicable 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 applicable agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
its funds or adequate indemnity against 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
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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 applicable agreement after the giving of a
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
(a) if the trustee ceases to be eligible to continue as trustee under the
applicable agreement,
(b) if the trustee becomes insolvent or
(c) 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 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 applicable agreement for each series of securities may be amended by
the seller, the servicer and the trustee with respect to the series, without
notice to or consent of the holders
(a) to cure any ambiguity,
(b) to correct any defective provisions or to correct or supplement any
provision in the agreement,
(c) to add to the duties of the seller, the trust fund or servicer,
(d) to add any other provisions with respect to matters or questions arising
under the applicable agreement or related credit applicable enhancement,
(e) to add or amend any provisions of the applicable 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
(f) to comply with any requirements imposed by the Internal Revenue Code of
1986;
provided that any amendment except pursuant to clause (f) above will not
materially and adversely affect the interests of any holders of the series or,
if specified in the related prospectus supplement, the enhancer, as evidenced
by an opinion of counsel. Any amendment except pursuant to clause (f) 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 the securities that the amendment
will not cause the rating agency to withdraw or reduce the then current rating
of the securities.
The applicable agreement for each series may also be amended by the
trustee, the servicer, if applicable, and the seller with respect to the
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 the series or, if
only certain classes of the series are affected by the amendment, 51% of the
aggregate outstanding principal amount of the securities of each class of the
series affected by the amendment, for the purpose of adding any provisions to
or changing in any manner
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or eliminating any of the provisions of the applicable agreement or modifying
in any manner the rights of holders of the series; provided, however, that no
amendment may
(a) reduce the amount or delay the timing of payments on any security
without the consent of the holder of that 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 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 by the amendment.
Voting rights
The related prospectus supplement will set forth the method of determining
allocation of voting rights with respect to a series. No holder of securities
of a series, solely by virtue of the holder's status as a holder, will have
any right under the applicable agreement for the relevant series to institute
any proceeding with respect to that agreement, unless the holder previously
has given to the trustee for the 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 the series have made written request upon the
trustee to institute a proceeding in its own name as trustee under the
applicable agreement and have offered to the trustee reasonable indemnity, and
the trustee for 60 days has neglected or refused to institute any 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 applicable agreement, which request is accompanied by a copy of the
communication which the holders propose to transmit, the trustee will afford
these 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, a
series or one or more classes of a series may be issued in book-entry form. In
this event, beneficial owners of the 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.
REMIC administrator
For any series with respect to which a REMIC election is made, preparation
of specific reports and 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.
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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 the applicable agreement after the earlier of
(a) the later of
(1) the final payment or other liquidation of the last primary asset
remaining in the trust fund for the series and
(2) the disposition of all property acquired upon foreclosure or deed in
lieu of foreclosure or repossession in respect of any primary asset
or
(b) the repurchase, as described below, by the servicer or other entity
specified in the related prospectus supplement from the trustee for the
series of all primary assets and other property at that time subject to
the applicable agreement.
The applicable 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 the 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 the 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 the primary assets, and
unreimbursed expenses, that are reimbursable pursuant to the terms of the
pooling and servicing agreement, plus, in either case, accrued interest at the
weighted average rate on the related primary assets through the last day of
the due period in which repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Internal Revenue Code of
1986, the repurchase price may equal the greater of
(a) 100% of the aggregate principal balance of the primary assets, plus
accrued interest at the applicable net rates on the primary assets
through the last day of the month of the repurchase and
(b) the aggregate fair market value of the 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 this right will effect early retirement of the securities of
the series, but an 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 the agreement. 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
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termination of the trust fund under the circumstances described in the related
prospectus supplement.
Indenture. The indenture will be discharged with respect to a series of
notes, except with respect to continuing rights specified in the indenture,
upon the delivery to the trustee for cancellation of all the notes of the
related series or, with limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of the series.
In addition to 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 that series, except
o for certain obligations relating to temporary notes and exchange of notes,
to register the transfer of or exchange notes of the series,
o to replace stolen, lost or mutilated notes of the series,
o 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 of the notes
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 the
series on the final scheduled distribution date for the notes and any
installment of interest on the notes in accordance with the terms of the
indenture and the notes of the series. In the event of any defeasance and
discharge of notes of a series, holders of notes of the related series would
be able to look only to the money and/or direct obligations for payment of
principal and interest, if any, on their notes until maturity.
