<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 28, 2000
$275,000,000
DELTA FUNDING HOME EQUITY LOAN TRUST 2000-2
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-2
DELTA FUNDING CORPORATION
Seller
COUNTRYWIDE HOME LOANS, INC.
Servicer
------------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT.
The certificates are obligations only of the trust.
The mortgage loans are not insured or guaranteed by any governmental agency or
by any other person.
CERTIFICATES OFFERED
o CLASSES OF ASSET BACKED CERTIFICATES LISTED BELOW
ASSETS
o FIXED AND ADJUSTABLE RATE, FIRST AND SECOND LIEN,
SUBPRIME RESIDENTIAL MORTGAGE LOANS
CREDIT ENHANCEMENT
o EXCESS INTEREST AND OVERCOLLATERALIZATION
o CROSS-COLLATERALIZATION
o SUBORDINATION
o FOR THE SENIOR CERTIFICATES ONLY, A FINANCIAL GUARANTY
INSURANCE POLICY ISSUED BY
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 PRICE TO UNDERWRITING PROCEEDS
CERTIFICATE BALANCE CERTIFICATE RATE PUBLIC DISCOUNT TO SELLER
------------------- ---------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Class A-1F............................. $ 61,480,000.00 7.79% 99.99908% 0.2500% 99.74908%
Class A-2F............................. $ 14,502,000.00 7.82% 99.98288% 0.2750% 99.70788%
Class A-3F............................. $ 41,519,000.00 7.98% 99.99999% 0.3250% 99.67499%
Class A-4F............................. $ 10,953,000.00 8.22% 99.98734% 0.3500% 99.63734%
Class A-5F............................. $ 20,327,000.00 8.36% 99.55254% 0.4750% 99.07754%
Class A-6F............................. $ 21,000,000.00 7.97% 99.97903% 0.3500% 99.62903%
Class IOF.............................. Notional 7.00% N/A N/A N/A
Class A-1A............................. $ 65,000,000.00 Adjustable 100.00000% 0.2250% 99.77500%
Class M-1.............................. $ 16,500,000.00 8.36% 96.91752% 0.5000% 96.41752%
Class M-2.............................. $ 11,344,000.00 8.36% 93.77643% 0.6500% 93.12643%
Class B................................ $ 12,375,000.00 8.36% 82.53612% 0.9950% 81.54112%
--------------- ---------------- ------------- --------- -------------
Total................................ $275,000,000.00 $271,524,436 $962,523 $270,561,913
=============== ================ ============= ========= =============
</TABLE>
The certificate rates on the offered fixed rate certificates, other than the
class IOF certificates, are subject to an interest rate cap and certain of those
certificate rates will increase after the optional termination date.
The certificate rate on the offered adjustable rate certificates is subject to
change on each distribution date and to an interest rate cap and will increase
after the optional termination date.
Subject to the satisfaction of specific conditions, the underwriters named below
will purchase the offered certificates from the seller. The offered certificates
will be issued in book-entry form only on or about June 30, 2000.
------------------------
LEHMAN BROTHERS
GREENWICH CAPITAL MARKETS, INC.
COUNTRYWIDE SECURITIES CORPORATION
JUNE 28, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the prospectus, which provides general information, some of which may not
apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
----
<S> <C>
Summary........................................ S-3
Risk Factors................................... S-8
Delta Funding Corporation...................... S-14
Description of the Mortgage Loans.............. S-19
Prepayment and Yield Considerations............ S-39
Description of the Certificates................ S-53
The Certificate Insurer........................ S-72
Countrywide Home Loans, Inc.................... S-75
The Pooling and Servicing Agreement............ S-76
Use of Proceeds................................ S-89
Federal Income Tax Considerations.............. S-89
ERISA Considerations........................... S-93
Legal Investment Considerations................ S-97
Underwriting................................... S-97
Experts........................................ S-99
Legal Matters.................................. S-99
Ratings........................................ S-99
Annex I........................................ I-1
PROSPECTUS
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference.................................... 2
The Seller..................................... 3
Description of the Securities.................. 14
The Trust Funds................................ 24
Enhancement.................................... 32
Servicing of Loans............................. 34
The Agreements................................. 43
Certain Legal Aspects of the Loans............. 54
Use of Proceeds................................ 65
Federal Income Tax Considerations.............. 65
State Tax Considerations....................... 95
ERISA Considerations........................... 95
Legal Investment............................... 96
Plan of Distribution........................... 96
Legal Matters.................................. 97
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset-Backed Certificates, Series
2000-2 in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Home Equity Loan Asset-Backed Certificates, Series 2000-2
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Home Equity Loan Asset-Backed Certificates, Series 2000-2
will be required to deliver a prospectus supplement and prospectus until
September 26, 2000.
S-2
<PAGE>
SUMMARY
This section gives a brief summary of the information contained in this
prospectus supplement. The summary does not include all of the important
information about the offered certificates. We recommend that you review
carefully the more detailed information in this prospectus supplement and in the
prospectus.
<TABLE>
<S> <C>
TITLE OF CERTIFICATES..................... Home Equity Loan Asset-Backed Certificates, Series 2000-2.
ISSUER.................................... Delta Funding Home Equity Loan Trust 2000-2.
SELLER.................................... Delta Funding Corporation.
SERVICER.................................. Countrywide Home Loans, Inc.
TRUSTEE................................... Norwest Bank Minnesota, National Association.
CUSTODIAN................................. Bank One Trust Company, N.A.
CERTIFICATE INSURER....................... Financial Security Assurance Inc.
CUT-OFF DATE.............................. The close of business on May 31, 2000, except that the cut-off date
for any mortgage loan originated after May 31, 2000 will be the date
of origination of that mortgage loan.
CLOSING DATE.............................. On or about June 30, 2000.
DISTRIBUTION DATES........................ The 15th day of each month or, if that day is not a business day, the
next business day, beginning in July 2000.
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>
<TABLE>
<CAPTION>
FINAL SCHEDULED FINAL SCHEDULED
CLASS DISTRIBUTION DATE CLASS DISTRIBUTION DATE
----- ------------------ ----- ------------------
<S> <C> <C> <C> <C>
A-1F December 15, 2018 IOF June 15, 2003
A-2F July 15, 2021 A-1A June 15, 2030
A-3F June 15, 2027 M-1 August 15, 2030
A-4F August 15, 2028 M-2 August 15, 2030
A-5F August 15, 2030 B August 15, 2030
A-6F August 15, 2030
</TABLE>
S-3
<PAGE>
DESIGNATIONS
Each class of certificates will have different characteristics. Some of those
characteristics are reflected in the following general designations. These
designations are used in this prospectus supplement and the prospectus to
provide a better understanding to potential investors.
Book-Entry Certificates
All classes of offered certificates.
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 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
Ratings
The offered certificates will not be issued unless they receive the respective
ratings set forth below from Standard & Poor's Ratings Services, Moody's
Investors Service, Inc. and Fitch, Inc.:
<TABLE>
<CAPTION>
STANDARD &
CLASS POOR'S MOODY'S FITCH
-------------------- ----------- ------- -----
<S> <C> <C> <C>
A-1F AAA Aaa AAA
A-2F AAA Aaa AAA
A-3F AAA Aaa AAA
A-4F AAA Aaa AAA
A-5F AAA Aaa AAA
A-6F AAA Aaa AAA
IOF AAAr Aaa AAA
A-1A AAA Aaa AAA
M-1 AA -- AA
M-2 A -- A
B BBB- -- BBB-
</TABLE>
See "Ratings" in this prospectus supplement.
Certificate Rates
The interest rate for each class of offered certificates is set forth on the
cover page of, or described in, this prospectus supplement. Each interest rate,
other than 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, net of
specified fees and expenses, on the mortgage loans in the related loan group in
the case of the class A-1A certificates, or in either loan group in the case of
the other offered certificates.
The certificate rates on the class A-1A, class A-5F, class A-6F, class
M-1, class M-2 and class B certificates will increase after the optional
termination date.
Interest Distributions
On each distribution date, each class of offered certificates will be entitled
to interest in an amount equal to
S-4
<PAGE>
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 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 subordinated class BIO certificates and Residual
certificates. The seller is not offering these classes to the public pursuant to
this prospectus supplement and the prospectus. The seller is including
information about the class BIO certificates and the Residual certificates
because they provide credit enhancement to the offered certificates.
THE MORTGAGE LOANS
The statistic calculation mortgage loans.
Set forth below is selected information about the mortgage loans that existed at
the close of business on the statistic calculation date of May 31, 2000. On the
closing date, additional mortgage loans will be delivered to the trust.
S-5
<PAGE>
Loan Group F
Number of loans 2,149
Aggregate principal
balance $156,197,829.20
Range of principal
balances $4,976.94 to $443,500.00
Average principal balance $72,683.96
Range of interest rates 7.970% to 15.990%
Weighted average interest
rate 10.984%
Range of CLTV 12.66% to 90.15%
Weighted average CLTV 73.28%
Range of original terms to
maturity (months) 60 to 360
Weighted average original
term to maturity
(months) 312
Range of remaining terms
to maturity (months) 58 to 360
Weighted average remaining
term to maturity
(months) 311
Range of loan ages
(months) 0 to 26
Weighted average loan age
(months) 1
Subject to prepayment
penalties (as % of
principal balance) 76.07%
Loan Group A
Number of loans 589
Aggregate principal
balance $49,200,417.05
Range of principal
balances $15,000.00 to $442,805.69
Average principal balance $83,532.12
Range of interest rates 8.040% to 15.340%
Weighted average interest
rate 10.942%
Range of LTV 21.71% to 90.00%
Weighted average LTV 77.07%
Range of original terms to
maturity (months) 180 to 360
Weighted average original
term to maturity (months) 360
Range of remaining terms
to maturity (months) 179 to 360
Weighted average remaining
term to maturity
(months) 359
Range of loan ages
(months) 0 to 14
Weighted average loan age
(months) 1
Range of gross margins 2.39% to 9.74%
Weighted average gross
margin 6.11%
Range of lifetime caps 15.04% to 22.34%
Weighted average lifetime
cap 17.93%
2/28 loans (by principal
balance) 2.44%
3/27 loans (by principal
balance) 97.56%
Weighted average periodic
cap
(first adjustment date) 3.00%
Weighted average periodic
cap
(subsequent adjustment
dates) 1.00%
Subject to prepayment
penalties (as % of
principal balance) 96.08%
Subsequent Loans
On the closing date, the seller may deposit not more than $10,000,000 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 beginning in the second month 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.
The senior certificates also will have the benefit of a financial guaranty
insurance policy issued by the certificate insurer. The financial guaranty
insurance policy will guarantee timely payment of interest and ultimate payment
of principal on the senior certificates.
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. If the servicer does not exercise its option, the
S-6
<PAGE>
holder of the Class BIO Certificates may do so.
FEDERAL INCOME TAX CONSIDERATIONS
The trust will make separate elections to treat segregated pools of its assets
as "real estate mortgage investment conduits," creating a tiered REMIC
structure. The offered certificates, excluding any rights to receive LIBOR
carryover or net rate cap carryover, will be designated as "regular interests"
in a REMIC and, will be treated as debt instruments of a REMIC for federal
income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax Considerations"
in this prospectus supplement and in the prospectus.
S-7
<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 DEFAULTS ON SECOND LIEN MORTGAGE LOANS MAY RESULT IN MORE SEVERE
LOSSES. Based on the cut-off date principal balances of the
mortgage loans in existence on May 31, 2000, approximately
10.69% 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.
S-8
<PAGE>
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 cut-off date principal balances of the
mortgage loans in existence on May 31, 2000, approximately
36.43%, 10.74% and 9.63% of the mortgage loans in Loan Group F
are secured by properties in New York, Ohio and Pennsylvania,
respectively and approximately 26.66%, 10.51%, and 9.80% of the
mortgage loans in Loan Group A are secured by properties in
Ohio, Florida and New Jersey, respectively. These states may
suffer economic problems or reductions in market values for
residential properties that are not experienced in other states.
Because of the concentration of mortgage loans in these states,
those types of problems may have a greater effect on the offered
certificates than if borrowers and properties were more spread
out in different geographic areas.
YOUR YIELD TO MATURITY MAY BE REDUCED BY PREPAYMENTS AND DEFAULTS
The pre-tax yield to maturity on your investment is uncertain and will
depend on a number of factors, including the following:
o THE RATE OF RETURN OF PRINCIPAL IS UNCERTAIN. The amount of
distributions of principal of the offered certificates and the
time when those distributions are received depend on the amount
and the times at which borrowers make principal payments on the
mortgage loans. Those principal payments may be regularly
scheduled payments or unscheduled payments resulting from
prepayments or defaults of the mortgage loans. The rate of
prepayment may be affected by the credit standings of the
borrowers. If a borrower's credit standing improves, that
borrower may be able to refinance his existing loan on more
favorable terms. If a borrower's credit standing declines, the
borrower may not be able to refinance.
S-9
<PAGE>
All of the mortgage loans in existence on May 31, 2000, 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 July 30, 2000, 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
S-10
<PAGE>
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.
The subordinate certificates are not covered by the financial guaranty
insurance policy.
THE TRANSFER OF PRIMARY SERVICING MAY RESULT IN HIGHER DELINQUENCIES AND
DEFAULTS WHICH MAY ADVERSELY AFFECT THE YIELD ON YOUR CERTIFICATES.
Countrywide Home Loans, Inc. will be the servicer under the pooling and
servicing agreement. However, Delta Funding Corporation will continue to service
the mortgage loans on an interim basis pending the transfer of primary servicing
obligations to Countrywide Home Loans, Inc. Although we expect the transfer to
be completed by August 1, 2000, we cannot assure you that it will be completed
by that date. All transfers of servicing involve the risk of disruption in
collections due to data input errors, misapplied or misdirected payments, system
incompatibilities and other reasons. As a result, the rate of delinquencies and
defaults are likely to increase at least for a period of time. We cannot assure
you as to the extent or duration of any disruptions associated with the transfer
of servicing or as to the resulting effects on the yield on your certificates.
ENVIRONMENTAL CONDITIONS AFFECTING THE MORTGAGED PROPERTIES MAY RESULT IN LOSSES
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the costs of clean-up. In
several states, this type of lien has priority over the lien of an existing
mortgage or owner's interest against real property. In addition, under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, a lender may be liable, as an owner or
operator, for costs of addressing releases or threatened releases of hazardous
substances that require
S-11
<PAGE>
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of whether
or not the environmental damage or threat was caused by a prior owner. A lender
also risks liability on foreclosure of the mortgaged property.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES
Applicable state laws generally regulate interest rates and other charges
and require specific disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
(1) the federal Truth in Lending Act and Regulation Z promulgated under
the Truth in Lending Act, which require particular disclosures to the
borrowers regarding the terms of the mortgage loans;
(2) the Equal Credit Opportunity Act and Regulation B promulgated under
the Equal Credit Opportunity Act, which prohibit discrimination on the
basis of age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit;
(3) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation; and
(4) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
The mortgage 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, including the trust, 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.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the trust, as owner of
the mortgage loans, to damages and administrative enforcement.
S-12
<PAGE>
IF PAYMENTS ON THE MORTGAGE LOANS ARE INSUFFICIENT, YOU WILL INCUR A LOSS
All distributions on the offered certificates will be made from payments by
borrowers under the mortgage loans or, in the case of the senior certificates,
payments under the financial guaranty insurance policy. The trust has no other
assets to make distributions on the offered certificates. The mortgage loans are
not insured or guaranteed by any person. The trust is the only person that is
obligated to make distributions on the offered certificates. The offered
certificates are not insured by any governmental agency.
INSOLVENCY OF THE SELLER MAY CAUSE LOSSES
The seller intends that its transfer of the mortgage loans to the trust
will constitute a sale, and the seller and the trust will agree to treat each
transfer as a sale. In the event of the insolvency of the seller, the trustee in
bankruptcy or the seller, as debtor-in-possession, may attempt to recharacterize
a sale as a loan by the trust to the seller secured by a pledge of the mortgage
loans. If an attempt were to be successful, holders of the offered certificates
could receive a prepayment of their certificates. Any prepayment could adversely
affect the yield on the offered certificates. Even if an attempt were to be
unsuccessful, holders of the offered certificates could experience delays in
distributions which would adversely affect the yield on the offered
certificates.
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL REDUCE THE PRICES FOR
CERTIFICATES
A security rating is not a recommendation to buy, sell or hold securities.
Similar ratings on different types of securities do not necessarily mean the
same thing. We recommend that you analyze the significance of each rating
independently from any other rating. Any rating agency may change its rating of
the offered certificates after those offered certificates are issued if that
rating agency believes that circumstances have changed. Any subsequent
withdrawal or downgrade in rating will likely reduce the price that a subsequent
purchaser will be willing to pay for your certificates.
LEGAL ACTIONS ARE PENDING AGAINST DELTA FUNDING CORPORATION
Because the nature of the seller's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the seller is subject to numerous claims and legal actions in the
ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to claims and
actions, and an adverse judgment in a claim or action may have a significant
adverse financial effect on the seller, the seller believes that the aggregate
amount of liabilities will not result in monetary damages which in the aggregate
would have a material adverse effect on the financial condition or results of
the seller.
Several class-action lawsuits have been filed against a number of consumer
finance companies alleging violations of various federal and state consumer
protection laws. The seller has been named in several lawsuits styled as class
actions and has entered into settlement agreements with various governmental
agencies following investigations of the seller's lending practices. See "Delta
Funding Corporation" in this prospectus supplement for a description of these
lawsuits and settlement agreements.
S-13
<PAGE>
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.
DELTA FUNDING CORPORATION
The seller's lending practices have been the subject of several lawsuits
styled as class actions and of investigations by various regulatory agencies
including the Office of the Attorney General of the State of New York (the
"NYOAG"), the Banking Department of the State of New York (the "NYBD") and the
United States Department of Justice (the "DOJ"). The current status of these
actions are summarized below.
CONSUMER LAWSUITS
A. In or about November 1998, the seller received notice that it had been
named in a lawsuit filed in the United States District Court for the Eastern
District of New York. In December 1998, plaintiffs filed an amended complaint
alleging that the Seller had violated the Home Equity and Ownership Protection
Act ("HOEPA"), the Truth in Lending Act ("TILA") and New York State General
Business Law ss. 349. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory judgment permitting rescission, (c) unspecified
actual, statutory, treble and punitive damages (including attorneys' fees),
(d) certain injunctive relief, and (e) declaratory judgment declaring the loan
transactions void and unconscionable.
