AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 2000
Registration No. 333-96001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DELTA FUNDING CORPORATION
(Exact name of Registrant as specified in its charter)
on behalf of itself and trusts with respect to which
it is the settlor, sponsor or depositor
NEW YORK 11-2609517
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
--------------------------------------
1000 Woodbury Road
Woodbury, New York 11797
(516) 364-8500
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
-----------------
Richard Blass
Chief Financial Officer
Delta Funding Corporation
1000 Woodbury Road
Woodbury, New York 11797
(516) 364-8500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
Copy to:
Reed Auerbach
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF
REGISTERED(1) REGISTERED(2) PRICE PER UNIT (2) OFFERING PRICE (2) REGISTRATION FEE (3)
<S> <C> <C> <C> <C>
Asset-Backed Notes and
Asset-Backed Certificates $1,250,000,000 100% $1,250,000,000 $330,000
(1) The securities are also being registered for the purpose of market making.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) A fee of $264 has already been filed.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
INCLUDED IN THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO
REGISTRATION STATEMENT NO. 333-51545 AS PREVIOUSLY FILED BY THE REGISTRANT ON
FORM S-3 WITH $185,000,000 SECURITIES REGISTERED. THIS REGISTRATION STATEMENT,
WHICH IS A NEW REGISTRATION STATEMENT, ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT
NO. 2 TO REGISTRATION STATEMENT NO. 333-51545 AND SUCH POST-EFFECTIVE AMENDMENT
SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS
REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(C) OF THE SECURITIES ACT
OF 1933.
<PAGE>
INTRODUCTORY NOTE
This Registration Statement contains (i) a form of Prospectus relating
to the offering of a series of Asset Backed Notes and/or Asset Backed
Certificates by various Delta Funding Home Equity Loan Trusts created from time
to time by Delta Funding Corporation and (ii) two forms of Prospectus Supplement
relating to the offering by Delta Funding Home Equity Loan Trusts of the
particular series of Asset Backed Certificates or of Asset Backed Notes
described therein. Each form of Prospectus Supplement relates only to the
securities described therein and is a form which, among others, may be used by
Delta Funding Corporation to offer Asset Backed Notes and/or Asset Backed
Certificates under this Registration Statement.
<PAGE>
Prospectus supplement to prospectus dated ____, 2000
$------------
DELTA FUNDING HOME EQUITY LOAN TRUST ____ Home
Equity Loan Asset-Backed Certificates, Series ______
Delta Funding Corporation
Seller and Servicer
---------------
CERTIFICATES OFFERED
o Classes of asset backed You should carefully consider the risk factors
certificates listed below beginning on page S-_ in this prospectus
supplement.
ASSETS
o Fixed and adjustable rate, The certificates are obligations only of the
first and second lien, trust.
subprime residential mortgage
loans Neither the certificates nor the mortgage
loans are insured or guaranteed by any
CREDIT ENHANCEMENT governmental agency or by any other person.
o Excess interest
o Overcollateralization
o Cross-collateralization
o Subordination
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 INITIAL
CLASS CLASS
CERTIFICATE CERTIFICATE EXPECTED RATINGS CERTIFICATE CERTIFICATE EXPECTED RATINGS
BALANCE RATE BALANCE RATE
- ------------------ ------------- ------------- -------- -------- ----------------- ------------ -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A-1F.... $ AAA AAA Class A-7F..... $ AAA AAA
- ------------------ ------------- ------------- -------- -------- ----------------- ------------ -------------- --------- -----------
Class A-2F.... $ AAA AAA Class IOF...... $ AAAr AAA
- ------------------ ------------- ------------- -------- -------- ----------------- ------------ -------------- --------- -----------
Class A-3F.... $ AAA AAA Class A-1A..... $ Adjustable AAA AAA
- ------------------ ------------- ------------- -------- -------- ----------------- ------------ -------------- --------- -----------
Class A-4F.... $ AAA AAA Class M-1...... $ AA AA
- ------------------ ------------- ------------- -------- -------- ----------------- ------------ -------------- --------- -----------
Class A-5F.... $ AAA AAA Class M-2...... $ A A
- ------------------ ------------- ------------- -------- -------- ----------------- ------------ -------------- --------- -----------
Class A-6F.... $ AAA AAA Class B........ $ BBB- BBB-
================== ============= ============= ======== ======== ================= ============ ============== ========= ===========
</TABLE>
The certificate rates on the offered fixed rate certificates are subject to
an interest rate cap and to increase after the optional termination date.
The certificate rate on the offered adjustable rate certificates is subject
to change on each distribution date, an interest rate cap and to increase after
the optional termination date.
See "Description of the Certificates - Certificate rates" in this
prospectus supplement.
Subject to the satisfaction of specific conditions, the underwriters named
below will purchase the offered certificates from the seller. See "Underwriting"
in this prospectus supplement. The offered certificates will be issued in
book-entry form only on or about ___________.
Underwriters
<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
PROSPECTUS SUPPLEMENT
PAGE
Summary...........................................S-5
Risk Factors.....................................S-10
Description of the Mortgage Loans................S-18
Prepayment and Yield Considerations..............S-34
Description of the Certificates..................S-50
The Pooling and Servicing Agreement..............S-68
Use of Proceeds..................................S-79
Federal Income Tax Considerations................S-79
ERISA Considerations.............................S-83
Legal Investment Considerations..................S-88
Underwriting.....................................S-88
Legal Matters....................................S-90
Ratings..........................................S-91
PROSPECTUS
PAGE
Reports to Holders..................................3
Available Information...............................3
Incorporation of Certain Documents by
Reference........................................3
Summary of Terms....................................4
Risk Factors.......................................18
The Seller and the Servicer........................22
Description of the Securities......................31
The Trust Funds....................................41
Enhancement........................................49
Servicing of Loans.................................51
The Agreements.....................................59
Certain Legal Aspects of the Loans.................70
Use of Proceeds....................................80
Federal Income Tax Considerations..................81
State Tax Considerations..........................109
ERISA Considerations..............................109
Legal Investment..................................110
Plan Of Distribution..............................110
Legal Matters.....................................111
Glossary of Terms.................................111
<PAGE>
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
_____ 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 _______
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Home Equity Loan Asset-Backed Certificates, Series ________
will be required to deliver a prospectus supplement and prospectus until
__________, -----.
<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 -----.
ISSUER............................ Delta Funding Home Equity Loan Trust _______.
SELLER AND SERVICER............... Delta Funding Corporation.
TRUSTEE........................... _____________
CUSTODIAN......................... _____________
SECURITIES ADMINISTRATOR.......... _____________
CUT-OFF DATE...................... The close of business on ________, _____,
except that the cut-off date for any mortgage
loan originated after ________, _____ will be
the date of origination of that mortgage
loan.
CLOSING DATE...................... On or about ________, _____.
DISTRIBUTION DATES................ The 15th day of each month or, if that day is
not a business day, the next business day,
beginning in ----------.
RECORD DATES...................... The last business day of the month before the
month in which the applicable distribution
date occurs. The record date for the class
A-1A certificates, however, is the business
day immediately before the applicable
distribution date so long as the class A-1A
certificates remain in book-entry form.
FINAL SCHEDULED DISTRIBUTION
DATES........................... The final scheduled distribution date for
each class of offered certificates is as
follows:
<TABLE>
<CAPTION>
FINAL SCHEDULED FINAL SCHEDULED
CLASS DISTRIBUTION DATE CLASS DISTRIBUTION DATE
<S> <C> <C> <C>
A-1F A-7F
A-2F IOF
A-3F A-1A
A-4F M-1
A-5F M-2
A-6F B
</TABLE>
<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.
FIXED RATE CERTIFICATES
All classes of offered certificates except for the adjustable rate certificates.
ADJUSTABLE RATE CERTIFICATES
Class A-1A certificates.
GROUP F CERTIFICATES OR CERTIFICATE
GROUP F
Class A-1F, class A-2F, class A-3F, class A-4F, class A-5F, class A-6F, class
A-7F and class IOF certificates.
GROUP A CERTIFICATES OR CERTIFICATE
GROUP A
Class A-1A certificates.
CERTIFICATE GROUP
Group F certificates or Group A certificates, as applicable.
LOAN GROUP F
All mortgage loans bearing interest at fixed rates.
LOAN GROUP A
All mortgage loans bearing interest at adjustable rates, including mortgage
loans which bear interest at rates that are fixed for two years or three years
before beginning to adjust.
NOTIONAL AMOUNT CERTIFICATES
Class IOF certificates.
SENIOR CERTIFICATES
Offered certificates other than subordinate certificates.
SUBORDINATE CERTIFICATES
Class M-1, class M-2 and class B certificates.
OFFERED CERTIFICATES
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 for the class IOF certificates, is limited by a maximum rate cap that
will be determined based on the weighted average of the interest rates on the
applicable mortgage loans net of specified fees and expenses.
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 or, in the case of the class A-1A certificates, the days in the
accrual period divided by 360, 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,
except that the interest accrual period for the class A-1A certificates will be
the period from the prior distribution date or, in the case of the first
distribution date from the closing date, to the day before the applicable
distribution date.
INTEREST CALCULATIONS
Actual/360 for the class A-1A certificates; 30/360 for all other offered
certificates.
CLASS PRINCIPAL BALANCES
The initial class principal balances and notional amount of the offered
certificates are set forth on the cover page of this prospectus supplement. The
notional amount of the class IOF 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 fixed rate 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 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 senior certificates may be eligible for purchase by persons investing assets
of employee benefit plans or similar arrangements. Purchase of the subordinate
certificates by these plans or arrangements will be permitted only upon
satisfaction of specified conditions. See "ERISA Considerations" in this
prospectus supplement.
OTHER CERTIFICATES
The trust will issue senior class P certificates and 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 INITIAL 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 ______, _____. On the
closing date, additional mortgage loans will be delivered to the trust.
LOAN GROUP F
Number of loans $
Aggregate principal balance
Range of principal balances $ to $
Average principal balance $
Range of interest rates % to %
Weighted average interest rate
%
Range of CLTV % to %
Weighted average CLTV %
Range of original terms to
maturity (months) 60 to 360
Weighted average original term to
maturity (months)
Range of remaining terms to
maturity (months) to 360
Weighted average remaining term to
maturity (months)
Range of loan ages (months) 0 to
Weighted average loan
age (months) __
LOAN GROUP A
Number of loans
Aggregate principal balance $
Range of principal balances $to $
Average principal balance $
Range of interest rates % to %
Weighted average interest
rate %
Range of LTV % to %
Weighted average LTV %
Range of original terms to
maturity (months) 180 to 360
Weighted average original term to
maturity (months)
Range of remaining terms to
maturity (months) to 360
Weighted average remaining
term to maturity (months)
Range of loan ages (months) 0 to
Weighted average loan
age (months)
Range of gross margins % to %
Weighted average gross margin %
Range of lifetime caps % to %
Weighted average lifetime cap %
2/28 loans (by principal balance) %
3/27 loans (by principal balance) %
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 will deposit approximately $____________ 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 three types of credit enhancement:
o the use of excess interest to cover losses and to create
overcollateralization
o crosscollateralization of the two loan groups
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 two forms of credit enhancement.
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 into the pre-funding account on that
date.
FEDERAL INCOME TAX
CONSIDERATIONS
The trust will make separate elections to treat some of its assets as a "real
estate mortgage investment conduit," creating a tiered REMIC structure. The
offered certificates, excluding any rights to receive LIBOR carryover or net
rate cap carryover, will be designated as "regular interests" in a REMIC and,
so, 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.
<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.
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 BALLOON LOANS MAY HAVE HIGHER RATES OF DEFAULT WHICH MAY CAUSE LOSSES.
Based on the principal balances of the mortgage loans in existence on
_____, _____, approximately _____% of the initial mortgage loans in
Loan Group F and none of the mortgage loans in Loan Group A are
balloon loans. A balloon loan has monthly payments that will not fully
pay off the loan balance by the maturity date. As a result, the
borrower usually will have to refinance the balloon loan in order to
pay the amount due. The borrower may not be able to refinance the
balloon loan for any number of reasons, including the level of
available mortgage rates, the value of the property or the borrower's
payment or credit history. The trust will not have any funds to
refinance a balloon loan, and the seller is not obligated to do so. If
the borrower is unable to refinance the balloon loan, the trust may
suffer a loss.
o DEFAULTS ON SECOND LIEN MORTGAGE LOANS MAY RESULT IN MORE SEVERE
LOSSES. Based on the principal balances of the mortgage loans in
existence on _______, _____, approximately _____% of the mortgage
loans in Loan Group F and none of the mortgage loans in Loan Group A
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 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 SUBSEQUENT MORTGAGE LOANS MAY HAVE CHARACTERISTICS THAT DIFFER FROM
THOSE OF THE INITIAL MORTGAGE LOANS WHICH MAY REDUCE YOUR YIELD TO
MATURITY. Following the transfer of the subsequent mortgage loans to
the trust after the closing date, 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 principal balances of the mortgage loans in existence on
___________, approximately ______% of the mortgage loans in Loan Group
F are secured by properties in ________ and approximately ____% of the
mortgage loans in Loan Group A are secured by properties in _____.
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 initial mortgage loans in Loan Group A have fixed interest
rates for two or three years and then adjust. Those mortgage loans may
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
___________, excess funding amounts will be distributed on the first
distribution date thereafter as a prepayment to the owners of the
class A-1F or class A-1A certificates, as applicable.
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 IOF certificates, is subject to a
rate cap that differs by loan group. The rate cap for those offered
certificates other than the class A-1A certificates is the lesser of
the maximum rate for either loan group, and the rate cap for the class
A-1A certificates is the maximum rate for Loan Group A. Each maximum
rate is based on the weighted average of the interest rates on the
mortgage loans in the related loan group, net of specified fees and
expenses. If mortgage loans with relatively higher loan rates prepay,
the maximum rate on the related classes of offered certificates will
be lower than otherwise would be the case.
Your investment in the class A-1A certificates also involves the risk
that the level of one-month LIBOR may change in a direction or at a
rate that is different from the level of the index used to determine
the interest rates on the adjustable rate mortgage loans.
o OWNERS OF CLASS IOF CERTIFICATES MAY NOT RECOVER THEIR INITIAL
INVESTMENTS. An investment in the class IOF 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 IOF certificates may not recover their initial investments.
In addition, the class IOF certificates are not entitled to any
distributions after the 36th distribution date.
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.
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. 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.
COMPUTER PROBLEMS IN THE YEAR 2000 MAY RESULT IN LOSSES
Many computers and computer chips were not programmed to recognize more
than two digits in the year of a date. As a result, in the year 2000, those
computers will not know whether the '00 refers to the year 1900 or the year
2000. The servicer has implemented a program to identify and correct this
problem in its computer systems, and has completed the necessary changes with
respect to its technology systems in August 1999. The seller believes that its
systems are year 2000 compliant. However, since the servicer relies on the
performance of computer systems of other companies, there may be problems in the
year 2000 due to other companies' computer systems. These problems may cause
delays or disruptions in the amount and timing of distributions to you.
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.
GENERAL
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS. 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.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS. 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 loans. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the servicer to collect all or part of the
principal of or interest on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the owner of the home
equity loan to damages and administrative enforcement.
The loans are also subject to federal laws, including:
(1) the federal Truth in Lending Act and regulation Z promulgated
under the Truthe in Lending Act, which require particular disclosures to
the borrowers regarding the terms of the 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.
Violations of particular provisions of these federal laws may limit the
ability of the servicer to collect all or part of the principal of or interest
on the loans and in addition could subject the trust fund to damages and
administrative enforcement. The loans may be subject to the Home Ownership and
Equity Protection Act of 1994 which amended the Truth in Lending Act as it
applies to mortgages subject to the Home Ownership and Equity Protection Act of
1994. The Home Ownership and Equity Protection Act of 1994 requires additional
disclosures, specifies the timing of these disclosures and limits or prohibits
inclusion of some provisions in mortgages subject to the Home Ownership and
Equity Protection Act 1994. The Home Ownership and Equity Protection Act 1994
also provides that any purchaser or assignee of a mortgage covered by the Home
Ownership and Equity Protection Act 1994 is subject to all of the claims and
defenses which the borrower could assert against the original lender. The
maximum damages that may be recovered under the Home Ownership and Equity
Protection Act 1994 from an assignee is the remaining amount of indebtedness
plus the total amount paid by the borrower in connection with the loans. If the
Trust fund includes loans subject to the Home Ownership and Equity Protection
Act 1994, it will be subject to all of the claims and defenses which the
borrower could assert against the seller. Any violation of the Home Ownership
and Equity Protection Act 1994 which would result in liability would be a breach
of the seller's representations and warranties, and the seller would be
obligated to cure, repurchase or, if permitted by the agreement, substitute for
the home equity loan in question. In addition, numerous other federal and state
statutory provisions, including the federal bankruptcy laws, the Soldiers' and
Sailors' Civil Relief Act of 1940 and state debtor relief laws, may also
adversely affect the servicer's ability to collect the principal of or interest
on the loans and also would affect the interests of the securityholders in these
loans if the applicable laws result in the loans being uncollectible. See
"Certain Legal Aspects of the Loans."
INSOLVENCY OF SELLER MAY CAUSE LOSSES. The seller intends that its transfer
of the primary assets to a trust fund will constitute a sale, and the seller and
the trust fund will agree to treat each 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 fund to the seller secured by the pledge of the related primary assets. If
an attempt were to be successful, holders of securities could receive a
prepayment of all or part of their securities. Any prepayment would adversely
affect the yield on the securities and could result in a loss. Even if an
attempt were to be unsuccessful, holders of securities could experience delays
in distributions which would adversely affect the yield on the related
securities.
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
The mortgage loans will include:
(a) the mortgage loans identified as of ____________ and described in
this prospectus supplement; called the statistic calculation mortgage
loans,
(b) additional closed-end fixed and adjustable rate home equity loans
to 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) additional mortgage loans to be purchased by the trust from the
seller from time to time on or prior to _____________, called the
subsequent mortgage loans, and together with the initial mortgage loans,
called the mortgage loans.
The mortgage loans will be divided into two groups, each called a loan
group constituting a separate sub-trust: Loan Group F and Loan Group A. Each
mortgage loan in Loan Group F will bear interest at a fixed rate that is
calculated on the "actuarial basis". Some of the mortgage loans in Loan Group F
will have original terms to stated maturity of up to 15 years and amortization
schedules of up to 30 years, called balloon loans , leaving a substantial
payment due at the stated maturity. The mortgage loans in Loan Group F are
secured by first or second liens primarily on one- to four-family residential
properties, called the mortgaged properties.
Each mortgage loan in Loan Group A will bear interest at an adjustable
rate, called an ARM, that is calculated on the "actuarial basis". 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. The mortgage loans in Loan Group A are
secured by first liens on the related mortgaged properties.
For all of the statistic calculation mortgage loans in Loan Group A, the
loan index is the London interbank offered rate for six-month United States
dollar deposits, 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. Approximately ______% and ______%, by principal balance,
of the statistic calculation mortgage loans in Loan Group A have initial change
dates that are 24 months and 36 months, respectively, after origination,
referred to as the 2/28 loans and 3/27 loans, respectively. 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 2/28 loans and 3/27 loans
generally is _____%.
As of the cut-off date, substantially all of the statistic calculation
mortgage loans in Loan Group A were accruing interest at loan rates that are
below the sum of the related gross margin and the loan index that would
otherwise have been applicable. On the first change date for each 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.
Approximately ______%, by principal balance, of the statistic calculation
mortgage loans provide for payment by the mortgagor of a prepayment charge on
specific prepayments as provided in the related mortgage note.
STATISTICAL INFORMATION
Set forth below is approximate statistical information as of the cut-off
date regarding the statistic calculation mortgage loans in each loan group. On
the closing date, the additional mortgage loans will be delivered to the trust
for inclusion in Loan Group F and Loan Group A, respectively. In addition, prior
to the closing date, statistic calculation mortgage loans may be removed from
either loan group and other mortgage loans may be substituted for the removed
loans. The seller believes that the information set forth in this prospectus
supplement with respect to each loan group as presently constituted is
representative of the characteristics of the initial mortgage loans in each loan
group as it will be constituted at the closing date, although some
characteristics of the initial mortgage loans in either loan group may vary. The
sum of the percentage columns in the following tables may not equal 100% due to
rounding.
LOAN GROUP F. As of the cut-off date: approximately ____%, by principal
balance, are balloon loans; and approximately _____%, by principal balance, have
payments which, as of the cut-off date, are __ to __ days delinquent.
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
$0.01- $25,000.00........................
$25,000.01- $50,000.00...................
$50,000.01- $75,000.00...................
$75,000.01-$100,000.00...................
$100,000.01-$125,000.00..................
$125,000.01-$150,000.00..................
$150,000.01-$175,000.00..................
$175,000.01-$200,000.00..................
$200,000.01-$225,000.00..................
$225,000.01-$250,000.00..................
$250,000.01-$275,000.00..................
$275,000.01-$300,000.00..................
$300,000.01-$325,000.00..................
$350,000.01-$375,000.00..................
$375,000.01-$400,000.00..................
$400,000.01-$425,000.00..................
$650,000.01-$675,000.00..................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Arizona.............................
Arkansas............................
California..........................
Colorado............................
Connecticut.........................
Delaware............................
District of Columbia................
Florida.............................
Georgia.............................
Illinois............................
Indiana.............................
Kansas..............................
Kentucky............................
Louisiana...........................
Maine...............................
Maryland............................
Massachusetts.......................
Michigan............................
Minnesota...........................
Mississippi.........................
Missouri............................
Nebraska............................
New Hampshire.......................
New Jersey..........................
New Mexico..........................
New York............................
North Carolina......................
Ohio................................
Oklahoma............................
Oregon..............................
Pennsylvania........................
Rhode Island........................
South Carolina......................
Tennessee...........................
Texas...............................
Virginia............................
Washington..........................
West Virginia.......................
Wisconsin...........................
Wyoming.............................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
(1) Determined by property address so designated in the related mortgage.
</TABLE>
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL COMBINED STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
5.01% to 10.00%.........................
10.01% to 15.00%.........................
15.01% to 20.00%.........................
20.01% to 25.00%.........................
25.01% to 30.00%.........................
30.01% to 35.00%.........................
35.01% to 40.00%.........................
40.01% to 45.00%.........................
45.01% to 50.00%.........................
50.01% to 55.00%.........................
55.01% to 60.00%.........................
60.01% to 65.00%.........................
65.01% to 70.00%.........................
70.01% to 75.00%.........................
75.01% to 80.00%.........................
80.01% to 85.00%.........................
85.01% to 90.00%.........................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
(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) 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 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.
</TABLE>
<PAGE>
CUT-OFF DATE LOAN RATES
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
7.001%- 7.500%..........................
7.501%- 8.000%..........................
8.001%- 8.500%..........................
8.501%- 9.000%..........................
9.001%- 9.500%..........................
9.501%-10.000%..........................
10.001%-10.500%..........................
10.501%-11.000%..........................
11.001%-11.500%..........................
11.501%-12.000%..........................
12.001%-12.500%..........................
12.501%-13.000%..........................
13.001%-13.500%..........................
13.501%-14.000%..........................
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
15.501%-16.000%..........................
16.001%-16.500%..........................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL TERMS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
TO STATED MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
1- 60..................................
61-120..................................
121-180..................................
181-240..................................
241-300..................................
301-360..................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF REMAINING MONTHS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
1- 60..................................
61-120..................................
121-180..................................
181-240..................................
241-300..................................
301-360..................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
MONTHS SINCE ORIGINATION
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF MONTHS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
0.......................................
1- 3....................................
4- 6....................................
7-12....................................
13-33....................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
PROPERTY TYPE
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Single Family............................
Two-to-Four Family.......................
Five-to-Eight Family.....................
Mixed Use................................
Condominium..............................
Mobile Home..............................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
OCCUPANCY TYPE (1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Owner Occupied...........................
Non-Owner Occupied.......................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
(1) Based upon representations made by borrowers at the time of origination of
the mortgage loans.
</TABLE>
LOAN GROUP A. As of the cut-off date: the weighted average current loan
rate of the 2/28 loans and 3/27 loans was approximately _____% and _____% per
annum, respectively; the weighted average number of months to the next change
date for the 2/28 loans and 3/27 loans was approximately ____ months and _____
months, respectively; and approximately ____%, by principal balance, have
payments which, as of the cut-off date, are __ to __ days delinquent.
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
$0.01 to $25,000.00....................
$25,000.01 to $50,000.00.................
$50,000.01 to $75,000.00.................
$75,000.01 to $100,000.00................
$100,000.01 to $125,000.00...............
$125,000.01 to $150,000.00...............
$150,000.01 to $175,000.00...............
$175,000.01 to $200,000.00...............
$200,000.01 to $225,000.00...............
$225,000.01 to $250,000.00...............
$250,000.01 to $275,000.00...............