Certain Legal Aspects of the Loans
The following discussion contains summaries of legal aspects of mortgage
loans which are general in nature. Because some of these 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 loans for a series will be secured by either mortgages or deeds of
trust or deeds to secure debt, referred to 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 the 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.
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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, particular types of federal
liens, some 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, 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
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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, either judicially or non-judicially, prior to collecting on the
loan. Whether a lender may subsequently 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 a cash equivalent satisfactory to the trustee, prior to and as
a condition to recognizing the 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.
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 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
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there are insufficient proceeds to repay the secured debt, the beneficiary
under the foreclosed lien generally may obtain a deficiency judgment against
the grantor.
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 some
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where the 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 the sale occurred while the 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 a deficiency judgment
is available. Subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will subsequently assume
the burdens of ownership, including obtaining hazard insurance, paying taxes
and making 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
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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 this cure generally becomes a part of the indebtedness
secured by the junior deed of trust.
Junior mortgages; rights of senior mortgagees
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, thus 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 a default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior
loan. In some
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states, absent a provision in the mortgage or 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
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 insurance 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 any order 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 of the property, 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 some
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
Some 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
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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 some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting the security; however, in some of these states, the lender,
following judgment on a 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 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 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.
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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 specified tax liens over the
lender's security. This may delay or interfere with the enforcement of rights
in respect of a defaulted loans. 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 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 due-on-sale clauses with respect
to mortgage loans that were
(a) originated or assumed during the "window period" under the Garn-St
Germain Depository Institutions Act which ended in all cases not later
than October 15, 1982, and
(b) originated by lenders other than national banks, federal savings
institutions and federal credit unions.
Freddie Mac 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 Depository Institutions 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 some circumstances, be
eliminated in any modified mortgage resulting from a 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 some states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Some states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. 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 mortgage loans having higher mortgage rates.
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 referred
to as "Title V", provides
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that state usury limitations shall not apply to specific types of residential
first mortgage loans originated by 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 the state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted a similar 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. This type of lien generally will have priority over all
subsequent liens on the property and, in some of these states, 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 these 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 the clean up costs
were required to be paid by the 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,
(a) 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,
(b) may be entitled to a stay of proceedings on any kind of foreclosure
or repossession action in the case of defaults on any obligations entered
into prior to military service for the duration of military service and
(c) may have the maturity of any 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 (a), (b), or (c) above are subject to challenge by
creditors and if, in the opinion of the court, the ability of a person to
comply with their obligations is not materially impaired by military service,
the court may apply equitable principles
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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 these
amounts, and any loss in respect of the borrower's obligation may reduce the
amounts available to be paid to the holders of the securities of the related
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 the related series that
is entitled to receive interest in respect of the loans or underlying loans in
proportion to the interest that each class of securities would have otherwise
been entitled to receive in respect of the loans or underlying loans had an
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:
o to establish any reserve fund, pre-funding account or segregated trust
account,
o to pay costs of structuring and issuing the securities, including the
costs of obtaining enhancement and
o for its general corporate purposes.
Federal Income Tax Considerations
This section sets forth
o certain federal income tax opinions of Stroock & Stroock & Lavan LLP,
special counsel to the seller, referred to as federal tax counsel, and
o 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 Internal
Revenue Code of 1986, 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 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 Internal Revenue Code of
1986, the regulations promulgated under the Internal Revenue Code of 1986,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions
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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 a change could
apply retroactively.
The federal income tax consequences to holders will vary depending on
whether
(a) the securities of a series are classified as indebtedness for
federal income tax purposes;
(b) 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, known as a REMIC, under the Internal
Revenue Code of 1986;
(c) 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
(d) 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 each series.
Opinions
Federal tax counsel is of the opinion that:
(a) 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;
(b) If a prospectus supplement indicates that one or more REMIC
elections will be made with respect to the related trust fund, assuming
that these REMIC elections are timely made and all of the provisions of
the applicable agreement are complied with
(1) each segregated pool of assets specified in the applicable
agreement will constitute a REMIC for federal income tax purposes,
(2) the class or classes of securities of the related series which
are designated as "regular interests" in the related prospectus
supplement will be considered regular interests in a REMIC for federal
income tax purposes and
(3) the class of securities of the related series which is
designated as the residual interest in the related prospectus
supplement will be considered the sole class of "residual interests" in
the applicable REMIC for federal income tax purposes;
(c) 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,
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(1) the trust fund will be considered to be a grantor trust under
Subpart E, Part 1 of Subchapter J of the Internal Revenue Code of 1986
and will not be considered to be an association taxable as a
corporation and
(2) 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
(d) 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, that
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 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 a regular
interest in a REMIC, which are referred to as 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,
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 of those securities in
accordance with their usual methods of accounting. Securities characterized as
debt for federal income tax purposes and regular interest securities will from
here be referred to in this prospectus collectively as debt securities.