On December 7, 1998, plaintiff filed a motion seeking a temporary
restraining order and preliminary injunction, enjoining the seller from
conducting foreclosure sales on 11 properties. The district court judge ruled
that in order to consider such a motion, plaintiff must move to intervene on
behalf of these 11 borrowers. Thereafter, plaintiff moved to intervene on behalf
of 3 of these 11 borrowers and sought the injunctive relief on their behalf. The
seller opposed the motions. On December 14, 1998, the district court judge
granted the motion to intervene and on December 23, 1998, the district court
judge issued a preliminary injunction enjoining the seller from proceeding with
the foreclosure sales of the three intervenors' properties. The seller has filed
a motion for reconsideration of the December 23, 1998 order.
In January 1999, the seller filed an answer to plaintiff's first amended
complaint. In July 1999, plaintiffs were granted leave, on consent, to file a
second amended complaint. In August 1999, plaintiffs filed a second amended
complaint that, among other things, added additional parties but contained the
same causes of action alleged in the first amended complaint. In September 1999,
the seller filed a motion to dismiss the complaint which was opposed by
plaintiffs in or about November 1999 and granted in part and denied in part by
the Court in June 2000. Also in September 1999, plaintiffs filed a motion for
class certification. In February 2000, the seller submitted opposition to the
plaintiffs' motion. In or about October 1999, plaintiffs filed a motion seeking
an order preventing the seller, its attorneys and/or the NYBD from issuing
notices to certain of the seller's borrowers, in accordance with a settlement
agreement entered into by and between the
S-14
<PAGE>
seller and the NYBD. In or about October 1999 and November 1999, respectively,
the seller and the NYBD submitted opposition to plaintiffs' motion. In March
2000, the court issued an order that permits the seller to issue an approved
form of notice. The seller believes that it has meritorious defenses and intends
to defend this suit, but cannot estimate with any certainty its ultimate legal
or financial liability, if any, with respect to the alleged claims.
B. In or about March, 1999, the seller received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York, New York
County, alleging that the seller had improperly charged certain borrowers
processing fees. The complaint seeks (1) certification of a class of plaintiffs,
(2) an accounting, and (3) unspecified compensatory and punitive damages
(including attorneys' fees), based upon alleged (a) unjust enrichment,
(b) fraud, and (c) deceptive trade practices. In April 1999, the seller filed an
answer to plaintiff's complaint. In August 1999, plaintiffs filed a motion for
class certification. In September 1999, the seller filed a motion to dismiss the
complaint, which was opposed by plaintiffs and in February 2000, the court
denied the seller's motion to dismiss. In April 1999, the seller filed a motion
to change venue and plaintiffs opposed the motion. In July 1999, the court
denied the motion to change venue. The seller appealed and in March 2000, the
appellate court granted the seller's appeal to change venue from New York County
to Nassau County. In May 2000, plaintiffs re-filed a motion for class
certification. The seller believes that it has meritorious defenses and intends
to defend this suit, but cannot estimate with any certainty its ultimate legal
or financial liability, if any, with respect to the alleged claims.
C. In or about July 1999, the seller received notice that it had been named
in a lawsuit filed in the United States District Court for the Western District
of New York, alleging that amounts collected and maintained by it in certain
borrowers' tax and insurance escrow accounts exceeded certain statutory (RESPA)
and/or contractual (the respective borrowers' mortgage agreements) ceilings. The
complaint seeks (a) certification of a class of plaintiffs, (b) declaratory
relief finding that the seller's practices violate applicable statutes and/or
the mortgage agreements, (c) injunctive relief, and (d) unspecified compensatory
and punitive damages (including attorneys' fees). In October 1999, the seller
filed a motion to dismiss the complaint. In or about November 1999, the case was
transferred to the United States District Court for the Northern District of
Illinois. In February 2000, the plaintiff opposed the seller's motion to
dismiss. In March 2000, the court granted the seller's motion to dismiss in
part, and denied it in part. The seller believes that it has meritorious
defenses and intends to defend this suit, but cannot estimate with any certainty
its ultimate legal or financial liability, if any, with respect to the alleged
claims.
D. In or about April 2000, the seller received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York, Nassau
County, alleging that the seller has improperly charged and collected from
borrowers certain fees when they paid off their mortgage loans with the seller.
The complaint seeks (a) certification of a class of plaintiffs, (b) declaratory
relief finding that the payoff statements used include unauthorized charges and
are deceptive and unfair, (c) injunctive relief and (d) unspecified
compensatory, statutory and punitive damages (including legal fees), based upon
alleged violations of Real Property Law 274-a, unfair and deceptive practices,
money had and received and unjust enrichment, and conversion. The seller
answered the complaint in June
S-15
<PAGE>
2000. The seller believes that it has meritorious defenses and intends to defend
this suit, but cannot estimate with any certainty its ultimate legal or
financial liability, if any, with respect to the alleged claims.
REGULATORY ACTIONS
In or about August 1999, the NYOAG filed a lawsuit against the seller
alleging violations of (a) RESPA (by paying yield spread premiums), (b) HOEPA
and TILA, (c) ECOA, (d) New York Executive Law ss. 296-a, and (e) New York
Executive Law ss. 63(12). In September 1999, the seller and the NYOAG settled
the lawsuit, as part of a global settlement by and among the seller, the NYOAG
and the NYBD, evidenced by that certain (a) Remediation Agreement by and between
the Seller and the NYBD, dated as of September 17, 1999 and (b) Stipulated Order
on Consent by and among the seller, Delta Financial Corporation and the NYOAG,
dated as of September 17, 1999. As part of the settlement, the seller will,
among other things, implement agreed upon changes to its lending practices;
provide reduced loan payments aggregating $7.25 million to certain borrowers
identified by the NYBD; and create a fund of approximately $4.75 million to be
financed by the grant of 525,000 shares of Delta Financial Corporation's common
stock valued at a constant assumed price of $9.10 per share, which approximates
book value. The proceeds of the fund will be used, for, among other things,
restitution to borrowers and to pay for a variety of consumer educational and
counseling programs. As a result, the NYOAG lawsuit has been dismissed against
the seller. The Remediation Agreement and Stipulated Order on Consent supersede
the seller's previously announced settlements with the NYOAG and the NY Banking
Department. In March 2000, the seller finalized a settlement agreement with the
United States Department of Justice, the Federal Trade Commission and the
Department of Housing and Urban Renewal, to complete the global settlement it
had reached with the NYSBD and NYOAG. The Federal agreement mandates some
additional compliance efforts for the seller, but it does not require any
additional financial commitment.
OTHER INFORMATION
In November 1999, Delta Financial Corporation received notice that it had
been named in a lawsuit filed in the United States District Court for the
Eastern District of New York, seeking certification as a class action and
alleging violations of the federal securities laws in connection with its
initial public offering in 1996 and its reports subsequently filed with the
Securities and Exchange Commission. The complaint alleges that the scope of the
violations alleged recently in the consumer lawsuits and regulatory actions
indicate a pervasive pattern of action and risk that should have been more
thoroughly disclosed to investors in its common stock. In May 2000, the District
Court consolidated this case and several other lawsuits that purportedly contain
the same or similar allegations. Delta Financial Corporation believes that is
has meritorious defenses and intends to defend these suits, but has not answered
yet and cannot estimate with any certainty its ultimate legal or financial
liability, if any, with respect to the alleged claims.
On September 3, 1999, Moody's Investors Service, Inc. announced that it had
put on credit watch all of the classes of certificates in the seller's
securitizations from Series 1997-3 through Series 1999-2 where the classes were
rated by Moody's Investors Service, Inc. and were not guaranteed by a monoline
insurance company. Fitch IBCA, Inc. issued a Rating Alert-Evolving with respect
to nine "BBB" rated classes and one "BBB-" rated
S-16
<PAGE>
class in the seller's prior securitizations. The seller was informed that these
actions were in response to the Seller's settlement agreement with the NYOAG and
the NYBD.
DELINQUENCY AND LOSS EXPERIENCE
All of the mortgage loans will have been originated by the seller. The
following table sets forth information relating to the delinquency and loss
experience of the seller for its servicing portfolio of mortgage loans including
mortgage loans serviced for others, for the periods indicated.
The information in the table below has not been adjusted to eliminate the
effect of the significant growth in the size of the servicer's mortgage loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of mortgage loans serviced for each
period would be higher than those shown if a group of mortgage loans were
artificially isolated at a point in time and the information showed the activity
only in that isolated group. However, since many of the mortgage loans in the
seller's mortgage loan portfolio are not fully seasoned, the delinquency and
loss information for an isolated group would also be distorted to some degree
since newly originated loans have not been in existence long enough to give rise
to some or all of the indicated periods of delinquency in the table.
DELTA FUNDING CORPORATION'S HISTORIC SERVICING PORTFOLIO INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Total Outstanding Principal Balance (end of period).... $2,950,434,922 $3,631,830,267 $3,732,117,997
Average Outstandings(1)................................ $2,436,343,233 $3,362,377,138 $3,698,544,785
DELINQUENCY
30-59 Days:
Principal Balance.................................... $ 153,726,410 $ 208,301,639 $ 195,375,058
Percent of Delinquency by Dollar(2).................. 5.2% 5.7% 5.2%
60-89 Days:
Principal Balance.................................... $ 50,034,005 $ 83,000,117 $ 81,289,819
Percent of Delinquency by Dollar(2).................. 1.7% 2.3% 2.2%
90 Days or More:
Principal Balance.................................... $ 47,886,542 $ 56,435,361 $ 48,618,880
Percent of Delinquency by Dollar(2).................. 1.6% 1.6% 1.3%
Total Delinquencies:
Principal Balance.................................... $ 251,646,956 $ 347,737,118 $ 325,283,757
Percent of Delinquency by Dollar(2).................. 8.5% 9.6% 8.7%
FORECLOSURES
Principal Balance.................................... $ 145,678,781 $ 185,843,344 $ 192,066,880
Percent of Foreclosures by Dollar(2)................. 4.9% 5.1% 5.1%
REO
Principal Balance.................................... $ 18,811,007 $ 36,662,789 $ 44,588,395
Percent of REO by Dollar(2).......................... 0.6% 1.0% 1.2%
Gross Losses........................................... $ (10,324,682) $ (16,327,384) $ (4,746,766)
Recoveries............................................. $ 1,620,479 $ 1,605,618 $ 202,536
Net Losses on liquidated loans(3)...................... $ (8,704,203) $ (14,721,765) $ (4,544,231)
Percentage of Net Losses on liquidated loans (based on
Average Outstanding Principal Balance)............... 0.36% 0.44% 0.49%(4)
</TABLE>
(Footnotes on next page)
S-17
<PAGE>
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Percentages are expressed based upon the total outstanding principal balance
as of the indicated date.
(3) Net Losses equal gross losses plus recoveries.
(4) Annualized.
The seller believes that it will continue to see a higher trend in Percent
of Delinquencies by Dollar for the foreseeable future primarily due to a
combination of (a) the continued seasoning of its servicing portfolio and (b) a
continued reduction, on a relative basis in the size of the increase in its
servicing portfolio. This latter trend is due to both a lower absolute dollar
amount of loan originations and a lower absolute dollar amount of its servicing
portfolio due to the transfer of servicing for this series of certificates.
While the above delinquency and foreclosure and loss experiences reflect
the seller's experiences for the periods indicated, there can be no assurance
that the delinquency and foreclosure and loss experiences on the mortgage loans
will be similar. Accordingly, this information should not be considered to
reflect the credit quality of the mortgage loans included in the trust, or as a
basis of assessing the likelihood, amount or severity of losses on the mortgage
loans. The statistical data in the table is based on all of the loans in the
seller's servicing portfolio. The mortgage loans in the trust may be more
recently originated than, and are likely to have other characteristics which
distinguish them from, the majority of the mortgage loans in the seller's
servicing portfolio.
Additional information regarding the seller's servicing portfolio is set
forth in the prospectus under the caption "The Seller--Delinquency and loss
experience."
S-18
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The mortgage loans will include:
(a) the mortgage loans identified as of May 31, 2000 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) subsequent mortgage loans to be purchased by the trust from the
seller from time to time on or prior to July 30, 2000 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 2.44% and 97.56%, 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 3.00%.
As of the cut-off date, substantially all of the statistic calculation
mortgage loans in Loan Group A were accruing interest at loan rates that are
below the sum of the related
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<PAGE>
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 2.78% and 2.97% of the statistic calculation mortgage loans
in Loan Group F and Loan Group A, respectively, have repair escrows that are
being held by the seller. The appraisals for these mortgage loans were based on
the conditions of the mortgaged properties without the repairs, that is, the
appraisals were not "subject to" appraisals. The repairs are typically completed
within 30 to 60 days after the loan closes. The related mortgage loan documents
give the seller the right to apply the escrowed amounts to prepayment of the
mortgage loan if the repairs are not completed.
CREDIT SCORES
"Credit scores" are obtained by many lenders in connection with mortgage
loan applications to help assess a borrower's credit-worthiness. Credit scores
are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a borrower's credit
history at a single point, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, level of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. Credit scores range from
approximately 400 to approximately 800, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a credit score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, that is, a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
credit scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, credit scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a credit score does not take into
consideration the differences between mortgage loans and consumer loans
generally or the specific characteristics of the related mortgage loan
including, for example, the LTV or CLTV, the collateral for the mortgage loan,
or the debt to income ratio. There can be no assurance that the credit scores of
the mortgagors will be an accurate predictor of the likelihood of repayment of
the related mortgage loans.
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
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<PAGE>
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 0.57%, by principal
balance, are balloon loans; and approximately 1.32%, by principal balance, have
payments which, as of the cut-off date, are 30 to 59 days delinquent.
S-21
<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 CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
$ 0.01-$ 25,000.00............ 255 $ 4,962,292.84 3.18%
$ 25,000.01-$ 50,000.00............ 660 24,585,522.02 15.74
$ 50,000.01-$ 75,000.00............ 511 31,499,880.02 20.17
$ 75,000.01-$100,000.00............ 261 22,643,240.75 14.50
$100,000.01-$125,000.00............ 155 17,361,367.69 11.11
$125,000.01-$150,000.00............ 105 14,424,776.59 9.23
$150,000.01-$175,000.00............ 72 11,704,976.98 7.49
$175,000.01-$200,000.00............ 60 11,287,993.07 7.23
$200,000.01-$225,000.00............ 23 4,857,674.22 3.11
$225,000.01-$250,000.00............ 19 4,511,974.46 2.89
$250,000.01-$275,000.00............ 10 2,643,631.47 1.69
$275,000.01-$300,000.00............ 9 2,630,679.07 1.68
$300,000.01-$325,000.00............ 5 1,570,566.93 1.01
$325,000.01-$350,000.00............ 2 694,894.27 0.44
$350,000.01-$375,000.00............ 1 374,858.82 0.24
$425,000.01-$450,000.00............ 1 443,500.00 0.28
--------- -------------------- ----------
Total........................ 2,149 $ 156,197,829.20 100.00%
========= ==================== ==========
</TABLE>
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<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
GEOGRAPHIC AREA MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Arizona............................ 5 $ 233,222.16 0.15%
Arkansas........................... 11 606,679.99 0.39
California......................... 4 701,588.05 0.45
Colorado........................... 6 331,944.78 0.21
Connecticut........................ 38 2,680,217.59 1.72
Delaware........................... 14 861,356.30 0.55
District of Columbia............... 2 135,000.00 0.09
Florida............................ 90 5,604,016.06 3.59
Georgia............................ 78 4,978,828.99 3.19
Illinois........................... 131 10,596,836.53 6.78
Indiana............................ 53 3,118,030.62 2.00
Kansas............................. 1 94,500.00 0.06
Kentucky........................... 14 760,787.42 0.49
Louisiana.......................... 20 770,811.71 0.49
Maine.............................. 9 554,780.76 0.36
Maryland........................... 42 2,183,475.17 1.40
Massachusetts...................... 58 5,127,579.61 3.28
Michigan........................... 59 2,839,981.26 1.82
Minnesota.......................... 2 83,447.46 0.05
Mississippi........................ 22 873,447.78 0.56
Missouri........................... 42 2,323,338.91 1.49
Nevada............................. 1 73,976.82 0.05
New Hampshire...................... 11 674,925.38 0.43
New Jersey......................... 106 9,061,317.18 5.80
New Mexico......................... 4 306,322.91 0.20
New York........................... 570 56,900,943.83 36.43
North Carolina..................... 85 5,116,616.76 3.28
Ohio............................... 262 16,774,032.39 10.74
Oklahoma........................... 4 107,868.74 0.07
Pennsylvania....................... 301 15,046,389.08 9.63
Rhode Island....................... 12 853,945.29 0.55
South Carolina..................... 6 367,981.63 0.24
Tennessee.......................... 36 2,622,223.89 1.68
Texas.............................. 13 684,815.71 0.44
Vermont............................ 3 155,262.26 0.10
Virginia........................... 26 1,610,376.57 1.03
West Virginia...................... 8 380,959.61 0.24
----- --------------- -------
Total........................ 2,149 $156,197,829.20 100.00%
===== =============== =======
</TABLE>
------------------
(1) Determined by property address so designated in the related mortgage.
S-23
<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 CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
10.01% to 15.00%................... 1 $ 30,000.00 0.02%
15.01% to 20.00%................... 4 87,453.00 0.06
20.01% to 25.00%................... 19 798,190.77 0.51
25.01% to 30.00%................... 23 1,011,593.54 0.65
30.01% to 35.00%................... 25 1,243,413.32 0.80
35.01% to 40.00%................... 35 1,971,673.13 1.26
40.01% to 45.00%................... 34 1,629,162.08 1.04
45.01% to 50.00%................... 69 4,053,911.22 2.60
50.01% to 55.00%................... 83 5,209,194.70 3.33
55.01% to 60.00%................... 124 7,832,524.65 5.01
60.01% to 65.00%................... 165 10,699,908.57 6.85
65.01% to 70.00%................... 317 21,240,598.13 13.60
70.01% to 75.00%................... 307 23,453,588.78 15.02
75.01% to 80.00%................... 510 40,702,733.92 26.06
80.01% to 85.00%................... 263 20,235,633.13 12.96
85.01% to 90.00%................... 169 15,974,267.87 10.23
90.01% to 95.00%................... 1 23,982.39 0.02
--------- -------------------- ----------
Total........................ 2,149 $ 156,197,829.20 100.00%
========= ==================== ==========
</TABLE>
------------------
(1) The original combined loan-to-value ratios, referred to as CLTVs, shown
above are equal, with respect to each statistic calculation mortgage loan,
to (x) the sum of (a) the original principal balance of the mortgage loan at
the date of origination plus (b) 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.