$275,000.01 to $300,000.00...............
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Arkansas.................................
Arizona..................................
California...............................
Colorado.................................
Connecticut..............................
Delaware.................................
Florida..................................
Georgia..................................
Idaho....................................
Illinois.................................
Indiana..................................
Kentucky.................................
Louisiana................................
Maryland.................................
Massachusetts............................
Michigan.................................
Minnesota................................
Mississippi..............................
Missouri.................................
Nevada...................................
New Hampshire............................
New Jersey...............................
New Mexico...............................
New York.................................
North Carolina...........................
Ohio.....................................
Pennsylvania.............................
Rhode Island.............................
Tennessee................................
Texas....................................
Virginia.................................
West Virginia............................
Wisconsin................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
(1) Determined by property address so designated in the related mortgage.
</TABLE>
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
15.01%-20.00%............................
20.01%-25.00%............................
25.01%-30.00%............................
30.01%-35.00%............................
35.01%-40.00%............................
40.01%-45.00%............................
45.01%-50.00%............................
50.01%-55.00%............................
55.01%-60.00%............................
60.01%-65.00%............................
65.01%-70.00%............................
70.01%-75.00%............................
75.01%-80.00%............................
80.01%-85.00%............................
85.01%-90.00%............................
90.01%-95.00%
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
(1) The original Loan-to-Value Ratios, referred to as LTVs, shown above are
equal, with respect to each statistic calculation mortgage loan, to the
original principal balance of that mortgage loan at the date of origination
divided by the value of the related mortgaged property, based upon the
lesser of the appraisal made at the time of origination of the mortgage
loan or the purchase price for 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 become equal to or greater than the value of the related
mortgaged properties, the actual losses could be higher than those now
generally experienced in the mortgage lending industry.
</TABLE>
<PAGE>
CUT-OFF DATE LOAN RATES
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
7.001%- 7.500%...........................
7.501%- 8.000%...........................
8.001%- 8.500%...........................
8.501%- 9.000%...........................
9.001%- 9.500%...........................
9.501%-10.000%...........................
10.001%-10.500%..........................
10.501%-11.000%..........................
11.001%-11.500%..........................
11.501%-12.000%..........................
12.001%-12.500%..........................
12.501%-13.000%..........................
13.001%-13.500%..........................
13.501%-14.000%..........................
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL TERMS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
TO STATE MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
180......................................
240......................................
360......................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF REMAINING STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
121-180..................................
181-240..................................
301-360..................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
MONTHS SINCE ORIGINATION
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
0........................................
1- 3.....................................
4- 6.....................................
7-12.....................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
PROPERTY TYPE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Single Family............................
Two-to-Four Family.......................
Condominium..............................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
OCCUPANCY TYPE(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Owner Occupied...........................
Non-Owner Occupied.......................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
(1) Based upon representations made by the borrowers at the time of originatio
of the mortgage loans.
</TABLE>
GROSS MARGIN
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
2.501%- 3.000%...........................
3.001%- 3.500%...........................
3.501%- 4.000%...........................
4.001%- 4.500%...........................
4.501%- 5.000%...........................
5.001%- 5.500%...........................
5.501%- 6.000%...........................
6.001%- 6.500%...........................
6.501%- 7.000%...........................
7.001%- 7.500%...........................
7.501%- 8.000%...........................
8.001%- 8.500%...........................
8.501%- 9.000%...........................
9.001%- 9.500%...........................
9.501%-10.000%...........................
10.001%-10.500%..........................
10.501%-11.000%..........................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
LIFETIME CAP
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF LIFETIME CAPS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
15.501%-16.000%..........................
16.001%-16.500%..........................
16.501%-17.000%..........................
17.001%-17.500%..........................
17.501%-18.000%..........................
18.001%-18.500%..........................
18.501%-19.000%..........................
19.001%-19.500%..........................
19.501%-20.000%..........................
20.001%-20.500%..........................
20.501%-21.000%..........................
21.001%-21.500%..........................
21.501%-22.000%..........................
22.001%-22.500%..........................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
LIFETIME FLOOR
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF LIFETIME FLOORS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
7.001%- 7.500%...........................
7.501%- 8.000%...........................
8.001%- 8.500%...........................
8.501%- 9.000%...........................
9.001%- 9.500%...........................
9.501%-10.000%...........................
10.001%-10.500%..........................
10.501%-11.000%..........................
11.001%-11.500%..........................
11.501%-12.000%..........................
12.001%-12.500%..........................
12.501%-13.000%..........................
13.001%-13.500%..........................
13.501%-14.000%..........................
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
MONTH OF NEXT CHANGE DATE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
MONTHS OF NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
August 2000..............................
September 2000...........................
November 2000............................
December 2000............................
February 2001............................
March 2001...............................
April 2001...............................
May 2001.................................
January 2002.............................
February 2002............................
March 2002...............................
April 2002...............................
May 2002.................................
June 2002................................
-------------- ----------- -----------
Total............................. 100.00%
============== =========== ===========
</TABLE>
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
On the closing date, cash in an amount not to exceed approximately
$____________, called the pre-funded amount, will 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 for Loan Group F and Loan Group A is approximately
$_________ and $___________, 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 for Loan Group F and Loan
Group A 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 $________,
(2) the date on which an event of default occurs under the agreement or
(3) the close of business on ___________.
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 applicable loan group.
Accordingly, the statistical characteristics of the mortgage loans in the trust
will vary upon the acquisition of subsequent mortgage loans.
The obligation of the trust to purchase subsequent mortgage loans on any
date during the funding period is subject to the following requirements in
addition to other requirements set forth in the 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 __ years for fully amortizing loans or __ years for
balloon loans in Loan Group F
o the subsequent mortgage loan will be secured by a mortgage in a first
lien position for Loan Group A or a first or second lien position for
Loan Group F
o the subsequent mortgage loan will not have a loan rate less than ___%
for Loan Group F and ____% for Loan Group A
Following the addition of the subsequent mortgage loans to each loan group,
the mortgage loans, including the applicable subsequent mortgage loans, if any,
in each loan group will have the following characteristics:
LOAN GROUP F
Weighted Average Loan Rate.......................... At least _____%
Weighted Average Remaining
Term to Stated Maturity........................... At least ___ months
Weighted Average Original
Combined Loan-to-Value Ratio...................... Not more than _____%
Weighted Average Credit Score (FICO)................ At least _____
Balloon Loans....................................... Not more than _____%
Principal Balance................................... Not more than $_______
State concentration................................. Not more than ______%
Zip code concentration.............................. Not more than ______%
Non-owner occupied.................................. Not more than ______%
Second liens........................................ Not more than ______%
LOAN GROUP A
Weighted Average Loan Rate.......................... At least ______%
Weighted Average Remaining
Term to Stated Maturity........................... At least _____ months
Weighted Average Original
Loan-to-Value Ratio............................... Not more than ______%
Weighted Average Credit Score (FICO)................ At least ___
Principal Balance................................... Not more than $_______
State concentration................................. Not more than ______%
Zip code concentration.............................. Not more than ______%
Non-owner occupied.................................. Not more than ______%
First liens......................................... _______%
PREPAYMENT AND YIELD CONSIDERATIONS
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 in the related loan group, in the
case of the senior certificates, and both loan groups, in the case of the
subordinate certificates. The rate of principal payments on the mortgage loans
will in turn be affected by their amortization schedules and by the rate of
principal prepayments, including for this purpose prepayments resulting from
refinancing, liquidations of the mortgage loans due to defaults, casualties,
condemnations and repurchases by the seller or the servicer. The mortgage loans
may be prepaid by the mortgagors at any time. However, 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 IOF certificates, is subject to the applicable available funds cap. Each
available funds cap on any distribution date is determined, in part, by
reference to the weighted average loan rate of the mortgage loans minus the
expense fee rate, which equals the net loan rate, in the related loan group in
effect at the beginning of the related due period. The expense fee rate is
________% per annum. All of the loan rates on the mortgage loans in Loan Group F
are fixed for the lives of the mortgage loans. If mortgage loans bearing higher
loan rates were to prepay at rates faster than mortgage loans with lower loan
rates, the available funds cap for Loan Group F would be lower than otherwise
would be the case. The certificate rate on the Group F certificates on any
distribution date is limited by the lower of the Loan Group F cap or the Loan
Group A cap. Thus, the effective certificate rates on the Group F certificates
will be dependent on the prepayment experience in each loan group. There is no
mechanism to compensate the holders of the Group F certificates, other than the
holders of the class A-6F certificates, if the related certificate rates are
limited by the available funds cap for Loan Group F. Although the holders of the
class A-6F certificates will be entitled to receive the related net rate cap
carryover to the extent funds are available for receipt as described and in the
priority set forth in this prospectus supplement, there is no assurance that
sufficient funds will be available. The ratings of the class A-6F certificates
do not address the likelihood of the payment of any net rate cap carryover.
The yield to investors in the class A-1A certificates will be sensitive to,
among other things, the level of 1-month LIBOR and the levels of the loan index.
All of the statistic calculation mortgage loans in Loan Group A are 2/28 and
3/27 loans which will bear interest at fixed loan rates for 24 months and 36
months, respectively, after origination of the mortgage loans. 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 for Loan Group A. Furthermore, mortgage loans that have not
reached their first change date are more likely to be subject to the applicable
periodic rate cap on their first change date. See "Description of the Mortgage
Loans" in this prospectus supplement. Although the holders of the class A-1A
certificates will be entitled to receive the related LIBOR carryover to the
extent funds are available for receipt as described and in the priority set
forth in this prospectus supplement, there is no assurance that sufficient funds
will be available. The ratings on the class A-1A certificates do not address the
likelihood of the payment of any LIBOR carryover.
Although the loan rates on the mortgage loans in Loan Group A are subject
to adjustment, the loan rates adjust less frequently than 1-month LIBOR and
adjust by reference to the loan index. Changes in 1-month LIBOR may not
correlate with changes in the loan index and either may not correlate with
prevailing interest rates. It is possible that an increased level of 1-month
LIBOR could occur simultaneously with a lower level of prevailing interest
rates, which would be expected to result in faster prepayments, thus reducing
the weighted average life of the class A-1A certificates.
The certificate rate on each class of the subordinate certificates on any
distribution date is limited by the lower of the Loan Group F cap or the Loan
Group A cap. Thus, the effective certificate rates on the subordinate
certificates will be dependent on the prepayment experience in each loan group.
Although the subordinate certificates will be entitled to receive any related
net rate cap carryover to the extent funds are available for receipt as
described and in the priority set forth in this prospectus supplement, there is
no assurance that sufficient funds will be available. The ratings of the
subordinate certificates do not address the likelihood of the payment of any net
rate cap carryover.
SUBORDINATE CERTIFICATES
The subordinate certificates provide credit enhancement for the senior
certificates in both certificate groups and may absorb losses on the mortgage
loans in either loan group. The weighted average lives of, and the yields to
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,
the application of excess interest, or the cross-collateralization provisions,
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 delinquency 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.
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 in Loan Group F 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 ____ DISTRIBUTION DATE.
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the mortgage loans, including
any optional purchase by the servicer of a delinquent mortgage loan and any
optional purchase of the remaining mortgage loans in connection with the
termination of the trust, in each case as described in this prospectus
supplement, will result in distributions on the related class or classes of
offered certificates then entitled to distributions of principal which would
otherwise be distributed over the remaining terms of 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 in either certificate group 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 related 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.
On each distribution date, the principal distribution amount will reflect
the total amount in respect of principal received with respect to both loan
groups in the related due period, as adjusted by the overcollateralization
provisions described in this prospectus supplement. The principal distribution
amount will be allocated between the senior certificates in each certificate
group generally on a pro rata basis, regardless of the amount of principal
actually received with respect to the loan group related to a particular
certificate group. Depending on the rate of payments of principal and/or the
rate of realized losses on the mortgage loans in a loan group relative to the
rates on the mortgage loans in the other loan group, the senior certificates in
a certificate group may receive principal distributions faster or slower than
would have been the case were distributions to be based solely on the principal
collections for the related loan group. The relative rates of principal payments
may change over time and may be affected by different factors. For example, the
mortgage loans with fixed loan rates may prepay at faster rates than the
mortgage loans with adjustable loan rates in response to a given decline in
market interest rates because adjustable loan rates would readjust based on
current rates. As a result of this method of allocating the principal
distribution amount, it may be more difficult to analyze the potential weighted
average lives of the senior certificates and the related yields 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.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the mortgage loans in Loan Group F is
affected by prevailing market rates for mortgage loans of a comparable term and
risk level. When the market interest rate is below the 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.
All of the mortgage loans in Loan Group A are ARMs. As is the case with
conventional fixed-rate mortgage loans, the ARMs may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, ARMs could be subject
to higher prepayment rates than if prevailing interest rates remain constant
because the availability of fixed-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their ARMs to "lock in" a lower
fixed interest rate. The 2/28 loans and 3/27 loans may become subject to higher
prepayment rates as 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
related 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 ____ distribution date. The final scheduled
distribution dates for the class A-1F, class A-2F, class A-3F, class A-4F and
class A-5F certificates have been set to equal the distribution date on which
the applicable class principal balance would be reduced to zero based on the
structuring assumptions and a __% prepayment assumption and an assumption that
no excess interest is used to make accelerated payments of principal to the
holders of the offered certificates. The final scheduled distribution date for
the class A-1A, class A-6F, class A-7F, 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 possible maturing mortgage loan in either loan
group, plus 12 months. 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 OF FIXED RATE CERTIFICATES
The effective yield to the certificateholders of each class of fixed rate
certificates will be lower than the yield otherwise produced by the certificate
rate for each 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-1F certificates in the case of
certificate group F and the holders of the class A-1A certificates in the case
of certificate group A, will receive an additional distribution allocable to
principal in an amount equal to the applicable excess funding amount. Although
there can be no assurance, the seller anticipates that there should be no
material principal prepayment to the certificateholders due to a lack of
subsequent mortgage loans.
INITIAL DISTRIBUTION DATE
With respect to any initial mortgage loan with a due date on the first day
of each month, the class A-1F and class A-1A certificateholders will receive a
distribution of principal reflecting two installments of principal during the
first due period. As a result, the certificateholders will receive a larger
payment in respect of principal on the initial distribution date than would have
been the case if the first due period were a one-month period.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on offered certificates purchased at a price less than par and will
decrease the yield on offered certificates purchased at a price greater than
par. The effect on an investor's yield due to principal payments on the mortgage
loans occurring at a rate that is faster (or slower) than the rate anticipated
by the investor in the period immediately following the issuance of the
certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average lives of the
offered certificates also will be affected by the amount and timing of
delinquencies and defaults on the mortgage loans and the recoveries, if any, on
liquidated mortgage loans and foreclosed properties.
The weighted average life of a certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of 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 Group F
certificates, a 100% prepayment assumption assumes a constant prepayment rate,
referred to as a CPR, of __% per annum of the outstanding principal balance of
the mortgage loans in Loan Group F in the first month of the life of the
mortgage loans and an additional amount of approximately _______%, precisely
____ 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 ___% per annum each month is
assumed. With respect to the Group A certificates, the prepayment assumption
assumes a constant prepayment rate of the applicable per annum CPR percentage of
the outstanding principal balances of the mortgage loans in Loan Group A. As
used in the table below, __% prepayment assumption assumes a constant prepayment
rate equal to ___% of the applicable prepayment assumption, i.e., no
prepayments. Correspondingly, ____% prepayment assumption assumes prepayment
rates equal to ____% of the applicable prepayment assumption, and so forth. The
prepayment assumption does not purport to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the mortgage loans. The seller believes
that no existing statistics of which it is aware provide a reliable basis for
holders of the offered certificates to predict the amount or the timing of
receipt of prepayments on the mortgage loans.
STRUCTURING ASSUMPTIONS
For the purposes of the tables below, it is assumed that:
(1) the mortgage loans consist of pools of loans with the level-pay
and balloon characteristics as set forth below,
(2) the amount of interest accrued on the mortgage loans is reduced by
amounts sufficient to pay the servicing fee and the securities
administration fee,
(3) the closing date is ___________,
(4) 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,
(5) 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 _____________,
(6) all prepayments are prepayments in full received on the last day
of each due period commencing in the calendar month following their
delivery with 30 days of accrued interest,
(7) the mortgage loan prepayment rates are a multiple of the
prepayment assumption in the case of Loan Group F, and various constant
percentages of CPR in the case of Loan Group A,
(8) the optional termination is not exercised except in the
calculation of weighted average life to call,
(9) 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,
(10) the overcollateralization levels for the initial mortgage loans
apply to the subsequent mortgage loans, are set initially as specified in
this prospectus supplement, and thereafter decrease in accordance with the
provisions specified in the agreement,
(11) the loan index is ________% on each change date,
(12) 1-month LIBOR for each interest period will be _______%,
(13) the maximum amount of subsequent mortgage loans are included in
the trust as of the cut-off date,
(14) all mortgage loans in Loan Group A have change dates every six
months after their initial change dates, and
(15) there is no deposit to the initial interest coverage account.
The foregoing assumptions are referred to in this prospectus supplement
collectively as the structuring assumptions.
<PAGE>
<TABLE>
<CAPTION>
REMAINING REMAINING ORIGINAL
AMORTIZATION TERM TO AMORTIZATION
PRINCIPAL LOAN TERM MATURITY TERM
BALANCE($) RATE(%) (MONTHS) (MONTHS) (MONTHS)
---------- ------ ------------ --------- -------------
Group F Initial
Mortgage Loans
Loans
<S> <C> <C> <C> <C> <C>
Level Pay..........
Level Pay..........
Level Pay..........
Level Pay..........
Balloon........
------------------
------------------
Group F Subsequent
Mortgage Loans
Level Pay..........
Level Pay..........
Level Pay..........
Level Pay..........
Balloon........
------------------
------------------
LOAN GROUP F.......
------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERIODIC PERIODIC
ORIGINAL NUMBER OF RATE RATE
REMAINING REMAINING AMORTI- MONTHS TO CAP CAP
AMORTIZATION TERM TO ZATION NEXT (SUBSEQUENT (FIRST
PRINCIPAL LOAN TERM MATURITY TERM GROSS CHANGE LIFETIME LIFETIME CHANGE CHANGE
BALANCE($) RATE(%) (MONTH) (MONTHS) (MONTHS) MARGIN(%) DATE CAP(%) FLOOR(%) DATES)(%) DATE(%)
---------- ------- ----------- ------------ ------------ --------- -------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Group A
Initial
Mortgage
Loans
Level Pay..
Level Pay..
Level Pay..
Level Pay..
Level Pay..
Level Pay..
------------
------------
Group A
Subsequent
Mortgage
Loans
Level Pay..
Level Pay..
-------------
-------------
LOAN
GROUP A...
-------------
TOTAL POOL.
-------------
</TABLE>
<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 IOF certificates, that would be
outstanding after each of the dates shown at various percentages of the
prepayment assumption and the corresponding weighted average lives.
Since the tables were prepared on the basis of the structuring assumptions,
there are discrepancies between characteristics of the actual mortgage loans and
the characteristics of the mortgage loans assumed in preparing the tables. Any
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.
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
Class A-1F Class A-2F Class A-3F
50% 75% 100% 115% 160% 175% 200% 50% 75% 100% 115% 160% 175% 200% 50% 76% 100% 115% 160% 175% 200%
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......
15,..............
15, .............
15, .............
15, .............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
Weighted Average
Life (years)(2)
To Maturity.....
To Call.........
- -----------
(1) The percentages of the prepayment assumption for the Loan Group F mortgage
loan are as set forth in the column headings above and the corresponding
prepayment assumption for the Loan Group A mortgage loans are at the
following percentages of CPR: 10%, 15%, 20%, 30%, 32%, 35% and 40%.
(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.
</TABLE>
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION (CONTINUED) (1)
<TABLE>
<CAPTION>
Class A-4F Class A-5F Class A-6F
50% 75% 100% 115% 160% 175% 200% 50% 75% 100% 115% 160% 175% 200% 50% 76% 100% 115% 160% 175% 200%
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......
15,..............
15, .............
15, .............
15, .............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
Weighted Average
Life (years)(2)
To Maturity.....
To Call.........
(1) The percentages of the prepayment assumption for the Loan Group F mortgage
loan are as set forth in the column headings above and the corresponding
prepayment assumption for the Loan Group A mortgage loans are at the
following percentages of CPR: 10%, 15%, 20%, 30%, 32%, 35% and 40%.
(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.
</TABLE>
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION (CONTINUED)(1)
<TABLE>
<CAPTION>
Class A-7F Class A-1a Class M-1
50% 75% 100% 115% 160% 175% 200% 50% 75% 100% 115% 160% 175% 200% 50% 76% 100% 115% 160% 175% 200%
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......
15,..............
15, .............
15, .............
15, .............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
Weighted Average
Life (years)(2)
To Maturity.....
To Call.........
(1) The percentage of the prepayment assumption for the Loan Group F. mortgage
loans are as set forth in the column headings above and the corresponding
prepayment assumptions for the Loan Group A mortgage loans are at the
following percentages of CPR: 10%, 15%, 20%, 30%, 32%, 35% and 40%.
(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.
</TABLE>
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION (CONTINUED)(1)
<TABLE>
<CAPTION>
Class M-2 Class B
50% 75% 100% 115% 160% 175% 200% 50% 75% 100% 115% 160% 175% 200%
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
15, .............
Weighted Average
Life (years)(2)
To Maturity......
To Call..........
(1) The percentage of the prepayment assumption for the Loan Group F. mortgage
loans are as set forth in the column headings above and the corresponding
prepayment assumptions for the Loan Group A mortgage loans are at the
following percentages of CPR: 10%, 15%, 20%, 30%, 32%, 35% and 40%.
(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.
</TABLE>
<PAGE>
DESCRIPTION OF THE CERTIFICATES
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
interest on the initial mortgage loans due on or before ___________ __, ____;
(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
(a) aggregate of amounts actually distributed as principal to the holders
of the class of certificates prior to the applicable date and
(b) 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 ____
distribution date will equal the lesser of
(a) the loan group balance of Loan Group F as of the end of the second
preceding due period and
(b) the applicable amount set forth below:
DISTRIBUTION DATES NOTIONAL AMOUNT
------------------ ---------------
1-3..................................................... $
4-6..................................................... $
7-9..................................................... $
10-12................................................... $
13-15................................................... $
16-18................................................... $
19-21................................................... $
22-24................................................... $
25-27................................................... $
28-30................................................... $
31-33................................................... $
34-36................................................... $
On and after the ____ distribution date, the notional amount of the notional
amount certificates will be zero. On any date, the certificate group balance of
a certificate group is the aggregate of the class principal balances of the
certificates in the certificate group on the applicable date. The percentage
interest of a certificate of any class as of any date of determination will
equal the percentage obtained by dividing the denomination of 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, the net rate cap fund and the LIBOR
carryover fund, created by the 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 LIBOR
carryover or 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 Cedelbank 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. Cedelbank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedelbank'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 Cedelbank 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.
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.
Neither the seller, the servicer, the securities administrator nor the
trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the book-entry
certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to 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 _________, 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 and (a) the fixed rate certificates, is the last business day
of the calendar month preceding the month of the applicable distribution date
and (b) the adjustable rate certificates, the business day immediately preceding
the applicable distribution date so long as the adjustable rate certificates
remain in book-entry form and, otherwise, the last business day of the calendar
month immediately preceding the applicable distribution date. Distributions will
be made (1) in immediately available funds to holders of certificates the
aggregate principal balance or notional amount of which is at least $1,000,000,
by wire transfer or otherwise, to the account of the certificateholder at a
domestic bank or other entity having appropriate facilities for distribution, if
the certificateholder has so notified the trustee, 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.
GLOSSARY
For purposes of describing the cash flow structure of the trust, the
following terms have the respective meanings set forth below:
ADJUSTED SENIOR PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date,
the excess of (a) the Senior Principal Distribution Amount for the applicable
distribution date over (b) the Group A Principal Distribution Amount for the
applicable distribution date.
AGGREGATE PRINCIPAL AMOUNT: As to any distribution date, the sum of the
Basic Principal Amount for each loan group.
AVAILABLE FUNDS: As to either loan group and any distribution date, the
sum, without duplication of the following amounts with respect to the mortgage
loans in the applicable loan group:
(1) scheduled and unscheduled payments of principal and interest on the
mortgage loans received by the servicer, net of amounts representing the
servicing fee with respect to each mortgage loans 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;
(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 related classes of offered certificates; and
(6) on the distribution date immediately following the funding period, any
related Excess Funding Amount.
AVAILABLE FUNDS CAP: As to any distribution date, (A) in the case of Loan
Group F, certificate group F, other than the class IOF certificates, and any
class of subordinate certificates, the lower of the Loan Group F Cap and the
Loan Group A Cap and (B) in the case of Loan Group A and certificate group A,
the Loan Group A Cap.