Debt securities that are compound interest securities will, and certain of
the other debt securities may, be issued with original issue discount, known
as OID. The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Internal Revenue Code of 1986
and the Treasury regulations issued under the Internal Revenue Code of 1986. A
holder should be aware, however, that the OID regulations do not adequately
address some 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 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 Internal Revenue Code of 1986.
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
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securities is sold for cash on or prior to the closing date, the issue price
for the class will be treated as the fair market value of the 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 the 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
Treasury regulations state that interest is unconditionally payable if
reasonable legal remedies exist to compel timely payment, or the debt
instrument otherwise provides terms and conditions that make the likelihood of
late payment, other than late payment that occurs within a reasonable grace
period, or nonpayment of interest a remote contingency, as defined in the OID
Treasury regulations. It is unclear whether the terms and conditions of the
loans underlying the debt securities, or those of the debt securities, are
considered when determining whether the likelihood of late payment or
nonpayment of interest is a remote contingency.
Some 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 (a) as part of
the issue price and the stated redemption price at maturity of the debt
securities or (b) as not included in the issue price or stated redemption
price. The OID Treasury 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 these cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Treasury 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 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 this 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.
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 the debt security, the
sum of the daily portions of 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
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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 the 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 these
instruments, called a pay-through security, is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument,
called 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
the present value of all payments remaining to be made on the pay-through
security as of the close of the accrual period and 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, 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:
(a) 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,
(b) events which have occurred before the end of the accrual period and
(c) 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.
It is unclear whether the seller may adjust the accrual of OID on a class
of regular interest securities, or other regular interests in a REMIC, to take
account of realized losses on the loans. The OID regulations do not provide
for adjustments. If the Internal Revenue Service were to require that OID be
accrued without adjustments, the rate of accrual of OID for a class of regular
interest securities could increase.
Some classes of regular interest securities may represent more than one
class of REMIC regular interests. Unless the applicable prospectus supplement
specifies otherwise,
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the trustee intends, based on the OID regulations, to calculate OID on these
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 a subsequent holder of a debt security who purchases that
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 the OID by comparable economic accruals of portions of the
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 these amounts are uncollectible. As a result, the amount
of income, including OID, reported by a holder of a security in any period
could significantly exceed the amount of cash distributed to the 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. However, the timing and character of 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, 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 are subject to special rules. A variable
rate debt security will qualify as a variable rate debt instrument if
(a) 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;
(b) it provides for stated interest, paid or compounded at least annually,
at
(1) one or more qualified floating rates,
(2) a single fixed rate and one or more qualified floating rates,
(3) a single objective rate or
(4) a single fixed rate and a single objective rate that is a
qualified inverse floating rate; and
(c) it does not provide for any principal payments that are contingent,
as defined in the OID regulations, except as provided in (a) above.
A qualified floating rate is any variable rate where variations in the
value of the 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
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multiple of a qualified floating rate will generally not itself constitute a
qualified floating rate for purposes of the OID Treasury regulations. However,
a variable rate equal to
(a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or
(b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a
fixed rate
will constitute a qualified floating rate for purposes of the OID Treasury
regulations. In addition, under the OID Treasury 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 and presumed to be a 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 Treasury 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
objective financial or economic information. The OID Treasury regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on
a REMIC regular interest that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. 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 the 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. Further, an objective
rate does not include a rate that is based on information that is in the
control of or unique to the circumstances of the issuer or a party related to
the issuer. An objective rate will qualify as a qualified inverse floating
rate if the 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 qualified floating rate. The OID Treasury
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 called 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.
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For variable rate debt securities that qualify as a variable rate debt
instrument under the OID Treasury regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a presumed
single qualified floating rate or a presumed single variable rate throughout
the term, original issue discount is computed as described above based on the
following:
(a) 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;
(b) by assuming that the variable rate on the single variable rate debt
security is a fixed rate equal to:
(1) 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
(2) 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 the single
variable rate debt security; and
(c) the qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an accrual
period exceeds (or is less than) the interest assumed to be paid under the
assumed fixed rate described in (b) above.