S-24
<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 CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
7.751%-8.000%...................... 1 $ 31,813.94 0.02%
8.001%-8.250....................... 10 596,230.07 0.38
8.251%-8.500%...................... 23 2,606,795.06 1.67
8.501%-8.750%...................... 42 4,304,167.17 2.76
8.751%-9.000%...................... 71 7,271,968.68 4.66
9.001%-9.250%...................... 37 3,116,199.18 2.00
9.251%-9.500%...................... 75 6,603,620.21 4.23
9.501%-9.750%...................... 89 7,660,429.77 4.90
9.751%-10.000%..................... 186 16,504,711.48 10.57
10.001%-10.250%.................... 68 4,753,774.10 3.04
10.251%-10.500%.................... 132 9,596,600.26 6.14
10.501%-10.750%.................... 107 7,700,304.00 4.93
10.751%-11.000%.................... 188 15,256,763.85 9.77
11.001%-11.250%.................... 102 6,354,887.42 4.07
11.251%-11.500%.................... 141 9,649,965.58 6.18
11.501%-11.750%.................... 135 8,438,163.79 5.40
11.751%-12.000%.................... 170 12,554,192.12 8.04
12.001%-12.250%.................... 97 5,884,343.92 3.77
12.251%-12.500%.................... 91 5,962,554.66 3.82
12.501%-12.750%.................... 70 3,974,228.12 2.54
12.751%-13.000%.................... 82 4,922,247.37 3.15
13.001%-13.250%.................... 54 3,447,405.97 2.21
13.251%-13.500%.................... 30 1,306,149.46 0.84
13.501%-13.750%.................... 32 2,058,619.02 1.32
13.751%-14.000%.................... 41 2,250,357.12 1.44
14.001%-14.250%.................... 15 553,736.13 0.35
14.251%-14.500%.................... 24 1,170,509.81 0.75
14.501%-14.750%.................... 11 570,614.54 0.37
14.751%-15.000%.................... 14 573,338.29 0.37
15.001%-15.250%.................... 2 105,569.78 0.07
15.251%-15.500%.................... 4 151,562.77 0.10
15.501%-15.750%.................... 3 165,986.61 0.11
15.751%-16.000%.................... 2 100,018.95 0.06
--------- -------------------- ----------
Total........................ 2,149 $ 156,197,829.20 100.00%
========= ==================== ==========
</TABLE>
S-25
<PAGE>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF ORIGINAL TERMS STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
TO STATED MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
1- 60............................ 8 $ 190,800.98 0.12%
61-120............................ 107 4,839,515.25 3.10
121-180............................ 421 24,319,707.11 15.57
181-240............................ 197 12,044,899.92 7.71
241-300............................ 43 3,576,350.92 2.29
301-360............................ 1,373 111,226,555.02 71.21
--------- -------------------- ----------
Total........................ 2,149 $ 156,197,829.20 100.00%
========= ==================== ==========
</TABLE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF REMAINING MONTHS STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1- 60............................ 8 $ 190,800.98 0.12%
61-120............................ 107 4,839,515.25 3.10
121-180............................ 421 24,319,707.11 15.57
181-240............................ 197 12,044,899.92 7.71
241-300............................ 43 3,576,350.92 2.29
301-360............................ 1,373 111,226,555.02 71.21
----- --------------- -------
Total........................ 2,149 $156,197,829.20 100.00%
===== =============== =======
</TABLE>
MONTHS SINCE ORIGINATION
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF MONTHS STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
0................................. 661 $ 46,880,676.00 30.01%
1- 3.............................. 1,473 107,810,266.28 69.02
4- 6.............................. 14 1,428,592.00 0.91
25-30.............................. 1 78,294.92 0.05
----- --------------- -------
Total........................ 2,149 $156,197,829.20 100.00%
===== =============== =======
</TABLE>
S-26
<PAGE>
PROPERTY TYPE
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
One Family......................... 1,676 $112,531,981.93 72.04%
Two Family......................... 189 17,756,127.44 11.37
Three Family....................... 61 6,428,995.24 4.12
Mixed Use.......................... 61 6,100,334.46 3.91
Multifamily........................ 51 5,940,285.77 3.80
Condominium........................ 59 3,223,300.80 2.06
Four Family........................ 29 3,015,587.62 1.93
Manufactured Housing............... 23 1,201,215.94 0.77
----- --------------- -------
Total........................ 2,149 $156,197,829.20 100.00%
===== =============== =======
</TABLE>
DOCUMENTATION PROGRAM
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
DOCUMENTATION PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Full documentation................. 1,697 $ 120,797,885.83 77.34%
No income documentation............ 250 20,465,860.06 13.10
Limited documentation.............. 152 10,941,365.07 7.00
Stated income documentation ....... 50 3,992,718.24 2.56
--------- -------------------- ----------
Total:....................... 2,149 $ 156,197,829.20 100.00%
========= ==================== ==========
</TABLE>
OCCUPANCY TYPE(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Owner Occupied..................... 1,843 $ 134,465,392.84 86.09%
Non-Owner Occupied................. 306 21,732,436.36 13.91
--------- -------------------- ----------
Total........................ 2,149 $ 156,197,829.20 100.00%
========= ==================== ==========
</TABLE>
------------------------
(1) Based upon representations made by the borrowers at the time of origination
of such Mortgage Loans.
S-27
<PAGE>
CREDIT GRADE
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
A...................................... 1,340 $107,595,443.74 68.88%
B...................................... 395 25,990,895.29 16.64
C...................................... 292 17,851,034.53 11.43
D...................................... 122 4,760,455.64 3.05
-------- --------------- -------
Total............................ 2,149 $156,197,829.20 100.00%
======== =============== =======
</TABLE>
CREDIT SCORES
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF CREDIT SCORES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Less than 400........................... 61 $ 3,206,293.87 2.05%
400-449................................. 2 91,585.33 0.06
450-499................................. 80 3,985,701.73 2.55
500-559................................. 551 37,023,456.91 23.70
560-579................................. 221 16,143,253.57 10.34
580-599................................. 228 16,627,346.82 10.65
600-619................................. 193 14,860,316.20 9.51
620-639................................. 202 15,314,027.29 9.80
640-659................................. 185 13,649,742.80 8.74
660-679................................. 153 12,747,898.17 8.16
680-699................................. 100 8,649,563.53 5.54
700-719................................. 65 5,616,712.79 3.60
720 and greater......................... 108 8,281,930.19 5.30
------- --------------- -------
Total............................. 2,149 $156,197,829.20 100.00%
======= =============== =======
</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 11.21% and 10.94% 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 22 months and 35
months, respectively; and approximately 1.55%, by principal balance, have
payments which, as of the cut-off date, are 30 to 59 days delinquent.
S-28
<PAGE>
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 CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
$ 0.01-$ 25,000.00................. 12 $ 258,649.17 0.53%
$ 25,000.01-$ 50,000.00................. 147 5,875,533.44 11.94
$ 50,000.01-$ 75,000.00................. 181 11,443,620.08 23.26
$ 75,000.01-$100,000.00................. 109 9,477,694.55 19.26
$100,000.01-$125,000.00................. 58 6,353,428.80 12.91
$125,000.01-$150,000.00................. 25 3,418,791.39 6.95
$150,000.01-$175,000.00................. 17 2,716,854.73 5.52
$175,000.01-$200,000.00................. 14 2,663,537.11 5.41
$200,000.01-$225,000.00................. 8 1,727,432.61 3.51
$225,000.01-$250,000.00................. 5 1,200,099.80 2.44
$250,000.01-$275,000.00................. 3 778,666.68 1.58
$275,000.01-$300,000.00................. 3 857,787.07 1.74
$300,000.01-$325,000.00................. 3 927,862.85 1.89
$325,000.01-$350,000.00................. 2 667,653.08 1.36
$375,000.01-$400,000.00................. 1 390,000.00 0.79
$425,000.01-$450,000.00................. 1 442,805.69 0.90
--- --------------- -------
Total............................. 589 $ 49,200,417.05 100.00%
=== =============== =======
</TABLE>
S-29
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
GEOGRAPHIC AREA MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Arizona............................ 1 $ 62,500.00 0.13%
Arkansas........................... 4 366,012.74 0.74
California......................... 3 599,357.55 1.22
Colorado........................... 7 865,798.68 1.76
Connecticut........................ 21 1,513,485.65 3.08
Delaware........................... 5 298,458.49 0.61
District of Columbia............... 2 268,429.53 0.55
Florida............................ 54 5,171,765.31 10.51
Georgia............................ 15 1,160,682.96 2.36
Illinois........................... 29 2,757,904.49 5.61
Indiana............................ 9 637,999.22 1.30
Kansas............................. 1 37,600.00 0.08
Kentucky........................... 15 1,015,245.57 2.06
Louisiana.......................... 4 214,558.82 0.44
Maryland........................... 19 1,626,883.30 3.31
Massachusetts...................... 5 522,182.77 1.06
Michigan........................... 32 2,697,820.89 5.48
Minnesota.......................... 2 103,467.99 0.21
Mississippi........................ 1 34,987.90 0.07
Missouri........................... 17 1,184,688.51 2.41
New Hampshire...................... 3 251,652.74 0.51
New Jersey......................... 38 4,823,677.68 9.80
New York........................... 7 1,366,754.25 2.78
North Carolina..................... 27 2,101,212.04 4.27
Ohio............................... 182 13,114,956.32 26.66
Pennsylvania....................... 47 3,331,638.59 6.77
Rhode Island....................... 1 95,168.21 0.19
South Carolina..................... 2 51,991.14 0.11
Tennessee.......................... 12 975,677.42 1.98
Virginia........................... 16 1,238,769.66 2.52
West Virginia...................... 6 408,718.91 0.83
Wisconsin.......................... 1 223,925.85 0.46
Wyoming............................ 1 76,443.87 0.16
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
------------------
(1) Determined by property address so designated in the related mortgage.
S-30
<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 CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
20.01% to 25.00%................... 1 $ 55,800.00 0.11%
30.01% to 35.00%................... 2 54,994.99 0.11
35.01% to 40.00%................... 4 202,325.71 0.41
40.01% to 45.00%................... 8 394,511.08 0.80
45.01% to 50.00%................... 16 1,144,813.53 2.33
50.01% to 55.00%................... 13 1,180,160.89 2.40
55.01% to 60.00%................... 36 1,878,759.62 3.82
60.01% to 65.00%................... 33 2,580,567.72 5.25
65.01% to 70.00%................... 60 3,779,690.27 7.68
70.01% to 75.00%................... 97 7,401,297.62 15.04
75.01% to 80.00%................... 153 14,110,920.70 28.68
80.01% to 85.00%................... 88 8,993,736.39 18.28
85.01% to 90.00%................... 78 7,422,838.53 15.09
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
------------------
(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.
S-31
<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>
8.001%- 8.250%.................... 3 $ 257,754.06 0.52%
8.251%- 8.500%.................... 4 432,432.46 0.88
8.501%- 8.750%.................... 8 813,181.16 1.65
8.751%- 9.000%.................... 16 1,600,305.67 3.25
9.001%- 9.250%.................... 14 1,184,168.62 2.41
9.251%- 9.500%.................... 22 2,010,024.55 4.09
9.501%- 9.750%.................... 26 2,610,897.86 5.31
9.751%-10.000%.................... 53 4,921,965.57 10.00
10.001%-10.250%.................... 28 2,710,486.08 5.51
10.251%-10.500%.................... 37 3,198,978.21 6.50
10.501%-10.750%.................... 54 4,960,663.84 10.08
10.751%-11.000%.................... 51 4,251,225.75 8.64
11.001%-11.250%.................... 21 1,678,046.29 3.41
11.251%-11.500%.................... 34 2,919,281.41 5.93
11.501%-11.750%.................... 29 1,957,659.01 3.98
11.751%-12.000%.................... 58 4,887,120.71 9.93
12.001%-12.250%.................... 27 2,174,965.53 4.42
12.251%-12.500%.................... 22 1,582,216.29 3.22
12.501%-12.750%.................... 10 726,663.62 1.48
12.751%-13.000%.................... 14 879,478.19 1.79
13.001%-13.250%.................... 11 660,970.42 1.34
13.251%-13.500%.................... 10 468,594.33 0.95
13.501%-13.750%.................... 8 557,980.96 1.13
13.751%-14.000%.................... 7 423,586.67 0.86
14.001%-14.250%.................... 1 46,391.73 0.09
14.251%-14.500%.................... 8 391,608.73 0.80
14.501%-14.750%.................... 4 139,994.44 0.28
14.751%-15.000%.................... 4 390,486.92 0.79
15.001%-15.250%.................... 3 155,078.20 0.32
15.251%-15.500%.................... 2 208,209.77 0.42
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</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 STATED MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
169-180............................ 1 $ 97,523.53 0.20%
349-360............................ 588 49,102,893.52 99.80
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
S-32
<PAGE>
'
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF REMAINING STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
121-180............................ 1 $ 97,523.53 0.20%
301-360............................ 588 49,102,893.52 99.80
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
MONTHS SINCE ORIGINATION
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
RANGE OF MONTHS STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
0.................................. 178 $ 14,185,940.00 28.83%
1-3................................ 410 34,941,971.95 71.02
13-18.............................. 1 72,505.10 0.15
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
PROPERTY TYPE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
One Family......................... 497 $ 41,545,075.29 84.44%
Two Family......................... 46 3,834,736.05 7.79
Condominium........................ 31 2,071,683.06 4.21
Three Family....................... 9 999,990.45 2.03
Four Family........................ 5 709,425.27 1.44
Manufactured Housing............... 1 39,506.93 0.08
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
S-33
<PAGE>
DOCUMENTATION PROGRAM
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
DOCUMENTATION PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Full documentation................. 429 $ 35,226,829.28 71.60%
No income documentation............ 75 7,288,408.36 14.81
Limited documentation.............. 63 4,627,979.18 9.41
Stated income documentation ....... 22 2,057,200.23 4.18
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
OCCUPANCY TYPE(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Owner Occupied..................... 515 $ 44,420,447.89 90.28%
Non-Owner Occupied................. 74 4,779,969.16 9.72
--- --------------- -------
Total........................ 589 $ 49,200,417.05 100.00%
=== =============== =======
</TABLE>
------------------
(1) Based upon representations made by the borrowers at the time of origination
of the mortgage loans.
GROSS MARGIN
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
2.001%- 2.500%.................... 1 $ 90,230.55 0.18%
3.501%- 4.000%.................... 5 486,558.23 0.99
4.001%- 4.500%.................... 24 2,468,486.49 5.02
4.501%- 5.000%.................... 48 4,072,166.68 8.28
5.001%- 5.500%.................... 91 8,058,843.82 16.38
5.501%- 6.000%.................... 112 9,977,281.47 20.28
6.001%- 6.500%.................... 87 7,715,194.83 15.68
6.501%- 7.000%.................... 90 6,991,936.53 14.21
7.001%- 7.500%.................... 62 4,464,229.16 9.07
7.501%- 8.000%.................... 31 2,161,276.16 4.39
8.001%- 8.500%.................... 17 1,484,025.99 3.02
8.501%- 9.000%.................... 9 524,918.76 1.07
9.001%- 9.500%.................... 10 507,792.83 1.03
9.501%-10.000%.................... 2 197,475.55 0.40
--- --------------- -------
Total........................ 589 $ 49,200,417.05 100.00%
=== =============== =======
</TABLE>
S-34
<PAGE>
LIFETIME CAP
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF LIFETIME CAPS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
15.001%-15.500%.................... 7 $ 690,186.52 1.40%
15.501%-16.000%.................... 26 2,775,031.72 5.64
16.001%-16.500%.................... 37 3,266,102.20 6.64
16.501%-17.000%.................... 78 7,210,825.47 14.66
17.001%-17.500%.................... 64 5,837,555.26 11.86
17.501%-18.000%.................... 104 9,172,382.66 18.64
18.001%-18.500%.................... 56 4,695,273.06 9.54
18.501%-19.000%.................... 86 6,792,794.80 13.81
19.001%-19.500%.................... 48 3,659,236.46 7.44
19.501%-20.000%.................... 26 1,706,426.73 3.47
20.001%-20.500%.................... 21 1,129,564.75 2.30
20.501%-21.000%.................... 14 933,267.63 1.90
21.001%-21.500%.................... 9 438,000.46 0.89
21.501%-22.000%.................... 8 530,481.36 1.08
22.001% and greater................ 5 363,287.97 0.74
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
S-35
<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>
8.001%- 8.500%.................... 7 $ 690,186.52 1.40%
8.501%- 9.000%.................... 24 2,413,486.83 4.91
9.001%- 9.500%.................... 36 3,194,193.17 6.49
9.501%-10.000%.................... 79 7,532,863.43 15.31
10.001%-10.500%.................... 65 5,909,464.29 12.01
10.501%-11.000%.................... 105 9,211,889.59 18.72
11.001%-11.500%.................... 55 4,597,327.70 9.34
11.501%-12.000%.................... 87 6,844,779.72 13.91
12.001%-12.500%.................... 49 3,757,181.82 7.64
12.501%-13.000%.................... 25 1,654,441.81 3.36
13.001%-13.500%.................... 21 1,129,564.75 2.30
13.501%-14.000%.................... 14 933,267.63 1.90
14.001%-14.500%.................... 9 438,000.46 0.89
14.501%-15.000%.................... 8 530,481.36 1.08
15.001%-15.500%.................... 5 363,287.97 0.74
--------- -------------------- ----------
Total......................... 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</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
MONTH OF NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
February 2002...................... 3 $ 347,082.96 0.71%
March 2002......................... 5 395,257.74 0.80
April 2002......................... 2 319,676.72 0.65
May 2002........................... 3 209,800.00 0.43
February 2003...................... 4 432,190.24 0.88
March 2003......................... 148 11,844,426.30 24.07
April 2003......................... 249 21,675,843.09 44.06
May 2003........................... 175 13,976,140.00 28.41
--------- -------------------- ----------
Total......................... 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
S-36
<PAGE>
CREDIT GRADE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
A.................................. 340 $ 31,481,561.67 63.99%
B.................................. 107 8,479,429.05 17.23
C.................................. 94 6,278,743.82 12.76
D.................................. 48 2,960,682.51 6.02
--------- -------------------- ----------
Total........................ 589 $ 49,200,417.05 100.00%
========= ==================== ==========
</TABLE>
CREDIT SCORES
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC CALCULATION STATISTIC CALCULATION STATISTIC CALCULATION
RANGE OF CREDIT SCORES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
less than 400...................... 30 $ 1,603,747.23 3.26%
400-449............................ 1 34,994.99 0.07
450-499............................ 29 2,080,807.35 4.23
500-559............................ 191 16,237,249.09 33.00
560-579............................ 72 5,762,213.84 11.71
580-599............................ 58 4,820,691.69 9.80
600-619............................ 60 5,506,846.39 11.19
620-639............................ 53 4,705,948.32 9.56
640-659............................ 40 3,129,805.24 6.36
660-679............................ 21 2,062,670.75 4.19
680-699............................ 14 1,400,548.16 2.85
700-719............................ 11 918,621.68 1.87
720 and greater.................... 9 936,272.32 1.90
--- --------------- -------
Total........................... 589 $ 49,200,417.05 100.00%
=== =============== =======
</TABLE>
S-37
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
On the closing date, cash in an amount not to exceed $10,000,000.00, called
the pre-funded amount, may be deposited into a segregated account maintained
with the trustee on behalf of the trust, called the pre-funding account. The
maximum amount of subsequent mortgage loans to be transferred to the trust for
Loan Group F and Loan Group A is approximately $7,600,000.00 and $2,400,000.00,
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 $100,000,
(2) the date on which an event of default occurs under the pooling and servicing
agreement or
(3) the close of business on July 30, 2000.