AVAILABLE LIBOR CARRYOVER AMOUNT: As to any distribution date, the lesser
of (A) the amounts remaining after distributions pursuant to clauses C.1 through
C.10 under "--Distribution Priorities" and (B) the excess, if any, of (x) the
Interest Remittance Amount for Loan Group A for the applicable distribution date
over (y) the sum of distributions pursuant to clauses B.1 and B.2 under
"--Distribution Priorities" and the Group A Subordination Increase Amount.
BASIC PRINCIPAL AMOUNT: As to either loan group and any distribution date,
an amount equal to the sum of the following amounts, without duplication, with
respect to the mortgage loans in the loans group and the immediately preceding
due period:
(1) each payment of principal on a mortgage loan received by the servicer
during the due period, including all full and partial principal prepayments;
(2) the Net Liquidation Proceeds allocable to principal received by the
servicer with respect to any Liquidated Mortgage Loan during the due period;
(3) the portion of the purchase price allocable to principal of all
repurchased defective mortgage loan with respect to the due period;
(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 related Excess Funding Amount.
CLASS A-7F PERCENTAGE: As to any distribution date, the applicable
percentage set forth below:
DISTRIBUTION DATES PERCENTAGES
-------------------.........................................
-------------------.........................................
-------------------.........................................
-------------------.........................................
_________ and thereafter....................................
CLASS A-7F PRINCIPAL DISTRIBUTION: As to any distribution date, the product
of (1) the applicable Class A-7F Percentage and (2) the product of (x) the
Adjusted Senior Principal Distribution Amount and (y) a fraction, the numerator
of which is the class Principal Balance of the class A-7F certificates
immediately prior to the applicable distribution date, and the denominator of
which is the aggregate class principal balance of the offered certificates in
certificate Group F immediately prior to the applicable distribution date.
CLASS B PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date on or
after the Stepdown Date and as long as a Delinquency 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) ____% 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, 100% of the Principal Distribution Amount if the class
principal balance of each class of senior certificates has been reduced to zero
and a Delinquency Event exists, or, if the senior certificates are still
outstanding, and as long as a Delinquency 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, 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) _____% 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, 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 Delinquency Event exists, or, if the
senior and class M-1 certificates are still outstanding and as long as a
Delinquency 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, 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) _____% 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 for the related Loan
Group 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.
CUMULATIVE LOSS EVENT: The occurrence of rates of cumulative losses during
particular periods of time as specified in the agreement.
DELINQUENCY AMOUNT: As to any date of determination, the aggregate
principal balance of the mortgage loans that are (a) __ or more days delinquent
or (b) in bankruptcy or foreclosure and REO properties.
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) __% of the senior enhancement Percentage.
DUE PERIOD: With respect to the first distribution date, the period from
and including ____________ through and including ____________, except that with
respect to payments due on ____________, only collections of principal are
included. With respect to each distribution date thereafter for collections of
both interest and principal, the period from and including the second day of the
month preceding the month of the applicable distribution date to and including
the first day of the month of that distribution date.
EXCESS FUNDING AMOUNT: As to either certificate group, the portion, if any,
of the Pre-Funded Amount allocated to the certificate group 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 6. of clause C.
under "--Distribution Priorities," above.
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 Aggregate Principal Amount is distributed on the offered
certificates, over (y) the Required Overcollateralization Amount.
GROUP A PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date, the
lesser of (A) the greater of (1) the product of (x) the Senior Principal
Distribution Amount for the applicable distribution date and (y) a fraction, the
numerator of which is the class principal balance of the class A-1A certificates
immediately prior to the applicable distribution date, and the denominator of
which is the aggregate class principal balance of all of the senior certificates
immediately prior to the applicable distribution date, and (2) the excess, if
any, of (x) the class principal balance of the class A-1A certificates
immediately prior to that distribution date over (y) the sum of the Loans Group
Balance of Loan Group A and the related Pre-Funded Amount as of the last day of
the related Due Period or (B) the Senior Principal Distribution Amount.
GROUP A SUBORDINATION INCREASE AMOUNT: As to any distribution date, the
product of (x) the Subordination Increase Amount, if any, for the applicable
distribution date and (y) a fraction the numerator of which is the Loans Group
Balance of Loan Group A as of the end of the second preceding Due Period and the
denominator of which is the Pool Balance as of the end of the second preceding
Due Period.
INTEREST PERIOD: For any distribution date and (a) the fixed rate
certificates, the calendar month preceding the month of the applicable
distribution date, calculated on the basis of a 360-day year comprised of twelve
30-day months and (b) the adjustable rate certificates, the period from the
prior distribution date, or in the case of the first distribution date, from the
closing date, through the day preceding the current distribution date,
calculated on the basis of a 360-day year and the actual number of days elapsed;
provided, however, that interest accrued on any class of offered certificates,
other than the class IOF certificates, at the applicable Available Funds Cap,
will be calculated on the basis of a 360-day year comprised of twelve 30-day
months.
INTEREST REMITTANCE AMOUNT: As to either loan group and any distribution
date, the portion of the Available Funds for that loan group that constitutes
amounts in respect of interest.
LOAN GROUP A CAP: The weighted average net loan rate of the mortgage loan
in loans Group A.
LOAN GROUP F CAP: A rate per annum equal to (1) the weighted average net
loan rate of the mortgage loans in Loan Group F 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 sum of the Loans Group Balance of Loan Group
F and the related Pre-Funded Amount as of the first day of the related Due
Period.
LIBOR CARRYOVER: As to the class A-1A certificates and any distribution
date, the sum of
(1) the excess, if any, of the related Class Monthly Interest Amount
calculated on the basis of the lesser of (x) 1-month LIBOR plus the applicable
certificate margin and (y) __% per annum over the related Class Monthly Interest
Amount for the applicable distribution date,
(2) any LIBOR Carryover remaining unpaid from prior distribution dates and
(3) 30 days interest on the amount in clause (2) calculated on the basis of
the lesser of (x) 1-month LIBOR plus the applicable certificate margin and (y)
__% per annum.
LIQUIDATED MORTGAGE LOAN: As to any distribution date, a mortgage loans
with respect to which the servicer has determined, in accordance with the
servicing procedures specified in the agreement, as of the end of the preceding
Due Period, that all liquidation proceeds which it expects to recover with
respect to the mortgage loans, including the disposition of the related REO,
have been received.
LOAN GROUP BALANCE: As to either loan group and any date of determination,
the aggregate of the principal balances of the mortgage loans in the loan group
at the applicable date.
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 class A-6F
certificates or any class of subordinate 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.
OC FLOOR: An amount equal to ____% 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 sum of the Loans Group
Balances as of the applicable date.
PRE-FUNDED AMOUNT: As to any date of determination and either loan group,
the applicable original Pre-Funded Amount minus the aggregate principal balance
of subsequent mortgage loans purchased by the trust for inclusion in the loan
group prior to the applicable date.
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
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 balances of the offered certificates
immediately preceding the applicable distribution date and (b) the sum of (1)
the Aggregate 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) ____% 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
____% and the aggregate original class principal balance of the offered
certificates and (y) the product of ____% 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 ____% of the aggregate original
class principal balance of the Offered certificates or (b) a Delinquency Event,
the Required Overcollateralization Amount will equal the Required
Overcollateralization Amount in effect as of the distribution date immediately
preceding the date on which the 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 Delinquency Event, the
lesser of (1) 100% of the Principal Distribution Amount and (2) the aggregate
class principal balance of the Senior certificates, and (b) any other
distribution date, an amount equal to the excess, if any, of (x) the aggregate
class principal balance of the senior certificates immediately prior to the
applicable distribution date over (y) the lesser of (A) _____% 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 _________ and (B) the distribution date on which the
aggregate 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 _____%.
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 Aggregate Principal Amount on that
distribution date.
SUBORDINATION INCREASE AMOUNT: As to any distribution date, the lesser of
(x) the Subordination Deficiency and (y) the Excess Interest.
DISTRIBUTION PRIORITIES
On each distribution date the trustee will withdraw from the distribution
account the Available Funds for each loan group and apply this amount in the
following order of priority, in each case, to the extent of the funds remaining:
A. Loan Group F
1. To the securities administrator, the securities administration fee
for Loan Group F for the applicable distribution date.
2. Concurrently, to each class of senior certificates in certificate
group F, the related Class Interest Distribution amount for the applicable
distribution date.
3. The remaining amount pursuant to clause C. below.
B. Loan Group A
1. To the securities administrator, the securities administration fee
for Loan Group A for the applicable distribution date.
2. To the class A-1A certificates, the related Class Interest
Distribution amount for the applicable distribution date.
3. The remaining amount pursuant to clause C. below.
C. Remaining Amounts
1. Concurrently, to the senior certificates in both certificate
groups, the related Class Interest Distribution amount to the extent not
paid pursuant to clauses A. and B. above on the applicable distribution
date.
2. Sequentially, to the class M-1, class M-2 and class B certificates,
in that order, the related Class Monthly Interest Amounts for the
applicable distribution date.
3. To the senior certificates, the Senior Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount, allocated as described under
"--Principal Priorities" below.
4. 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.
5. 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.
6. 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.
7. To the offered certificates, the Subordination Increase Amount for
the applicable distribution date, allocated as described under "--Principal
Priorities" below.
8. To the class M-1 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
9. To the class M-2 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
10. To the class B certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
11. To the class BIO certificates for concurrent deposit in the LIBOR
carryover fund and the net rate cap fund.
12. To the class A-1A certificates, the lesser of the LIBOR Carryover
and the Available LIBOR Carryover Amount from the LIBOR carryover fund.
13. Sequentially, to the class A-6F, 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.
14. To the class BIO certificates, the amount required by the
agreement.
15. To the residual certificates, any remaining amounts.
On each distribution date, the Class Interest Distribution for each class
of senior certificates in a certificate group will be distributed on an equal
priority within the certificate group and any shortfall in the amount required
to be distributed as interest on that certificate to each class 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.
PRINCIPAL PRIORITIES
On each distribution date, the trustee will withdraw the Aggregate
Principal Amount from the distribution account and apply this amount together
with the amount, if any, included in the Principal Distribution Amount from
clause C.7 above under "--Distribution Priorities," in the following order of
priority, in each case, to the extent of the funds remaining for this
distribution:
(A) up to the Senior Principal Distribution Amount, concurrently, as
follows:
(1) to the senior certificates in certificate group F, the Adjusted
Senior Principal Distribution Amount plus the Excess Funding Amount, if
any, for certificate group F allocated in the following order of priority:
(a) to the class A-7F certificates, the Class A-7F Principal
Distribution, until the class Principal Balance of these certificates
has been reduced to zero; and
(b) sequentially, to the class A-1F, class A-2F, class A-3F,
class A-4F, class A-5F, class A-6F and class A-7F certificates, in
that order, until the respective class Principal Balances of these
certificates have been reduced to zero; and
(2) to the class A-1A certificates, the Group A Principal Distribution
Amount plus the Excess Funding Amount, if any, for certificate group A
until the class Principal Balance of these certificates has been reduced to
zero.
(B) to the subordinate certificates, as follows:
(1) to the class M-1 certificates, the Class M-1 Principal
Distribution Amount until its class principal balance has been reduced to
zero;
(2) to the class M-2 certificates, the Class M-2 Principal
Distribution Amount until its class principal balance has been reduced to
zero; and
(3) to the class B certificates, the Class B Principal Distribution
Amount until its class principal balance has been reduced to zero.
(C) to the class BIO and residual certificates, any remaining principal in
accordance with the agreement.
Notwithstanding the priority set forth in clause A(1) and (2) above, if the
aggregate class principal balance of the subordinate certificates has been
reduced to zero, the Senior Principal Distribution Amount will be distributed
concurrently to each class of senior certificates on a pro rata basis in
accordance with their respective class principal balances.
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
in each loan group during the related Due Period, and these amounts will not be
available for distribution on the other classes of certificates.
The securities administrator will pay the trustee the trustee fee for Loan
Group F and Loan Group A from the related securities administration fee.
CERTIFICATE RATES
The certificate rate for each class of fixed rate certificates is set forth
on the cover page or described in this prospectus supplement. Each certificate
rate, other than that on the class IOF certificates, is subject to the lower of
the Loan Group F Cap and the Loan Group A Cap.
The certificate rate for the adjustable rate certificates for any Interest
Period will equal the least of
(x) the sum of 1-month LIBOR and the applicable certificate margin,
(y) __%, and
(z) the Loan Group A Cap.
The certificate margin for the adjustable rate certificates will be as
follows:
CERTIFICATE MARGIN
CLASS (1) (2)
----- ---- ---
A-1A............................................_____% ____%
- -------------------
(1) Prior to or on the optional termination date.
(2) After the optional termination date.
With respect to each distribution date, 1-month LIBOR will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
second LIBOR business day prior to the first day of the related Interest Period.
Telerate Page 3750 means the display designated as page 3750 on the Bridge
Telerate, or any other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks. If the rate
does not appear on the page, or any other page as may replace that page on that
service, or if the service is no longer offered, any other service for
displaying LIBOR or comparable rates as may be selected by the trustee after
consultation with the servicer, the rate will be the reference bank rate. The
reference bank rate will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks, which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the trustee after consultation with the servicer, as of
11:00 A.M., London time, on the day that is two LIBOR business days prior to the
immediately preceding distribution date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the aggregate
class principal balance of the adjustable rate certificates. The trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will be
the arithmetic mean of the quotations. If on the related date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
trustee after consultation with the servicer, as of 11:00 A.M., New York City
time, on the date for loans in U.S. Dollars to leading European banks for a
period of one month in amounts approximately equal to the aggregate class
principal balance of the adjustable rate certificates. If no quotations can be
obtained, the rate will be LIBOR for the prior distribution date. LIBOR business
day means any day other than a Saturday or a Sunday or a day on which banking
institutions in the State of New York or in the city of London, England are
required or authorized by law to be closed.
OVERCOLLATERALIZATION PROVISIONS
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.
CROSSCOLLATERALIZATION PROVISIONS
Some Available Funds with respect to each loan group will be available to
cover some shortfalls and to create overcollateralization with respect to the
offered certificates relating to the other loan group as described above under
the caption "--Distribution Priorities."
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, i.e.,
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 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 securities
administrator will prepare and the trustee will forward to each
certificateholder a statement setting forth, among other items the following, to
the extent applicable to each class of certificates:
(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;
(d) the amount of Excess Interest for each loan group paid as
principal;
(e) the servicing fee;
(f) the Loan Group Balance of each loan group and the Pool Balance, in
each case 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 in each loan
group and specifying the weighted average loan rate for each loan group as
of the first day of the month prior to the distribution date;
(n) the certificate rate on the adjustable rate certificates for the
applicable distribution date;
(o) the amount of LIBOR Carryover distributed to the adjustable rate
certificates and the amount of LIBOR Carryover remaining for the class;
(p) the amount of Net Rate Cap Carryover distributed to the class A-6F
certificates and each class of subordinate certificates and the amount of
Net Rate Cap Carryover remaining for each class;
(q) the amount of any Class Principal Carryover Shortfall paid with
respect to each class of subordinate certificates and any amounts
remaining;
(r) during the funding period, the remaining Pre-Funded Amount and the
portion of this amount used to acquired subsequent mortgage loans since the
preceding distribution date; and
(s) 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.
THE POOLING AND SERVICING AGREEMENT
The certificates will be issued pursuant to the agreement. A form of the
agreement has been filed as an exhibit to the registration statement of which
this prospectus supplement and the prospectus 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 agreement. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the agreement. Wherever particular sections or defined terms of
the agreement are referred to, these sections or defined terms are incorporated
by reference in this prospectus supplement.
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 interest
on the initial mortgage loans due on or before ____________. The trustee,
concurrently with the initial 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 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 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 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 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. The seller expects that assignments for
substantially all of the mortgage loans will not be recorded based on the
opinion of counsel. 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 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 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 an
eligible substitute 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 __% 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 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, 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
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
representation or warranty in the agreement that materially and adversely
affects the interests of the certificateholders.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The servicer will establish and maintain in the name of the trustee a
separate 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 interest due on or before ____________, the servicer will
deposit these amounts in the collection account. Amounts so deposited may be
invested in eligible investments, as described in the agreement, maturing no
later than one business day prior to the date on which the amount on deposit 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 11:00 a.m.
New York time on the business day prior to each distribution date, the Available
Funds for a loan group and the related Due Period are required to be deposited
into the distribution account. The distribution account will be an eligible
account. Amounts on deposit 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 Rating
Service and A2 by Moody's Investor Services, 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;
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
$__________, 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.
ADVANCES
Not later than the close of business on the fourth business day prior to
each distribution date, referred to as the determination 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.
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.
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 for each loan group
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 to (a) 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-1F
certificates in the case of certificate group F and the holders of the class
A-1A certificates in the case of certificate group A.
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 FUNDS
The agreement provides for two reserve funds, the LIBOR carryover fund and
the net rate cap fund, which are held by the trustee on behalf of the holders of
the class A-1A certificates with respect to the LIBOR carryover fund and class
A-6F certificates and the subordinate certificates with respect to the net rate
cap fund. To the extent amounts on deposit are sufficient, holders of the class
A-1A certificates, class A-6F certificates and subordinate certificates will be
entitled to receive payments from the related fund equal to any LIBOR Carryover
or Net Rate Cap Carryover, as applicable. The amount required to be deposited in
each fund on any distribution date will equal any LIBOR Carryover or Net Rate
Cap Carryover, as applicable, for the applicable distribution date, or, if no
LIBOR Carryover or Net Rate Cap Carryover, as applicable, is payable on the
applicable distribution date, an amount that when added to other amounts already
on deposit in the applicable fund, the aggregate amount on deposit is equal to
$10,000. Any investment earnings on amounts on deposit in each 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 LIBOR Carryover or Net Rate Cap Carryover, as
applicable. Neither the LIBOR carryover fund nor the net rate cap fund will 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
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 forth in the 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 and the securities administrator written notice of
the modification together with the calculations demonstrating that the
modification is permitted by the REMIC provisions of the 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 ____% 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 Due 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)
the sum of the servicing fee received by the servicer in the most recently ended
Due Period.
The servicer is not obligated to offset any of the servicing fee against,
or to provide any other funds to cover, any Civil Relief Act Shortfalls.
EVIDENCE AS TO COMPLIANCE
The pooling and servicing agreement provides for delivery on or before the
last business day of the fifth month following the end of each fiscal year of
the servicer, beginning in 2000, to the trustee, the securities administrator
and the rating agencies of an annual statement signed by an officer of the
servicer to the effect that the servicer has fulfilled its material obligations
under the agreement throughout the preceding fiscal year, except as specified in
the statement.
On or before the last business day of the fifth month following the end of
each fiscal year of the servicer, beginning in 2000, 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 securities administrator 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 conclusion.
The servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The agreement provides that the servicer may not resign from its
obligations and duties under the 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 securities administrator or (2) upon the
satisfaction of the following conditions: (a) the servicer has proposed a
successor servicer, if other than Norwest Bank, to the trustee and the
securities administrator in writing and the proposed successor servicer is
reasonably acceptable to the trustee and the securities administrator; and (b)
the rating agencies have confirmed to the trustee and the securities
administrator 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
agreement. Notwithstanding anything to the contrary in the prospectus, pursuant
to the terms of the agreement, the servicer has initially designated, and the
trustee has agreed to the appointment of, Norwest Bank Minnesota, National
Association or its affiliate, referred to as Norwest Bank, as the successor
servicer in the event the servicer resigns from its obligations and duties. The
appointment to be effective within ninety (90) days of the resignation of the
servicer. Norwest Bank shall have no obligation to service the mortgage loans
prior to the resignation or removal of the servicer.
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, the securities
administrator and the certificateholders for the servicer's duties and
obligations under the 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 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 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 to make any required monthly advance or
(B) any other failure of the servicer to deposit in the collection
account or the distribution account any deposit required to be made
under the agreement, which failure continues unremedied for three
business days after payment was required to be made;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the agreement
which, in each case, materially and adversely affects the interests of
the certificateholders and continues unremedied for 30 days after
knowledge or the giving of written notice of the failure to the
servicer by the trustee or the securities administrator, or to the
servicer, the securities administrator 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 a period of 30 days after
knowledge or the giving of written notice of the failure to the
servicer by the trustee or the securities administrator, or to the
servicer, the securities administrator 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 exceed the level set forth in the agreement.
If any monthly advance is not made by 12:00 noon, New York City time, on
the second business day preceding the applicable distribution date, the
successor servicer will immediately assume the advancing obligation of the
servicer.
Notwithstanding anything to the contrary in the prospectus, pursuant to the
terms of the agreement, within ninety (90) days of the removal of the servicer,
Norwest Bank 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. If, however, Norwest Bank
is unable to act as successor servicer, or if the majority of certificateholders
so requests, the trustee may act as successor servicer or may appoint, or
petition a court of competent jurisdiction to appoint any established mortgage
loan servicing institution having a net worth of not less than $25,000,000 as
the successor servicer in the assumption of all or any part of the
responsibilities, duties or liabilities of the servicer.
RIGHTS UPON AN EVENT OF DEFAULT
So long as an event of default remains unremedied, either the trustee or
certificateholders holding certificates evidencing at least 51% of the voting
rights in the trust may terminate all of the rights and obligations of the
servicer under the pooling and servicing agreement and in and to the mortgage
loans, whereupon the successor servicer will succeed to all the
responsibilities, duties and liabilities of the servicer under the pooling and
servicing agreement and will be entitled to similar compensation arrangements.
In the event that the successor servicer would be obligated to succeed the
servicer but is unable so to act, the trustee may act as successor servicer or
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the agreement and having a net worth of at least $25,000,000
to act as successor to the servicer under the pooling and servicing agreement.
Pending an appointment, the successor servicer will be obligated to act in this
capacity unless prohibited by law. The successor will be entitled to receive the
same compensation that the servicer would otherwise have received, or a lesser
compensation as the trustee, the securities administrator and the 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.
AMENDMENT
The pooling and servicing agreement may be amended from time to time by the
seller, the servicer, the securities administrator and the trustee, 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 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, the securities administrator 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 not be deemed
to 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, the securities administrator and the trustee, 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.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The trust will terminate on the distribution date following 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 by the servicer of the mortgage loans, as
described below.
Subject to provisions in the agreement concerning adopting a plan of
complete liquidation, the servicer may, at its option, terminate the agreement
on any distribution date following the Due Period during which the aggregate
Principal Balance of the mortgage loans is less than 10% of the sum of the
Principal Balances of the initial mortgage loans and subsequent mortgage loans
as of the cut-off date, 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 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.
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 the Principal Balance computed at the loan rate.
VOTING RIGHTS
Under the agreement, the portion of the voting rights allocated to the
offered certificates will equal 100% minus the portion allocated to the 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
__________________________ will be named trustee pursuant to the agreement.
The trustee's principal office is located at __________________________________.
The telephone number is (___) ________. 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 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 appointment by the successor trustee.
No holder of a certificate will have any right under the agreement to
institute any proceeding with respect to the agreement unless 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 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 agreement or to make any investigation of
matters arising under the agreement or to institute, conduct or defend any
litigation under the agreement or in relation to the 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.
[THE SECURITIES ADMINISTRATOR
______________________________________, will be named securities
administrator pursuant to the agreement.]
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,
exclusive of the initial interest coverage account, the pre-funding account, the
net rate cap fund and the LIBOR carryover 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 the Code, creating a tiered
REMIC structure. The offered certificates, excluding any associated rights to
receive LIBOR Carryover or 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 mortgage loans in Loan Group F and
Loan Group A will prepay in accordance with ____% of the prepayment assumption
and ___% CPR, respectively. No representation is made as to the actual rate at
which the mortgage loans will prepay.
A reasonable application of the principles of the OID regulations to the
adjustable rate certificates generally would be to calculate OID for each
period, computing the OID (a) by assuming that the value of the 1-month LIBOR
will remain constant for purposes of determining the original yield to maturity
of the class of certificates and projecting future distributions on the
certificates, thereby treating the certificates as fixed rate instruments to
which the OID computation rules described in the prospectus can be applied, and
(b) by accounting for any positive or negative variation in the actual value of
LIBOR in any period from its assumed value as a current adjustment to OID with
respect to the applicable period.
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.
LIBOR CARRYOVER AND NET RATE CAP CARRYOVER
The beneficial owners of the class A-1A certificates and the class A-6F and
subordinate certificates and the related rights to receive LIBOR Carryover and
Net Rate Cap Carryover, respectively, will be treated for tax purposes as owning
two separate assets: (a) the respective class A-1A certificates and the class
A-6F and subordinate certificates without the rights to receive LIBOR Carryover
or Net Rate Cap Carryover, which constitute regular interests in a REMIC, and
(b) the related rights to receive LIBOR Carryover or Net Rate Cap Carryover.