In general, any variable rate debt security other than a single variable
rate debt security, called 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 Treasury regulations generally
require that 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 these 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
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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 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 these amounts differ from the accrual amount of interest accrued or paid
on the multiple variable rate debt security during the accrual period.
If a variable rate debt security does not qualify as a variable rate debt
instrument under the OID Treasury 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
the debt security were treated as a contingent payment debt obligation.
The Internal Revenue Services issued final regulations governing the
calculation of OID on instruments having contingent interest payments. The
final regulations specifically do not apply for purposes of calculating OID on
debt instruments to Internal Revenue Code Section 1272(a)(6), such as the pay-
through securities, including regular interest securities. Additionally, the
OID regulations do not contain provisions specifically interpreting Internal
Revenue Code Section 1272(a)(6). Until the Treasury issues guidelines to the
contrary, the trustee intends to base its computation on Internal Revenue Code
Section 1272(a)(6) and the OID Treasury regulations as described in this
prospectus. However, because no regulatory guidance exists under Internal
Revenue Code Section 1272(a)(6), there can be no assurance that the
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 Internal Revenue Code of 1986. 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. Market discount would accrue in a manner to be provided in Treasury
regulations but, until applicable regulations are issued, market discount
would in general accrue either
(a) on the basis of a constant yield, in the case of a pay-through
security, taking into account a prepayment assumption, or
(b) in the ratio of
(1) in the case of securities, or in the case of a pass-through
security, as set forth below, the loans underlying the security, not
originally issued with original
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issue discount, stated interest payable in the relevant period to total
stated interest remaining to be paid at the beginning of the period or
(2) in the case of securities or in the case of a pass-through
security, as described below, the loans underlying the security,
originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Internal Revenue 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
the security is allowed as a current deduction only to the extent the excess
is greater than the market discount that accrued during the taxable year in
which the interest expense was incurred. In general, the deferred portion of
any interest expense will be deductible when 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 that holder during the taxable year the
election is made and after, 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 the security, and not as a separate deduction
item, on a constant yield method. Although there are regulations addressing
amortizable bond premium, they specifically do not apply to prepayable debt
instruments subject to Internal Revenue Code Section 1272(a)(6), such as the
pay-through securities. The legislative history of the Tax Reform Act of 1986
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
that class. If a holder makes an election to amortize premium on a debt
security, the 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 subsequently acquired by the holder, and will be
irrevocable without the consent of the Internal Revenue Service. We recommend
that purchasers who pay a premium for the securities consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
Election to treat all interest as original issue discount. The OID Treasury
regulations permit a holder of a 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, 1994. If 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 the holder of the debt security acquires during the year
of the election or after. Similarly, a
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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 the 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
the 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 Internal
Revenue 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
(a) the amount that would have been includible in the holder's income
if the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of the holder's holding
period, over
(b) the amount of ordinary income actually recognized by the holder
with respect to the regular interest security.
In addition, gain on the sale of a debt security purchased at a market
discount would be taxable as ordinary income in an amount not exceeding the
market discount that accrued while the security was held by the seller,
reduced by market discount included in income under the rules described above
under "Market discount."
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
will be real estate assets for purposes of Section 856(c)(4)(A) of the
Internal Revenue Code and assets described in Section 7701(a)(19)(C) of the
Internal Revenue Code 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 Internal Revenue 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. The loans generally will be qualifying assets
under both of the foregoing sections of the Internal Revenue 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 Internal Revenue Code. In addition, to the
extent that the principal amount of a loan
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exceeds the value of the property securing the loan, it is unclear and Federal
tax counsel is unable to opine whether the loan will be qualifying assets. The
regulations under Sections 860A through 860G of the Internal Revenue Code are
known as the REMIC regulations and 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 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 holder, including pass-through entities but not
including real estate investment trusts, expenses will be deductible only to
the extent that these expenses, plus other miscellaneous itemized deductions
of the holder, exceed 2% of the holder's adjusted gross income and the holder
may not be able to deduct any fees and expenses to any extent in computing the
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
(a) 3% of the excess of adjusted gross income over the applicable amount, or
(b) 80% of the amount of itemized deductions otherwise allowable for the
related taxable year.
For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
electing large partnership, 70 percent of the partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners. The
reduction or disallowance of this deduction may have a significant impact on
the yield of the regular interest security to a holder. In general terms, a
single class REMIC is one that either
(a) 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
(b) is similar to a grantor trust which is not a REMIC 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.