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 pooling and servicing agreement:
o the subsequent mortgage loan may not be 30 or more days contractually
delinquent as of the related cut-off date
o the remaining term to stated maturity of the subsequent mortgage loan
will not exceed 30 years for fully amortizing loans or 15 years for
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
7.75% for Loan Group F and 7.50% for Loan Group A
o after addition of the subsequent mortgage loans, no more than 10% of
the principal balance of all the mortgage loans in the trust will be
subject to the Home Ownership and Equity Protection Act of 1994
o the addition of the subsequent mortgage loans will not result in the
withdrawal or downgrading of the ratings assigned to the offered
certificates without regard to the financial guaranty insurance
policy
S-38
<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:
<TABLE>
<S> <C>
LOAN GROUP F
Weighted Average Loan Rate.......................... At least 11.03%
Weighted Average Remaining Term to Stated
Maturity......................................... At least 305 months
Weighted Average Original Combined Loan-to-Value
Ratio............................................ Not more than 74%
Weighted Average Credit Score (FICO)................ At least 605
Balloon Loans....................................... Not more than 1%
Principal Balance................................... Not more than $500,000
State concentration................................. Not more than 37%
Zip code concentration.............................. Not more than 2%
Non-owner occupied.................................. Not more than 14%
Second liens........................................ Not more than 11%
LOAN GROUP A
Weighted Average Loan Rate.......................... At least 10.99%
Weighted Average Remaining
Term to Stated Maturity.......................... At least 355 months
Weighted Average Original
Loan-to-Value Ratio.............................. Not more than 78%
Weighted Average Credit Score (FICO)................ At least 585
Principal Balance................................... Not more than $500,000
State concentration................................. Not more than 28%
Zip code concentration.............................. Not more than 2%
Non-owner occupied.................................. Not more than 10%
First liens......................................... 100%
</TABLE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related primarily to the rate and timing of
payments of principal on the mortgage loans 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 purchases by the servicer. The
mortgage loans may be prepaid by the mortgagors at any time. However, a majority
of the mortgage loans are subject to a prepayment charge.
S-39
<PAGE>
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
0.525% 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, other than
the class IOF 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, other than the class IOF certificates, will
be dependent on the prepayment experience in each loan group. Although the
holders of the Group F certificates will be entitled to receive the related net
rate cap carryover to the extent funds are available for that purpose as
described and in the priority set forth in this prospectus supplement, there is
no assurance that sufficient funds will be available. The financial guaranty
insurance policy does not cover, and the ratings of the Group F 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 or 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 that purpose as described and in the priority set forth in this
prospectus supplement, there is no assurance that sufficient funds will be
available. The financial guaranty insurance policy does not cover, and the
ratings on the 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
S-40
<PAGE>
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 that purpose as
described and in the priority set forth in this prospectus supplement, there is
no assurance that sufficient funds will be available. The 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 trigger event, unless all of the certificates
with a higher relative payment priority have been paid in full. Because of the
disproportionate distribution of principal of the senior certificates, depending
on the timing of realized losses, the subordinate certificates may bear a
disproportionate percentage of the realized losses on the mortgage loans.
For all purposes, the class B certificates will have the lowest payment
priority of any class of subordinate certificates.
The subordinate certificates are not covered by the financial guaranty
insurance policy.
S-41
<PAGE>
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 36TH DISTRIBUTION DATE.
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the mortgage loans, including
any optional purchase by the servicer of a delinquent mortgage loan and any
optional purchase of the remaining mortgage loans in connection with the
termination of the trust, in each case as described 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 or advanced with respect to
both loan groups in the related prepayment period and 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
S-42
<PAGE>
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
S-43
<PAGE>
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 beginning in the second
month 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 36th distribution date. The final scheduled
distribution dates for the class A-1F, class A-2F, class A-3F and class A-4F
certificates have been set to equal the distribution date on which the
applicable class principal balance would be reduced to zero based on the
structuring assumptions and a 0% prepayment assumption 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 certificates is the 360th distribution date. The final scheduled
distribution date for the class A-5F, class A-6F, class M-1, class M-2 and class
B certificates is the distribution date immediately following the month of the
last due date of the latest maturing statistical calculation mortgage loan in
either loan group plus one month. It is expected that the last actual
distribution date for each class of offered certificates will occur
significantly earlier than the final scheduled distribution dates but the final
distribution date could occur later than the applicable final scheduled
distribution date.
PAYMENT DELAY FEATURE 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.
S-44
<PAGE>
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 mortgage
loans in Loan Group F, a 100% prepayment assumption assumes a constant
prepayment rate, referred to as a CPR, of 4% per annum of the outstanding
principal balance of the mortgage loans in Loan Group F in the first month of
the life of such mortgage loans and an additional amount of approximately
1.454545%, precisely 16/11 percent per annum, in each month thereafter until the
twelfth month; beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, a constant prepayment rate of 20% per
annum each month is assumed. With respect to the mortgage loans in Loan
Group A, a 100% prepayment assumption assumes a constant prepayment rate of 4%
per annum of the outstanding principal balance of the mortgage loans in Loan
Group A in the first month of the life of such mortgage loans and an additional
amount of approximately 1.068966%, precisely 31/29 percent per annum, in each
month thereafter until the 30th month; beginning in the 30th month and in each
month thereafter during the life of the mortgage loans, a constant prepayment
rate of 35% per annum each month is assumed. As used in the table below, 50%
prepayment assumption assumes prepayment rates equal to 50% of the applicable
prepayment assumption. Correspondingly, 115% prepayment assumption assumes
prepayment rates equal to 115% of the applicable prepayment assumption, and so
forth. Neither prepayment assumption purports to be an historical description of
prepayment experience or a
S-45
<PAGE>
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,
(3) the closing date is June 30, 2000,
(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 July 1, 2000,
(6) all prepayments are prepayments in full received on the last day of
each due period commencing in the calendar month following delivery of the
related mortgage loans with 30 days of accrued interest,
(7) the mortgage loan prepayment rates are a multiple of the prepayment
assumption,
(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 6.94% on each change date,
(12) 1-month LIBOR for each interest period will be 6.68438%,
(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.
S-46
<PAGE>
LOAN GROUP F MORTGAGE LOANS
<TABLE>
<CAPTION>
REMAINING
AMORTIZATION REMAINING TERM ORIGINAL
PRINCIPAL LOAN TERM TO MATURITY AMORTIZATION
BALANCE ($) RATE (%) (MONTHS) (MONTHS) TERM (MONTHS)
--------------- -------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Level Pay.................. $ 6,763,003.13 10.069 110 110 111
Level Pay.................. 32,696,603.53 10.558 176 176 177
Level Pay.................. 16,193,752.48 10.620 236 236 237
Level Pay.................. 4,808,221.07 10.020 290 290 290
Level Pay.................. 149,538,419.80 11.189 359 359 360
---------------
Loan Group F............... $210,000,000.00
===============
</TABLE>
LOAN GROUP A MORTGAGE LOANS
<TABLE>
<CAPTION>
REMAINING NUMBER OF
REMAINING TERM ORIGINAL MONTHS TO
AMORTIZATION TO AMORTIZATION NEXT
PRINCIPAL LOAN TERM MATURITY TERM GROSS CHANGE
BALANCE ($) RATE (%) (MONTHS) (MONTHS) (MONTHS) MARGIN (%) DATE
-------------- -------- ------------ --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Level Pay................................. $44,855,511.56 10.951 358 358 359 6.149 35
Level Pay................................. 18,464,256.09 10.890 360 360 360 5.991 36
Level Pay................................. 1,680,232.35 11.271 358 358 360 6.499 22
--------------
Loan Group A.............................. $65,000,000.00
==============
<CAPTION>
PERIODIC PERIODIC
RATE RATE CAP
CAP (FIRST (SUBSEQUENT
LIFETIME CHANGE CHANGE
CAP (%) DATE) (%) DATES) (%)
------- ----------- -----------
<S> <C> <C> <C>
Level Pay................................. 17.953 3.000 1.000
Level Pay................................. 17.886 2.997 1.000
Level Pay................................. 17.822 2.955 1.000
Loan Group A..............................
</TABLE>
S-47
<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.
S-48
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1F
-----------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 73 63 53 42 32 21 11
June 15, 2002............ 37 13 0 0 0 0 0
June 15, 2003............ 3 0 0 0 0 0 0
June 15, 2004............ 0 0 0 0 0 0 0
June 15, 2005............ 0 0 0 0 0 0 0
June 15, 2006............ 0 0 0 0 0 0 0
June 15, 2007............ 0 0 0 0 0 0 0
June 15, 2008............ 0 0 0 0 0 0 0
June 15, 2009............ 0 0 0 0 0 0 0
June 15, 2010............ 0 0 0 0 0 0 0
June 15, 2011............ 0 0 0 0 0 0 0
June 15, 2012............ 0 0 0 0 0 0 0
June 15, 2013............ 0 0 0 0 0 0 0
June 15, 2014............ 0 0 0 0 0 0 0
June 15, 2015............ 0 0 0 0 0 0 0
June 15, 2016............ 0 0 0 0 0 0 0
June 15, 2017............ 0 0 0 0 0 0 0
June 15, 2018............ 0 0 0 0 0 0 0
June 15, 2019............ 0 0 0 0 0 0 0
June 15, 2020............ 0 0 0 0 0 0 0
June 15, 2021............ 0 0 0 0 0 0 0
June 15, 2022............ 0 0 0 0 0 0 0
June 15, 2023............ 0 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
years(2)
To Maturity............ 1.63 1.24 1.02 0.88 0.78 0.70 0.64
To Call................ 1.63 1.24 1.02 0.88 0.78 0.70 0.64
<CAPTION>
CLASS A-2F
---------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 57 0 0 0 0
June 15, 2003............ 100 0 0 0 0 0 0
June 15, 2004............ 0 0 0 0 0 0 0
June 15, 2005............ 0 0 0 0 0 0 0
June 15, 2006............ 0 0 0 0 0 0 0
June 15, 2007............ 0 0 0 0 0 0 0
June 15, 2008............ 0 0 0 0 0 0 0
June 15, 2009............ 0 0 0 0 0 0 0
June 15, 2010............ 0 0 0 0 0 0 0
June 15, 2011............ 0 0 0 0 0 0 0
June 15, 2012............ 0 0 0 0 0 0 0
June 15, 2013............ 0 0 0 0 0 0 0
June 15, 2014............ 0 0 0 0 0 0 0
June 15, 2015............ 0 0 0 0 0 0 0
June 15, 2016............ 0 0 0 0 0 0 0
June 15, 2017............ 0 0 0 0 0 0 0
June 15, 2018............ 0 0 0 0 0 0 0
June 15, 2019............ 0 0 0 0 0 0 0
June 15, 2020............ 0 0 0 0 0 0 0
June 15, 2021............ 0 0 0 0 0 0 0
June 15, 2022............ 0 0 0 0 0 0 0
June 15, 2023............ 0 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
years(2)
To Maturity............ 3.53 2.53 2.03 1.70 1.48 1.32 1.20
To Call................ 3.53 2.53 2.03 1.70 1.48 1.32 1.20
<CAPTION>
CLASS A-3F
-----------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 87 56 26 0
June 15, 2003............ 100 88 41 0 0 0 0
June 15, 2004............ 99 40 8 0 0 0 0
June 15, 2005............ 64 17 0 0 0 0 0
June 15, 2006............ 40 2 0 0 0 0 0
June 15, 2007............ 26 0 0 0 0 0 0
June 15, 2008............ 21 0 0 0 0 0 0
June 15, 2009............ 14 0 0 0 0 0 0
June 15, 2010............ 6 0 0 0 0 0 0
June 15, 2011............ 0 0 0 0 0 0 0
June 15, 2012............ 0 0 0 0 0 0 0
June 15, 2013............ 0 0 0 0 0 0 0
June 15, 2014............ 0 0 0 0 0 0 0
June 15, 2015............ 0 0 0 0 0 0 0
June 15, 2016............ 0 0 0 0 0 0 0
June 15, 2017............ 0 0 0 0 0 0 0
June 15, 2018............ 0 0 0 0 0 0 0
June 15, 2019............ 0 0 0 0 0 0 0
June 15, 2020............ 0 0 0 0 0 0 0
June 15, 2021............ 0 0 0 0 0 0 0
June 15, 2022............ 0 0 0 0 0 0 0
June 15, 2023............ 0 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
years(2)
To Maturity............ 6.18 3.99 3.00 2.40 2.06 1.82 1.63
To Call................ 6.18 3.99 3.00 2.40 2.06 1.82 1.63
</TABLE>
------------------
(1) The percentages of the prepayment assumption for the Loan Group F and Loan
Group A mortgage loans are as set forth in the column headings above.
(2) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance of
the certificate to the related distribution date, (b) adding the results,
and (c) dividing by the highest related class principal balance of the class
of certificates.
S-49
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION (CONTINUED)(1)
<TABLE>
<CAPTION>
CLASS A-4F
-----------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 100 100 100 94
June 15, 2003............ 100 100 100 99 0 0 0
June 15, 2004............ 100 100 100 31 0 0 0
June 15, 2005............ 100 100 50 0 0 0 0
June 15, 2006............ 100 100 0 0 0 0 0
June 15, 2007............ 100 59 0 0 0 0 0
June 15, 2008............ 100 48 0 0 0 0 0
June 15, 2009............ 100 26 0 0 0 0 0
June 15, 2010............ 100 0 0 0 0 0 0
June 15, 2011............ 92 0 0 0 0 0 0
June 15, 2012............ 61 0 0 0 0 0 0
June 15, 2013............ 31 0 0 0 0 0 0
June 15, 2014............ 3 0 0 0 0 0 0
June 15, 2015............ 0 0 0 0 0 0 0
June 15, 2016............ 0 0 0 0 0 0 0
June 15, 2017............ 0 0 0 0 0 0 0
June 15, 2018............ 0 0 0 0 0 0 0
June 15, 2019............ 0 0 0 0 0 0 0
June 15, 2020............ 0 0 0 0 0 0 0
June 15, 2021............ 0 0 0 0 0 0 0
June 15, 2022............ 0 0 0 0 0 0 0
June 15, 2023............ 0 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
years(2)
To Maturity............ 12.39 7.86 5.06 3.80 2.70 2.36 2.10
To Call................ 12.39 7.86 5.06 3.80 2.70 2.36 2.10
<CAPTION>
CLASS A-5F
------------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 100 100 100 100
June 15, 2003............ 100 100 100 100 79 13 0
June 15, 2004............ 100 100 100 100 68 13 0
June 15, 2005............ 100 100 100 76 33 0 0
June 15, 2006............ 100 100 98 53 18 0 0
June 15, 2007............ 100 100 77 39 13 0 0
June 15, 2008............ 100 100 76 39 13 0 0
June 15, 2009............ 100 100 68 37 13 0 0
June 15, 2010............ 100 100 57 31 13 0 0
June 15, 2011............ 100 86 47 24 10 0 0
June 15, 2012............ 100 72 37 18 5 0 0
June 15, 2013............ 100 60 29 13 1 0 0
June 15, 2014............ 100 49 22 7 0 0 0
June 15, 2015............ 88 40 17 3 0 0 0
June 15, 2016............ 77 33 13 0 0 0 0
June 15, 2017............ 67 27 8 0 0 0 0
June 15, 2018............ 58 22 5 0 0 0 0
June 15, 2019............ 49 18 2 0 0 0 0
June 15, 2020............ 42 14 0 0 0 0 0
June 15, 2021............ 36 10 0 0 0 0 0
June 15, 2022............ 30 7 0 0 0 0 0
June 15, 2023............ 25 4 0 0 0 0 0
June 15, 2024............ 20 1 0 0 0 0 0
June 15, 2025............ 16 0 0 0 0 0 0
June 15, 2026............ 11 0 0 0 0 0 0
June 15, 2027............ 6 0 0 0 0 0 0
June 15, 2028............ 1 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
years(2)
To Maturity............ 19.75 14.90 11.07 7.93 5.26 2.96 2.44
To Call................ 15.93 11.50 8.40 6.09 4.49 2.96 2.44
<CAPTION>
CLASS A-6F
------------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
------- ----- ----- ----- ----- ----- -----
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 100 100 100 100
June 15, 2003............ 100 100 100 100 100 100 57
June 15, 2004............ 92 88 89 92 96 100 57
June 15, 2005............ 84 81 80 81 82 82 57
June 15, 2006............ 73 71 67 64 62 53 34
June 15, 2007............ 65 59 53 47 43 34 20
June 15, 2008............ 44 34 27 25 25 22 11
June 15, 2009............ 30 19 13 10 13 14 4
June 15, 2010............ 20 11 6 4 5 6 0
June 15, 2011............ 13 6 3 1 1 2 0
June 15, 2012............ 9 3 1 1 0 0 0
June 15, 2013............ 6 2 1 0 0 0 0
June 15, 2014............ 4 1 0 0 0 0 0
June 15, 2015............ 2 1 0 0 0 0 0
June 15, 2016............ 1 0 0 0 0 0 0
June 15, 2017............ 1 0 0 0 0 0 0
June 15, 2018............ 1 0 0 0 0 0 0
June 15, 2019............ 0 0 0 0 0 0 0
June 15, 2020............ 0 0 0 0 0 0 0
June 15, 2021............ 0 0 0 0 0 0 0
June 15, 2022............ 0 0 0 0 0 0 0
June 15, 2023............ 0 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
years(2)
To Maturity............ 7.93 7.24 6.86 6.73 6.77 6.63 5.03
To Call................ 7.90 7.18 6.70 6.20 5.58 4.98 3.72
</TABLE>
------------------------
(1) The percentages of the prepayment assumption for the Loan Group F and Loan
Group A mortgage loans are as set forth in the column headings above.
(2) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance of
the certificate to the related distribution date, (b) adding the results,
and (c) dividing by the highest related class principal balance of the
class of certificates.