Accordingly, a purchaser of a class A-1A certificate or class A-6F or
subordinate certificate 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 class A-1A certificates, class
A-6F certificates and subordinate certificates consult their tax advisors
regarding the taxation of LIBOR Carryover and Net Rate Cap Carryover,
respectively, 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 LIBOR Carryover or 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 LIBOR Carryover and 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 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 __________ __, ____,
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 or any state or political
subdivision of the United States,
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 owner an executed Internal Revenue Service Form W-8
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 _____________.
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.
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 ,
collectively, called a plan, which proposes to cause a plan to acquire any of
the offered certificates should consult with its counsel with respect to the
potential consequences, under 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___________ (Prohibited Transaction Exemption ___-___), 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 asset-backed
pass-through trusts, with respect to which _______________ or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of the
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 of the senior certificates by a plan
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 senior 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 rights and interests evidenced by the senior certificates
acquired by the plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) The senior certificates acquired by the plan have received a
rating at the time of the acquisition that is in one of the three highest
generic rating categories from either S&P, Fitch, Moody's Investors
Service, Inc., or Duff & Phelps Credit Rating Co.;
(4) The sum of all payments made to and retained by the underwriters
in connection with the distribution of the senior certificates represents
not more than reasonable compensation for underwriting 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;
(5) The trustee is not an affiliate of the underwriters, the seller,
the servicer, any borrower whose obligations under one or more mortgage
loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the trust, or any of their respective affiliates;
and
(6) The plan investing in the senior certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
It is expected that the exemption will apply to the acquisition and holding
of the senior certificates by plans and that all conditions of the exemption
other than those within the control of the investors will be met.
The exemption does not apply to plans sponsored by the seller, the
underwriters, the trustee, the 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. 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 any member of the restricted group. In addition, no plan's investment in any
class of offered certificates may exceed 25% of all of the certificates of 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.
On July 21, 1997, the U.S. Department of Labor published in the Federal
Register an amendment to the exemption which extends exemptive relief to
particular mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. With respect
to the offered certificates, the amendment generally allows a portion of the
mortgage loans 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
additional loans, must meet the same terms and conditions for eligibility
as the original loans used to create the trust, which terms and conditions
have been approved by the rating agency.
(3) The transfer of the additional loans to the trust during the
pre-funding period must not result in the certificates receiving a lower
credit rating from the rating agency upon termination of the pre-funding
period than the rating that was obtained at the time of the initial
issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the 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.
(5) Either: (a) the characteristics of the additional 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 additional 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 senior certificates will depend upon the relevant facts and circumstances
existing at the time a plan acquires the senior certificates. Plan investors
should make their own determination, in consultation with their counsel, before
acquiring senior certificates in reliance on the applicability of the exemption.
BECAUSE THE CHARACTERISTICS OF THE CLASS M-1, CLASS M-2 AND CLASS B
CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF THE EXEMPTION OR ANY OTHER ISSUED
EXEMPTION UNDER ERISA, 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 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;
(B) 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 PTCE 95-60; OR
(C) 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.
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 ____________, 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.
<PAGE>
CLASS
Class A-1F
Class A-2F
Class A-3F
Class A-4F
Class A-5F
Class A-6F
Class A-7F
Class A-1A
Class M-1
Class M-2
Class B
Total
The seller has been advised that the underwriters propose initially to
offer the offered certificates to some dealers at the price less a selling
concession not to exceed the applicable percentage of the certificate
denomination set forth below, and that the underwriters may allow and the
dealers may reallow a reallowance discount not to exceed the applicable
percentage of the certificate denomination set forth below:
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- --------
Class A-1F..............................
Class A-2F..............................
Class A-3F..............................
Class A-4F..............................
Class A-5F..............................
Class A-6F..............................
Class A-7F..............................
Class A-1A..............................
Class M-1...............................
Class M-2...............................
Class B.................................
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
_______________ 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 $___________
plus accrued interest, before deducting a portion of the total expenses payable
by the seller which total is estimated to be a total of $____________. In
connection with the purchase and sale of the notional amount certificates,
_______________ may be deemed to have received compensation from the seller in
the form of underwriting discounts and commissions.
The seller has been advised by the underwriters that they presently intend
to make a market in the offered certificates. However, no underwriter is
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for any class of offered
certificates will develop or if one does develop, that it will continue for the
life of the applicable class or that it will provide certificateholders with a
sufficient level of liquidity of investment.
Until the distribution of the offered certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the underwriters
and some selling group members to bid for and purchase the offered certificates,
other than the class IOF 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 IOF 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 affiliates of some 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.
LEGAL MATTERS
Some legal matters with respect to the offered certificates will be passed
upon for the seller and servicer by Stroock & Stroock & Lavan LLP, New York, New
York, and for the underwriters by Brown & Wood LLP, New York, New York.
RATINGS
The offered certificates will be rated by ____________________, referred to
as ________________, and _______________, referred to as _______________, 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
----- ------- -------
Class A-1F AAA AAA
Class A-2F AAA AAA
Class A-3F AAA AAA
Class A-4F AAA AAA
Class A-5F AAA AAA
Class A-6F AAA AAA
Class A-7F AAA AAA
Class IOF AAA AAA
Class A-1A AAA AAA
Class M-1 AA AA
Class M-2 A A
Class B BBB- BBB-
The ratings assigned by ______ to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which the
certificates are issued. ________'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make the payments
required by the certificates. __________'s ratings on the certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings assigned by __________ to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which the
certificates are issued. __________'s ratings take into consideration credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make the payments
required by the certificates. __________'s ratings on the certificates do not,
however, constitute a statement regarding frequency of payments of the 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 adjustable rate certificates will receive any
LIBOR Carryover or the likelihood that holders of the class A-6F certificates or
subordinate 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.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Home Equity Loan
Asset-Backed Certificates, series ____-_, 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,
Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear and DTC
participants holding certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank 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, Cedelbank 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 Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear participants. Secondary market
trading between Cedelbank participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
global securities are to be transferred from the account of a DTC participant to
the account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective depositary, as the case may
be, to receive the global securities against payment. Payment will include
interest accrued on the global securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the applicable accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of global securities. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the respective depositary
of the DTC participant's account against delivery of the global securities.
After settlement has been completed, the global securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Cedelbank 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 Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the global securities are credited to their accounts one day later.
As an alternative, if Cedelbank 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, Cedelbank participants or Euroclear
participants purchasing global securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the global securities were
credited to their accounts. However, interest on the global securities would
accrue from the value date. Therefore, in many cases the investment income on
the global securities earned during that one-day period may substantially reduce
or offset the amount of the overdraft charges, although this result will depend
on each Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective depositary, as
appropriate, to deliver the global securities to the DTC participant's account
against payment. Payment will include interest accrued on the global securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of global securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Cedelbank participant or Euroclear participant the following day,
and receipt of the cash proceeds in the Cedelbank 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 Cedelbank
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
Cedelbank participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
global securities from DTC participants for delivery to Cedelbank participants
or Euroclear participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day, until the
purchase side of the day trade is reflected in their Cedelbank 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 Cedelbank 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 Cedelbank
participant or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Cedelbank 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). Beneficial owners of global
securities that are non-U.S. persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. persons that are certificate owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate, depending on the treaty terms, by filing Form 1001 (Ownership,
Exemption or Reduced Rate certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the certificate owners
or his agent.
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The certificate owner of a
global security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds,
the clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. person" means
(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 or any political subdivision of the United States,
(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 or
with the application of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments after
__________ __, ____. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the global
securities.
<PAGE>
START
Prospectus supplement to prospectus dated ____, 2000
$------------
DELTA FUNDING HOME EQUITY LOAN TRUST ____
Home Equity Loan Asset-Backed Notes, Series
______
Delta Funding Corporation
Seller and Servicer
---------------
NOTES OFFERED
o Classes of asset backed notes listed below
ASSETS
o Fixed and adjustable rate, first and second lien, subprime residential
mortgage loans
CREDIT ENHANCEMENT
o Excess interest
o Overcollateralization
o Note insurance policy
You should carefully carefully consider the risk factors beginning on page S-_
in this prospectus supplement.
The notes are obligations only of the trust.
The mortgage loans are not insured or guaranteed by any governmental agency or
by any other person.
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 NOTE BALANCE NOTE RATE EXPECTED RATINGS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A-1F....................... $ AAA AAA
- ----------------------------------------------------------------------------------------------------------
Class A-1A....................... $ Adjustable AAA AAA
==========================================================================================================
</TABLE>
The note rates on the offered fixed rate notes are subject to an interest
rate cap and to increase after the optional termination date.
The note rate on the offered adjustable rate notes is subject to change on
each payment date, an interest rate cap and to increase after the optional
termination date.
See "Description of the Notes - Note rates" in this prospectus supplement.
Subject to the satisfaction of specific conditions, the underwriters named
below will purchase the offered notes from the seller. See "Underwriting" in
this prospectus supplement. The offered notes will be issued in book-entry form
only on or about ___________.
<PAGE>
Underwriters
- -----------------
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS
We provide information to you about the offered notes 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 notes; and
o this prospectus supplement, which describes the specific terms of your
series of notes.
IF THE DESCRIPTION OF YOUR NOTES 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
PROSPECTUS SUPPLEMENT
PAGE
Summary...................................................................5
Risk Factors.............................................................10
Description of the Mortgage Loans........................................17
Prepayment and Yield Considerations......................................33
Description of the Notes.................................................44
The Note Insurer.........................................................58
The Agreements...........................................................58
Use of Proceeds..........................................................72
ERISA Considerations.....................................................73
Legal Investment Considerations..........................................75
Underwriting.............................................................75
Legal Matters............................................................77
Ratings..................................................................77
PROSPECTUS
PAGE
Reports to Holders........................................................3
Incorporation of Certain Documents by Reference...........................3
The Seller and the Servicer..............................................22
Description of the Securities............................................31
The Trust Funds..........................................................41
Enhancement..............................................................49
Servicing of Loans.......................................................51
The Agreements...........................................................59
Certain Legal Aspects of the Loans.......................................70
Use of Proceeds..........................................................80
Federal Income Tax Considerations........................................81
State Tax Considerations................................................109
ERISA Considerations....................................................109
Legal Investment........................................................110
Plan of Distribution....................................................110
Legal Matters...........................................................111
Glossary of Terms.......................................................111
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 Notes, Series _____
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 Notes, Series _______ and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Home Equity Loan Asset-Backed Notes, Series ________ will be
required to deliver a prospectus supplement and prospectus until __________,
_____.
<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 notes. We recommend that you review carefully the
more detailed information in this prospectus supplement and in the prospectus.
TITLE OF NOTES....................... Home Equity Loan Asset-Backed Notes,
Series _____.
ISSUER............................... Delta Funding Home Equity Loan
Trust _______.
SELLER AND SERVICER.................. Delta Funding Corporation.
INDENTURE TRUSTEE.................... _____________
OWNER TRUSTEE........................ _____________
CUSTODIAN............................ _____________
SECURITIES ADMINISTRATOR............. _____________
NOTE INSURER......................... _____________
CUT-OFF DATE......................... The close of business on ________,
_____, except that the cut-off date for
any mortgage loan originated after
________, _____ will be the date of
origination of that mortgage loan.
CLOSING DATE......................... On or about ________, _____.
PAYMENT DATES........................ The 15th day of each month or, if that
day is not a business day, the next
business day, beginning in __________.
RECORD DATES......................... The last business day of the month
before the month in which the applicable
payment date occurs. The record date for
the class A-1A notes, however, is the
business day immediately before the
applicable payment date so long as the
class A-1A notes remain in book-entry
form.
FINAL MATURITY DATES................. The final maturity date for each class
of offered notes is as follows:
CLASS Final Maturity Date
----- -------------------
A-1F
A-1A
<PAGE>
DESIGNATIONS
Each class of notes 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 NOTES
All classes of offered notes.
FIXED RATE NOTES
Class A-1F notes.
ADJUSTABLE RATE NOTES
Class A-1A notes.
GROUP F NOTES OR NOTE GROUP F
Class A-1F notes.
GROUP A NOTES OR NOTE GROUP A
Class A-1A notes.
NOTE GROUP
Group F notes or Group A notes, as applicable.
LOAN GROUP F
All mortgage loans bearing interest at fixed rates.
LOAN GROUP A
All mortgage loans bearing interest at adjustable rates, including mortgage
loans which bear interest at rates that are fixed for two years or three years
before beginning to adjust.
OFFERED NOTES
NOTE RATES
The interest rate for each class of offered notes is set forth on the cover page
of, or described in, this prospectus supplement. Each interest rate is limited
by a maximum rate cap that will be determined based on the weighted average of
the interest rates on the applicable mortgage loans net of specified fees and
expenses.
INTEREST PAYMENTS
On each payment date, each class of offered notes will be entitled to interest
in an amount equal to
o the applicable note rate, MULTIPLIED BY
o the applicable class principal balance on the day before that payment date,
multiplied by
o 1/12 or, in the case of the class A-1A notes, the days in the accrual
period divided by 360, MINUS
o the pro rata share of civil relief act interest shortfalls, PLUS
o any unpaid interest amounts from prior payment dates, PLUS
o 30 days' interest on unpaid interest amounts at the applicable note rate.
INTEREST ACCRUAL PERIOD
The calendar month preceding the month in which a payment date occurs, except
that the interest accrual period for the class A-1A notes will be the period
from the prior payment date or, in the case of the first payment date from the
closing date, to the day before the applicable payment date.
INTEREST CALCULATIONS
Actual/360 for the class A-1A notes; 30/360 for the Class A-1F notes.
CLASS PRINCIPAL BALANCES
The initial class principal balances of the offered notes are set forth on the
cover page of this prospectus supplement.
PRINCIPAL PAYMENTS
The indenture trustee will pay principal of the classes of offered notes in the
priority discussed under the caption "Description of the Notes--Principal
priorities" in this prospectus supplement.
MINIMUM DENOMINATIONS
$25,000.
FORM
Book-Entry.
SMMEA ELIGIBILITY
The offered notes will not be mortgage related securities.
ERISA ELIGIBILITY
The offered notes may be eligible for purchase by persons investing assets of
employee benefit plans or similar arrangements. See "ERISA Considerations" in
this prospectus supplement.
OTHER SECURITIES
The trust will issue subordinated owner trust certificates. The seller is not
offering these certificates to the public pursuant to this prospectus supplement
and the prospectus. The seller is including information about the owner trust
certificates because they provide credit enhancement to the offered notes.
THE MORTGAGE LOANS
THE INITIAL 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 ______, _____. On the
closing date, additional mortgage loans will be delivered to the trust.
LOAN GROUP F
Number of loans $
Aggregate principal balance
Range of principal balances $ to $
Average principal balance $
Range of interest rates % to %
Weighted average interest rate %
Range of CLTV % to %
Weighted average CLTV %
Range of original terms to
maturity (months) 60 to 360
Weighted average original term to
maturity (months)
Range of remaining terms to
maturity (months) to 360
Weighted average remaining term to
maturity (months)
Range of loan ages (months) 0 to
Weighted average loan
age (months) __
LOAN GROUP A
Number of loans
Aggregate principal balance $
Range of principal balances $ to $
Average principal balance $
Range of interest rates % to %
Weighted average interest rate
Range of CLTV % to %
Weighted average CLTV %
Range of original terms to
maturity (months) 180 to 360
Weighted average original term to
maturity (months)
Range of remaining terms to
maturity (months) to 360
Weighted average remaining term to
maturity (months)
Range of loan ages (months) 0 to
Weighted average loan
age (months)
Range of gross margins % to %
Weighted average gross margin %
Range of lifetime caps % to %
Weighted average lifetime cap %
2/28 loans (by principal balance) %
3/27 loans (by principal balance) %
Weighted average period cap
(first adjustment date) 3.00%
Weighted average periodic cap
(subsequent adjustment dates) 1.00%
SUBSEQUENT LOANS
On the closing date, the seller will deposit approximately $____________ 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 notes against losses due to defaults by the borrowers
under the mortgage loans.
The offered notes have the benefit of three types of credit enhancement:
o the use of excess interest to cover losses and to create
overcollateralization
o crosscollateralization of the two loan groups
o a final guaranty insurance policy which will guarantee timely payments of
interest on the notes and ultimate payment of principal of the notes.
OPTIONAL TERMINATION BY THE SERVICER
The servicer may, at its option, terminate the trust on any payment 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 into the pre-funding account on that date.
FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Stroock & Stroock & Lavan LLP, counsel to the seller and the
issuer, for federal income tax purposes, the notes will be treated as debt and
the trust will not be an association, publicly traded partnership or taxable
mortgage pool taxable as a corporation. By your purchase of a note, you will be
agreeing to treat the notes as debt for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered notes, see "Federal Income Tax Considerations" in this
prospectus supplement and in the prospectus.
RISK FACTORS
AN INVESTMENT IN THE OFFERED NOTES INVOLVES SIGNIFICANT RISKS. BEFORE YOU
DECIDE TO INVEST IN THE OFFERED NOTES, WE RECOMMEND THAT YOU CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS.
YOU MAY HAVE DIFFICULTY SELLING YOUR NOTES
The offered notes will not be listed on any securities exchange. As a
result, if you wish to sell your notes, you will have to find a purchaser that
is willing to purchase your notes. The underwriters intend to make a secondary
market for the offered notes. The underwriters may do so by offering to buy the
offered notes from investors that wish to sell. However, the underwriters will
not be obligated to make offers to buy the offered notes 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 notes 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 S
HORTFALLS
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 BALLOON LOANS MAY HAVE HIGHER RATES OF DEFAULT WHICH MAY CAUSE LOSSES.
Based on the principal balances of the mortgage loans in existence on
_____, _____, approximately _____% of the initial mortgage loans in
Loan Group F and none of the mortgage loans in Loan Group A are
balloon loans. A balloon loan has monthly payments that will not fully
pay off the loan balance by the maturity date. As a result, the
borrower usually will have to refinance the balloon loan in order to
pay the amount due. The borrower may not be able to refinance the
balloon loan for any number of reasons, including the level of
available mortgage rates, the value of the property or the borrower's
payment or credit history. The trust will not have any funds to
refinance a balloon loan, and the seller is not obligated to do so. If
the borrower is unable to refinance the balloon loan, the trust may
suffer a loss.
o DEFAULTS ON SECOND LIEN MORTGAGE LOANS MAY RESULT IN MORE SEVERE
LOSSES. Based on the principal balances of the mortgage loans in
existence on _______, _____, approximately _____% of the mortgage
loans in Loan Group F and none of the mortgage loans in Loan Group A
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 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 SUBSEQUENT MORTGAGE LOANS MAY HAVE CHARACTERISTICS THAT DIFFER FROM
THOSE OF THE INITIAL MORTGAGE LOANS WHICH MAY REDUCE YOUR YIELD TO
MATURITY. Following the transfer of the subsequent mortgage loans to
the trust after the closing date, 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 payment
by interest rate, the payment by principal balance, the payment by
loan- to-value ratio and the payment by remaining term to stated
maturity. We recommend that you consider potential variances when
making your investment decision concerning the offered notes.
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 principal balances of the mortgage loans in existence on
___________, approximately ______% of the mortgage loans in Loan Group
F are secured by properties in ________ and approximately ____% of the
mortgage loans in Loan Group A are secured by properties in _____.
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 notes than if borrowers and properties were more spread out in
different geographic areas.
<PAGE>
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 payments
of principal of the offered notes and the time when those payments 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 initial mortgage loans in Loan Group A have fixed interest
rates for two or three years and then adjust. Those mortgage loans may
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
___________, excess funding amounts will be paid on the first payment
date thereafter as a prepayment to the owners of the class A-1F or
class A-1A notes, as applicable.
o YOU MAY BE UNABLE TO REINVEST PAYMENTS IN COMPARABLE INVESTMENTS.
Asset backed securities, like the offered notes, 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 notes,
and are likely to receive less money to reinvest when other
investments generally are producing a higher yield than that on the
offered notes. You will bear the risk that the timing and amount of
payments on your offered notes will prevent you from attaining your
desired yield.
o LIMITATIONS ON NOTE RATES WILL AFFECT YOUR YIELD TO MATURITY. The rate
at which interest accrues on each class of offered notes, is subject
to a rate cap that differs by loan group. The rate cap for the class
A-1F and the class A-1A notes is the maximum rate for the related Loan
Group. Each maximum rate is based on the weighted average of the
interest rates on the mortgage loans in the related loan group, net of
specified fees and expenses. If mortgage loans with relatively higher
loan rates prepay, the maximum rate on the related classes of offered
notes will be lower than otherwise would be the case.
Your investment in the class A-1A notes also involves the risk that
the level of one-month LIBOR may change in a direction or at a rate
that is different from the level of the index used to determine the
interest rates on the adjustable rate mortgage loans.
o EXCESS CASH MAY AFFECT YOUR YIELD. If a class of notes is
overcollateralized by the related loan group below the required
amount, excess interest, if any, generated by the loan group will be
payable on the related notes as a payment of principal. If you
purchase a note at a premium or a discount, your yield to maturity
will be affected by the rate at which excess interest is paid. The
amount of excess interest available for payment from a loan group on
any payment date will be affected by:
o the actual amount of interest received, collected or recovered
with respect to the mortgage loans in the related loan group
during the calendar month prior to the related payment date;
o changes in the weighted average of the coupon rates of the
mortgage loans in the related loan group resulting from
prepayments and liquidations of mortgage loans; and
o in the case of Group A, adjustments in the interest rates on
these loans and adjustments in the note rate on the class A-1A
notes.
The amount of excess interest paid as principal on the notes
related to a loan group will be based on the required amount of
overcollateralization. The required level of
overcollateralization may increase or decrease during the period
that the related class of notes remain outstanding. Any increase
in the overcollateralization for the notes related to a loan
group may result in an accelerated rate of amortization of the
related notes until the overcollateralization for the notes
equals the required amount of overcollateralization. Any decrease
in the required amount of overcollateralization will result in a
decelerated rate of amortization of the related notes until the
overcollateralization for the notes is reduced to the required
amount of overcollateralization for the notes.
CREDIT ENHANCEMENT PROVIDES LIMITED PROTECTION AGAINST LOSSES
Although credit enhancement is intended to reduce the impact of delinquent
payments or losses on the payment of the notes, the amount of credit enhancement
will be limited and will decline and under certain circumstances could be
depleted prior to the payment in full of the notes. As a result, you may suffer
losses on your investment.
<PAGE>
EVENTS OF DEFAULT UNDER THE INDENTURE MAY HAVE A SIGNIFICANT IMPACT ON THE
WEIGHTED AVERAGE LIFE OF YOUR NOTES
So long as the note insurer is not in default under the note insurance
policy, neither the indenture trustee nor the noteholders may declare an event
of default under the indenture or accelerate the maturity of the notes without
the consent of the note insurer. Upon the occurrence of an event of default
under the indenture, the note insurer will have the right, but not the
obligation, to cause the liquidation, in whole or in part, of the mortgage pool,
which will result in redemption, in whole or in part, of the notes. The note
insurer's decisions regarding defaults under the indenture may have a
significant impact on the weighted average life of your notes.
COMPUTER PROBLEMS IN THE YEAR 2000 MAY RESULT IN LOSSES
Many computers and computer chips were not programmed to recognize more
than two digits in the year of a date. As a result, in the year 2000, those
computers will not know whether the '00 refers to the year 1900 or the year
2000. The servicer has implemented a program to identify and correct this
problem in its computer systems, and has completed the necessary changes with
respect to its technology systems in August 1999. The seller has not experienced
any significant problems in its systems related to this issue. However, since
the servicer relies on the performance of computer systems of other companies,
there may be problems in the year 2000 due to other companies' computer systems.
These problems may cause delays or disruptions in the amount and timing of
payments to you.
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL REDUCE THE PRICES FOR NOTES
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 notes after those offered notes 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 notes.
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.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY CAUSE 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 loans. Violations of these laws,
policies and principles may limit the ability of the servicer to collect all or
part of the principal of or interest on the loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the loan to damages and administrative enforcement.
The 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 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.
Violations of these federal laws may limit the ability of the servicer to
collect all or part of the principal of or interest on the loans and in addition
could subject the trust fund to damages and administrative enforcement.
The loans may also be subject to the Home Ownership and Equity Protection
Act of 1994 which amended the Truth in Lending Act as it applies to mortgages
subject to the Home Ownership and Equity Protection Act of 1994. The Home
Ownership and Equity Protection Act of 1994
o requires additional disclosures,
o specifies the timing of these disclosures and
o limits or prohibits inclusion of some provisions in mortgages subject
to the Home Ownership and Equity Protection Act 1994.
The Home Ownership and Equity Protection Act 1994 also provides that any
purchaser or assignee of a mortgage covered by the Home Ownership and Equity
Protection Act 1994 is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered under the Home Ownership and Equity Protection Act 1994 from an
assignee is the remaining amount of indebtedness plus the total amount paid by
the borrower in connection with the loans. The Trust fund will be subject to all
of the claims and defenses which the borrower could assert against the seller
for violations of the Home Ownership and Equity Protection Act 1994.