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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 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)(4)(A) of the Internal Revenue Code, and loans
secured by an interest in real property under Section 7701(a)(19)(C) of the
Internal Revenue Code, and whether the income on these certificates is
interest described in Section 856(c)(3)(B) of the Internal Revenue Code, the
tiered REMICs will be treated as one REMIC.
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 adjustments. In general, the taxable income or
net loss will be the difference between
(a) 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
(b) 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 these expenses, when aggregated with
the holder's other miscellaneous itemized deductions for that year, do not
exceed two percent of such holder's adjusted gross income and the holder may
not be able to deduct these fees and expenses to any extent in computing his
alternative minimum tax liability. For taxable years beginning after December
31, 1997, in the case of a partnership that has 100 or more partners and
elects to be treated as an electing large partnership, 70 percent of the
partnership's miscellaneous itemized deductions will be disallowed, although
the remaining deductions will generally be allowed at the partnership level
and will not be subject to the 2 percent floor that would otherwise be
applicable to individual partners.
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. This aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Internal Revenue Code apply to loans of
individuals originated on or after March 2, 1984. Subject to possible
application of the de minimis rules, the method of accrual by the REMIC of OID
income on loans originated on or after
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March 2, 1984 will be equivalent to the method under which holders of pay-
through securities accrue original issue discount, that is, 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 discount in income, but
without regard to the de minimis rules. However, a REMIC that acquires loans
at a market discount must include 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 September 27, 1985,
it is possible that the premium may be recovered in proportion to payments of
loan principal.
Prohibited transactions; Contributions tax; Tax on net income from
foreclosure property. 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:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a cash
flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Internal Revenue Code; or
o 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. In
addition, a REMIC is subject to tax, deductible from its income, on any net
income from foreclosure property, determined in accordance with Section
857(b)(4)(B) of the Internal Revenue Code as if the REMIC were a REIT. The
holders of residual interest securities will generally be responsible for the
payment of any taxes imposed on the REMIC. To the extent not paid by the
holders or otherwise, however, the taxes will be paid out of the trust fund
and will be allocated pro rata to all outstanding classes of securities of the
REMIC.
Taxation of holders of residual interest securities
The holder of a security representing a residual interest 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 the 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
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or net loss of the REMIC for the relevant quarter, and by allocating that
amount among the holders, on that day, of the Residual interest securities in
proportion to their respective holdings on that 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 income or loss. The reporting of
taxable income without corresponding distributions could occur, for example,
in some 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 some 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 a corporate
bond or stripped 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 the loss arises. A holder's basis in a
residual interest security will initially equal the 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 same REMIC. The ability of holders of
residual interest securities to deduct net losses may be subject to additional
limitations under the Internal Revenue Code, and we recommend that holders
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 a 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 the
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 the holder's adjusted
basis in the residual interest security at the time of the 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
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disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after 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 the
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 Internal Revenue Code Section 511, the holder's excess
inclusion income will be treated as unrelated business taxable income of that
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.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a residual holder:
(a) alternative minimum taxable income for a residual holder is determined
without regard to the special rule that taxable income cannot be less
than excess inclusions;
(b) a residual holder's alternative minimum income for a tax year cannot be
less than excess inclusions for the year;
(c) 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 these 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 the related
quarterly period of
(a) 120% of the long-term applicable federal rate on the startup date
multiplied by
(b) the adjusted issue price of the residual interest security at the
beginning of the related 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.
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Under the REMIC regulations, in some circumstances, transfers of residual
interest securities may be disregarded.
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 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 Internal Revenue Code, or any entity exempt from tax,
other than certain farmers' cooperatives, unless the 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 acting 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 that 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.
For taxable years beginning after December 31, 1997, all partners of electing
partnerships having 100 or more partners will be treated as disqualified
organizations for purposes of the tax imposed on pass-through entities if
these electing large partnerships hold residual interests in a REMIC. However,
the electing large partnership would be entitled to exclude the excess
inclusion income from gross income for purposes of determining the taxable
income of the partners.
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 the excess inclusion accrue, sufficient
to pay the taxes that excess inclusion.
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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
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 know
or have reason to know if the following conditions are met:
(a) 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
(b) the transferee represents to the transferor that
(1) the transferee understands that it might incur tax liabilities in
excess of any cash received with respect to the residual interest
and
(2) the transferee intends to pay the taxes associated with owning the
residual interest as they come due.