S-50
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION (CONTINUED)(1)
<TABLE>
<CAPTION>
CLASS A-1A
-----------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 90 87 83 79 75 72 68
June 15, 2002............ 77 68 60 52 44 37 30
June 15, 2003............ 65 52 41 31 22 14 7
June 15, 2004............ 54 39 29 19 12 12 7
June 15, 2005............ 45 30 19 11 6 3 1
June 15, 2006............ 37 22 12 6 3 1 0
June 15, 2007............ 31 16 8 3 1 0 0
June 15, 2008............ 25 12 5 2 1 0 0
June 15, 2009............ 21 9 3 1 0 0 0
June 15, 2010............ 17 6 2 1 0 0 0
June 15, 2011............ 14 5 1 0 0 0 0
June 15, 2012............ 11 3 1 0 0 0 0
June 15, 2013............ 9 2 1 0 0 0 0
June 15, 2014............ 7 2 0 0 0 0 0
June 15, 2015............ 6 1 0 0 0 0 0
June 15, 2016............ 5 1 0 0 0 0 0
June 15, 2017............ 4 1 0 0 0 0 0
June 15, 2018............ 3 0 0 0 0 0 0
June 15, 2019............ 2 0 0 0 0 0 0
June 15, 2020............ 2 0 0 0 0 0 0
June 15, 2021............ 2 0 0 0 0 0 0
June 15, 2022............ 1 0 0 0 0 0 0
June 15, 2023............ 1 0 0 0 0 0 0
June 15, 2024............ 1 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
(years)(2)
To Maturity............ 5.80 4.07 3.15 2.57 2.17 1.89 1.66
To Call................ 5.63 3.96 3.08 2.51 2.13 1.86 1.62
<CAPTION>
CLASS M-1
------------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 100 100 100 100
June 15, 2003............ 100 100 100 100 100 100 100
June 15, 2004............ 100 99 78 60 45 34 62
June 15, 2005............ 100 81 59 42 30 21 14
June 15, 2006............ 94 66 45 30 20 13 8
June 15, 2007............ 82 54 34 22 13 8 4
June 15, 2008............ 71 44 26 16 9 5 0
June 15, 2009............ 61 35 20 11 6 0 0
June 15, 2010............ 53 29 15 8 3 0 0
June 15, 2011............ 45 23 12 6 0 0 0
June 15, 2012............ 39 19 9 3 0 0 0
June 15, 2013............ 33 15 7 0 0 0 0
June 15, 2014............ 28 12 5 0 0 0 0
June 15, 2015............ 24 10 2 0 0 0 0
June 15, 2016............ 21 8 0 0 0 0 0
June 15, 2017............ 18 6 0 0 0 0 0
June 15, 2018............ 15 5 0 0 0 0 0
June 15, 2019............ 13 3 0 0 0 0 0
June 15, 2020............ 11 0 0 0 0 0 0
June 15, 2021............ 9 0 0 0 0 0 0
June 15, 2022............ 7 0 0 0 0 0 0
June 15, 2023............ 6 0 0 0 0 0 0
June 15, 2024............ 5 0 0 0 0 0 0
June 15, 2025............ 2 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
(years)(2)
To Maturity............ 11.86 8.58 6.61 5.41 4.73 4.40 4.40
To Call................ 10.96 7.83 6.02 4.91 4.32 4.05 4.10
</TABLE>
------------------------
(1) The percentage of the prepayment assumption for the Loan Group F and Loan
Group A mortgage loans are as set forth in the column headings above.
(2) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance of
the certificate to the related distribution date, (b) adding the results,
and (c) dividing by the highest related class principal balance of the
class of certificates.
S-51
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION (CONTINUED)(1)
<TABLE>
<CAPTION>
CLASS M-2
-----------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 100 100 100 100
June 15, 2003............ 100 100 100 100 100 100 100
June 15, 2004............ 100 99 78 60 45 34 25
June 15, 2005............ 100 81 59 42 30 21 14
June 15, 2006............ 94 66 45 30 20 13 8
June 15, 2007............ 82 54 34 22 13 8 0
June 15, 2008............ 71 44 26 16 9 0 0
June 15, 2009............ 61 35 20 11 3 0 0
June 15, 2010............ 53 29 15 8 0 0 0
June 15, 2011............ 45 23 12 2 0 0 0
June 15, 2012............ 39 19 9 0 0 0 0
June 15, 2013............ 33 15 5 0 0 0 0
June 15, 2014............ 28 12 1 0 0 0 0
June 15, 2015............ 24 10 0 0 0 0 0
June 15, 2016............ 21 8 0 0 0 0 0
June 15, 2017............ 18 4 0 0 0 0 0
June 15, 2018............ 15 1 0 0 0 0 0
June 15, 2019............ 13 0 0 0 0 0 0
June 15, 2020............ 11 0 0 0 0 0 0
June 15, 2021............ 9 0 0 0 0 0 0
June 15, 2022............ 6 0 0 0 0 0 0
June 15, 2023............ 3 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
(years)(2)
To Maturity............ 11.76 8.47 6.53 5.32 4.59 4.16 3.95
To Call................ 10.96 7.83 6.02 4.90 4.24 3.87 3.70
<CAPTION>
CLASS B
------------------------------------------------------------
50% 75% 100% 125% 150% 175% 200%
------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
-------------------------
Initial Percent.......... 100 100 100 100 100 100 100
June 15, 2001............ 100 100 100 100 100 100 100
June 15, 2002............ 100 100 100 100 100 100 100
June 15, 2003............ 100 100 100 100 100 100 100
June 15, 2004............ 100 99 78 60 45 34 22
June 15, 2005............ 100 81 59 42 30 17 8
June 15, 2006............ 94 66 45 30 16 6 0
June 15, 2007............ 82 54 34 18 7 0 0
June 15, 2008............ 71 44 25 10 1 0 0
June 15, 2009............ 61 35 16 4 0 0 0
June 15, 2010............ 53 28 10 0 0 0 0
June 15, 2011............ 45 21 5 0 0 0 0
June 15, 2012............ 39 15 1 0 0 0 0
June 15, 2013............ 33 10 0 0 0 0 0
June 15, 2014............ 27 5 0 0 0 0 0
June 15, 2015............ 21 2 0 0 0 0 0
June 15, 2016............ 17 0 0 0 0 0 0
June 15, 2017............ 13 0 0 0 0 0 0
June 15, 2018............ 9 0 0 0 0 0 0
June 15, 2019............ 6 0 0 0 0 0 0
June 15, 2020............ 3 0 0 0 0 0 0
June 15, 2021............ 1 0 0 0 0 0 0
June 15, 2022............ 0 0 0 0 0 0 0
June 15, 2023............ 0 0 0 0 0 0 0
June 15, 2024............ 0 0 0 0 0 0 0
June 15, 2025............ 0 0 0 0 0 0 0
June 15, 2026............ 0 0 0 0 0 0 0
June 15, 2027............ 0 0 0 0 0 0 0
June 15, 2028............ 0 0 0 0 0 0 0
June 15, 2029............ 0 0 0 0 0 0 0
Weighted Average Life
(years)(2)
To Maturity............ 11.27 8.07 6.21 5.05 4.34 3.89 3.61
To Call................ 10.90 7.79 5.99 4.86 4.18 3.76 3.51
</TABLE>
------------------
(1) The percentage of the prepayment assumption for the Loan Group F and Loan
Group A mortgage loans are as set forth in the column headings above.
(2) The weighted average life of a class of certificates is determined by
(a) multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance of
the certificate to the related distribution date, (b) adding the results,
and (c) dividing by the highest related class principal balance of the
class of certificates.
S-52
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The property of the trust will consist of, to the extent provided in the
pooling and servicing agreement:
(a) the mortgage loans;
(b) payments received after the cut-off date, other than payments of
interest on the initial mortgage loans due on or before June 1, 2000;
(c) mortgaged properties relating to the mortgage loans that are
acquired by foreclosure or deed in lieu of foreclosure together with all
collections on and proceeds of the mortgaged properties;
(d) the collection account and the distribution account and any assets
deposited in these accounts from time to time and any investment proceeds
of these accounts; and
(e) the initial interest coverage account and the pre-funding account
and funds on deposit in these accounts, if any.
Definitive certificates, as defined under "Description of the
Securities--Book-entry securities" in the prospectus, if issued, will be
transferable and exchangeable at the corporate trust office of the trustee,
which will initially act as certificate Registrar. See "--Book-entry
certificates" below. No service charge will be made for any registration of
exchange or transfer of certificates, but the trustee may require payment of a
sum sufficient to cover any tax or other governmental charge.
The principal balance of a class of certificates, other than the notional
amount certificates, on any distribution date is equal to the applicable class
principal balance on the closing date reduced by the
o aggregate of amounts actually distributed as principal to the holders of
the class of certificates prior to the applicable date and
o in the case of a subordinate certificate, any reductions in the class
principal balance of the subordinate certificate due to realized losses
as described in this prospectus supplement.
The notional amount certificates do not have a class principal balance but
will have a notional amount which for any distribution date prior to the 37th
distribution date will equal the lesser of
(a) the loan group balance of Loan Group F as of the end of the second
preceding due period and
S-53
<PAGE>
(b) the applicable amount set forth below:
<TABLE>
<CAPTION>
DISTRIBUTION DATES NOTIONAL AMOUNT
--------------------------------------------- ---------------
<S> <C>
1-3......................................... $58,500,000
4-6......................................... 55,000,000
7-9......................................... 52,000,000
10-12........................................ 46,000,000
13-15........................................ 41,000,000
16-18........................................ 35,500,000
19-21........................................ 30,500,000
22-24........................................ 26,000,000
25-27........................................ 20,500,000
28-30........................................ 19,500,000
31-33........................................ 18,000,000
34-36........................................ 18,000,000
</TABLE>
On and after the 37th 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 pooling and servicing agreement will include
multiple segregated asset pools, each of which will be treated as a separate
REMIC, creating a tiered REMIC structure. The offered certificates, excluding
any rights to receive 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 Clearstream, Luxembourg or the
Euroclear System, referred to as Euroclear, in Europe, if they are participants
of these systems, or indirectly through organizations which are participants in
these systems. Clearstream, Luxembourg and Euroclear will hold omnibus positions
on behalf of their participants through customers' securities accounts in
Clearstream, Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold positions in customers' securities accounts
in the depositaries' names on the books of DTC. Citibank, N.A., referred to as
Citibank, will act as depositary for Clearstream, Luxembourg and The Chase
Manhattan Bank, referred to as Chase, will act as depositary for Euroclear.
Collectively these entities are referred to as the European depositaries.
S-54
<PAGE>
Investors may hold beneficial interests in the book-entry certificates in
minimum denominations representing class principal balances or notional amount
of $25,000 and in integral multiples of $1,000 in excess of the notional amount
of $25,000. One certificate of each class of offered certificates may be issued
in a different principal amount to accommodate the remainder of the initial
principal amount of the certificates of the class. Unless and until definitive
certificates are issued, it is anticipated that the only certificateholder of
the offered certificates will be Cede & Co., as nominee of DTC. Certificate
owners will not be certificateholders as that term is used in the agreement.
Certificate owners are only permitted to exercise their rights indirectly
through participants and DTC. For a description of the features of the
book-entry registration system, see "Description of the Securities--Book-entry
securities" in the prospectus. For information with respect to tax documentation
procedures relating to the certificates, see "Federal Income Tax
Considerations--Federal Income Tax Consequences to Foreign Investors" and
"--Backup Withholding" in this prospectus supplement and "Global Clearance,
Settlement and Tax Documentation Procedures-Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to this prospectus supplement.
None of the seller, the servicer or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
DISTRIBUTION DATES
Distributions on the certificates will be made by the trustee on the 15th
day of each month or, if that day is not a business day, on the first business
day thereafter, commencing in July 2000, 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.
S-55
<PAGE>
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 payments of principal and interest on the mortgage loans
due during the related Due Period and received by the servicer on or prior
to the determination date, net of amounts representing the servicing fee
with respect to each mortgage loan and reimbursement for related monthly
advances and servicing advances;
(2) Net Liquidation Proceeds and insurance proceeds with respect to the
mortgage loans, net of amounts applied to the restoration or repair of a
mortgaged property and unscheduled payments of principal and interest on
the mortgage loans received by the servicer during the related Prepayment
Period, net of amounts representing the servicing fee with respect to each
mortgage loan and reimbursement for related monthly advances and servicing
advances;
(3) the purchase price for repurchased defective mortgage loans with
respect to the loan group and any related substitution adjustment amounts;
(4) payments from the servicer in connection with
(a) monthly advances,
(b) prepayment interest shortfalls and
(c) the termination of the trust with respect to the mortgage
loans as provided in the agreement;
(5) on the distribution dates during and immediately following the
funding period, amounts from the initial interest coverage account for the
payment of interest on the 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.11 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.
S-56
<PAGE>
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 loan group:
(1) each payment of principal on a mortgage loan due during the related
Due Period and received by the servicer on or prior to the determination
date;
(2) the Net Liquidation Proceeds allocable to principal and all full
and partial principal prepayments received by the servicer during the
related Prepayment Period;
(3) the portion of the purchase price allocable to principal of all
repurchased defective mortgage loans with respect to the Due Period;
(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.
Civil Relief Act Shortfalls: Reductions in the amount of interest due from
borrowers as a result of the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
Class A-6F Percentage: As to any distribution date, the applicable
percentage set forth below:
<TABLE>
<CAPTION>
DISTRIBUTION DATES PERCENTAGES
--------------------------------------------------- -----------
<S> <C>
July 2000-June 2003................................ 0%
July 2003-June 2005................................ 45%
July 2005-June 2006................................ 80%
July 2006-June 2007................................ 100%
July 2007 and thereafter........................... 300%
</TABLE>
Class A-6F Principal Distribution: As to any distribution date, the product
of (1) the applicable Class A-6F 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-6F 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 Trigger Event is not in effect, the
excess of:
(1) the sum of
(A) the aggregate class principal balance of the senior
certificates, after taking into account distributions of the
Senior Principal Distribution Amount for the applicable
distribution date,
(B) the class principal balance of the class M-1 certificates,
after taking into account distribution of the Class M-1
Principal Distribution Amount for the applicable distribution
date,
(C) the class principal balance of the class M-2 certificates,
after taking into account distribution of the Class M-2
Principal Distribution Amount for the applicable distribution
date, and
S-57
<PAGE>
(D) the class principal balance of the class B certificates
immediately prior to the applicable distribution date
over (2) the lesser of
(A) 96.75% of the Pool Balance as of the last day of the related
due period and
(B) the Pool Balance as of the last day of the related due period
minus the OC Floor,
provided, however, that after the class principal balances of the senior,
class M-1 and class M-2 certificates are reduced to zero, the Class B Principal
Distribution Amount for the applicable distribution date will equal 100% of the
Principal Distribution Amount.
Class Interest Carryover Shortfall: As to any class of certificates and any
distribution date, an amount equal to the sum of (1) the excess of the related
Class Monthly Interest Amount for the preceding distribution date and any
outstanding Class Interest Carryover Shortfall with respect to that class on the
preceding distribution date, over the amount in respect of interest that is
actually distributed to the holders of the class on the preceding distribution
date plus (2) one month's interest on the excess, to the extent permitted by
law, at the related certificate rate.
Class Interest Distribution: As to any class of certificates and
distribution date, an amount equal to the sum of (a) the related Class Monthly
Interest Amount and (b) any Class Interest Carryover Shortfall for that class of
certificates for the applicable distribution date.
Class M-1 Principal Distribution Amount: As to any distribution date on or
after the Stepdown Date, (x) 100% of the Principal Distribution Amount if the
class principal balance of each class of senior certificates has been reduced to
zero and a Trigger Event exists, or (y) if a Trigger Event is not in effect, the
excess of
(1) the sum of
(A) the 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) 79.50% of the Pool Balance as of the last day of the related due
period and
(B) the Pool Balance as of the last day of the related due period minus
the OC Floor.
Class M-2 Principal Distribution Amount: As to any distribution date on or
after the Stepdown Date, (x) 100% of the Principal Distribution Amount if the
aggregate class principal balance of each of the senior and class M-1
certificates has been reduced to zero and a Trigger Event exists, or (y) if a
Trigger Event is not in effect, the excess of
(1) the sum of
(A) the aggregate class principal balance of the senior certificates,
after taking into account distributions of the Senior Principal
Distribution Amount for the applicable distribution date,
S-58
<PAGE>
(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) 87.75% 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 pooling and servicing agreement.
Delinquency Amount: As to any distribution date, the aggregate principal
balance of the mortgage loans that are (a) 60 or more days delinquent or (b) in
bankruptcy or foreclosure and REO properties as of the last day of the related
Prepayment Period.
Delinquency Event: A Delinquency Event shall have occurred and be
continuing, if at any time, (x) the three-month rolling average of the
percentage equivalent of a fraction, the numerator of which is the Delinquency
Amount and the denominator of which is the Pool Balance as of the last day of
the related due period exceeds (y) 50% of the Senior Enhancement Percentage.
Due Period: With respect to the first distribution date, the period from
and including June 1, 2000 through and including July 1, 2000, except that with
respect to payments due on June 1, 2000, only collections of principal are
included. With respect to each distribution date thereafter for scheduled
payments of both interest and principal, the period from and including the
second day of the month preceding the month of the applicable distribution date
to and including the first day of the month of that distribution date.
Excess Funding Amount: 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 7. of
clause C. under "--Distribution Priorities," below.
Excess Overcollateralization Amount: As to any distribution date, the
lesser of (1) the Aggregate Principal Amount for the applicable distribution
date and (2) the excess, if any,
S-59
<PAGE>
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 Loan 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 Loan 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 loans
in Loan Group A minus the premium payable to the certificate insurer on the
class A-1A certificates, expressed as a per annum rate.
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 Loan Group Balance
of Loan Group F and the related Pre-Funded Amount as of the last day of the
second preceding due period minus (3) the premium payable to the certificate
insurer on the Group F certificates, expressed as a per annum rate.
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
S-60
<PAGE>
(y) 14% 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) 14% per annum.
Liquidated Mortgage Loan: As to any distribution date, a mortgage loan with
respect to which the servicer has determined, in accordance with the servicing
procedures specified in the pooling and servicing agreement, as of the end of
the preceding Prepayment Period, that all liquidation proceeds which it expects
to recover with respect to that mortgage loan, including the disposition of the
related REO, have been received.
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 certificate
group F certificates, other than the class IOF 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 0.50% of the aggregate class principal balance
of the offered certificates as of the closing date.
Overcollateralization Amount: As to any distribution date, the excess, if
any, of (1) the Pool Balance as of the end of the related due period over (2)
the aggregate class principal balance of the offered certificates after giving
effect to the distribution of the Principal Distribution Amount on the
applicable distribution date.
Pool Balance: As of any date of determination, the sum of the Loan 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.
Prepayment Period: As to any distribution date, the preceding calendar
month.
Principal Balance: As to any mortgage loan and any date of determination,
the unpaid principal balance of the mortgage loan as of the related cut-off date
minus all amounts credited against the Principal Balance prior to the date of
determination.