INSOLVENCY OF SELLER MAY CAUSE LOSSES
The seller intends that its transfer of the loans to the trust fund will
constitute a sale, and the seller and the trust fund will agree to treat each
transfer as a sale. In the event of the insolvency of the seller, the indenture
trustee in bankruptcy or the seller, as debtor-in-possession, may attempt to
recharacterize a sale as a loan by the trust fund to the seller secured by the
pledge of the loans. If an attempt were to be successful, you could receive a
prepayment of all or part of your notes. Any prepayment would adversely affect
the yield on your notes and could result in a loss. Even if an attempt were to
be unsuccessful, you could experience delays in payments which would adversely
affect the yield on your notes.
THE OFFERED NOTES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered notes are not suitable investments for any investor that
requires a regular or predictable schedule of payments or payment on any
specific date. The offered notes 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.
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
The mortgage loans will include:
(a) the mortgage loans identified as of ____________ and described in
this prospectus supplement; called the statistic calculation mortgage
loans,
(b) additional closed-end fixed and adjustable rate home equity loans
to 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) additional mortgage loans to be purchased by the trust from the
seller from time to time on or prior to _____________, called the
subsequent mortgage loans, and together with the initial mortgage loans,
called the mortgage loans.
The mortgage loans will be divided into two groups, each called a loan
group constituting a separate sub-trust: Loan Group F and Loan Group A. Each
mortgage loan in Loan Group F will bear interest at a fixed rate that is
calculated on the "actuarial basis". Some of the mortgage loans in Loan Group F
will have original terms to stated maturity of up to 15 years and amortization
schedules of up to 30 years, called balloon loans , leaving a substantial
payment due at the stated maturity. The mortgage loans in Loan Group F are
secured by first or second liens primarily on one- to four-family residential
properties, called the mortgaged properties.
Each mortgage loan in Loan Group A will bear interest at an adjustable
rate, called an ARM, that is calculated on the "actuarial basis". 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. The mortgage loans in Loan Group A are
secured by first liens on the related mortgaged properties.
For all of the statistic calculation mortgage loans in Loan Group A, the
loan index is the London interbank offered rate for six-month United States
dollar deposits, 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. Approximately ______% and ______%, by principal balance,
of the statistic calculation mortgage loans in Loan Group A have initial change
dates that are 24 months and 36 months, respectively, after origination,
referred to as the 2/28 loans and 3/27 loans, respectively. 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 2/28 loans and 3/27 loans
generally is _____%.
As of the cut-off date, substantially all of the statistic calculation
mortgage loans in Loan Group A were accruing interest at loan rates that are
below the sum of the related gross margin and the loan index that would
otherwise have been applicable. On the first change date for each 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.
Approximately ______%, by principal balance, of the statistic calculation
mortgage loans provide for payment by the mortgagor of a prepayment charge on
specific prepayments as provided in the related mortgage note.
STATISTICAL INFORMATION
Set forth below is approximate statistical information as of the cut-off
date regarding the statistic calculation mortgage loans in each loan group. On
the closing date, the additional mortgage loans will be delivered to the trust
for inclusion in Loan Group F and Loan Group A, respectively. In addition, prior
to the closing date, statistic calculation mortgage loans may be removed from
either loan group and other mortgage loans may be substituted for the removed
loans. The seller believes that the information set forth in this prospectus
supplement with respect to each loan group as presently constituted is
representative of the characteristics of the initial mortgage loans in each loan
group as it will be constituted at the closing date, although some
characteristics of the initial mortgage loans in either loan group may vary. The
sum of the percentage columns in the following tables may not equal 100% due to
rounding.
LOAN GROUP F. As of the cut-off date: approximately ____%, by principal
balance, are balloon loans; and approximately _____%, by principal balance, have
payments which, as of the cut-off date, are __ to __ days delinquent.
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ----------------------- --------------------- ---------------------
<S> <C> <C> <C>
$0.01- $25,000.00........................
$25,000.01- $50,000.00...................
$50,000.01- $75,000.00...................
$75,000.01-$100,000.00...................
$100,000.01-$125,000.00..................
$125,000.01-$150,000.00..................
$150,000.01-$175,000.00..................
$175,000.01-$200,000.00..................
$200,000.01-$225,000.00..................
$225,000.01-$250,000.00..................
$250,000.01-$275,000.00..................
$275,000.01-$300,000.00..................
$300,000.01-$325,000.00..................
$350,000.01-$375,000.00..................
$375,000.01-$400,000.00..................
$400,000.01-$425,000.00..................
$650,000.01-$675,000.00..................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP F
NUMBER OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATIONS MORTGAGE STATISTIC CALCULATION STATISTIC CALCULATION
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- --------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Arizona.............................
Arkansas............................
California..........................
Colorado............................
Connecticut.........................
Delaware............................
District of Columbia................
Florida.............................
Georgia.............................
Illinois............................
Indiana.............................
Kansas..............................
Kentucky............................
Louisiana...........................
Maine...............................
Maryland............................
Massachusetts.......................
Michigan............................
Minnesota...........................
Mississippi.........................
Missouri............................
Nebraska............................
New Hampshire.......................
New Jersey..........................
New Mexico..........................
New York............................
North Carolina......................
Ohio................................
Oklahoma............................
Oregon..............................
Pennsylvania........................
Rhode Island........................
South Carolina......................
Tennessee...........................
Texas...............................
Virginia............................
Washington..........................
West Virginia.......................
Wisconsin...........................
Wyoming.............................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
(1) Determined by property address so designated in the related mortgage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL COMBINED STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ----------------------- --------------------- ----------------------
<S> <C> <C> <C>
5.01% to 10.00%.............................
10.01% to 15.00%.............................
15.01% to 20.00%.............................
20.01% to 25.00%.............................
25.01% to 30.00%.............................
30.01% to 35.00%.............................
35.01% to 40.00%.............................
40.01% to 45.00%.............................
45.01% to 50.00%.............................
50.01% to 55.00%.............................
55.01% to 60.00%.............................
60.01% to 65.00%.............................
65.01% to 70.00%.............................
70.01% to 75.00%.............................
75.01% to 80.00%.............................
80.01% to 85.00%.............................
85.01% to 90.00%.............................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
(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) 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 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUT-OFF DATE LOAN RATES
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
7.001%- 7.500%..............................
7.501%- 8.000%..............................
8.001%- 8.500%..............................
8.501%- 9.000%..............................
9.001%- 9.500%..............................
9.501%-10.000%..............................
10.001%-10.500%..............................
10.501%-11.000%..............................
11.001%-11.500%..............................
11.501%-12.000%..............................
12.001%-12.500%..............................
12.501%-13.000%..............................
13.001%-13.500%..............................
13.501%-14.000%..............................
14.001%-14.500%..............................
14.501%-15.000%..............................
15.001%-15.500%..............................
15.501%-16.000%..............................
16.001%-16.500%..............................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL TERMS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
TO STATED MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C>
1- 60..................................
61-120..................................
121-180..................................
181-240..................................
241-300..................................
301-360..................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF REMAINING MONTHS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ----------------------- --------------------- ---------------------
<S> <C> <C> <C>
1- 60......................................
61-120......................................
121-180......................................
181-240......................................
241-300......................................
301-360......................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
MONTHS SINCE ORIGINATION
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF MONTHS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
0.......................................
1- 3....................................
4- 6....................................
7-12....................................
13-33....................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>`9
<CAPTION>
PROPERTY TYPE
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Single Family................................
Two-to-Four Family...........................
Five-to-Eight Family.........................
Mixed Use....................................
Condominium..................................
Mobile Home..................................
--------------------- --------------------- ---------------------
Total................................ 100.00%
===================== ===================== =====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPE (1)
LOAN GROUP F
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------- ---------------------- --------------------- -----------------------
<S> <C> <C> <C>
Owner Occupied...........................
Non-Owner Occupied.......................
----------------------- --------------------- -----------------------
Total................................ 100.00%
======================= ===================== =======================
(1) Based upon representations made by borrowers at the time of origination of
the mortgage loans.
LOAN GROUP A. As of the cut-off date: the weighted average current loan
rate of the 2/28 loans and 3/27 loans was approximately _____% and _____% per
annum, respectively; the weighted average number of months to the next change
date for the 2/28 loans and 3/27 loans was approximately ____ months and _____
months, respectively; and approximately ____%, by principal balance, have
payments which, as of the cut-off date, are __ to __ days delinquent.
</TABLE>
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ----------------------- --------------------- ---------------------
<S> <C> <C> <C>
$0.01 to $25,000.00........................
$25,000.01 to $50,000.00.....................
$50,000.01 to $75,000.00.....................
$75,000.01 to $100,000.00....................
$100,000.01 to $125,000.00...................
$125,000.01 to $150,000.00...................
$150,000.01 to $175,000.00...................
$175,000.01 to $200,000.00...................
$200,000.01 to $225,000.00...................
$225,000.01 to $250,000.00...................
$250,000.01 to $275,000.00...................
$275,000.01 to $300,000.00...................
---------------------- ------------------- -------------------
Total................................ 100.00%
====================== =================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Arkansas.................................
Arizona..................................
California...............................
Colorado.................................
Connecticut..............................
Delaware.................................
Florida..................................
Georgia..................................
Idaho....................................
Illinois.................................
Indiana..................................
Kentucky.................................
Louisiana................................
Maryland.................................
Massachusetts............................
Michigan.................................
Minnesota................................
Mississippi..............................
Missouri.................................
Nevada...................................
New Hampshire............................
New Jersey...............................
New Mexico...............................
New York.................................
North Carolina...........................
Ohio.....................................
Pennsylvania.............................
Rhode Island.............................
Tennessee................................
Texas....................................
Virginia.................................
West Virginia............................
Wisconsin................................
--------------- ------------------- ----------------
Total................................ 100.00%
=============== ==================== ================
(1) Determined by property address so designated in the related mortgage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
15.01%-20.00%............................
20.01%-25.00%............................
25.01%-30.00%............................
30.01%-35.00%............................
35.01%-40.00%............................
40.01%-45.00%............................
45.01%-50.00%............................
50.01%-55.00%............................
55.01%-60.00%............................
60.01%-65.00%............................
65.01%-70.00%............................
70.01%-75.00%............................
75.01%-80.00%............................
80.01%-85.00%............................
85.01%-90.00%............................
90.01%-95.00%
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
(1) The original Loan-to-Value Ratios, referred to as LTVs, shown above are
equal, with respect to each statistic calculation mortgage loan, to the
original principal balance of that mortgage loan at the date of origination
divided by the value of the related mortgaged property, based upon the
lesser of the appraisal made at the time of origination of the mortgage
loan or the purchase price for 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 become equal to or greater than the value of the related
mortgaged properties, the actual losses could be higher than those now
generally experienced in the mortgage lending industry.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUT-OFF DATE LOAN RATES
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF CUT-OFF DATE STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
7.001%- 7.500%...........................
7.501%- 8.000%...........................
8.001%- 8.500%...........................
8.501%- 9.000%...........................
9.001%- 9.500%...........................
9.501%-10.000%...........................
10.001%-10.500%..........................
10.501%-11.000%..........................
11.001%-11.500%..........................
11.501%-12.000%..........................
12.001%-12.500%..........................
12.501%-13.000%..........................
13.001%-13.500%..........................
13.501%-14.000%..........................
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL TERMS STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
TO STATE MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
180......................................
240......................................
360......................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF REMAINING STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
121-180..................................
181-240..................................
301-360..................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
MONTHS SINCE ORIGINATION
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ---------------------- -------------------- ----------------------
<S> <C> <C> <C>
0............................................
1- 3.........................................
4- 6.........................................
7-12.........................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Single Family............................
Two-to-Four Family.......................
Condominium..............................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPE(1)
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C>
Owner Occupied...........................
Non-Owner Occupied.......................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
(1) Based upon representations made by the borrowers at the time of origination
of the mortgage loans.
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGIN
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
2.501%- 3.000%...........................
3.001%- 3.500%...........................
3.501%- 4.000%...........................
4.001%- 4.500%...........................
4.501%- 5.000%...........................
5.001%- 5.500%...........................
5.501%- 6.000%...........................
6.001%- 6.500%...........................
6.501%- 7.000%...........................
7.001%- 7.500%...........................
7.501%- 8.000%...........................
8.001%- 8.500%...........................
8.501%- 9.000%...........................
9.001%- 9.500%...........................
9.501%-10.000%...........................
10.001%-10.500%..........................
10.501%-11.000%..........................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
LIFETIME CAP
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF LIFETIME CAPS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
15.501%-16.000%..........................
16.001%-16.500%..........................
16.501%-17.000%..........................
17.001%-17.500%..........................
17.501%-18.000%..........................
18.001%-18.500%..........................
18.501%-19.000%..........................
19.001%-19.500%..........................
19.501%-20.000%..........................
20.001%-20.500%..........................
20.501%-21.000%..........................
21.001%-21.500%..........................
21.501%-22.000%..........................
22.001%-22.500%..........................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIFETIME FLOOR
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF LIFETIME FLOORS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
7.001%- 7.500%...........................
7.501%- 8.000%...........................
8.001%- 8.500%...........................
8.501%- 9.000%...........................
9.001%- 9.500%...........................
9.501%-10.000%...........................
10.001%-10.500%..........................
10.501%-11.000%..........................
11.001%-11.500%..........................
11.501%-12.000%..........................
12.001%-12.500%..........................
12.501%-13.000%..........................
13.001%-13.500%..........................
13.501%-14.000%..........................
14.001%-14.500%..........................
14.501%-15.000%..........................
15.001%-15.500%..........................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
MONTH OF NEXT CHANGE DATE
LOAN GROUP A
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATIONS STATISTIC CALCULATION STATISTIC CALCULATION
MONTH OF NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
August 2000..............................
September 2000...........................
November 2000............................
December 2000............................
February 2001............................
March 2001...............................
April 2001...............................
May 2001.................................
January 2002.............................
February 2002............................
March 2002...............................
April 2002...............................
May 2002.................................
June 2002................................
--------------- --------------- ---------------
Total................................ 100.00%
=============== =============== ===============
</TABLE>
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
On the closing date, cash in an amount not to exceed approximately
$____________, called the pre-funded amount, will be deposited into a segregated
account maintained with the indenture trustee, called the pre-funding account.
The maximum amount of subsequent mortgage loans to be transferred to the trust
for Loan Group F and Loan Group A is approximately $_________ and $___________,
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 for Loan Group F and Loan Group A 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 $_________,
(2) the date on which an event of default occurs under the sale and servicing
agreement or the indenture, or
(3) the close of business on ___________.
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 applicable loan group.
Accordingly, the statistical characteristics of the mortgage loans in the trust
will vary upon the acquisition of subsequent mortgage loans.
The obligation of the trust to purchase subsequent mortgage loans on any
date during the funding period is subject to the following requirements in
addition to other requirements set forth in the 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 __ years for fully amortizing loans or __
years for balloon loans in Loan Group F
o the subsequent mortgage loan will be secured by a mortgage in a
first lien position for Loan Group A or a first or second lien
position for Loan Group F
o the subsequent mortgage loan will not have a loan rate less than
___% for Loan Group F and ____% for Loan Group A
<PAGE>
Following the addition of the subsequent mortgage loans to each loan group,
the mortgage loans, including the applicable subsequent mortgage loans, if any,
in each loan group will have the following characteristics:
LOAN GROUP F
Weighted Average Loan Rate...................... At least _____%
Weighted Average Remaining
Term to Stated Maturity....................... At least ___ months
Weighted Average Original
Combined Loan-to-Value Ratio.................. Not more than _____%
Weighted Average Credit Score (FICO)............ At least _____
Balloon Loans................................... Not more than _____%
Principal Balance............................... Not more than $_______
State concentration............................. Not more than ______%
Zip code concentration.......................... Not more than ______%
Non-owner occupied.............................. Not more than ______%
Second liens.................................... Not more than ______%
LOAN GROUP A
Weighted Average Loan Rate...................... At least ______%
Weighted Average Remaining
Term to Stated Maturity....................... At least _____ months
Weighted Average Original
Loan-to-Value Ratio........................... Not more than ______%
Weighted Average Credit Score (FICO)............ At least ___
Principal Balance............................... Not more than $_______
State concentration............................. Not more than ______%
Zip code concentration.......................... Not more than ______%
Non-owner occupied.............................. Not more than ______%
First liens..................................... _______%
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the offered notes, the aggregate amount
of payments on the offered notes and the yield to maturity of the offered notes
will be related primarily to the rate and timing of payments of principal on the
mortgage loans in the related loan group. The rate of principal payments on the
mortgage loans will in turn be affected by their amortization schedules and by
the rate of principal prepayments, including for this purpose prepayments
resulting from refinancing, liquidations of the mortgage loans due to defaults,
casualties, condemnations and repurchases by the seller or the servicer. The
mortgage loans may be prepaid by the mortgagors at any time. However, a majority
of the mortgage loans are subject to a prepayment charge.
<PAGE>
THE NOTE RATES
The note rate for each class of offered notes, is subject to the applicable
available funds cap. Each available funds cap on any payment 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 the related loan
group in effect at the beginning of the related due period. The expense fee rate
is ________% per annum. All of the loan rates on the mortgage loans in Loan
Group F are fixed for the lives of the mortgage loans. If mortgage loans bearing
higher loan rates were to prepay at rates faster than mortgage loans with lower
loan rates, the available funds cap for Loan Group F would be lower than
otherwise would be the case. There is no mechanism to compensate the holders of
the Group F notes, if the related note rate is limited by the available funds
cap for Loan Group F.
The yield to investors in the class A-1A notes will be sensitive to, among
other things, the level of 1-month LIBOR and the levels of the loan index. All
of the statistic calculation mortgage loans in Loan Group A are 2/28 and 3/27
loans which will bear interest at fixed loan rates for 24 months and 36 months,
respectively, after origination of the mortgage loans. 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 for Loan Group A. Furthermore, mortgage loans that have not reached their
first change date are more likely to be subject to the applicable periodic rate
cap on their first change date. See "Description of the Mortgage Loans" in this
prospectus supplement. Although the holders of the class A-1A notes will be
entitled to receive the related LIBOR carryover to the extent funds are
available for receipt as described and in the priority set forth in this
prospectus supplement, there is no assurance that sufficient funds will be
available. The ratings on the class A-1A notes do not address the likelihood of,
and the note insurance policy does not cover, the payment of any LIBOR
carryover.
Although the loan rates on the mortgage loans in Loan Group A are subject
to adjustment, the loan rates adjust less frequently than 1-month LIBOR and
adjust by reference to the loan index. Changes in 1-month LIBOR may not
correlate with changes in the loan index and either may not correlate with
prevailing interest rates. It is possible that an increased level of 1-month
LIBOR could occur simultaneously with a lower level of prevailing interest
rates, which would be expected to result in faster prepayments, thus reducing
the weighted average life of the class A-1A notes.
<PAGE>
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the mortgage loans, including
any optional purchase by the servicer of a delinquent mortgage loan and any
optional purchase of the remaining mortgage loans in connection with the
termination of the trust, in each case as described in this prospectus
supplement, will result in payments on the related class of offered notes which
would otherwise be paid 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 notes in either note group may vary from the anticipated yield
will depend upon the degree to which a note of a class is purchased at a
discount or premium, and the degree to which the timing of payments on that note
is sensitive to prepayments, liquidations and purchases of the related mortgage
loans.
We recommend that holders of the offered notes consider, in the case of any
notes purchased at a discount, and particularly the subordinate notes, 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 notes 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.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the mortgage loans in Loan Group F is
affected by prevailing market rates for mortgage loans of a comparable term and
risk level. When the market interest rate is below the 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.
All of the mortgage loans in Loan Group A are ARMs. As is the case with
conventional fixed-rate mortgage loans, the ARMs may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, ARMs could be subject
to higher prepayment rates than if prevailing interest rates remain constant
because the availability of fixed-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their ARMs to "lock in" a lower
fixed interest rate. The 2/28 loans and 3/27 loans may become subject to higher
prepayment rates as 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 notes, the use of excess interest to pay principal of the offered
notes will result in acceleration of the offered notes then entitled to
principal payments, relative to the amortization of the related 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 notes. Once the
required level of overcollateralization is reached, the acceleration feature
will cease, unless necessary to maintain the required level of
overcollateralization.
MATURITY DATES
The maturity date for each class of offered notes is set forth under
"Summary-Maturity Dates" in this prospectus supplement. The final maturity dates
are the payment date immediately following the month of the last due date of the
latest possible maturing mortgage loan in either loan group, plus 12 months. It
is expected that the last actual payment date for each class of offered notes
will occur significantly earlier than the maturity dates.
PAYMENT DELAY FEATURE OF FIXED RATE NOTES
The effective yield to the noteholders of the fixed rate notes will be
lower than the yield otherwise produced by the note rate and the purchase price
of these notes because payments will not be made to the noteholders until the
15th day of the month following the month of accrual, without any additional
payment of interest or earnings on that note in respect of the delay.
<PAGE>
MANDATORY PREPAYMENT
In the event that at the end of the funding period there is an excess
funding amount, the holders of the class A-1F notes in the case of note group F
and the holders of the class A-1A notes in the case of note group A, will
receive an additional principal payment in an amount equal to the applicable
excess funding amount. Although there can be no assurance, the seller
anticipates that there should be no material principal prepayment to the
noteholders due to a lack of subsequent mortgage loans.
INITIAL PAYMENT DATE
With respect to any initial mortgage loan with a due date on the first day
of each month, the class A-1F and class A-1A noteholders will receive a
principal payment reflecting two installments of principal during the first due
period. As a result, the noteholders will receive a larger payment in respect of
principal on the initial payment date than would have been the case if the first
due period were a one-month period.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on offered notes purchased at a price less than par and will decrease
the yield on offered notes 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 notes 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 notes 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 note 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 note is repaid. The weighted average life of any class of
offered notes 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 Group F
notes, a 100% prepayment assumption assumes a constant prepayment rate, referred
to as a CPR, of __% per annum of the outstanding principal balance of the
mortgage loans in Loan Group F in the first month of the life of the mortgage
loans and an additional amount of approximately _______%, precisely ____ 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 each
month is assumed. With respect to the Group A notes, the prepayment assumption
assumes a constant prepayment rate of the applicable per annum CPR percentage of
the outstanding principal balances of the mortgage loans in Loan Group A. As
used in the table below, __% prepayment assumption assumes a constant prepayment
rate equal to ___% of the applicable prepayment assumption, i.e., no
prepayments. Correspondingly, ____% prepayment assumption assumes prepayment
rates equal to ____% of the applicable prepayment assumption, and so forth. The
prepayment assumption does not purport to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the mortgage loans. The seller believes
that no existing statistics of which it is aware provide a reliable basis for
holders of the offered notes to predict the amount or the timing of receipt of
prepayments on the mortgage loans.
STRUCTURING ASSUMPTIONS
For the purposes of the tables below, it is assumed that:
(1) the mortgage loans consist of pools of loans with the level-pay
and balloon characteristics as set forth below,
(2) the amount of interest accrued on the mortgage loans is reduced by
amounts sufficient to pay the servicing fee, the securities administration
fee and the premium,
(3) the closing date is ___________,
(4) payments on the offered notes are made on the 15th day of each
month regardless of the date on which the payment date actually occurs,
commencing in the month after the closing date, and are made in accordance
with the priorities described in this prospectus supplement,
(5) 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 _____________,
(6) all prepayments are prepayments in full received on the last day
of each due period commencing in the calendar month following their
delivery with 30 days of accrued interest,
(7) the mortgage loan prepayment rates are a multiple of the
prepayment assumption in the case of Loan Group F, and various constant
percentages of CPR in the case of Loan Group A,
(8) the optional termination is not exercised except in the
calculation of weighted average life to call,
<PAGE>
(9) each class of offered notes has the respective note rate and
initial class principal balance as set forth in this prospectus supplement,
(10) the overcollateralization levels for the initial mortgage loans
apply to the subsequent mortgage loans, are set initially as specified in
this prospectus supplement, and thereafter decrease in accordance with the
provisions specified in the agreement,
(11) the loan index is ________% on each change date,
(12) 1-month LIBOR for each interest period will be _______%,
(13) the maximum amount of subsequent mortgage loans are included in
the trust as of the cut-off date,
(14) all mortgage loans in Loan Group A have change dates every six
months after their initial change dates, and
(15) there is no deposit to the initial interest coverage account.
The foregoing assumptions are referred to in this prospectus supplement
collectively as the structuring assumptions.
<PAGE>
<TABLE>
<CAPTION>
REMAINING REMAINING ORIGINAL
AMORTIZATION TERM TO AMORTIZATION
PRINCIPAL LOAN TERM MATURITY TERM
BALANCE($) RATE(%) (MONTHS) (MONTHS) (MONTHS)
---------- ------- ------------ ------------ -----------
Group F Initial
Mortgage Loans
<S> <C> <C> <C> <C> <C>
Level Pay..........