The Treasury Department has proposed an amendment to the Regulations that
would add a third condition, effective February 4, 2000. According to the
proposed amendment, a transferor of a residual interest would be presumed not
to have improper knowledge only if the present value of the anticipated tax
liabilities associated with holding the residual interest is less than or
equal to the present value of the sum of (i) any consideration given to the
transferee to acquire the residual interest, (ii) expected future
distributions on the residual interest, and (iii) anticipated tax savings
associated with holding the residual interest as the related REMIC trust
generates losses. The application of the proposed amendment to an actual
transfer is uncertain, and you should consult your own tax advisor regarding
its effect on the transfer of a residual interest.
A different formulation of this rule applies to transfers of residual interest
security by or to foreign transferees.
Mark to market rules. Treasury regulations provide that for purposes of the
mark to market requirements of Internal Revenue Code Section 475, a REMIC
residual interest acquired after January 3, 1995 is not a security and cannot
be marked to market, regardless of the value of the 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 Internal Revenue 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.
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Tax status as a grantor trust
As further described below, each holder of 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 each pass-through security and may deduct
the portion of the expenses incurred or accrued by the trust fund that is
allocable to that pass-through security, at the same time and to the same
extent as these items would be reported by the holder if it had purchased and
held directly an interest in the mortgages and 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 expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of the holder's adjusted gross income. Moreover, a holder
of a pass-through security that is not a corporation cannot deduct expenses
for purposes of the alternative minimum tax, if applicable. 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 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 Internal Revenue Code and loans . . . . secured by an
interest in real property within the meaning of Section 7701(a)(19)(C)(v) of
the Internal Revenue Code 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 Internal Revenue 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 loans secured 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 Internal Revenue Code.
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 rules of Internal Revenue Code Section 1286 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
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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 Internal Revenue 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 (a) 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 (b) 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 the pass-through security, to the
holder. The 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 Internal
Revenue Code requires that OID be accrued based on a prepayment assumption
determined in a manner prescribed by forthcoming regulations. Section
1272(a)(6) has been amended to apply to pools of debt instruments the yield on
which may be affected by prepayments. If required to report interest income on
the pass-through securities to the Internal Revenue Service under the rules of
Section 1286 of the Internal Revenue Code, 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 this yield
may differ from the yield to any particular holder that would be used in
calculating the interest income of that 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.
Assuming 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 this principal amount, respectively, the use
of a reasonable prepayment assumption would increase or decrease the yield,
and thus accelerate or decelerate the reporting of interest income,
respectively.
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If a 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 loan that is allocable to the pass-through security and the
portion of the adjusted basis of the pass-through security that is allocable
to the loans. The method of allocating the 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 some series 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 that 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 Internal Revenue Code and, in
the case of discount other than OID, whether this 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 the 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 loan, known as an 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, the holder will
also generally be required to include in income in each month the amount of
discount accrued through the applicable month and not previously included in
income, but limited, with respect to the portion of discount allocable to any
mortgage, to the amount of principal on the mortgage received by the trust
fund in that month. Because the mortgages will provide for monthly principal
payments, a discount may be required to be included in income at a rate that
is not significantly slower than the rate at which the discount accrues, and
therefore at a rate not significantly slower than the rate at which the
discount would be included in income if it were OID. The holder may elect to
accrue discount under a constant yield method based on the yield of the pass-
through security to the holder, or possibly based on the yields of each loan.
In the absence of an election, it may be necessary to accrue discount under a
more rapid straight-line method. Under the de minimis
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rule, market discount with respect to a pass-through security will be
considered to be zero if it is less than the product of
(a) 0.25% of the principal amount of the mortgages allocable to the pass-
through security and
(b) 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, the holder may
elect under Section 171 of the Internal Revenue Code to amortize the portion
of premium that is allocable to a loan under a constant yield method based on
the yield of the loan to the holder, provided that the loan was originated
after September 27, 1985. Premium allocable to a loan originated on or before
that date should be allocated among the principal payments on the 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 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
loan that is allocable to the pass-through security and the portion of the
adjusted basis of the pass-through security that is allocable to the loans.
The method of allocating 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. 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 some 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
o fails to furnish the trustee with its taxpayer identification number;
o furnishes the trustee an incorrect taxpayer identification number;
o fails to report properly interest, dividends or other reportable payments
as defined in the Internal Revenue Code; or
o under particular circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed under
penalty of perjury, that the taxpayer identification number provided is
its correct number and that the holder is not subject to backup
withholding.