Principal Distribution Amount: As to any distribution date, the lesser of
(a) the aggregate class principal balance of the offered certificates
immediately preceding the
S-61
<PAGE>
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 the first distribution date,
zero. As to any other distribution date (a) prior to the Stepdown Date, the
product of (x) 1.625% 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 1.625% and the aggregate original class
principal balance of the offered certificates and (y) the product of 3.25% 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 1.625% of the aggregate original class principal balance of the offered
certificates or (b) a Delinquency Event, provided that a Cumulative Loss Event
is not then continuing, the Required Overcollateralization Amount will equal the
Required Overcollateralization Amount in effect as of the distribution date
immediately preceding the date on which the Delinquency Event first occurred.
Senior Enhancement Percentage: As to any distribution date, the percentage
equivalent of a fraction, the numerator of which is the sum of (1) the aggregate
class principal balance of the subordinate certificates and (2) the
Overcollateralization Amount, in each case, after taking into account the
distribution of the Principal Distribution Amount on the applicable distribution
date, and the denominator of which is the Pool Balance as of the last day of the
related due period.
Senior Principal Distribution Amount: As to (a) any distribution date prior
to the Stepdown Date or during the continuation of a Trigger Event, the lesser
of (1) 100% of the Principal Distribution Amount and (2) the aggregate class
principal balance of the senior certificates, and (b) any other distribution
date, an amount equal to the lesser of (1) the Principal Distribution Amount and
(2) the excess, if any, of (x) the aggregate class principal balance of the
senior certificates immediately prior to the applicable distribution date over
(y) the lesser of (A) 67.50% of the Pool Balance as of the last day of the
related due period and (B) the Pool Balance as of the last day of the related
due period minus the OC Floor.
Stepdown Date: The later to occur of (x) the earlier to occur of (A) the
distribution date in July 2003 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 32.50%.
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 Deficit: As to any distribution date, the excess, if any, of
(x) the aggregate class principal balance of the senior certificates over
(y) the sum of the Pool Balance as of the end of the related due period plus the
amount, if any, remaining in the pre-funding account.
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Subordination Increase Amount: As to the first distribution date, zero. As
to any subsequent distribution date, the lesser of (x) the Subordination
Deficiency and (y) the Excess Interest.
Trigger Event: The existence of either a Cumulative Loss Event or a
Delinquency Event.
DISTRIBUTION PRIORITIES
On each distribution date the trustee will withdraw (x) any payments made
under the financial guaranty insurance policy and (y) from the distribution
account the Available Funds for each loan group and apply this amount in the
following order of priority, in each case, to the extent of the funds remaining;
provided that payments under the financial guaranty insurance policy may only be
applied to make the Guaranteed Distributions:
A. Loan Group F
1. Concurrently, to the trustee and the certificate insurer, the
trustee fee and the premium for Loan Group F, respectively, for the
applicable distribution date.
2. Concurrently, to each class of senior certificates in
certificate group F, the related Class Interest Distribution for the
applicable distribution date.
3. The remaining amount pursuant to clause C. below.
B. Loan Group A
1. Concurrently, to the trustee and the certificate insurer, the
trustee fee and the premium for Loan Group A, respectively, for the
applicable distribution date.
2. To the class A-1A certificates, the related Class Interest
Distribution 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 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 Amount
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 certificate insurer, any amounts owing to the
certificate insurer under the insurance agreement.
5. 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.
6. To the class M-2 certificates, the Class M-2 Principal
Distribution Amount for the applicable distribution date, excluding any
Subordination Increase Amount included in that amount.
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7. 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.
8. To the offered certificates, the Subordination Increase
Amount for the applicable distribution date, allocated as described
under "--Principal Priorities" below.
9. To the class M-1 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
10. To the class M-2 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
11. To the class B certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
12. To the class BIO certificates for concurrent deposit in the
LIBOR carryover fund and the net rate cap fund.
13. To the class A-1A certificates, the lesser of the LIBOR
Carryover and the Available LIBOR Carryover Amount from the LIBOR
carryover fund.
14. Sequentially, (a) concurrently to the class A-1F,
class A-2F, class A-3F, class A-4F, class A-5F and class A-6F
certificates, pro rata, and (b) sequentially, to the class M-1,
class M-2 and class B certificates, in that order, the related Net Rate
Cap Carryover, from the net rate cap fund.
15. To the class BIO certificates, the amount required by the
pooling and servicing agreement.
16. To the trustee, reimbursement for expenses incurred by the
trustee relating to the transition of servicing functions to the
trustee following the resignation or termination of the servicer.
17. To the residual certificates, any remaining amounts.
On each distribution date, the Class Interest Distribution for each class
of senior certificates 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.
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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.8 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 allocated in the following order of
priority:
(a) to the class A-6F certificates, the Class A-6F Principal
Distribution, until the class principal balance 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 and class A-6F 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 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 pooling and servicing agreement.
Notwithstanding the priority set forth in clause A(1) and (2) above, if a
certificate insurer default has occurred and is continuing and 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.
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 for each of the fixed rate certificates, other than the class IOF
certificates, is subject to the lower of the Loan Group F Cap and the Loan Group
A Cap. The certificate rate on the class A-5F, class A-6F, class M-1, class M-2
and class B certificates will increase by 0.50% after the optional termination
date.
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) 14%, and
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(z) the Loan Group A Cap.
The certificate margin for the adjustable rate certificates will be as
follows:
<TABLE>
<CAPTION>
CERTIFICATE MARGIN
-------------------------
CLASS (1) (2)
----------------------------------- ----------- -----------
<S> <C> <C>
A-1A............................... 0.32% 0.64%
</TABLE>
------------------
(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.
THE POLICY
The following summary of the terms of the policy does not purport to be
complete and is qualified in its entirety by reference to the policy. A form of
the policy may be obtained, upon request, from the trustee.
Simultaneously with the issuance of the certificates, the certificate
insurer will deliver the policy to the trustee for the benefit of each
certificateholder of a senior certificate. Under the policy, the certificate
insurer unconditionally and irrevocably guarantees to the trustee for the
benefit of each senior certificateholder the full and complete payment of (i)
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Guaranteed Distributions (as defined below) on the senior certificates and
(ii) the amount of any Guaranteed Distribution which subsequently is voided in
whole or in part as a preference payment under applicable law.
"Guaranteed Distributions" means the sum of (x) Class Monthly Interest
Amount on each class of senior certificates, plus (y) the Subordination Deficit,
plus (z) without duplication of clause (y) the outstanding class principal
balance of each class of senior certificates on their respective Final Scheduled
Distribution Dates after giving effect to distributions thereon on that
distribution date, determined in accordance with the original terms of the
senior certificates when issued and without regard to any subsequent amendment
or modification of the senior certificates; payments which become due on an
accelerated basis do not constitute "Guaranteed Distributions," unless the
certificate insurer elects, in its sole discretion, to pay that principal due
upon acceleration, together with any accrued interest to the date of
acceleration.
Payment of claims on the policy made in respect of Guaranteed Distributions
will be made by the certificate insurer following Receipt by the certificate
insurer of the appropriate notice for payment on the later to occur of
(x) 12:00 noon, New York City time, on the third Business Day following Receipt
of the notice for payment, and (y) 12:00 noon, New York City time, on the date
on which such payment was due on the senior certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the policy, the certificate insurer shall cause the payment to be made on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (1) the fourth Business Day following Receipt
by the certificate insurer from the trustee of
(A) a certified copy of the order (the "Order") of the court or other
governmental body which exercised jurisdiction to the effect that the
certificateholder is required to return principal or interest paid on the senior
certificates during the term of the policy because those payments were avoidable
as preference payments under applicable bankruptcy law,
(B) a certificate of the certificateholder that the Order has been entered
and is not subject to any stay, and
(C) an assignment duly executed and delivered by the certificateholder, in
a form as is reasonably required by the certificate insurer and provided to the
certificateholder by the certificate insurer, irrevocably assigning to the
certificate insurer all rights and claims of the certificateholder relating to
or arising under the senior certificates against the trust or otherwise with
respect to the applicable preference payment, or
(2) the date of Receipt by the certificate insurer from the trustee of the items
referred to in clauses (A), (B) and (C) above if, at least four Business Days
prior to the date of Receipt, the certificate insurer shall have Received
written notice from the trustee that the items were to be delivered on that date
and that date was specified in the applicable notice. The payment shall be
disbursed to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order and not to the trustee or any certificateholder
directly, unless a certificateholder has previously paid the applicable amount
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Order, in which
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case the applicable payment shall be disbursed to the trustee, for distribution
to such certificateholder upon proof of payment reasonably satisfactory to the
certificate insurer.
The terms "Receipt" and "Received," with respect to the policy, shall mean
actual delivery to the certificate insurer and to the fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on a
day that is not a Business Day or after 12:00 noon, New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the policy by the trustee is not in proper form or is
not properly completed, executed or delivered, it shall be deemed not to have
been Received, and the certificate insurer or the fiscal agent shall promptly so
advise the trustee and the trustee may submit an amended notice.
Under the policy, "Business Day" means any day other than (x) a Saturday or
Sunday or (y) a day on which banking institutions in New York, New York, or in
the city in which the corporate trust office of the trustee is located are
authorized or obligated by law or executive order to be closed.
The certificate insurer's obligations under the policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the trustee as provided in the policy whether or not those funds are properly
applied by the trustee.
The certificate insurer shall be subrogated to the rights of each senior
certificateholder to receive payments of principal and interest under the senior
certificates to the extent of any payment by the certificate insurer under the
policy. To the fullest extent permitted by applicable law, the certificate
insurer agrees under the policy not to assert, and waives, for the benefit of
each senior certificateholder, all its rights (whether by counterclaim, setoff
or otherwise) and defenses (including, without limitation, the defense of
fraud), whether acquired by subrogation, assignment or otherwise, to the extent
that those rights and defenses may be available to the certificate insurer to
avoid payment of its obligations under the policy in accordance with the express
provisions of the policy.
Claims under the policy constitute direct, unsecured and unsubordinated
obligations of the certificate insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the certificate insurer for
borrowed money. Claims against the certificate insurer under the policy and
claims against the certificate insurer under each other financial guaranty
insurance policy issued thereby constitute pari passu claims against the general
assets of the certificate insurer. The terms of the policy cannot be modified or
altered by any other agreement or instrument. The policy may not be canceled or
revoked prior to payment in full of the senior certificates. The policy is not
covered by the property/casualty insurance security fund specified in
Article 76 of the New York Insurance Law. The policy is governed by the laws of
the State of New York.
The seller and the certificate insurer will enter into the insurance
agreement pursuant to which the seller will agree to reimburse, with interest,
the certificate insurer for amounts paid pursuant to claims under the policy.
The seller will further agree to pay the certificate insurer all reasonable
charges and expenses which the certificate insurer may pay or incur relative to
any amounts paid under the policy or otherwise in connection with the
transaction and to indemnify the certificate insurer against certain
liabilities. Amounts owing by the seller under the insurance agreement will be
secured by, and payable solely from, the trust except as provided in the
insurance agreement.
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Except during the continuation of a certificate insurer default, the
certificate insurer will have the power to exercise all of the voting rights of
the holders of the senior certificates.
OVERCOLLATERALIZATION PROVISIONS
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, that is,
the certificates are undercollateralized, the class principal balance of the
class of subordinate certificates then outstanding with the lowest relative
payment priority will be reduced by the amount of the excess. Any reduction will
constitute a Class Principal Carryover Shortfall for the applicable class.
Although a Class Principal Carryover Shortfall will not accrue interest, this
amount may be paid on a future distribution date to the extent funds are
available for distribution as provided above under "--Distribution Priorities."
For all purposes of this prospectus supplement the class B certificates
will have the lowest payment priority of any class of subordinate certificates.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to certificateholders, the trustee will
prepare and make available to each certificateholder a statement setting forth,
among other items the following, to the extent applicable to each class of
certificates:
(a) the aggregate amount of the distribution to each class of
certificates on the applicable distribution date;
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<PAGE>
(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 Group F
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;
(s) during the funding period, the amount remaining in the initial
interest coverage account; and
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(t) the amount paid under the policy on that distribution date in
respect of interest and principal.
In the case of information furnished pursuant to clauses (b) and (c) above,
the amounts shall be expressed as a dollar amount per certificate with a $1,000
denomination.
Within 60 days after the end of each calendar year, the trustee will
forward to each person, if requested in writing by that person, who was a
certificateholder during the prior calendar year a statement containing the
information set forth in clauses (b) and (c) above aggregated for the applicable
calendar year.
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THE CERTIFICATE INSURER
The certificate insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The certificate insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
The certificate insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. Financial guaranty insurance provides a
guaranty of scheduled payments of an issuer's securities, thereby enhancing the
credit rating of those securities, in consideration for the payment of a premium
to the insurer. The certificate insurer and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed securities
are typically supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities include general
obligation bonds, special revenue bonds and other special obligation of state
and local governments. The certificate insurer insures both newly-issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the certificate insurer's underwriting criteria.
The certificate insurer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include White Mountains Insurance Group, Ltd.,
The Tokio Marine and Fire Insurance Co., Ltd. and XL Capital Ltd. On March 14,
2000, Holdings announced that it had entered into a merger agreement pursuant to
which Holdings would become a wholly owned subsidiary of Dexia S.A., a publicly
held Belgian corporation, subject to satisfaction of regulatory and other
closing conditions. Dexia S.A., through its bank subsidiaries, is primarily
engaged in the business of public finance in France, Belgium and other European
countries. No shareholder of Holdings is obligated to pay any debt of the
certificate insurer or any claim under any insurance policy issued by
certificate insurer or to make any additional contribution to the capital of the
certificate insurer.
The principal executive offices of the certificate insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE
Under an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the certificate insurer or
its domestic or Bermuda operating insurance company subsidiaries are usually
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the certificate insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the
certificate insurer as a risk management device and to comply
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with certain statutory and rating agency requirements; it does not alter or
limit the certificate insurer's obligations under any financial guaranty
insurance policy.
RATINGS
The certificate insurer's financial strength is rated "Aaa" by Moody's. The
certificate insurer's insurer financial strength is rated "AAA" by each of
Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd. The certificate
insurer's claims-paying ability is rated "AAA" by each of Fitch, Inc. and Japan
Rating and Investment Information, Inc. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
CAPITALIZATION
The following table sets forth the capitalization of the certificate
insurer and its subsidiaries as of March 31, 2000, on the basis of accounting
principles generally accepted in the United States:
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------
(IN THOUSANDS)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums).................
$ 547,872
-----------
Surplus Notes.................................................................. 120,000
-----------
Minority Interest.............................................................. 33,914
-----------
Shareholder's Equity:
Common Stock................................................................ 15,000
Additional Paid-In Capital.................................................. 841,036
Accumulated Other Comprehensive Loss (net of deferred income taxes)......... (3,409)
Accumulated Earnings........................................................ 508,095
-----------
Total Shareholder's Equity..................................................... 1,360,722
-----------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest and
Shareholder's Equity........................................................ $ 2,062,508
===========
</TABLE>
For further information concerning the certificate insurer, see the
Consolidated Financial Statements of Financial Security Assurance Inc. and
Subsidiaries, and the notes thereto, incorporated by reference herein. The
certificate insurer's financial statements are included as exhibits to the
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed
with the Securities and Exchange Commission (the "Commission") by Holdings and
may be viewed at the EDGAR website maintained by the Commission and at the
Holdings website at http://www.FSA.com. Copies of the statutory quarterly and
annual financial statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of New
York Insurance Department.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the financial statements of the
certificate insurer and subsidiaries included in, or as exhibits to, the
following documents which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this prospectus
supplement: the Annual Report on Form 10-K for the year ended December 31, 1999.
All financial statements of the certificate insurer and subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this prospectus supplement and prior to the termination of the offering of
the offered certificates shall be deemed to be incorporated by reference into
this prospectus supplement and to be a part hereof from the respective dates of
filing such documents.
The seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the foregoing financial statements incorporated
in this prospectus supplement by reference. Requests for such copies should be
directed to 1000 Woodbury Road, Woodbury, New York 11797, Attention: Corporate
Secretary.
The seller on behalf of the trust hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
trust's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, and each filing of the financial statements of
the certificate insurer included in or as an exhibit to the annual report of
Holdings filed pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934, that is incorporated by reference in the registration
statement, as defined in the prospectus, shall be deemed to be a new
registration statement relating to the offered certificates offered hereby, and
the offering of those offered certificates at that time shall be deemed to be
the initial bona fide offering thereof.
INSURANCE REGULATION
The certificate insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the certificate insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the certificate insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and the
volume of transactions ("aggregate risks") that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the certificate insurer, regulate, among other
things, permitted
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investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
COUNTRYWIDE HOME LOANS, INC.
GENERAL
Countrywide Home Loans, Inc., called Countrywide, will act as servicer
under the pooling and servicing agreement. During the servicing transfer period
expected to be completed by August 1, 2000, the seller will directly service the
mortgage loans as interim subservicer on behalf of Countrywide. Upon completion
of the servicing transfer, Countrywide will directly service the mortgage loans.
Both the seller, as interim subservicer, and Countrywide, as servicer, will
service the mortgage loans in accordance with the terms of the pooling and
servicing agreement.
Countrywide is a New York corporation and a subsidiary of Countrywide
Credit Industries, Inc. Countrywide is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
Countrywide originates mortgage loans through a retail branch system and through
mortgage loan brokers and correspondents nationwide. Countrywide's mortgage
loans are principally first-lien, fixed or adjustable rate mortgage loans
secured by single-family residences.
As of March 31, 2000, Countrywide provided servicing for mortgage loans
with an aggregate principal balance of approximately $252.8 billion,
substantially all of which are being serviced for unaffiliated persons. As of
March 31, 2000, Countrywide provided servicing for approximately $7.5 billion in
subprime mortgage loans.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302. Its telephone number is (818) 225-3000.
Countrywide conducts operations from its headquarters in Calabasas and from
offices throughout the nation.
LOAN SERVICING
Countrywide has established standard policies for the servicing and
collection of mortgages. Servicing includes, but is not limited to:
(a) collecting, aggregating and remitting mortgage loan payments,
(b) accounting for principal and interest,
(c) holding escrow (impound) funds for payment of taxes and insurance,
(d) making inspections as required of the mortgaged properties,
(e) preparation of tax related information in connection with the
mortgage loans,
(f) supervision of delinquent mortgage loans,
(g) loss mitigation efforts,
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(h) foreclosure proceedings and, if applicable, the disposition of
mortgaged properties, and
(i) generally administering the mortgage loans, for which it receives
servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
Countrywide. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by
Countrywide to the mortgagor with such statements.
COLLECTION PROCEDURES
When a mortgagor fails to make a payment on a subprime mortgage loan,
Countrywide attempts to cause the deficiency to be cured by corresponding with
the mortgagor. Pursuant to Countrywide's subprime servicing procedures,
Countrywide generally mails to the mortgagor a notice of intent to foreclose
after the loan becomes 31 days past due (two payments due but not received) and,
within 30 days thereafter, if the loan remains delinquent, institutes
appropriate legal action to foreclose on the mortgaged property. Foreclosure
proceedings may be terminated if the delinquency is cured. Mortgage loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such loans, including any
deficiencies.