Level Pay..........
Level Pay..........
Level Pay..........
Balloon........
------------------
------------------
Group F Subsequent
Mortgage Loans
Level Pay..........
Level Pay..........
Level Pay..........
Level Pay..........
Balloon........
------------------
------------------
LOAN GROUP F
------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING REMAINING ORIGINAL
AMORTIZATION TERM TO AMORTIZATION
PRINCIPAL LOAN TERM MATURITY TERM GROSS
BALANCE($) RATE(%) (MONTH) (MONTHS) (MONTHS) MARGIN(%)
---------- ------- ------------ --------- ------------ ---------
Group A Initial
Mortgage Loans
<S> <C> <C> <C> <C> <C> <C>
Level Pay........
Level Pay........
Level Pay........
Level Pay........
Level Pay........
Level Pay........
----------
----------
Group A Subsequent
Mortgage Loans
Level Pay........
Level Pay........
----------
----------
LOAN GROUP A
----------
TOTAL POOL
----------
</TABLE>
<TABLE>
<CAPTION>
PERIODIC PERIODIC
NUMBER OF RATE RATE
MONTHS TO CAP CAP
NEXT (SUBSEQUENT (FIRST
CHANGE LIFETIME LIFETIME CHANGE CHANGE
DATE CAP(%) FLOOR(%) DATES)(%) DATE(%)
-------- -------- -------- ------------ --------
Group A Initial
Mortgage Loans
<S> <C> <C> <C> <C> <C>
Level Pay........
Level Pay........
Level Pay........
Level Pay........
Level Pay........
Level Pay........
----------
----------
Group A Subsequent
Mortgage Loans
Level Pay........
Level Pay........
----------
----------
LOAN GROUP A
----------
TOTAL POOL
----------
</TABLE>
<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 notes that would be outstanding after each of the dates shown at
various percentages of the prepayment assumption and the corresponding weighted
average lives.
Since the tables were prepared on the basis of the structuring assumptions,
there are discrepancies between characteristics of the actual mortgage loans and
the characteristics of the mortgage loans assumed in preparing the tables. Any
discrepancy may have an effect upon the percentages of the class principal
balances outstanding and weighted average lives of the notes 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 payments of principal on the notes may be made earlier or later
than as indicated in the tables.
<PAGE>
<TABLE>
<CAPTION>
***PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
Class A-1F Class A-1A
------------------------------------------------------------------------------------------------
50% 75% 100% 115% 160% 175% 200% 50% 75% 100% 115% 160% 175% 200%
PAYMENT DATE --- --- ---- ---- ---- ---- ---- --- --- --- --- --- --- ----
- --------------
Initial Percentage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15,..............
15, .............
15, .............
15, .............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
15,..............
Weighted Average Life
(years)(2)
To Maturity
To Call............
- -----------
(1) The percentages of the prepayment assumption for the Loan Group F mortgage
loan are as set forth in the column headings above and the corresponding
prepayment assumption for the Loan Group A mortgage loans are at the
following percentages of CPR: 10%, 15%, 20%, 30%, 32%, 35% and 40%.
(2) The weighted average life of a class of notes is determined by (a)
multiplying the amount of each payment in reduction of the related class
principal balance by the number of years from the date of issuance of the
note to the related payment date, (b) adding the results, and (c) dividing
by the highest related class principal balance of the class of notes.
</TABLE>
<PAGE>
DESCRIPTION OF THE NOTES
The property of the trust will consist of, to the extent provided in the
sale and servicing agreement:
(a) the mortgage loans;
(b) payments received after the cut-off date, other than payments of
interest on the initial mortgage loans due on or before ___________ __, ____;
(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 note 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 notes, 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 indenture trustee, which will
initially act as note Registrar. See "--Book-entry notes" below. No service
charge will be made for any registration of exchange or transfer of notes, but
the indenture trustee may require payment of a sum sufficient to cover any tax
or other governmental charge.
The principal balance of a class of notes, other than the notional amount
notes on any payment date is equal to the applicable class principal balance on
the closing date reduced by the
(a) aggregate of amounts actually paid as principal to the holders of the
class of notes prior to the applicable date and
(b) in the case of a subordinate note, any reductions in the class
principal balance of the subordinate note due to realized losses as described in
this prospectus supplement
The notional amount notes do not have a class principal balance but will
have a notional amount which for any payment date prior to the ____ payment date
will equal the lesser of
(a) the loan group balance of Loan Group F as of the end of the second
preceding due period and
<PAGE>
(b) the applicable amount set forth below:
PAYMENT DATES NOTIONAL AMOUNT
------------- ---------------
1-3.............................................. $
4-6.............................................. $
7-9.............................................. $
10-12............................................ $
13-15............................................ $
16-18............................................ $
19-21............................................ $
22-24............................................ $
25-27............................................ $
28-30............................................ $
31-33............................................ $
34-36............................................ $
On and after the ____ payment date, the notional amount of the notional amount
notes will be zero. On any date, the note group balance of a note group is the
aggregate of the class principal balances of the notes in the note group on the
applicable date. The percentage interest of a note of any class as of any date
of determination will equal the percentage obtained by dividing the denomination
of the note by the original class principal balance or notional amount for the
related class of notes.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the trust, other than the initial interest
coverage account, the pre-funding account, the net rate cap fund and the LIBOR
carryover fund, created by the agreement will include multiple segregated asset
pools, each of which will be treated as a separate REMIC, creating a tiered
REMIC structure. The offered notes, excluding any rights to receive LIBOR
carryover or net rate cap carryover, will be designated as regular interests in
a REMIC.
BOOK-ENTRY NOTES
The book-entry notes will be issued in one or more notes which equal the
aggregate principal balance of the offered notes 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 notes will hold their notes through DTC in
the United States, or Cedelbank 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. Cedelbank and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedelbank'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 Cedelbank 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.
Investors may hold beneficial interests in the book-entry notes 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 note of each class of offered notes may be issued in a different
principal amount to accommodate the remainder of the initial principal amount of
the notes of the class. Unless and until definitive notes are issued, it is
anticipated that the only noteholder of the offered notes will be Cede & Co., as
nominee of DTC. Note owners will not be noteholders as that term is used in the
agreement. Note 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 notes, 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.
Neither the seller, the servicer, the securities administrator nor the
indenture trustee will have any responsibility for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
book-entry notes held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to beneficial ownership interests.
PAYMENT DATES
Payments on the notes will be made by the indenture 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 _________, each called a payment date, to the persons
in whose names the notes are registered, each called a noteholder, as of the
related record date. The record date for any payment date and (a) the fixed rate
notes, is the last business day of the calendar month preceding the month of the
applicable payment date and (b) the adjustable rate notes, the business day
immediately preceding the applicable payment date so long as the adjustable rate
notes remain in book-entry form and, otherwise, the last business day of the
calendar month immediately preceding the applicable payment date. Payments will
be made (1) in immediately available funds to holders of notes the aggregate
principal balance or notional amount of which is at least $1,000,000, by wire
transfer or otherwise, to the account of the noteholder at a domestic bank or
other entity having appropriate facilities for payment, if the noteholder has so
notified the indenture trustee, or (2) by check mailed to the address of the
person entitled to the payment as it appears on the note register maintained by
the indenture trustee as note registrar. Notwithstanding the foregoing, the
final payment on any note will be made in like manner but only upon presentment
and surrender of the note at the office or agency appointed for that purpose.
<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 either loan group and any payment date, the sum,
without duplication of the following amounts with respect to the mortgage loans
in the applicable loan group:
(1) scheduled and unscheduled payments of principal and interest on the
mortgage loans received by the servicer, net of amounts representing the
servicing fee with respect to each mortgage loans 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;
(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 payment dates during and immediately following the funding
period, amounts from the initial interest coverage account for the payment
of interest on the related classes of offered notes; and
(6) on the payment date immediately following the funding period, any
related Excess Funding Amount.
AVAILABLE FUNDS CAP: As to any payment date, (A) in the case of Loan Group
F, note group F, the Loan Group F Cap and (B) in the case of Loan Group A and
note group A, the Loan Group A Cap.
AVAILABLE LIBOR CARRYOVER AMOUNT: As to any payment date, the lesser of (A)
the amounts remaining after payments pursuant to clauses C.1 through C.10 under
"--Payment Priorities" and (B) the excess, if any, of (x) the Interest
Remittance Amount for Loan Group A for the applicable payment date over (y) the
sum of payments pursuant to clauses B.1 and B.2 under "--Payment Priorities" and
the Group A Subordination Increase Amount.
<PAGE>
BASIC PRINCIPAL AMOUNT: As to either loan group and any payment date, an
amount equal to the sum of the following amounts, without duplication, with
respect to the mortgage loans in the loans group and the immediately preceding
due period:
(1) each payment of principal on a mortgage loan received by the servicer
during the due period, including all full and partial principal prepayments;
(2) the Net Liquidation Proceeds allocable to principal received by the
servicer with respect to any Liquidated Mortgage Loan during the due period;
(3) the portion of the purchase price allocable to principal of all
repurchased defective mortgage loan with respect to the due period;
(4) any substitution adjustment amounts received on or prior to the
previous determination date and not yet paid;
(5) any monthly advances with respect to scheduled payments of principal
due during the related due period; and
(6) any related Excess Funding Amount.
CLASS INTEREST CARRYOVER SHORTFALL: As to any class of notes and any
payment date, an amount equal to the sum of (1) the excess of the related Class
Monthly Interest Amount for the preceding payment date and any outstanding Class
Interest Carryover Shortfall with respect to that class on the preceding payment
date, over the amount in respect of interest that is actually paid to the
holders of the class on the preceding payment date plus (2) one month's interest
on the excess, to the extent permitted by law, at the related note rate.
CLASS INTEREST PAYMENT: As to any class of notes and payment 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 notes for the
applicable payment date.
CLASS MONTHLY INTEREST AMOUNT: As to any payment date and class of notes,
interest for the related Interest Period at the related note rate on the related
class principal balance or notional amount minus the pro rata portion of any
Civil Relief Act shortfalls for the related Loan Group 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.
CUMULATIVE LOSS EVENT: The occurrence of rates of cumulative losses during
particular periods of time as specified in the agreement.
DELINQUENCY AMOUNT: As to any date of determination, the aggregate
principal balance of the mortgage loans that are (a) __ or more days delinquent
or (b) in bankruptcy or foreclosure and REO properties.
<PAGE>
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) __% of the senior enhancement Percentage.
DUE PERIOD: With respect to the first payment date, the period from and
including ____________ through and including ____________, except that with
respect to payments due on ____________, only collections of principal are
included. With respect to each payment date thereafter for collections of both
interest and principal, the period from and including the second day of the
month preceding the month of the applicable payment date to and including the
first day of the month of that payment date.
EXCESS FUNDING AMOUNT: As to either note group, the portion, if any, of the
Pre-Funded Amount allocated to the note group which remains on deposit in the
pre-funding account at the end of the funding period.
EXCESS INTEREST: As to any payment date, the Available Funds remaining
after the application of payments pursuant to clauses 1. through 6. of clause C.
under "--Payment Priorities," above.
EXCESS OVERCOLLATERALIZATION AMOUNT: As to any payment date and loan group,
the lesser of (1) the related Basic Principal Amount for the applicable payment
date and (2) the excess, if any, of (x) the related Overcollateralization
Amount, assuming 100% of the Basic Principal Amount is paid on the offered
notes, over (y) the related Required Overcollateralization Amount.
INTEREST PERIOD: For any payment date and (a) the fixed rate notes, the
calendar month preceding the month of the applicable payment date, calculated on
the basis of a 360-day year comprised of twelve 30-day months and (b) the
adjustable rate notes, the period from the prior payment date, or in the case of
the first payment date, from the closing date, through the day preceding the
current payment date, calculated on the basis of a 360-day year and the actual
number of days elapsed; provided, however, that interest accrued on any class of
offered notes, other than the class IOF notes, at the applicable Available Funds
Cap, will be calculated on the basis of a 360-day year comprised of twelve
30-day months.
INTEREST REMITTANCE AMOUNT: As to either loan group and any payment date,
the portion of the Available Funds for that loan group that constitutes amounts
in respect of interest.
LOAN GROUP A CAP: The weighted average net loan rate of the mortgage loan
in loans Group A.
LOAN GROUP F CAP: The weighted average net loan rate of the mortgage loans
in Loan Group F.
<PAGE>
LIBOR CARRYOVER: As to the class A-1A notes and any payment date, the sum
of
(1) the excess, if any, of the related Class Monthly Interest Amount
calculated on the basis of the lesser of (x) 1-month LIBOR plus the applicable
note margin and (y) __% per annum over the related Class Monthly Interest Amount
for the applicable payment date,
(2) any LIBOR Carryover remaining unpaid from prior payment dates and
(3) 30 days interest on the amount in clause (2) calculated on the basis of
the lesser of (x) 1-month LIBOR plus the applicable note margin and (y) __% per
annum.
LIQUIDATED MORTGAGE LOAN: As to any payment date, a mortgage loans with
respect to which the servicer has determined, in accordance with the servicing
procedures specified in the agreement, as of the end of the preceding Due
Period, that all liquidation proceeds which it expects to recover with respect
to the mortgage loans, including the disposition of the related REO, have been
received.
LOAN GROUP BALANCE: As to either loan group and any date of determination,
the aggregate of the principal balances of the mortgage loans in the loan group
at the applicable date.
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.
OC FLOOR: An amount equal to ____% of the aggregate class principal balance
of the offered notes as of the closing date.
OVERCOLLATERALIZATION AMOUNT: As to any payment date and loan group, the
excess, if any, of (1) the Loan Group Balance as of the end of the related Due
Period over (2) the class principal balance of the related notes after giving
effect to the payment of the Principal Payment Amount on the applicable payment
date.
POOL BALANCE: As of any date of determination, the sum of the Loans Group
Balances as of the applicable date.
PRE-FUNDED AMOUNT: As to any date of determination and either loan group,
the applicable original Pre-Funded Amount minus the aggregate principal balance
of subsequent mortgage loans purchased by the trust for inclusion in the loan
group prior to the applicable date.
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
minus all amounts credited against the Principal Balance prior to the date of
determination.
PRINCIPAL PAYMENT AMOUNT: As to any payment date and loan group, the lesser
of (a) the class principal balance of the related notes immediately preceding
the applicable payment 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 payment date and either
loan group, the amount determined as provided in the sale and servicing
agreement.
SUBORDINATION DEFICIENCY: As to any payment date and loan group, the
excess, if any, of (x) the Required Overcollateralization Amount for the
applicable payment date over (y) the Overcollateralization Amount for that
payment date after giving effect to the payment of the Basic Principal Amount on
that payment date.
SUBORDINATION INCREASE AMOUNT: As to any payment date and loan group, the
lesser of (x) the Subordination Deficiency and (y) the Excess Interest.
PAYMENT PRIORITIES
On each payment date the indenture trustee will withdraw from the note
account the Available Funds for each loan group and apply this amount in the
following order of priority, in each case, to the extent of the funds remaining:
1. Concurrently, to the note insurer and to the securities
administrator, premium and the securities administration fee, respectively
for Loan Group F for the applicable payment date.
2. To the related notes, the related Class Interest Payment amount for
the applicable payment date.
3. To the related notes, the Principal Payment Amount for the
applicable payment date, excluding any Subordination Increase Amount
included in that amount.
4. To the note insurer, reimbursement for prior draws on the note
policy.
5. To the notes related to the other loan group (x) first, the related
Class Interest Payment Amount to the extent not paid and (y) second, any
Subordination Deficit.
6. To the related notes, the Subordination Increase Amount for the
applicable payment date.
7. To the note insurer, any amounts owing under the insurance
agreement.
8. To the LIBOR carryover fund.
9. To the class A-1A notes, the LIBOR Carryover from the LIBOR
carryover fund.
<PAGE>
10. To the issuer, any remaining amounts.
NOTE RATES
The note rate for the fixed rate notes is set forth on the cover page or
described in this prospectus supplement. That note rate, is subject to the Loan
Group F Cap.
The note rate for the adjustable rate notes for any Interest Period will equal
the least of
(x) the sum of 1-month LIBOR and the applicable note margin,
(y) __%, and
(z) the Loan Group A Cap.
The note margin for the adjustable rate notes will be as follows:
NOTE MARGIN
CLASS (1) (2)
----- ---- ---
A-1A.............................._____% ____%
- -------------------
(1) Prior to or on the optional termination date.
(2) After the optional termination date.
With respect to each payment date, 1-month LIBOR will equal the interbank
offered rate for one-month United States dollar deposits in the London market as
quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the second LIBOR
business day prior to the first day of the related Interest Period. Telerate
Page 3750 means the display designated as page 3750 on the Bridge Telerate, or
any other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks. If the rate does not
appear on the page, or any other page as may replace that page on that service,
or if the service is no longer offered, any other service for displaying LIBOR
or comparable rates as may be selected by the indenture trustee after
consultation with the servicer, the rate will be the reference bank rate. The
reference bank rate will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks, which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the indenture trustee after consultation with the servicer,
as of 11:00 A.M., London time, on the day that is two LIBOR business days prior
to the immediately preceding payment date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the aggregate
class principal balance of the adjustable rate notes. The indenture trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will be
the arithmetic mean of the quotations. If on the related date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
indenture trustee after consultation with the servicer, as of 11:00 A.M., New
York City time, on the date for loans in U.S. Dollars to leading European banks
for a period of one month in amounts approximately equal to the aggregate class
principal balance of the adjustable rate notes. If no quotations can be
obtained, the rate will be LIBOR for the prior payment date. LIBOR business day
means any day other than a Saturday or a Sunday or a day on which banking
institutions in the State of New York or in the city of London, England are
required or authorized by law to be closed.
CREDIT ENHANCEMENT
THE NOTE INSURANCE POLICY. The note insurer has issued a note insurance
policy which guaranties payments on the notes. This section describes the terms
of the note insurance policy. The following information has been supplied by the
note insurer for inclusion in this prospectus supplement.
The note insurer, in consideration of the payment of the premium and
subject to the terms of the note insurance policy, unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the indenture trustee, or its
successor, as indenture trustee for the Owners, on behalf of the Owners from the
note insurer, for payment by the indenture trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The note insurer's obligations under
the note insurance policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the indenture trustee, whether or not these funds are properly
applied by the indenture trustee. Insured Payments shall be made only at the
time set forth in the note insurance policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the notes, unless the
accelerated Insured Payments are made at the sole option of the note insurer.
Notwithstanding the foregoing paragraph, the note insurance policy does not
cover shortfalls, if ( any, attributable to the liability of the trust or the
indenture trustee for withholding taxes, if any, including interest and
penalties in respect of any liability so attributable.
The note insurer will pay any Insured Payment that is a Preference Amount
on the day following receipt on a business day by the fiscal agent of:
(1) a certified copy of requiring the return of a preference payment,
(2) an opinion of counsel satisfactory to the note insurer that the order
is final and not subject to appeal,
(3) an assignment in any form as is reasonably required by the note insurer
all rights and claims of the Owner relating to or arising under the notes
against the debtor that made the preference payment or otherwise with
respect to the preference payment, and
<PAGE>
(4) appropriate instruments to effect the appointment of the note insurer
as agent for the Owner in any legal proceeding related to the preference
payment, these instruments being in a form satisfactory to the note
insurer,
provided that if these documents are received after 12:00 noon, New York City
time, on the applicable business day, they will be deemed to be received on the
following business day. These payments shall be disbursed to the receiver or
indenture trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless the
Owner has returned principal or interest paid on the notes to the receiver or
indenture trustee in bankruptcy, in which case the payment shall be disbursed to
the applicable Owner. Subject to the terms of the sale and servicing agreement,
the note insurer shall be subrogated to the rights of each Owner to receive
payments under the notes to the extent of any payment by the note insurer under
the note insurance policy.
As used in this prospectus supplement, the following terms shall have the
following meanings:
"Deficiency Amount" means for any payment date the sum of:
(A) the excess, if any, of
(1) accrued and unpaid interest due on the notes over
(2) the amount of available funds, including any
cross-collateralization payment and excluding any payments under the
note insurance policy available to be distributed therefor on the
applicable payment date and
(B) the Guaranteed Principal Amount.
However, the Deficiency Amount does not include any shortfalls in interest with
respect to the applicable loan group resulting from application of the Soldiers'
and Sailors' Civil Relief Act of 1940, any LIBOR Carryover Amount, or any
reduction in interest paid to any owner resulting from application of the
Maximum Cap.
"Final Payment Date" means the payment date in ______________.
"Guaranteed Principal Amount" means (a) for any payment date, other than
the Final Payment date, and each class of notes the amount, if any, by which the
related note principal balance exceeds the related group balance at the end of
the related Due Period, after giving effect to all payments of principal on the
applicable notes on the related payment date , including the related
Subordination Increase Amount and any crosscollateralization payment, and (b) on
the Final Payment date, the related outstanding note principal balance, after
giving effect to all other payments of principal on the applicable notes on the
related payment date, including the related Subordination Increase Amount and
any crosscollateralization payment.
"Insured Payment" means (1) as of any payment date, any Deficiency Amount
and (2) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the note
insurance policy, the original of which is subsequently delivered by registered
or certified mail, from the indenture trustee specifying the Insured Payment
which shall be due and owing on the applicable payment date .
"Owner" means each securityholder who, on the applicable payment date, is
entitled under the terms of the notes to payment under those notes.
"Preference Amount" means any amount previously distributed to an Owner on
the notes that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy with respect to the seller, the depositor
or the trust pursuant to the United States Bankruptcy Code (11 U.S.C.), as
amended from time to time in accordance with a final nonappealable order of a
court having competent jurisdiction.
So long as no insurer default is continuing, the note insurer will be
entitled to exercise the rights of the noteholders. An insurer default will
occur in the event the note insurer fails to make a payment required under the
note insurance policy or if certain events of bankruptcy or insolvency occur
with respect to the note insurer.
Capitalized terms used in the note insurance policy and not otherwise
defined in the note insurance policy shall have the respective meanings set
forth in the sale and servicing agreement as of the date of execution of the
note insurance policy, without giving effect to any subsequent amendment or
modification to the sale and servicing agreement unless the amendment or
modification has been approved in writing by the note insurer.
Any notice under the note insurance policy or service of process on the
fiscal agent or the note insurer may be made at the address listed below for the
fiscal agent or the note insurer or any other address as the note insurer shall
specify in writing to the indenture trustee.
The notice address of the fiscal agent is ______________________________,
Attention: ____________________, or any other address as the fiscal agent shall
specify to the indenture trustee in writing.
The note insurance policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles of the State of New York.
<PAGE>
The insurance provided by the note insurance policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The note insurance policy is not cancelable for any reason. The premium on
the note insurance policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the notes.
OVERCOLLATERALIZATION PROVISIONS. The sale and servicing agreement provides
for the maintenance of overcollateralization at a specified required level for
each loan group. To the extent that overcollateralization with respect to a
class of notes on any payment date exceeds this level, the amount payable as
principal will be adjusted to slow the amortization of the notes relative to
that of the mortgage loans, freeing up cash to make other payments, including
crosscollateralization payments with respect to the other loan groups.
To the extent that overcollateralization on a payment date falls below the
required level for a loan group, either because the required level of
overcollateralization has increased or because of losses realized with respect
to the related group of mortgage loans, available excess spread with respect to
the mortgage loans will be applied to accelerate the amortization of the related
notes so as to increase the level of overcollateralization.
Crosscollateralization payments will not be available for this purpose.
To the extent that aggregate outstanding principal with respect to a class
of notes falls below the outstanding principal balance of the related loan
group, amounts may be available in the form of a crosscollateralization payment.
In addition, draws on the note insurance policy will be available, to the extent
that a class of notes remains undercollateralized after all excess spread has
been applied and all available crosscollateralization payments have been made.
CROSSCOLLATERALIZATION PROVISIONS. Excess cash with respect to a group of
mortgage loans will be available to cover certain shortfalls with respect to the
notes relating to the other group.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to noteholders, the securities administrator
will prepare and the indenture trustee will forward to each noteholder a
statement setting forth, among other items the following, to the extent
applicable to each class of notes:
(a) the aggregate amount of the payment to each class of notes on the
applicable payment date;
(b) the amount of the payment set forth in paragraph (a) above in
respect of interest and the amount of that payment in respect of any Class
Interest Carryover Shortfall, and the amount of any Class Interest
Carryover Shortfall remaining;
<PAGE>
(c) the amount of the payment set forth in paragraph (a) above in
respect of principal;
(d) the amount of Excess Interest for each loan group paid as
principal;
(e) the servicing fee;
(f) the Loan Group Balance of each loan group and the Pool Balance, in
each case as of the close of business on the last day of the preceding Due
Period;
(g) the class principal balance of each class of notes 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 payment
date, after giving effect to payments of principal on the applicable
payment 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 in each loan
group and specifying the weighted average loan rate for each loan group as
of the first day of the month prior to the payment date;
(n) the note rate on the adjustable rate notes for the applicable
payment date;
(o) the amount of LIBOR Carryover paid to the adjustable rate notes
and the amount of LIBOR Carryover remaining for the class;
(p) during the funding period, the remaining Pre-Funded Amount and the
portion of this amount used to acquired subsequent mortgage loans since the
preceding payment date; and
<PAGE>
(q) 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 note with a $1,000
denomination.