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Backup withholding will not apply, however, with respect to payments made to
holders, including payments to exempt recipients, such as exempt
organizations, and to foreign investors. Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
Treasury regulations, which are generally effective with respect to
payments made after December 31, 2000, consolidate and modify the current
certification requirements and means by which a holder may claim exemption
from United States federal income tax withholding and provide presumptions
regarding the status of holders when payments to the holders cannot be
reliably associated with appropriate documentation provided to the payor. We
recommend that holders consult their tax advisors regarding the application of
Treasury regulations with respect to payments made after December 31, 2000.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any reportable payments during the 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 foreign investor, the interest will normally qualify as
portfolio interest, except where
(a) the recipient is a holder, directly or by attribution, of 10% or more of
the capital or profits interest in the issuer, or
(b) the recipient is a controlled foreign corporation to which the issuer is
a related person, and will be exempt from federal income tax.
For this purpose, a foreign investor is any holder that is not
(a) a citizen or resident of the United States,
(b) a corporation or partnership, including any entity that is classified as
either a corporation or partnership for federal income tax purposes,
organized under the law of the United States or any state, including the
District of Columbia,
(c) an estate the income of which is includible in gross income regardless
of its source, or
(d) a trust other than a foreign trust, as the term is defined in Section
7701(a)(31) of the Internal Revenue Code.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from 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 the
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 foreign investors. Holders of pass-through securities however, may be
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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 investors are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and timely provide an Internal Revenue Service Form
4224. They will, however, generally be subject to the regular United States
income tax.
The Final Withholding regulations consolidate and modify the current
certification requirements and means by which a holder may claim exemption
from United States federal income tax withholding. We recommend that holders
consult their tax advisors regarding the application of Treasury regulations
with respect to payments made after December 31, 2000.
Payments to holders of residual interest securities who are foreign
investors will generally be treated as interest for purposes of the 30%, or
lower treaty rate, United States withholding tax. Holders should assume that
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 these amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Treasury 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 foreign investor
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 these 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 foreign investor transfers a residual interest
security to a United States person, that is, a person that is not a foreign
investor, 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 Internal
Revenue Code.
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 investor will be exempt from United States federal
income and withholding tax, provided that
(a) the gain is not effectively connected with the conduct of a trade or
business in the United States by the foreign investor and
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(b) in the case of an individual foreign investor, the foreign investor 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 Internal Revenue Service
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.
Possible alternative treatment of the notes. If, contrary to the opinion of
Federal Tax Counsel, the Internal Revenue Service 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
qualifying income tests. Nonetheless, treatment of the notes as equity
interests in a publicly traded partnership could have adverse tax consequences
to some holders. For example, income to foreign holders generally would be
subject to United States federal income tax and United States federal income
tax return filing and withholding requirements, and individual holders might
be subject to 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 in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered
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debt of the trust fund. This type of 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 United States
dollars, none of the certificates have interest rates which would qualify as
contingent interest under the OID Treasury 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 the 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 a 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 Internal Revenue 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
(a) the interest that accrues on the certificates in accordance with their
terms for the related month, including interest accruing at the pass-
through rate for the related month and interest on amounts previously
due on the certificates but not yet distributed;
(b) 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;
(c) prepayment premium payable to the certificateholders for the related
month; and
(d) any other amounts of income payable to the certificateholders for the
related month.
This taxable income 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 Internal Revenue Service 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 that amount. Thus, cash basis holders will
in effect be required to report income from the certificates on the accrual
basis
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and certificateholders may become liable for taxes on trust fund income even
if they have not received cash from the trust fund to pay these 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 this type of
holder under the Internal Revenue 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. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the 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 Internal
Revenue Service were to require that tax 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 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 loan by loan
basis.
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any market discount in income currently as it
accrues over the life of the loans or to offset any premium against interest
income on the loans. As indicated above, a portion of market discount income
or premium deduction may be allocated to certificateholders.
Section 708 termination. Under Section 708 of the Internal Revenue 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 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 the technical requirements that might
apply when a constructive termination occurs. As a result, the trust fund may
be subject to 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
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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 the 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
those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of the 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 special reporting requirements. Thus, to avoid those
special reporting requirements, the trust fund will elect to include market
discount in income as it accrues.
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 to those certificates, the 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 the applicable 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 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 or loss, the purchasing certificateholder will have a
higher or 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 Internal Revenue 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 this 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.