Once foreclosure is initiated by Countrywide, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
If foreclosed, the mortgaged property is sold at a public or private sale
and may be purchased by Countrywide. After foreclosure, Countrywide may
liquidate the mortgaged property and charge-off the loan balance which was not
recovered through liquidation proceeds.
Servicing and charge-off policies and collection practices with respect to
subprime mortgage loans may change over time in accordance with, among other
things, Countrywide's business judgment, changes in the servicing portfolio and
applicable laws and regulations.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the pooling and servicing
agreement. A form of pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus supplement and
the prospectus are a part. The following summaries together with the information
in this prospectus supplement under "Description of the Certificates" and in the
prospectus under the headings "Description of the Securities" and "The
Agreements" describe the material provisions of the pooling and
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servicing agreement. The summaries do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the pooling and servicing agreement. Wherever particular sections or defined
terms of the pooling and servicing agreement are referred to, these sections or
defined terms are incorporated by reference in this prospectus supplement.
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 June 1, 2000. 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 pooling and
servicing agreement. This schedule will include information as to the Principal
Balance of each mortgage loan as of the related cut-off date, as well as
information with respect to the loan rate.
The pooling and servicing agreement will require that, within the time
period specified in the agreement, the seller will deliver to the trustee, or
the custodian, as the trustee's agent for this purpose, the mortgage loans
endorsed to the trustee and the related documents. In lieu of delivery of
original mortgages, if the original is not available, the seller may deliver
true and correct copies of the original mortgages.
Under the terms of the pooling and servicing agreement, the seller will
promptly and in no event later than 30 days after the closing date with respect
to the initial mortgage loans and promptly but not later than 30 days after each
subsequent transfer date with respect to the related subsequent mortgage loans,
prepare and record assignments of the mortgages related to each mortgage loan in
favor of the trustee, unless opinions of counsel satisfactory to the certificate
insurer and the rating agencies are delivered to the trustee to the effect that
recordation of the assignments is not required in the relevant jurisdictions to
protect the interests of the trustee in the mortgage loans. If the recording
information with respect to any assignment of mortgage is unavailable within
30 days of the closing date or subsequent transfer date, as the case may be, the
assignment will be prepared and recorded within 30 days after receipt of this
information, but in no event later than one year after the closing date or
subsequent transfer date, as the case may be.
Within 45 days of the closing date with respect to the initial mortgage
loans and each subsequent transfer date with respect to the related subsequent
mortgage loans, the trustee, or the custodian on behalf of the trustee, will
review the mortgage loans and the related documents pursuant to the agreement
and if any mortgage loan or related document is found to be defective in any
material respect and the defect is not cured within 90 days following
notification of the defect to the seller by the trustee, the seller will be
obligated to either (a) substitute for the mortgage loan an eligible substitute
mortgage loan; however, this substitution is permitted only within two years of
the closing date and may not be made unless an opinion of counsel is provided to
the effect that the substitution will not
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disqualify any REMIC as a REMIC or result in a prohibited transaction tax under
the Internal Revenue Code or (b) purchase the mortgage loan at a price equal to
the outstanding Principal Balance of the mortgage loan as of the date of
purchase, plus unpaid interest on the mortgage loan from the date interest was
last paid or with respect to which interest was advanced and not reimbursed
through the end of the calendar month in which the purchase occurred, computed
at the loan rate, net of the servicing fee if the seller is the servicer, plus
if the seller is not the servicer the amount of any unreimbursed servicing
advances made by the servicer. The purchase price will be deposited in the
collection account on or prior to the next succeeding determination date after
the obligation arises. The obligation of the seller to repurchase or substitute
for a defective mortgage loan is the sole remedy regarding any defects in the
mortgage loans and related documents available to the trustee or the
certificateholders.
In connection with the substitution of an eligible substitute mortgage
loan, the seller will be required to deposit in the collection account on or
prior to the next succeeding determination date after the obligation arises a
substitution amount equal to the excess of the Principal Balance of the related
defective mortgage loan over the Principal Balance of the eligible substitute
mortgage loan.
An eligible substitute mortgage loan is a mortgage loan to be substituted
by the seller for a defective mortgage loan which must, on the date of the
substitution,
o have an outstanding principal balance after deducting all scheduled
principal payments due in the month of the substitution, or in the case
of a substitution of more than one mortgage loan for a defective mortgage
loan, an aggregate Principal Balance, not in excess of, and not less than
95% of, the Principal Balance of the defective mortgage loan;
o have a loan rate not less than the loan rate of the defective mortgage
loan and not more than 1% in excess of the loan rate of the defective
mortgage loan;
o have a mortgage of the same or higher level of priority as the mortgage
relating to the defective mortgage loan;
o have a remaining term to maturity not more than six months earlier and
not later than the remaining term to maturity of the defective mortgage
loan; and
o comply with each representation and warranty as to the mortgage loans set
forth in the pooling and servicing agreement, deemed to be made as of the
date of substitution.
The seller will make representations and warranties as to the accuracy in
all material respects of information furnished to the trustee with respect to
each mortgage loan. In addition, the seller will represent and warrant, on the
closing date, that, among other things: (a) at the time of transfer to the
trust, the seller has transferred or assigned all of its right, title and
interest in each mortgage loan and the related documents, free of any lien; and
(b) each mortgage loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any representation and warranty which materially and adversely affects the value
of, or the interests of the certificateholders in, the related mortgage loan and
related documents, the seller will have a
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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 pooling and servicing agreement that materially and adversely
affects the interests of the certificateholders.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The servicer will establish and maintain in the name of the trustee a
separate collection account for the benefit of the holders of the certificates.
The collection account will be an eligible account, as defined in this
prospectus supplement. Upon receipt by the servicer of amounts in respect of the
mortgage loans, excluding amounts representing the servicing fee, reimbursement
for monthly advances and servicer advances and insurance proceeds to be applied
to the restoration or repair of a mortgaged property or similar items and
amounts in respect of interest due on or before June 1, 2000, the servicer will
deposit these amounts in the collection account. Amounts so deposited may be
invested in eligible investments, as described in the pooling and servicing
agreement, maturing no later than one business day prior to the date on which
the amount on deposit is required to be deposited in the distribution account or
on the applicable distribution date if approved by the rating agencies.
The trustee will establish a distribution account. No later than 1:00 p.m.
New York time on or before the business day prior to each distribution date, the
Available Funds for a loan group and that distribution date are required to be
deposited into the distribution account. The distribution account will be an
eligible account. Amounts on deposit in the distribution account may be invested
in eligible investments maturing on or before the business day prior to the
related distribution date or, if the eligible investments are an obligation of
the trustee or are money market funds for which the trustee or any affiliate is
the manager or the advisor, the eligible investments shall mature no later than
the related distribution date. Investment earnings from amounts on deposit in
the distribution account will not be part of Available Funds.
An eligible account is a segregated account that is
1. maintained with a depository institution whose debt obligations at the
time of any deposit in the eligible account have the highest short-term
debt rating by the rating agencies and whose accounts are insured to the
maximum extent provided by either the Savings Association Insurance Fund
or the Bank Insurance Fund of the Federal Deposit Insurance Corporation
established by the fund with a minimum long-term unsecured debt rating
of A by Standard & Poor's Ratings Services and A2 by Moody's Investor
Services, Inc. and which is any of
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(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 $50,000,000,
acting in its fiduciary capacity; or
3. otherwise acceptable to each rating agency as evidenced by a letter from
each rating agency to the trustee, without reduction or withdrawal of
the then current ratings of the offered certificates without regard to
the financial guaranty insurance policy.
ADVANCES
The determination date for each distribution date is on the fourth business
day prior to that distribution date. On or prior to the business day before each
distribution date, the servicer will deposit in the collection account an amount
equal to each scheduled payment due on a mortgage loan during the related due
period but not received by the servicer as of the related determination date,
net of the servicing fee, called a monthly advance. The obligation of the
servicer continues with respect to each mortgage loan until the mortgage loan
becomes a Liquidated Mortgage Loan. So long as the servicer is Countrywide Home
Loans, Inc. or has long-term debt rated at least investment grade, the servicer
may fund monthly advances from amounts in the collection account that are being
held for future distribution but must replace any of those funds so used prior
to the next distribution date.
In the course of performing its servicing obligations, the servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of
o the preservation, restoration and protection of the mortgaged properties,
o any enforcement or judicial proceedings, including foreclosures, and
o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
Each expenditure will constitute a servicing advance.
The servicer's right to reimbursement for servicing advances is limited to
late collections on the related mortgage loan, including liquidation proceeds,
released mortgaged property proceeds, insurance proceeds and any other amounts
as may be collected by the servicer from the related mortgagor or otherwise
relating to the mortgage loan in respect of which the unreimbursed amounts are
owed. The servicer's right to reimbursement for monthly advances is limited to
late collections on any mortgage loan and to liquidation
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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, if any, 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.
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CARRYOVER RESERVE FUNDS
The pooling and servicing 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 fixed rate certificates, other than the class IOF
certificates, with respect to the net rate cap fund. To the extent amounts on
deposit are sufficient, holders of the applicable 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
pooling and servicing agreement, follow the same collection procedures as it
follows with respect to comparable loans held in its own portfolio. Consistent
with the above and subject to the limitations set forth in the pooling and
servicing agreement, the servicer may, in its discretion, (a) waive any
assumption fee, late payment charge, or other charge in connection with a
mortgage loan and (b) arrange with an obligor a schedule for the liquidation of
delinquencies by extending the due dates for scheduled payments on the mortgage
loans. In addition, the servicer has the right to modify the terms of the
mortgage loans if the modification would be made by the servicer if the mortgage
loan were held for the servicer's own account and it first delivers to the
trustee written notice of the modification together with the calculations
demonstrating that the modification is permitted by the REMIC provisions of the
Internal Revenue Code and applicable Treasury regulations.
SERVICING COMPENSATION, PAYMENT OF EXPENSES AND PREPAYMENT INTEREST SHORTFALLS
With respect to each due period, the servicer will receive from interest
payments in respect of the mortgage loans a portion of the interest payments as
a monthly servicing fee in the amount equal to 0.50% 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, prepayment charges and other fees and
charges, excluding prepayment charges, to the extent collected from borrowers,
will be retained by the servicer as additional servicing compensation.
Not later than the determination date, the servicer is required to remit to
the trustee, without any right of reimbursement, an amount equal to, with
respect to each mortgage loan as to which a principal prepayment in full was
received during the related prepayment period, the lesser of (a) the excess, if
any, of the sum of 30 days' interest on the Principal
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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 fees
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
May 31 of each year beginning May 31, 2001, to the trustee, the certificate
insurer and the rating agencies of an annual statement signed by an officer of
the servicer to the effect that the servicer has fulfilled its material
obligations under the pooling and servicing agreement throughout the preceding
fiscal year, except as specified in the statement.
On or before May 31 of each year beginning May 31, 2001, the servicer will
furnish a report prepared by a firm of nationally recognized independent public
accountants, who may also render other services to the servicer, to the trustee,
the certificate insurer and the rating agencies to the effect that the firm has
examined particular documents and the records relating to servicing of the
mortgage loans under the Uniform Single Attestation Program for Mortgage Bankers
and the firm's conclusions.
CERTAIN MATTERS REGARDING THE SERVICER
The pooling and servicing agreement provides that the servicer may not
resign from its obligations and duties under that agreement, except in
connection with a permitted transfer of servicing, unless (1) these duties and
obligations are no longer permissible under applicable law as evidenced by an
opinion of counsel delivered to the trustee and the certificate insurer or (2)
upon the satisfaction of the following conditions:
(a) the servicer has proposed a successor servicer to the seller and the
trustee in writing and the proposed successor servicer is reasonably acceptable
to the seller and the trustee;
(b) the proposed successor servicer
o is the seller
or
o is an affiliate of Norwest Bank Minnesota, National Association that
services similar collateral
or
o if the aggregate class principal balance of the senior certificates
is greater than 50% of the aggregate class principal balance of all
the certificates, the proposed successor servicer is approved by the
holders of certificates evidencing at least 51% of the voting rights
in the trust
or
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o if the aggregate class principal balance of the senior certificates
is 50% or less than the aggregate class principal balance of all the
certificates, the proposed sucessor servicer is an approved servicer
by Standard & Poor's Ratings Services
and
(c) the rating agencies have confirmed to the trustee that the appointment
of the proposed successor servicer as the servicer will not result in the
reduction or withdrawal of the then current ratings of the offered certificates.
No resignation will become effective until a successor servicer has assumed the
servicer's obligations and duties under the pooling and servicing agreement.
The servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the servicer. Notwithstanding any arrangement, the
servicer will remain liable and obligated to the trustee and the
certificateholders for the servicer's duties and obligations under the pooling
and servicing agreement, without any diminution of these duties and obligations
and as if the servicer itself were performing the duties and obligations.
Any corporation into which the servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the servicer shall be a party, or any corporation succeeding to the business of
the servicer shall be the successor of the servicer under the pooling and
servicing agreement, without the execution or filing of any paper or any further
act on the part of any of the parties to the pooling and servicing agreement,
anything in the pooling and servicing agreement to the contrary notwithstanding.
EVENTS OF DEFAULT
Events of default will consist of:
o any failure by the servicer (a) to make any required monthly advance
which failure continues unremedied for one business day after the date
due or (b) to deposit in the collection account or the distribution
account any deposit required to be made under the pooling and servicing
agreement, which failure continues unremedied for two business days after
the date due;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the pooling and
servicing agreement which, in each case, materially and adversely affects
the interests of the certificateholders and continues unremedied for
60 days after knowledge or the giving of written notice of the failure to
the servicer by the trustee, or to the servicer and the trustee by
certificateholders evidencing at least 25% of the voting rights;
o any failure by the servicer to make any required servicing advance, which
failure continues unremedied for the lesser of the time at which the
failure would have a material adverse effect on the trust or for a period
of 60 days after knowledge or the giving of written notice of the failure
to the servicer by the trustee, or to the servicer and the trustee by
certificateholders evidencing at least 25% of the voting rights;
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o particular events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the servicer
and particular actions by the servicer indicating insolvency,
reorganization or inability to pay its obligations; and
o cumulative losses or delinquency levels exceed the levels set forth in
the pooling and servicing agreement.
So long as an event of default remains unremedied, the trustee or holders
of certificates evidencing not less than 51% of the aggregate voting rights in
the trust may terminate all of the rights and obligations of the servicer as
servicer under the pooling and servicing agreement, other than its right to
recovery of expenses and amounts advanced pursuant to the terms of the pooling
and servicing agreement; provided, however, that in the case of the last event
of default listed above, those holders, in their sole discretion, must first
determine that the loss or delinquency levels were exceeded through the fault of
the servicer.
Notwithstanding anything to the contrary in the prospectus, pursuant to the
terms of the pooling and servicing agreement, within ninety (90) days of the
removal of the servicer, called the transition period, the trustee will be the
successor servicer and will assume all of the rights and obligations of the
servicer. Notwithstanding the foregoing sentence, the successor servicer will be
obligated to make monthly advances and servicing advances upon the removal of
the servicer unless it determines reasonably and in good faith that the advances
would not be recoverable. The successor servicer shall have no responsibility or
obligation (x) to repurchase or substitute for any mortgage loan or (y) for any
act or omission of a predecessor servicer during the transition period. If,
however, the trustee is unable or unwilling to act as successor servicer, or if
the majority of certificateholders so requests, the trustee may appoint, or
petition a court of competent jurisdiction to appoint as the successor servicer
in the assumption of all or any part of the responsibilities, duties or
liabilities of the servicer any established mortgage loan servicing institution
meeting the following requirements:
o having a net worth of not less than $25,000,000
o if the aggregate class principal balance of the senior certificates is
greater than 50% of the aggregate class principal balance of all the
certificates, the proposed successor servicer is approved by the holders
of certificates evidencing at least 51% of the voting rights in the trust
or
o if the aggregate class principal balances of the senior certificates is
50% or less than the aggregate class principal balance of all the
certificates, the proposed successor servicer is an approved servicer by
Standard & Poor's Ratings Services
Pending the appointment, the trustee will be obligated to act in that capacity
unless prohibited by law. The successor servicer will be entitled to receive the
same compensation that the servicer would otherwise have received or the lesser
compensation as the trustee and that successor may agree. A receiver or
conservator for the servicer may be empowered to prevent the termination and
replacement of the servicer if the only event of default that has occurred is an
insolvency event.
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If an event of default occurs under the pooling and servicing agreement and
the defaulting servicer is not replaced by the successor servicer or another
person in accordance with the pooling and servicing agreement, the appointment
of the defaulting servicer shall be limited to 90 days. If the appointment is so
limited, the trustee will automatically renew the appointment for successive
90-day terms unless directed in writing not to renew by the holders of
certificates evidencing at least 51% of the voting rights in the trust. However,
if the defaulting servicer is replaced, the succesor's appointment will not be
limited to 90 days unless and until an event of default exists with respect to
that successor.
AMENDMENT
The pooling and servicing agreement may be amended from time to time by the
seller, the servicer and the trustee, subject in the case of any amendment which
affects any right, benefit, duty or obligation of the certificate insurer, to
the consent of the certificate insurer, without the consent of the
certificateholders, to
o cure any ambiguity,
o correct or supplement any provisions in the pooling and servicing
agreement which may be defective or inconsistent with any other
provisions of the pooling and servicing agreement,
o add to the duties of the servicer,
o comply with any requirements imposed by the Internal Revenue Code or any
regulation under the Internal Revenue Code, or to add or amend any
provisions of the pooling and servicing agreement as required by the
rating agencies in order to maintain or improve any rating of the offered
certificates, it being understood that, after obtaining the ratings in
effect on the closing date, none of the seller, the trustee or the
servicer is obligated to obtain, maintain, or improve any rating, or
o add any other provisions with respect to matters or questions arising
under the pooling and servicing agreement which shall not be inconsistent
with the provisions of the pooling and servicing agreement,
provided that the action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any certificateholder;
provided, that any amendment will be deemed to not materially and adversely
affect the certificateholders and no opinion will be required to be delivered if
the person requesting the amendment obtains a letter from the rating agencies
stating that the amendment would not result in a downgrading of the then current
rating of the offered certificates.
The pooling and servicing agreement also may be amended from time to time
by the seller, the servicer and the trustee, subject in the case of any
amendment which affects any right, benefit, duty or obligation of the
certificate insurer, to the consent of the certificate insurer, with the consent
of certificateholders holding certificates evidencing at least 51% of the voting
rights of each class affected by the amendment, or 51% of all of the voting
rights if all classes are affected, for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the agreement
or of modifying in any manner the rights of the certificateholders, provided
that no amendment will (x) reduce in
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any manner the amount of, or delay the timing of, collections of payments on the
certificates or distributions or payments which are required to be made on any
certificate without the consent of the certificateholder or (y) reduce the
aforesaid percentage required to consent to any amendment, without the consent
of the holders of all certificates of the affected class then outstanding.