Within 60 days after the end of each calendar year, the indenture trustee
will forward to each person, if requested in writing by that person, who was a
noteholder during the prior calendar year a statement containing the information
set forth in clauses (b) and (c) above aggregated for the applicable calendar
year.
[THE NOTE INSURER
To be inserted, as applicable]
THE AGREEMENT
The following summaries together with the information in this prospectus
supplement under "Description of the Notes" and in the prospectus under the
headings "Description of the securities" and "The Agreements" describe the
material provisions of the sale and servicing agreement, the trust agreement and
the indenture. 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 agreements.
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 interest
on the initial mortgage loans due on or before ____________. The indenture
trustee, concurrently with the initial transfer, will deliver the notes to the
seller. Each mortgage loan transferred to the trust will be identified on a
mortgage loan schedule delivered to the indenture trustee pursuant to the sale
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 sale and servicing agreement will require that, within the time period
specified in the sale and servicing agreement, the seller will deliver to the
indenture trustee, or the Custodian, as the indenture trustee's agent for this
purpose, the mortgage loans endorsed to the indenture 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.
<PAGE>
Under the terms of the agreement, the seller will promptly and in no event
later than 30 days after the closing date with respect to the initial mortgage
loans and promptly but not later than 30 days after each subsequent transfer
date with respect to the related subsequent mortgage loans, prepare and record
assignments of the mortgages related to each mortgage loan in favor of the
indenture trustee, unless opinions of counsel satisfactory to the rating
agencies and the note insurer are delivered to the indenture trustee to the
effect that recordation of the assignments is not required in the relevant
jurisdictions to protect the interests of the indenture trustee in the mortgage
loans. The seller expects that assignments for substantially all of the mortgage
loans will not be recorded based on the opinion of counsel. 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 indenture trustee, or the custodian on behalf of the
indenture trustee, will review the mortgage loans and the related documents
pursuant to the sale and servicing 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
indenture 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 90 days of the closing date 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 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 indenture trustee or the noteholders.
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 an
eligible substitute 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 __% 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 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 indenture trustee with
respect to each mortgage loan. In addition, the seller will represent and
warrant, on the closing date, 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 interests of the noteholders 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
representation or warranty in the sale and servicing agreement that materially
and adversely affects the interests of the noteholders.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND NOTE ACCOUNT
The servicer will establish and maintain in the name of the indenture
trustee a separate collection account for the benefit of the holders of the
notes. 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 interest due on or before ____________, the servicer will
deposit these amounts in the collection account. Amounts so deposited may be
invested in eligible investments, as described in the agreement, maturing no
later than one business day prior to the date on which the amount on deposit is
required to be deposited in the note account or on the applicable payment date
if approved by the rating agencies and the note insurer.
<PAGE>
The indenture trustee will establish a note account. No later than 11:00
a.m. New York time on the business day prior to each payment date, the Available
Funds for a loan group and the related Due Period are required to be deposited
into the note account. The note account will be an eligible account. Amounts on
deposit in the note account may be invested in eligible investments maturing on
or before the business day prior to the related payment date or, if the eligible
investments are an obligation of the indenture trustee or are money market funds
for which the indenture trustee or any affiliate is the manager or the advisor,
the eligible investments shall mature no later than the related payment date.
Investment earnings from amounts on deposit in the note 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 Rating
Service and A2 by Moody's Investor Services, 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;
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
$__________, acting in its fiduciary capacity; or
3. otherwise acceptable to each rating agency as evidenced by a letter
from each rating agency to the indenture trustee, without reduction or
withdrawal of the then current ratings of the offered notes.
<PAGE>
ADVANCES
Not later than the close of business on the fourth business day prior to
each payment date, referred to as the determination 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.
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 noteholders.
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.
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 indenture
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 indenture trustee, on the payment 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 trust and will not thereafter be available for payment to the
holders of the offered notes.
Amounts on deposit in the initial interest coverage account will be
invested in eligible investments.
PRE-FUNDING ACCOUNT
On the closing date, the Original Pre-Funded Amount for each loan group
will be deposited into the pre-funding account. Amounts in the pre-funding
account may be used only to (a) acquire subsequent mortgage loans, and (b) to
make accelerated payments of principal on the notes. 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 sale and servicing
agreement. Any Pre-Funded Amount remaining at the end of the funding period will
be paid as a principal prepayment to the holders of the class A-1F notes in the
case of note group F and the holders of the class A-1A notes in the case of note
group A.
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.
CARRYOVER RESERVE FUND
The sale and servicing agreement provides for the LIBOR carryover fund,
which is held by the indenture trustee on behalf of the holders of the class
A-1A notes. To the extent amounts on deposit are sufficient, holders of the
class A-1A notes will be entitled to receive payments from the fund equal to any
LIBOR Carryover. The amount required to be deposited in the fund on any payment
date will equal any LIBOR Carryover, for the applicable payment date, or, if no
LIBOR Carryover, is payable on the applicable payment date, an amount that when
added to other amounts already on deposit in the applicable fund, the aggregate
amount on deposit is equal to $10,000. Any investment earnings on amounts on
deposit in each fund will be paid to, and for the benefit of, the holders of the
owner trust notes and will not be available to pay any LIBOR Carryover.
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
sale 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 forth in the sale 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.
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 ____% 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 indenture trustee, without any right of reimbursement, an amount equal to,
with respect to each mortgage loan as to which a principal prepayment in full
was received during the related Due Period, the lesser of (a) the excess, if
any, of the sum of 30 days' interest on the Principal Balance of each 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) the sum of the servicing fee received by the servicer in the
most recently ended Due Period.
The servicer is not obligated to offset any of the servicing fee against,
or to provide any other funds to cover, any Civil Relief Act Shortfalls.
EVIDENCE AS TO COMPLIANCE
The sale and servicing agreement provides for delivery on or before the
last business day of the fifth month following the end of each fiscal year of
the servicer, beginning in ____, to the indenture trustee, the securities
administrator, the note 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 sale and servicing agreement
throughout the preceding fiscal year, except as specified in the statement.
On or before the last business day of the fifth month following the end of
each fiscal year of the servicer, beginning in ____, the servicer will furnish a
report prepared by a firm of nationally recognized independent public
accountants, who may also render other services to the servicer, to the
indenture trustee, the securities administrator, the note 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 conclusion.
The servicer's fiscal year is the calendar year.
<PAGE>
CERTAIN MATTERS REGARDING THE SERVICER
The sale and servicing agreement provides that the servicer may not resign
from its obligations and duties under the sale and servicing 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 indenture trustee, the note insurer and
the securities administrator or (2) upon the satisfaction of the following
conditions: (a) the servicer has proposed a successor servicer, to the indenture
trustee, the note insurer and the securities administrator in writing and the
proposed successor servicer is reasonably acceptable to the indenture trustee
and the securities administrator; and (b) the rating agencies have confirmed to
the indenture trustee, the note insurer and the securities administrator 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
notes. No resignation will become effective until a successor servicer has
assumed the servicer's obligations and duties under the sale and servicing
agreement.
The servicer may perform any of its duties and obligations under the sale
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 indenture trustee, the securities
administrator, the note insurer and the noteholders for the servicer's duties
and obligations under the sale 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 sale 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 sale and servicing agreement, anything in
the sale and servicing agreement to the contrary notwithstanding.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, at the
direction of the note insurer or at the direction of noteholders representing at
least 51% of the aggregate note principal balance with the consent of the note
insurer, the indenture trustee must terminate all of the rights and obligations
of the servicer under the sale and servicing agreement, at which point the
indenture trustee will succeed to all the responsibilities, duties and
liabilities of the servicer under the sale and servicing agreement and will be
entitled to similar compensation arrangements. In the event that the indenture
trustee would be obligated to succeed to the duties and obligations of the
servicer but is unwilling or unable do so, it may appoint, or petition a court
of competent jurisdiction for the appointment of, a housing and home finance
institution or other home equity loan or home equity loan servicer with all
licenses and permits required to perform its obligations under the sale and
servicing agreement and having a net worth of at least $50,000,000 and
acceptable to the note insurer to act as successor to the servicer under the
sale and servicing agreement. Pending an appointment, the indenture trustee will
be obligated to act in this capacity unless prohibited by law.
EVENTS OF DEFAULT UNDER THE INDENTURE
"Events of Default" under the indenture include:
o a default in the payment of any interest with respect to any class of
notes when the same becomes due and continuance of this default for a
period of five days or a default in the payment in full of the note
principal balance with respect to any class of notes at the final
scheduled distribution date;
o failure on the part of the trust to perform in any material respect
any other covenant or agreement under the indenture, or the breach of
a representation or warranty by the trust, which continues for a
period of thirty days after notice of the breach is given; and
o certain events of bankruptcy, insolvency, receivership or liquidation
of the trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the indenture has occurred and is continuing,
the indenture trustee must at the direction of the note insurer or upon the
direction of noteholders representing at least a majority of the aggregate
outstanding note principal balance of the notes with the prior written consent
of the note insurer, declare the principal amount of the notes due and payable
immediately. This declaration may be rescinded by the note insurer or
noteholders representing at least a majority of the aggregate outstanding note
principal balance of the notes with the written consent of the note insurer.
Upon acceleration of payment of the notes described above, the indenture
trustee will, at the direction of the note insurer or upon the direction of
noteholders representing at least a majority of the aggregate outstanding note
principal balance of the notes with the prior written consent of the note
insurer, elect not to liquidate the assets of the trust provided that the assets
are generating sufficient cash to pay scheduled interest and principal as it
becomes due and payable to the noteholders.
However, the indenture trustee may not sell or otherwise liquidate the
assets of the trust following an Event of Default unless:
o 100% of the noteholders and the note insurer consent to a sale,
o the proceeds of the sale or liquidation are sufficient to pay all
amounts due to the noteholders, and the note insurer, or
o the indenture trustee determines that the assets of the trust would
not be sufficient on an ongoing basis to make all scheduled payments
on the notes and obtains the consent of the note insurer and the
holders of 66 and 2/3% of the aggregate outstanding principal balance
of the notes to sell or liquidate the trust's assets.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the trust or the noteholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the indenture, or for errors in judgment; provided, that
neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be protected against any liability that would otherwise
be imposed on it by reason of willful malfeasance, bad faith or negligence in
the performance of its duties or by reason of its reckless disregard of its
obligations and duties under the indenture. Subject to certain limitations set
forth in the indenture, the indenture trustee and any director, officer,
employee or agent of the indenture trustee will be indemnified by the servicer
and held harmless against any loss, liability or expense incurred in connection
with any of its duties under the agreements other than any loss, liability or
expense incurred by reason of its own willful malfeasance, bad faith or
negligence in the performance of its duties under the indenture, or by reason of
its reckless disregard of its obligations and duties under the indenture. All
persons into which the indenture trustee may be merged or with which it may be
consolidated, or any person resulting from a merger or consolidation, will be
the successor to the indenture trustee under the indenture.
The owner trustee, the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the owner trustee and
the indenture trustee acting jointly, or in some instances, the owner trustee or
the indenture trustee acting alone, with the consent of the note insurer (which
consent will not be unreasonably withheld), will have the power to appoint
co-trustees or separate trustees of all or any part of the trust. In the event
of an appointment, all rights, powers, duties and obligations conferred or
imposed upon the owner trustee by the sale and servicing agreement and the trust
agreement and the indenture trustee by the indenture will be conferred or
imposed upon the owner trustee and the indenture trustee, respectively, and in
each case a separate trustee or co-trustee jointly, or, in any jurisdiction in
which the owner trustee or indenture trustee will 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 owner trustee or the indenture trustee, respectively.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor to the owner trustee acceptable
to the note insurer. The indenture trustee may also remove the owner trustee if
it ceases to be eligible to continue as owner trustee under the trust agreement
or becomes legally unable to act or becomes insolvent. Any resignation or
removal of the owner trustee and appointment of a successor to the owner trustee
will not become effective until acceptance of the appointment by the successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the trust agreement, the notes, or of any home equity loans or
related documents, and will not be accountable for the use or application by the
seller or the servicer or any of its affiliates of any funds paid to any of them
with respect to the notes, or the mortgage loans, or the investment of any
monies by the servicer before the monies are deposited into the collection
account or the note account. The owner trustee will be required to perform only
those duties specifically required of it under the trust agreement. Generally,
those duties will be limited to the receipt of the various certificates, reports
or other instruments required to be furnished to the owner trustee under the
trust agreement, in which case it will only be required to examine them to
determine whether they conform to the requirements of the trust agreement.
The indenture trustee will make no representations as to the validity or
sufficiency of the indenture or the notes, other than their execution and
authentication, or of any mortgage loans or related documents, and will not be
accountable for the use or application by the seller, the servicer or any of its
affiliates of any funds paid to any of them with respect to the notes or the
mortgage loans, or the use or investment of any monies by the servicer before
the monies are deposited into the collection account or the note account. So
long as no Event of Default or Event of Servicing Termination has occurred and
is continuing, the indenture trustee will be required to perform only those
duties specifically required of it under the indenture. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the indenture trustee under the
indenture, in which case it will only be required to examine them to determine
whether they conform to the requirements of the indenture. The indenture trustee
will not be charged with knowledge of a failure by the servicer to perform its
duties under the trust agreement or sale and servicing agreement which
constitutes an Event of Servicing Termination unless the indenture trustee
obtains actual knowledge of the failure as specified in the indenture.
AMENDMENT
The sale and servicing agreement may be amended by the parties to that
agreement with the consent of the note insurer, but without the consent of the
noteholders, to
o cure any ambiguity,
o correct or supplement any provisions which may be inconsistent with
any other provisions of the sale and servicing agreement
o add to the duties of the seller or the servicer,
o add or amend any provisions of the sale and servicing agreement
required by the rating agencies in order to maintain or improve any
rating on the notes, it being understood that, after obtaining the
ratings in effect on the closing date, none of the seller, the
depositor, the indenture trustee, the owner 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 sale and servicing agreement that are not inconsistent with
the provisions of the sale and servicing agreement
<PAGE>
However, the sale and servicing agreement may only be amended in this
manner if either an opinion of counsel is delivered that states that this action
will not materially and adversely affect the interests of any noteholder or the
note insurer or the person requesting the amendment obtains a letter from the
rating agencies stating that the amendment would not result in a downgrade of
the then current rating of the notes, without regard to the note insurance
policy. The sale and servicing agreement may also be amended by the seller, the
depositor, the servicer, the owner trustee and the indenture trustee, with the
consent of the note insurer and noteholders holding at least 51% of the related
aggregate note principal balance of the affected notes in order to add any
provisions, change or eliminate any of the provisions of the sale and servicing
agreement or modify the rights of the noteholders. No amendment, however, may
reduce the amount or delay the timing of collections of payments on the notes or
under the note insurance policy without the consent of the holder of the
applicable note and the note insurer or reduce percentage of noteholders
required to consent to the amendment, without the consent of the holders of all
notes then outstanding.
The indenture provides that, with the consent of the note insurer and prior
notice to the rating agencies and at the request of the trust pursuant to the
indenture, the trust and the indenture trustee may, without noteholder consent,
enter into one or more supplemental indentures which will conform to the
provisions of the Trust Indenture Act of 1939, as amended (the "TIA"), for any
of the following purposes:
(a) to correct or amplify the description of any property at any time
subject to the lien of the indenture, or better to assure, convey and
confirm unto the indenture trustee any property subject or required to be
subjected to the lien of the indenture, or to subject to the lien of the
indenture additional property;
(b) to evidence the succession, in compliance with the applicable
provisions of the indenture, of another entity to the trust, and assumption
by any successor of the covenants of the trust contained in the notes or
the indenture;
(c) to add to the covenants of the trust for the benefit of the holders of
the notes, or to surrender any right or power conferred upon the trust in
the indenture;
(d) to convey, transfer, assign, mortgage or pledge any property to or with
the indenture trustee;
(e) to cure any ambiguity, to correct or supplement any provision in the
indenture or in any supplemental indenture that may be inconsistent with
any other provision in the indenture or in any supplemental indenture;
(f) to evidence and provide for the acceptance of the appointment under the
indenture by a successor trustee with respect to the notes and to add to or
change any of the provisions of the indenture as will be necessary to
facilitate the administration of the trusts under the indenture by more
than one trustee, pursuant to the requirements of the indenture; or
<PAGE>
(g) to modify, eliminate or add to the provisions of the indenture to any
extent as will be necessary to effect the qualification of the indenture
under the TIA or under any similar federal statute enacted after the date
of the indenture and to add to the indenture any other provisions as may be
expressly required by the TIA.
No supplemental indentures will, however, be entered into unless the
indenture trustee has received an opinion of counsel to the effect that entering
into the supplemental indenture will not have any material adverse tax
consequences to the trust or the noteholders.
In addition, the indenture provides that, with the consent of the rating
agencies and the note insurer, and at the request of the trust pursuant to the
indenture, the trust and indenture trustee may, without noteholder consent,
enter into one or more supplemental indentures that conform to the TIA to add
provisions to, change or eliminate provisions of the indenture, or modify the
rights of the noteholders, if an opinion of counsel states that the action will
not have a material adverse tax consequence to the trust or the noteholders. The
opinion must also state that this action will not materially and adversely
affect the interests of the noteholders or the note insurer, unless 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 notes, without regard to the note insurance policy.
The indenture also provides that the trust and the indenture trustee, when
authorized by a written request of the trust, also may, with prior notice to the
note insurer and each rating agency and with the consent of the note insurer and
the holders of at least a majority of the aggregate principal balance of the
notes affected enter into a supplemental indenture to add, change or eliminate
any provisions of the indenture or modify the rights of the noteholders.
However, without the consent of the holder of each affected noteholder and an
opinion of counsel that the contemplated action will not cause the trust to be
subject to any entity level tax, no supplemental indenture may:
(a) change the date of payment, reduce the amount of or the interest rate
on any installment of interest or principal, change the provisions of the
indenture relating to the application of collections on, or the proceeds of
the sale of, the corpus of the trust to payment of principal of or interest
on the notes, change any place, coin or currency of any payment on any
note, or impair the right to institute suit for the enforcement of the
provisions of the indenture requiring the application of funds to the
payment of any amount due on the notes on or after the due date;
(b) reduce the percentage of the note principal balances of the notes, the
consent of the holders required for any supplemental indenture, or the
consent of the holders required for any waiver of compliance with certain
provisions of the indenture or certain defaults and their consequences
under the indenture;
(c) modify or alter the provisions of the proviso to the definition of the
term "Outstanding" in the indenture or modify or alter the exception in the
definition of the term "Holder";
<PAGE>
(d) reduce the percentage of the aggregate outstanding principal balance of
the notes required to direct the indenture trustee to direct the trust to
sell or liquidate the corpus of the trust pursuant to the indenture;
(e) modify any of the amendment provisions of the indenture other than to
increase any percentage specified in the indenture or to provide that
certain additional provisions of the indenture or the other Agreements
cannot be modified or waived without the consent of the holder of each
affected note;
(f) modify any of the provisions of the indenture in so as to affect the
calculation of the amount of any payment of interest or principal due on
any note on any distribution date (including the calculation of any of the
individual components of the calculation); or
(g) permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any part of the trust estate or,
except as otherwise permitted or contemplated in the indenture, terminate
the lien of the indenture on any pledged property or deprive the holder of
any note of the security provided by the lien of the indenture.
TERMINATION; RETIREMENT OF THE NOTES
The trust will terminate on the payment date following the later of (A)
payment in full of all amounts owing to the note insurer, unless the note
insurer shall otherwise consent and (B) the earliest of (1) the final payment
(or other liquidation) of the last mortgage loan in the trust or the disposition
of all property acquired upon foreclosure or by deed in lieu of foreclosure of
any mortgage loan, (2) the optional transfer to the servicer of all of the
mortgage loans, as described below and (3) the stated final maturity date.
The servicer may, at its option, terminate the trust on the first payment
date on which the aggregate outstanding principal balance of the mortgage loans
is equal to or less than 10% of the aggregate outstanding principal balance of
the mortgage loans on the cut-off date. In order to terminate the trust, the
servicer must pay an amount equal to the sum of the aggregate outstanding
principal balance of the mortgage loans plus accrued and unpaid interest at the
weighted average mortgage rate with respect to the mortgage loans as of the end
of the related Due Period, together with all amounts due to the note insurer.
In no event will the trust created by the trust agreement continue for more
than 21 years after the death of certain individuals named in the sale and
servicing agreement. Written notice of termination of the trust will be given to
each noteholder, and the final payment will be made only upon surrender and
cancellation of the notes at an office or agency appointed by the indenture
trustee which will be specified in the notice of termination.
NO PETITION
The indenture trustee and the noteholders by their acceptance of a note
will covenant that they will not institute or join in instituting against the
trust, the seller, the servicer or the depositor, any bankruptcy,
reorganization, insolvency, liquidation or similar proceeding in connection with
any obligations regarding the notes, the indenture or the transactions
contemplated by the Agreements.
THE INDENTURE TRUSTEE
____________, a banking corporation organized under the laws of the State
of __________, will be named indenture trustee pursuant to the sale and
servicing agreement and the indenture.
The indenture trustee may own notes and have normal banking relationships
with the servicer, the seller and the note insurer and/or their affiliates.
The indenture trustee may resign at any time, in which event the trust will
be obligated to appoint a successor indenture trustee, subject to the consent of
the note insurer. The note insurer may remove the indenture trustee if the
indenture trustee ceases to be eligible under the indenture or if the indenture
trustee becomes insolvent. Upon becoming aware of the insolvency of the
indenture trustee, the trust will be obligated to appoint a successor indenture
trustee approved by the note insurer. Any resignation or removal of the
indenture trustee and appointment of a successor indenture trustee will not
become effective until acceptance of the appointment by the successor indenture
trustee.
No noteholder will have the right under the indenture to institute any
proceeding with respect to the indenture unless the note insurer has consented
in writing to the institution of the proceeding, the noteholder previously has
given to the indenture trustee written notice of default under the indenture and
noteholders representing at least 51% of the aggregate outstanding principal
balance of the notes have made written requests to the indenture trustee to
institute the proceeding in its own name as indenture trustee and have offered
to the indenture trustee reasonable indemnity, but the indenture trustee has
neglected or refused to institute any proceeding for sixty days. The indenture
trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the indenture or to make any investigation of matters arising
under the indenture or to institute, conduct or defend any litigation under or
related to the indenture at the request, order or direction of any of the
noteholders, unless the noteholders have offered the indenture trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred and the note insurer has consented to the action.
[THE SECURITIES ADMINISTRATOR
______________________________________, will be named securities
administrator pursuant to the agreement.]
USE OF PROCEEDS
The net proceeds to be received from the sale of the notes 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.
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Stroock & Stroock & Lavan LLP, special tax counsel to the seller and the
issuer, is of the opinion that, for federal income tax purposes, assuming that
all of the provisions of the agreements are complied with, the notes will be
considered indebtedness and the trust will not be an association, publicly
traded partnership, or taxable mortgage taxable as a corporation. This opinion
is an expression of opinion only, is not a guarantee of a particular tax result
and is not binding on the Internal Revenue Service or any third party.
The trust will agree, and the noteholders will agree by their purchase of
the notes, to treat the notes as debt for federal income tax purposes.
Consequently, unless the Internal Revenue Service were to successfully assert
that the notes did not represent debt for federal income tax purposes, the
noteholders will be subject to taxation as described in "Federal Income Tax
Consequences-Taxation of debt securities including regular interest securities"
in the prospectus.
The Class A-1A notes provide for stated interest at a floating rate based
upon one-month LIBOR, but are subject to certain restrictions on the maximum
level of the floating rate. Under Treasury regulations governing "original issue
discount" ("OID"), stated interest payable at a variable rate is not taxed as
OID or contingent interest if the variable rate is a qualified floating rate.
The tax treatment of interest that is not based on a qualified floating rate is
not certain and the regulations do not address the tax treatment of debt
instruments bearing contingent interest except in circumstances not relevant to
this discussion. Because of the imposition of an interest rate cap the tax
treatment of interest on the notes is not entirely clear under the regulations,
the trust intends to treat the stated interest as a "qualified floating rate"
for OID purposes and thus the stated interest should not be taxable to the Class
A-1A noteholders as OID or as contingent interest.