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Administrative matters. The owner trustee is required to keep or have kept
complete and accurate books of the trust fund. These 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 (Internal Revenue Service Form 1065) with the
Internal Revenue Service 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 Internal Revenue Service 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 the
nominees will be required to forward the 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 inconsistencies.
Under Section 6031 of the Internal Revenue 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 information on the nominee,
the beneficial owners and the certificates so held. This information includes:
(a) the name, address and taxpayer identification number of the nominee and
(b) as to each beneficial owner
(1) the name, address and identification number of the person,
(2) whether the 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
(3) information on certificates that were held, bought or sold on behalf
of the 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 Securities Exchange Act of 1934 is not required to
furnish an 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 the tax matters partner, will be responsible for
representing the certificateholders in any dispute with the Internal Revenue
Service. The Internal Revenue 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 some circumstances, a
certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the trust fund. An adjustment could also result in
an
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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 in this prospectus. Although it
is not expected that the trust fund would be engaged in a trade or business in
the United States for tax withholding 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 Internal Revenue Code, as
if the taxable 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 United States 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 Internal Revenue
Service and submit that number to the trust fund on Form W-8BEN in order to
assure appropriate crediting of the taxes withheld. A foreign holder generally
would be entitled to file with the Internal Revenue Service 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 United States 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 these interest 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 this
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
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Internal Revenue 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
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locality. Therefore, we recommend that potential investors 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, known as ERISA, and Section 4975 of the Internal Revenue Code
prohibit a pension, profit sharing or other employee benefit plan from
engaging in certain transactions involving plan assets with persons that are
parties in interest under ERISA or disqualified persons under the Internal
Revenue Code with respect to the plan. ERISA also imposes particular duties
and particular 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 the plan. A violation of these prohibited
transaction rules may generate excise tax and other liabilities under ERISA
and the Internal Revenue Code for the violating persons.
Some transactions involving the related trust fund might be deemed to
constitute prohibited transactions under ERISA and the Internal Revenue Code
with respect to a benefit plan that purchased securities if assets of the
related trust fund were deemed to be assets of the benefit plan. Under a
regulation issued by the United States Department of Labor, the assets of a
trust fund would be treated as plan assets of a benefit plan for the purposes
of ERISA and the Internal Revenue Code only if the benefit plan acquired an
equity interest in the trust fund and none of the exceptions contained in the
regulation issued by United States Department of Labor was applicable. An
equity interest is defined under the regulation issued by United States
Department of Labor 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 some 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 The Secondary Mortgage Marketing Enhancement Act. 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.
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Plan of Distribution
On the terms and conditions set forth in an underwriting agreement with
respect to each trust fund, the seller will agree to sell to each of the
underwriters named in the related prospectus supplement, and each of those
underwriters will severally agree to purchase from the seller, the principal
amount of each class of securities of the related series set forth in the
related prospectus supplement.
In each underwriting agreement, the several underwriters will agree,
subject to the terms and conditions set forth in that agreement, to purchase
all of the securities which are offered by this prospectus and by the related
prospectus supplement if any of those securities are purchased. If an
underwriter defaults in its obligations, each underwriting agreement will
provide that purchase commitments of the nondefaulting underwriters may be
increased, or the underwriting agreement may be terminated.
Each prospectus supplement will either
(x) set forth the price at which each class of securities will be offered
to the public and any concessions that may be offered to dealers
participating in the offering of those securities or
(y) 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 sale.
After the initial public offering of any securities, the public offering price
and concessions may be changed.
Each underwriting agreement will provide that the seller will indemnify
underwriters against particular liabilities, including liabilities under the
Securities Act of 1933, as amended.
Under each underwriting agreement, the closing of the sale of any class of
securities subject to that agreement will be conditioned on the closing of the
sale of all other classes also subject to that agreement.
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
Legal matters in connection with the securities will be passed upon for the
seller by Stroock & Stroock & Lavan LLP, New York, New York or such other
counsel as may be identified in the applicable prospectus supplement.
95
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$115,000,000
Delta Funding
Home Equity Loan Trust 2000-4
Home Equity Loan
Asset-Backed Certificates, Series 2000-4
Delta Funding Corporation
(Seller)
Countrywide Home Loans, Inc.
(Servicer)
_________________
PROSPECTUS SUPPLEMENT
December 13, 2000
_________________
GREENWICH CAPITAL MARKETS, INC.
COUNTRYWIDE SECURITIES CORPORATION