If the trust has a single owner for tax purposes it will be treated as
division of its owner and as division of its owner will be disregarded as an
entity separate from its owner for federal tax purposes. However, in the event
that contrary to the opinion of special tax counsel, the Internal Revenue
Service successfully asserts that one or more classes of notes did not represent
debt for federal tax purposes and instead were treated as equity, this could
have certain adverse tax consequences to foreign holders as described in
"Federal Income Tax Consequences-Tax consequences to holders of the notes issued
by a partnership or division - possible alternative treatment of the notes" in
the prospectus. If the trust has more than one owner for tax purposes, the
seller intends to treat the trust as a partnership for federal income tax
purposes and will not take any actions with respect to federal income tax
reporting requirements that are inconsistent with the trust and the noteholders'
agreement to treat the notes as debt for tax purposes.
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 ,
collectively, called a plan, which proposes to cause a plan to acquire any of
the offered notes 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 notes. See "ERISA Considerations" in the
prospectus.
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements that are subject to Title I of ERISA and/or Section 4975 of the
Internal Revenue Code, including individual retirement accounts and annuities,
Keogh plans and entities in which these plans, accounts, annuities or
arrangements are invested including insurance company general accounts, persons
acting on behalf of a pan, or persons using the assets of a Plan, should review
carefully with their legal advisors whether the purchase or holding of the notes
could either give rise to a transaction that is prohibited under ERISA or the
Internal Revenue Code or cause the trust to be treated as plan assets for
purposes of regulations of the Department of Labor set forth in 29 C.F.R.
ss.2510.3-101 called the "Plan Asset Regulations". Prospective investors should
be aware that, although certain exceptions from the application of the
prohibited transaction rules and the Plan Asset Regulations exist, it is not
anticipated that any exception will apply with respect to the acquisition of a
note.
Under the Plan Asset Regulations, if the notes are treated as having
substantial equity features, the purchaser of a note of could be treated as
having acquired a direct interest in the assets securing the notes. In that
event, the purchase, holding, or resale of the applicable notes and the
operation and management of the trust could result in transactions that are
prohibited under ERISA or the Internal Revenue Code. Consequently, if a plan
investor purchases the notes, the trust could be deemed assets of the Plan for
purposes of the fiduciary responsibility provisions of ERISA and the Internal
Revenue Code. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a plan is considered
to be a fiduciary of that plan. Therefore, the owner trustee could be deemed an
ERISA fiduciary of plans that invest in the notes and could be subject to the
general fiduciary requirements of ERISA in exercising its authority with respect
to the management of the trust. Regardless whether the notes are treated as debt
or equity for purposes of ERISA, the acquisition or holding of notes by or on
behalf of a plan could still be considered to give rise to a prohibited
transaction if the trust, the owner trustee, or any of their respective
affiliates is or becomes a party in interest or a disqualified person with
respect to the plan or in the event that a subsequent transfer of a note is
between a plan and a "party in interest" as defined in Section 3(14) of ERISA or
"disqualified person" (as defined in Section 4975 of the Internal Revenue Code)
with respect to the plan.
Regardless whether the notes are treated as debt or equity for purposes of
ERISA, the acquisition or holding of notes by or on behalf of a plan could still
be considered to give rise to a prohibited transaction if the trust, the owner
trustee, the indenture trustee or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to the plan or
in the event that a subsequent transfer of a note is between a plan and a party
in interest or disqualified person with respect to the plan. However, one or
more exemptions may be available with respect to certain prohibited transaction
rules of ERISA that might apply in connection with the initial purchase, holding
and resale of the notes, depending in part upon the type of plan fiduciary
making the decision to acquire notes and the circumstances under which the
decision is made. These exemptions include, but are not limited to,
<PAGE>
(1) PTCE 96-23, regarding investments determined by in-house asset
managers,
(2) PTCE 95-60, regarding investments by insurance company general
accounts,
(3) PTCE 91-38, regarding investments by bank collective investment funds,
(4) PTCE 90-1, regarding investments by insurance company pooled separate
accounts; or
(5) PTCE 84-14, regarding transactions negotiated by qualified professional
asset managers.
Before purchasing any notes, we recommend that a plan subject to the fiduciary
responsibility provisions of ERISA or described in Section 4975(e)(1) of the
Internal Revenue Code and not exempt under Section 4975(g) of the Internal
Revenue Code consult with its counsel to determine whether the conditions of any
exemption would be met. A purchaser of a note should be aware, however, that
even if the conditions specified in one or more exemptions are met, the scope of
the relief provided by an exemption might not cover all acts that might be
construed as prohibited transactions. A purchaser of a note will be required to
represent that either: (1) it is not, and is not purchasing a note for, on
behalf of or with the assets of, an employee benefit plan or other retirement
arrangement which is subject to Title I of ERISA and/or Section 4975 of the
Internal Revenue Code, or (2) PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1,
PTCE 84-14 or some other prohibited transaction exemption is applicable to the
purchase and holding of a note by the acquirer.
LEGAL INVESTMENT CONSIDERATIONS
The offered notes 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 notes. See "Legal
Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ____________, 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 notes set forth below under the underwriter's name.
CLASS
Class A-1F
Class A-2F
Total
<PAGE>
The seller has been advised that the underwriters propose initially to
offer the offered notes to some dealers at the price less a selling concession
not to exceed the applicable percentage of the note 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 note
denomination set forth below:
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
- ----- ---------- --------
Class A-1F..............................
Class A-2F..............................
After the initial public offering, the public offering prices, concessions
and discounts may be changed.
The seller has been advised by the underwriters that they presently intend
to make a market in the offered notes. However, no underwriter is obligated to
do so, any market-making may be discontinued at any time, and there can be no
assurance that an active public market for any class of offered notes will
develop or if one does develop, that it will continue for the life of the
applicable class or that it will provide noteholders with a sufficient level of
liquidity of investment.
Until the payment of the offered notes 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 notes, other than
the class IOF notes. As an exception to these rules, the underwriters are
permitted to engage in particular transactions that stabilize the prices of the
offered notes, other than the class IOF notes. These transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the offered notes.
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 notes. 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 affiliates of some of the
underwriters. The seller will apply a portion of the proceeds it receives from
the sale of the offered notes to repay the financing.
<PAGE>
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.
The consolidated balance sheets of __________________ and _____________ as
of _____________ and ________________ and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended _______________, incorporated by reference in this
prospectus supplement have been incorporated in this prospectus supplement in
reliance on the report of _____________________, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Some legal matters with respect to the offered notes will be passed upon
for the seller and servicer by Stroock & Stroock & Lavan LLP, New York, New
York, and for the underwriters by Brown & Wood LLP, New York, New York.
RATINGS
The offered notes will be rated by ____________________, referred to as
________________, and _______________, referred to as _______________, each
called a rating agency. It is a condition to the issuance of the offered notes
that they receive ratings by the rating agencies as follows:
CLASS
----- ---- ---
Class A-1F AAA AAA
Class A-2F AAA AAA
The ratings assigned by ______ to mortgage pass-through notes address the
likelihood of the receipt of all payments on the mortgage loans by the related
noteholders under the agreements pursuant to which the notes are issued.
________'s ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with the notes, and the extent to which the payment stream on
the mortgage pool is adequate to make the payments required by the notes.
__________'s ratings on the notes do not, however, constitute a statement
regarding frequency of prepayments on the related mortgage loans.
The ratings assigned by __________ to mortgage pass-through notes address
the likelihood of the receipt of all payments on the mortgage loans by the
related noteholders under the agreements pursuant to which the notes are issued.
__________'s ratings take into consideration credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with the notes, and the extent to which the payment stream on
the mortgage pool is adequate to make the payments required by the notes.
__________'s ratings on the notes do not, however, constitute a statement
regarding frequency of payments of the 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 likelihood that holders of the
adjustable rate notes will receive any LIBOR Carryover.
There can be no assurance as to whether any other rating agency will rate
the offered notes or, if it does, what rating would be assigned by another
rating agency. The rating assigned by another rating agency to the offered notes
of any class could be lower than the respective ratings assigned by the
applicable rating agency.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Mortgage loan
Asset-Backed Notes, series ____-_, 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, Cedelbank 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 Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice, i.e., seven calendar day settlement.
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset-backed notes
issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
participants holding notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedelbank 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, Cedelbank 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 notes
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global securities through Cedelbank 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.
<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 notes issues in same-day funds.
Trading between Cedelbank and/or Euroclear participants. Secondary market
trading between Cedelbank participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
global securities are to be transferred from the account of a DTC participant to
the account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective depositary, as the case may
be, to receive the global securities against payment. Payment will include
interest accrued on the global securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the applicable accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of global securities. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the respective depositary
of the DTC participant's account against delivery of the global securities.
After settlement has been completed, the global securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Cedelbank 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 Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the global securities are credited to their accounts one day later.
As an alternative, if Cedelbank 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, Cedelbank participants or Euroclear
participants purchasing global securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the global securities were
credited to their accounts. However, interest on the global securities would
accrue from the value date. Therefore, in many cases the investment income on
the global securities earned during that one- day period may substantially
reduce or offset the amount of the overdraft charges, although this result will
depend on each Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective depositary, as
appropriate, to deliver the global securities to the DTC participant's account
against payment. Payment will include interest accrued on the global securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of global securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Cedelbank participant or Euroclear participant the following day,
and receipt of the cash proceeds in the Cedelbank 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 Cedelbank
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
Cedelbank participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
global securities from DTC participants for delivery to Cedelbank 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:
<PAGE>
(a) borrowing through Cedelbank or Euroclear for one day, until the
purchase side of the day trade is reflected in their Cedelbank 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 Cedelbank 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 Cedelbank participant
or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Cedelbank 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). Beneficial owners of global
securities that are non-U.S. persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (note of Foreign Status). If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non- U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. persons that are note owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate, depending on the treaty terms, by filing Form 1001 (Ownership, Exemption
or Reduced Rate note). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the note owners or his agent.
<PAGE>
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 note owner of a global
security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds, the
clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. person" means
(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 or any political subdivision of the United States,
(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 or
with the application of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments after
__________ __, ____. We recommend that investors consult their own tax advisors
for specific tax advice concerning their holding and disposing of the global
securities.
<PAGE>
SUBJECT TO COMPLETION DATED _________, 2000
PROSPECTUS
$------------------
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
------------------
DELTA FUNDING CORPORATION
SELLER AND SERVICER
------------------
SECURITIES OFFERED The securities are obligations only of the
o asset backed notes, related trust and are not insured or
asset backed certificates guaranteed by any governmental agency.
or a combination
The securities involve significant risks.
o rated in one of four highest We recommend that you review the
rating categories by at information under "Risk Factors" in the
least one rationally related prospectus supplement.
recognized rating organization
This prospectus must be accompanied
o not listed on any trading by a prospectus supplement for the
exchange particular series.
ASSETS
o subprime mortgage loans
secured by first or second liens
on residential or _____ 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 "Method of Distribution."
The date of this prospectus is ________, 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 6061-2511 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.
THE SELLER AND THE SERVICER
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. The company purchases from approved licensed mortgage
bankers and financial institutions, loans that conform to the company's
underwriting guidelines. 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 and loans from correspondents within one day, consistent application of
its underwriting guidelines and funding or purchasing of loans within 14 to 21
days of preliminary approval. In addition, the company seeks to establish and
maintain productive relationships with its network of brokers and correspondents
by servicing each one with a business development representative, a team of
experienced underwriters and, in the case of loans from brokers, 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
15 retail offices located in Florida (3), Georgia, Illinois, Indiana, Missouri,
North Carolina, Ohio (4), Pennsylvania (2) and Tennessee.
During its first 12 years of operation, 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. To increase the size of its network of brokers and
correspondents in these new markets and to provide better service, the company
operates a full service office in Atlanta, Georgia; full processing offices in
Chicago, Illinois and Warwick, Rhode Island; processing offices in Deerfield
Beach, Florida and Cleveland, Ohio and business development offices in Delaware,
Michigan (2), New Jersey, Ohio, Pennsylvania, and Virginia. The company is not
dependent on any single or affiliated group of brokers or correspondents.
The company's headquarters are 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.
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 "C" Risk "D" Risk
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Credit profile............. Excellent credit Good overall credit Good to fair credit Fair to poor credit
history
Existing mortgage
history.................. Current at Current at Up to 30 days 90 days delinquent
application time and application time delinquent at or more
a maximum of two and a maximum of application time
30-day late payments four 30-day late and a maximum of
in the last 12 months payments in the four 30-day late
last 12 months payments and one
90-day late payment
in the last 12
months
Other credit............... Minor 30-day late Some slow pays Slow pays, some Not a factor.
items allowed with a allowed but open delinquencies Derogatory credit
letter of majority of credit allowed. Isolated must be paid with
explanation; no open and installment charge-offs, proceeds. Must
collection accounts, debt paid as collection accounts demonstrate ability
charge-offs, agreed. Small or judgments to pay
judgments isolated case-by-case
charge-offs,
collections, or
judgments allowed
case-by-case
Bankruptcy filings......... Discharged more than Discharged more Discharged more May be open at
three years prior to than two years than one year prior closing, but must be
closing and prior to closing to closing and good paid off with
excellent and excellent reestablished credit proceeds
reestablished credit reestablished credit
Maximum loan-to-value
ratio:
Owner-occupied........... Generally 80% (up to Generally 80% (up Generally 75% (up Generally 65% (up to
90%*) for a one- to to 85%*) for a one- to 80%*) for a one- 70%*) for a one- to
four-family residence to four-family to four-family four-family residence
residence residence
Non-owner occupied....... Generally 75% (up to Generally 70% (up Generally 65% (up Generally 55% (up to
80%*) for a one- to to 80%*) for a one- to 75%*) for a one- 60%*) for a one- to
four-family residence to four-family to four-family four-family residence
residence residence
Employment................. Minimum 2 years Minimum 2 years No minimum required No minimum required
employment in the employment in the
same field same field
.........
* On an exception basis
</TABLE>
<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,
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 esure that all documents have been
properly prepared, all applicable disclosures given in a timely
fashion, and proper compliance with all federal and state regulations.
Appraisals are performed by third party, fee-based appraisers or by the
company's 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;
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, 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.
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.
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.
<PAGE>
<TABLE>
<CAPTION>
DELTA FUNDING CORPORATION'S HISTORIC SERVICING PORTFOLIO INFORMATION
Year Ended December 31,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance (end of $310,228,743 $468,846,079 $ 932,958,188 $1,840,150,403 $2,950,434,922
period)
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 $ 49,887,242 $ 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) $ (8,703,996)
Percentage of Net Losses on liquidated loans
(based on Average Outstanding Principal
Balance)(4)............................ 0.23% 0.57% 0.43% 0.36% 0.36%
(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.
</TABLE>
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.
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. 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 Cedelbank 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, Cedelbank is referred to as
Cedel 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. Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold the
omnibus positions in customers' securities accounts in the depositaries' names
on the books of DTC. Citibank N.A. will act as depositary for Cedel 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 Cedel or Euroclear, as appropriate.
Owners will receive all distributions of principal of, and interest
on, the book-entry securities from the trustee through DTC and DTC participants.
While the book-entry securities are outstanding, 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 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
Cedel or Euroclear as a result of a transaction with a participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Those credits or any transactions in the
securities settled during processing will be reported to the relevant Euroclear
or Cedel participants on that business day. Cash received in Cedel or Euroclear
as a result of sales of securities by or through a Cedel 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 Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC
rules. Transfers between Cedel participants and Euroclear participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, 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. Cedel
participants and Euroclear participants may not deliver instructions directly to
the European depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which, and/or their
representatives, own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the book-entry
certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of book-entry certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel participants through electronic book-entry changes in accounts of Cedel
participants, thus eliminating the need for physical movement of certificates.
Transactions may be settled in Cedel in any of 28 currencies, including United
States dollars. Cedel provides to its Cedel participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary Institute.
Cedel participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and other organizations. Indirect access to Cedel is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Cedel Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
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 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 Cedel or Euroclear will be
credited to the cash accounts of Cedel participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. 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 Cedel participant or Euroclear participant
only in accordance with its relevant rules and procedures and subject to the
ability of the relevant depositary to effect actions on its behalf through DTC.
DTC may take actions, at the direction of the related participants, with respect
to some securities which conflict with actions taken with respect to other
securities.
Definitive securities will be issued to owners, or their nominees,
rather than to DTC, only if:
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, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform 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 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 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.
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 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.
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.
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 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;
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 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;
(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 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 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.
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 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.
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.
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.
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;
(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
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 its customary in the state in which the related property is located. The
standard hazard insurance policies will provide for coverage at least equal to
the applicable state standard form of fire insurance policy with extended
coverage for property of the type securing the related loans.
In general, the standard form of fire and extended coverage insurance
policy covers physical damage to or destruction of the improvements on the
property by fire, lightning, explosion, smoke, windstorm and hail, and riot,
strike and civil commotion, subject to the conditions and exclusions specified
in each policy. Although the policies relating to the 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.
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 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.
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.
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 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.
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;
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,
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
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 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.
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 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 66 2/3% 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 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 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 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.
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
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.
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
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
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 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 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 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.
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.
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 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 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 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 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,
(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 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 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, 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 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.
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 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 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 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 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.
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 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 the 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 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
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.
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 acing on behalf of a disqualified organization.
If a residual interest security is transferred to a disqualified
organization in violation of the restrictions set forth above, a substantial tax
will be imposed on the transferor of 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.
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
(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.
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.
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 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. It is unclear whether these regulations would apply
this rule to the pass-through securities, whether Section 1272(a)(6) might apply
to the pass-through securities in the absence of regulations, or whether the
Internal Revenue Service could require use of a reasonable prepayment assumption
based on other tax law principles and Federal tax counsel is unable to opine
with respect to this issue. If required to report interest income on the
pass-through securities to the Internal Revenue Service under the 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.
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 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.
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 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
(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 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 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 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.
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
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-8 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 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.
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.
<PAGE>
Delta Funding
Home Equity Loan Trust 2000-__
Home Equity Loan
Asset-Backed Certificates Series 2000-__
Delta Funding Corporation
(Seller and Servicer)
----------------------------------------------------------
PROSPECTUS SUPPLEMENT
_______, 2000
----------------------------------------------------------
[UNDERWRITERS]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions:
Registration Fee $ 330,000
Printing and Engraving Expenses 25,000
Trustee's Fees and Expenses 20,000
Legal Fees and Expenses 75,000
Accountant's Fees and Expenses 35,000
Rating Agency Fees 100,000
Miscellaneous 5,000
---------
Total 590,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Section 722 of the New York Business Corporation Law (the "NYBCL")
authorizes a New York corporation to indemnify any person who is made, or is
threatened to be made, a party in an action or proceeding (other than one by or
in the right of the corporation to procure a judgment in its favor), whether
civil or criminal, including an action by or in the right of any other
corporation of any type or kind, domestic or foreign, or any partnership, joint
venture, trust, employee benefit plan or other enterprise, which any director or
officer of the corporation served in any capacity at the request of the
corporation, by reason of the fact that he, his testator or intestate, was a
director or officer of the corporation, or served such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity, against judgements, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and necessarily incurred
as a result of such action or proceeding, or any appeal therein, if such
director or officer acted, in good faith, for a purpose which he reasonably
believe to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation and, in criminal actions
or proceedings, in addition, had no reasonable cause to believe that his conduct
was unlawful.
(b) A corporation may indemnify any person made, or threatened to be
made, a party to an action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he, his testator or intestate,
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of any other corporation of
any type or kind, domestic or foreign, of any partnership, join venture, trust,
employee benefit plan or other enterprise, against amounts paid in settlement
and reasonable expenses, including attorney's fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
ITEM 16. EXHIBITS
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Delta Funding Corporation*
4.1 Form of Indenture.*
4.2 Form of Pooling and Servicing Agreement.*
4.3 Form of Trust Agreement.*
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities offered**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters.
(included in Exhibit 5.1)**
10.1 Form of Sale and Servicing Agreement. *
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in Exhibits 5.1
and 8.1)**
24.1 Powers of Attorney of directors and officers of Delta Funding
Corporation. (included in the signature
pages to this Registration Statement)
25.1 Statement of Eligibility and Qualification of Trustee***
* Incorporated by reference to Registration Statement No. 333-03418
** To be filed by this amendment.
*** To be filed following the effectiveness of the Registration Statement.
ITEM 17. UNDERTAKINGS
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(2) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to the information in this Registration Statement;
PROVIDED, HOWEVER, that the undertakings set forth in clauses (1) and (2) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered ,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) As to documents subsequently filed that are incorporated by
reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered in this prospectus,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in the denominations and registered in the names as required by the
Underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described under
Item 15, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission the indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event that
a claim for indemnification against the liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by the director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939, as
amended, in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Trust Indenture Act of 1939, as
amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on this
6th day of March 2000.
Delta Funding Corporation
By: /s/ HUGH MILLER
------------------------
Name: Hugh Miller
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated on March 6, 2000.
SIGNATURE TITLE DATE
* President and Director March 6, 2000
- ------------------ (Principal Executive Officer)
Hugh Miller
* Treasurer and Director March 6, 2000
- ----------------- (Principal Financial Officer and
Richard Blass Principal Accounting Officer)
* Director March 6, 2000
- -----------------
Sidney Miller
*By: /s/ HUGH MILLER
-----------------------
Hugh Miller
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Item 16. Exhibits
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Delta Funding Corporation*
4.1 Form of Indenture.*
4.2 Form of Pooling and Servicing Agreement.*
4.3 Form of Trust Agreement.*
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities offered**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters.
(included in Exhibit 5.1)**
10.1 Form of Sale and Servicing Agreement. *
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in Exhibits 5.1
and 8.1)**
24.1 Powers of Attorney of directors and officers of Delta Funding
Corporation. (included in the signature
pages to this Registration Statement)
25.1 Statement of Eligibility and Qualification of Trustee***
* Incorporated by reference to Registration Statement No. 333-03418.
** To be filed by this amendment.
*** To be filed following the effectiveness of the Registration Statement.
Exhibit 5.1
STROOCK & STROOCK & LAVAN LLP
180 Maiden Lane
New York, New York 10038
March 6, 2000
Delta Funding Corporation
1000 Woodbury Road
Woodbury, New York 11797
Ladies and Gentlemen:
We have acted as counsel to Delta Funding Corporation, a New York corporation
(the "Company"), in connection with the preparation of the registration
statement on Form S-3 (No. 333) (the "Registration Statement") relating to the
proposed offering from time to time in one or more series (each, a "Series") by
one or more trusts of asset backed notes (the "Notes") and asset backed
certificates (the "Certificates," and, together with the Notes, the
"Securities"). The Registration Statement has been filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). As set forth in the Registration Statement, each Series of
Securities is to be issued under and pursuant to the terms of a separate pooling
and servicing agreement, or sale and servicing agreement, or sale and servicing
agreement, trust agreement and indenture (each, an "Agreement") among the
Company as seller and as servicer and one or more independent trustees (each, a
"Trustee") to be identified in the prospectus supplement for such Series of
Securities.
As such counsel, we have examined copies of the Articles of Incorporation and
By-Laws of the Company, the Registration Statement, the base Prospectus and form
of Prospectus Supplement included therein, the form of each Agreement, and
originals or copies of such other corporate minutes, records, agreements and
other instruments of the Company, certificates of public officials and other
documents and have made such examinations of law, as we have deemed necessary to
form the basis for the opinions hereinafter expressed. In our examination of
such materials, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to such opinion, we have relied, to the extent we deemed
appropriate, upon representations, statements and certificates of officers and
representatives of the Company and others.
Based upon and subject to the foregoing, we are of the opinion that:
1. When the issuance, execution and delivery of each Series of Notes
have been authorized by all necessary corporate action of the Company in
accordance with the provisions of the related Agreement or Agreements, and when
such Notes have been duly executed and delivered, authenticated by the Trustee
and sold as described in the Registration Statement, such Notes will constitute
valid and binding obligations of the issuer thereof in accordance with their
terms and the terms of such Agreement or Agreements. This opinion is subject to
the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto and we express no opinion with respect to the
application of equitable principles or remedies in any proceeding, whether at
law or in equity.
2. When the issuance, execution and delivery of each Series of
Certificates have been authorized by all necessary corporate action of the
Company in accordance with the provisions of the related Agreement or
Agreements, and when such Certificates have been duly executed and delivered,
authenticated by the Trustee and sold as described in the Registration
Statement, such Certificates will be legally issued, fully paid and
non-assessable.
3. We hereby confirm the opinions set forth in the Prospectus under
the heading "Federal Income Tax Considerations," to the extent they constitute
matters of law or legal conclusions with respect thereto.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and do not express any opinion herein concerning
any law other than the federal laws of the United States of America and the laws
of the State of New York.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm in the Prospectus
which forms a part of the Registration Statement. In giving such consent, we do
not admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Very truly yours,
/s/Stroock & Stroock & Lavan LLP
- -----------------------------------
Stroock & Stroock & Lavan LLP