Notwithstanding the foregoing, if the trustee is acting as the servicer at
the time of any proposed amendment and the senior certificates are still
outstanding, any proposed amendment will require the consent of the certificate
insurer.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The trust will terminate on the distribution date following the later of
(x) payment in full of all amounts owing to the certificate insurer, unless the
certificate insurer otherwise consents, and (y) the earliest of
(a) the distribution date on which the aggregate class principal balance of
all the certificates has been reduced to zero,
(b) the final payment or other liquidation of the last mortgage loan in the
trust and
(c) the optional purchase of the mortgage loans, as described below.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, the servicer may, at its option,
terminate the pooling and servicing agreement on any distribution date following
the due period during which the aggregate Principal Balance of the mortgage
loans is less than 10% of the sum of the Principal Balances of the initial
mortgage loans and the amount deposited in the pre-funding account on the
closing date, called the optional termination date, by purchasing all of the
outstanding mortgage loans and REO properties at a price equal to the sum of the
outstanding Pool Balance, subject to reduction of the purchase price based in
part on the appraised value of any REO property included in the trust if the
appraised value is less than the Principal Balance of the related mortgage loan,
as provided in the pooling and servicing agreement, and accrued and unpaid
interest on the related mortgage loan at the weighted average of the loan rates
through the end of the related due period together with all amounts due to the
certificate insurer. If the servicer does not exercise this option, the holders
of the class BIO certificates may do so on the same terms.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The servicer has the option to purchase from the trust any mortgage loan
90 days or more delinquent at a purchase price equal to the outstanding
principal balance of the mortgage loan as of the date of purchase, plus all
accrued and unpaid interest on that principal balance computed at the loan rate.
VOTING RIGHTS
Under the pooling and servicing agreement, the portion of the voting rights
allocated to the offered certificates will equal 100% minus the portion
allocated to the class BIO certificates and the Residual certificates, and the
portion of the voting rights allocated to the class BIO certificates and the
Residual certificates will equal the percentage equivalent of a fraction, the
numerator of which is the Required Overcollateralization Amount and the
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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
Norwest Bank Minnesota, National Association will be named trustee pursuant
to the pooling and servicing agreement. Norwest Bank Minnesota, National
Association, a direct, wholly-owned subsidiary of Wells Fargo & Co., is a
national banking association originally chartered in 1872 and is engaged in a
wide range of activities typical of a national bank. Its principal office is
located at Norwest Center, Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479-0113. It otherwise conducts its securities administration
services at its offices in Columbia, Maryland. Its address there is 11000 Broken
Land Parkway, Columbia, Maryland 21044-3562. The trustee may make available each
month, to any interested party, the monthly statement to certificateholders via
the trustee's website and its fax-on-demand service. The trustee's website will
be located at "www.ctslink.com". The trustee's fax-on-demand service may be
accessed by calling (301) 815-6610. The trustee may have banking relationships
with the seller and the servicer. The trustee may appoint one or more
co-trustees if necessary to comply with the fiduciary requirements imposed by
any jurisdiction in which a mortgaged property is located.
The trustee may resign at any time, in which event the seller will be
obligated to appoint a successor trustee. The seller may also remove the trustee
if the trustee ceases to be eligible to continue as such under the pooling and
servicing agreement or if the trustee becomes insolvent. Upon becoming aware of
these circumstances, the seller will be obligated to appoint a successor
trustee. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee. If the successor trustee is to act as the successor
servicer under the pooling and servicing agreement, the successor trustee must
satisfy the conditions in clause (b) under the caption "Certain matters
regarding the servicer" above.
No holder of a certificate will have any right under the agreement to
institute any proceeding with respect to the pooling and servicing agreement
unless the holder previously has given to the trustee written notice of default
and unless certificateholders evidencing at least 51% of the voting rights have
made written requests upon the trustee to institute a proceeding in its own name
as trustee under the pooling and servicing agreement and have offered to the
trustee reasonable indemnity and the trustee for 60 days has neglected or
refused to institute any proceeding. The trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the pooling and servicing
agreement or to make any investigation of matters arising under the pooling and
servicing agreement or to institute, conduct or defend any litigation under the
pooling and servicing agreement or in relation to the pooling and servicing
agreement at the request, order or direction of any of the certificateholders,
unless the certificateholders have offered to the trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the certificates will be
applied by the seller for general corporate purposes, including repayment of
financing for the mortgage loans. This financing may have been provided by one
or more of the underwriters or their affiliates.
FEDERAL INCOME TAX CONSIDERATIONS
Separate elections will be made to treat particular assets of the trust,
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, 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 100% of the applicable prepayment
assumption. No representation is made as to the actual rate at which the
mortgage loans will prepay.
A reasonable application of the principles of the OID regulations to the
adjustable rate certificates generally would be to 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.
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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 fixed rate
certificates, other than the class IOF 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 applicable fixed rate 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
applicable fixed rate 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 and applicable fixed rate 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
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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 December 31, 2000,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide particular presumptions regarding the status of holders when
payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. We recommend that all holders consult their
tax advisors regarding the application of the final withholding regulations.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are foreign investors. The term foreign investor means
any person other than
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a corporation or
partnership for United States federal income tax purposes organized in or
under the laws of the United States, any state thereof or the District of
Columbia,
o an estate the income of which is includible in gross income for United
States federal income tax purposes, regardless of its source, or
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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-8BEN signed under penalty of perjury by the certificate owner stating
that the certificate owner is a foreign investor and providing the certificate
owner's name and address. The statement must be received by the withholding
agent in the calendar year in which the interest payment is made, or in either
of the two preceding calendar years.
As indicated above, the final withholding regulations consolidate and
modify the current certification requirements and means by which a foreign
investor may claim exemption from United States federal income tax withholding.
All foreign investors should consult their tax advisors regarding the
application of the final withholding regulations, which are generally effective
with respect to payments made after December 31, 2000.
A certificate owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of the offered certificate, provided that
o the gain is not effectively connected with a trade or business carried on
by the certificate owner in the United States,
o in the case of a certificate owner that is an individual, the certificate
owner is not present in the United States for 183 days or more during the
taxable year in which the sale, exchange or redemption occurs and
o in the case of gain representing accrued interest, the conditions
described in the second preceding paragraph are satisfied.
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ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan or other retirement arrangement
subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended, called ERISA, and/or Section 4975 of the Internal Revenue Code, which
proposes to cause the benefit plan or other retirement arrangement, collectively
called a plan, to acquire any of the offered certificates should consult with
its counsel with respect to the potential consequences, under ERISA and the
Internal Revenue Code, of the plan's acquisition and ownership of the
certificates. See "ERISA Considerations" in the prospectus.
The U.S. Department of Labor has granted an administrative exemption to
Lehman Brothers, Inc. (Prohibited Transaction Exemption 91-14), 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 Lehman Brothers, Inc. or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of the
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, or Moody's Investors Service,
Inc.;
(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
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(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.
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(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
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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.
S-96
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will NOT constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in the offered
certificates. See "Legal Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated June 28, 2000, among the seller and the underwriters named
below, the seller has agreed to sell to the underwriters and each of the
underwriters has severally agreed to purchase from the seller the principal
amount of offered certificates set forth below under the underwriter's name.
<TABLE>
<CAPTION>
COUNTRYWIDE
LEHMAN GREENWICH CAPITAL SECURITIES
CLASS BROTHERS INC. MARKETS, INC. CORPORATION
---------------------------------------------------------- -------------- ----------------- -----------
<S> <C> <C> <C>
Class A-1F................................................ $ 36,581,000 $15,370,000 $ 9,529,000
Class A-2F................................................ 8,629,000 3,625,000 2,248,000
Class A-3F................................................ 24,704,000 10,380,000 6,435,000
Class A-4F................................................ 6,517,000 2,738,000 1,698,000
Class A-5F................................................ 12,094,000 5,082,000 3,151,000
Class A-6F................................................ 12,495,000 5,250,000 3,255,000
Class A-1A................................................ 38,675,000 16,250,000 10,075,000
Class M-1................................................. 9,817,000 4,125,000 2,558,000
Class M-2................................................. 6,750,000 2,836,000 1,758,000
Class B................................................... 7,363,000 3,094,000 1,918,000
------------ ----------- -----------
Total................................................ $163,625,000 $68,750,000 $42,625,000
============ =========== ===========
</TABLE>
The seller has been advised that the underwriters propose initially to
offer the offered certificates to some dealers at the prices set forth on the
cover page of this prospectus supplement less a selling concession not to exceed
the applicable percentage of the certificate denomination set forth below, and
that the underwriters may allow and the dealers may reallow a reallowance
discount not to exceed the applicable percentage of the certificate denomination
set forth below:
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----------------------------------------------------------- ---------- ------------
<S> <C> <C>
Class A-1F................................................. 0.1500% 0.0750%
Class A-2F................................................. 0.1650% 0.0825%
Class A-3F................................................. 0.1950% 0.0975%
Class A-4F................................................. 0.2100% 0.1050%
Class A-5F................................................. 0.2850% 0.1425%
Class A-6F................................................. 0.2100% 0.1050%
Class A-1A................................................. 0.1350% 0.0675%
Class M-1.................................................. 0.3000% 0.1500%
Class M-2.................................................. 0.3900% 0.1950%
Class B.................................................... 0.5970% 0.2985%
</TABLE>
S-97
<PAGE>
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 Lehman
Brothers, Inc. from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the seller from
the notional amount certificates are expected to be approximately $6,284,546
plus accrued interest, before deducting a portion of the total expenses payable
by the seller which total is estimated to be $500,000. In connection with the
purchase and sale of the notional amount certificates, Lehman Brothers, Inc. may
be deemed to have received compensation from the seller in the form of
underwriting discounts and commissions.
The seller has been advised by the underwriters that they presently intend
to make a market in the offered certificates. However, no underwriter is
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an 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.
S-98
<PAGE>
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1999,
incorporated by reference in this prospectus supplement have been incorporated
in this prospectus supplement in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the offered certificates will be
passed upon for the seller by Stroock & Stroock & Lavan LLP, New York, New York,
and for the underwriters by Brown & Wood LLP, New York, New York.
RATINGS
The offered certificates will be rated by Standard & Poor's Ratings
Services, referred to as S&P, Moody's Investors Service, Inc., referred to as
Moody's, and Fitch, Inc., referred to as Fitch, each called a rating agency. It
is a condition to the issuance of the offered certificates that they receive
ratings by the rating agencies as follows:
<TABLE>
<CAPTION>
CLASS S&P MOODY'S FITCH
----------- ---- ------- -----
<S> <C> <C> <C>
Class A-1F AAA Aaa AAA
Class A-2F AAA Aaa AAA
Class A-3F AAA Aaa AAA
Class A-4F AAA Aaa AAA
Class A-5F AAA Aaa AAA
Class A-6F AAA Aaa AAA
Class IOF AAAr Aaa AAA
Class A-1A AAA Aaa AAA
Class M-1 AA -- AA
Class M-2 A -- A
Class B BBB- -- BBB-
</TABLE>
The ratings assigned by the rating agencies to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which such certificates are issued. The ratings take into consideration the
credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such certificates, and
the extent to which the payment stream on such mortgage pool is adequate to make
the payments required by such certificates. The ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The "r" symbol is appended to the ratings by S&P of those certificates that
S&P believes may experience high volatility or high variability in expected
returns due to non-
S-99
<PAGE>
credit risks. The absence of an "r" symbol in the ratings of other offered
certificates should not be taken as an indication that such certificates will
exhibit no volatility or variability in total return.
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 applicable fixed rate
certificates will receive any related Net Rate Cap Carryover. Each securities
rating should be evaluated independently of similar ratings on different
securities.
There can be no assurance as to whether any other rating agency will rate
the offered certificates or, if it does, what rating would be assigned by
another rating agency. The rating assigned by another rating agency to the
offered certificates of any class could be lower than the respective ratings
assigned by the applicable rating agency.
S-100
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Home Equity Loan
Asset-Backed Certificates, Series 2000-2, referred to as the global securities,
will be available only in book-entry form. Investors in the global securities
may hold the global securities through any of The Depository Trust Company,
Clearstream, Luxembourg or Euroclear. The global securities will be tradable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice, i.e., seven calendar day
settlement.
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior home equity loan asset-backed
certificates issues.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC participants holding certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear, in this capacity, and as DTC
participants.
Non-U.S. holders, as described below, of global securities will be subject
to U.S. withholding taxes unless the holders meet particular requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTC participants.
Investors electing to hold their global securities through DTC will follow
the settlement practices applicable to prior home equity loan asset-backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
I-1
<PAGE>
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC Seller and Clearstream, Luxembourg or Euroclear
Purchaser. When global securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the respective depositary, as
the case may be, to receive the global securities against payment. Payment will
include interest accrued on the global securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of 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 Clearstream, Luxembourg participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the global
securities will accrue from, the value date, which would be the preceding day
when settlement occurred in New York. If settlement is not completed on the
intended value date, i.e., the trade fails, the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the global securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Cedelbank participants or Euroclear participants can
elect not to preposition funds and allow that credit line to be drawn upon the
finance settlement. Under this
I-2
<PAGE>
procedure, Clearstream, Luxembourg participants or Euroclear participants
purchasing global securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the global securities were credited to their
accounts. However, interest on the global securities would accrue from the value
date. Therefore, in many cases the investment income on the global securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although this result will depend on each Clearstream,
Luxembourg participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending global securities to
the respective European depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which global securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective depositary, as appropriate,
to deliver the global securities to the DTC participant's account against
payment. Payment will include interest accrued on the global securities from and
including the last coupon payment to and excluding the settlement date on the
basis of 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 Clearstream, Luxembourg participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would be back-valued to the
value date, which would be the preceding day, when settlement occurred in New
York. Should the Clearstream, Luxembourg participant or Euroclear participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date, i.e., the trade
fails, receipt of the cash proceeds in the Clearstream, Luxembourg participant's
or Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase global securities from DTC participants for delivery to Clearstream,
Luxembourg participants or Euroclear participants should note that these trades
would automatically fail
I-3
<PAGE>
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one
day, until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts, in accordance with the
clearing system's customary procedures;
(b) borrowing the global securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the global
securities sufficient time to be reflected in their Clearstream,
Luxembourg or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Clearstream,
Luxembourg participant or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC if the holder has an
address outside the U.S., will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest, including original issue discount, on
registered debt issued by U.S. persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial
owners of global securities that are non-U.S. persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (certificate of
Foreign Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
changes, a new Form W-8 or Form W-8BEN must be filed within 30 days of the
change. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form 4224
or Form W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade or Business in the
United States) or Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States). After December 31, 2000, only Form
W-8ECI will be acceptable.
I-4
<PAGE>
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001 or Form W-8BEN). Non-U.S. persons that are certificate owners
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate, depending on the treaty terms, by filing
Form 1001 (Ownership, Exemption or Reduced Rate certificate) or Form W-8BEN. If
Form 1001 is provided and the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8 or Form W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The certificate owner of a
global security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8, Form 1001 and Form 4224 are
effective for payments through December 31, 2000. Form W-8BEN and Form W-8ECI
are effective until the third succeeding calendar year from the date the form is
signed.
The term "U.S. person" means
(a) a citizen or resident of the United States,
(b) a corporation or partnership, or other entity treated as a corporation
or partnership for U.S. federal income tax purposes, organized in or under the
laws of the United States, any state thereof or the District of Columbia,
(c) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source or
(d) a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the global securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the global securities.
I-5
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS
$1,435,000,000
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
------------------------
DELTA FUNDING CORPORATION
SELLER
------------------------
SECURITIES OFFERED
o asset backed notes, asset backed certificates or a combination
o rated in one of four highest rating categories by at least one
nationally recognized rating organization
o not listed on any trading exchange
ASSETS
o subprime mortgage loans secured by first or second liens on residential
or mixed used properties
o securities backed by those types of subprime mortgage loans
o may include one or more forms of enhancement
The securities are obligations only of the related trust and are not insured or
guaranteed by any governmental agency.
The securities involve significant risks.
We recommend that you review the information under "Risk Factors" in the related
prospectus supplement.
This prospectus must be accompanied by a prospectus supplement for the
particular series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A
CRIMINAL OFFENSE.
The seller may offer securities through underwriters or by other methods
described under the caption "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS JUNE 28, 2000
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The seller, as creator of each trust, has filed with the Securities and
Exchange Commission a Registration Statement under the Securities Act of 1933,
as amended, with respect to the notes and the certificates offered pursuant to
this prospectus. The Registration Statement includes information about the
securities which is not included in this prospectus. Prospective investors may
read the Registration Statement and make copies of it at the Commission's main
office located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade Center,
New York, New York 10048. Prospective investors also may obtain a copy of the
Registration Statement by paying a fee set by the Commission and requesting a
copy of the Registration Statement by paying a fee set by the Commission and
requesting a copy from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Prospective
investors who have access to the Internet also may read the Registration
Statement at the Commission's site on the World Wide Web located at
http://www.sec.gov.
Each trust will be required to file with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the securities Exchange Act of 1934, as
amended, (a) a Current Report on Form 8-K each month after the month of
formation of that trust and prior to the expiration of the calendar year in
which that trust was formed and (b) an annual report on Form 10-K within
90 days after the end of the calendar year in which the trust was formed. Each
Form 8-K will include as an exhibit the monthly statement to securityholders of
the related series. The Form 10-K will include certain summary information about
the trust. Any reports and documents so filed by or on behalf of a trust before
the termination of the offering of the securities of that trust will be
incorporated in this prospectus. If the information incorporated in this
prospectus modifies or changes the information in this prospectus the modified
or changed information will control if any information incorporated by reference
in this prospectus is itself modified or changed by subsequent information
incorporated by reference, the latter information will control. Any reports and
documents that are incorporated in this prospectus will not be physically
included in this prospectus or delivered with this prospectus.
The servicer will provide without charge to each person, including any
beneficial owner of securities, to whom a copy of this prospectus is delivered,
on the written or oral request of any person, a copy of any or all of the
documents incorporated in this prospectus or in any related prospectus
supplement, other than exhibits to the documents unless these exhibits are
specifically incorporated by reference in the document. Written requests for
copies should be directed to Corporate Secretary, Delta Funding Corporation,
1000 Woodbury Road, Woodbury, New York 11797. Telephone requests for copies
should be directed to the servicer, at (516) 364-8500. IN ORDER TO RECEIVE ANY
REQUESTED INFORMATION IN A TIMELY FASHION, PROSPECTIVE INVESTORS MUST MAKE THEIR
REQUESTS NO LATER THAN FIVE BUSINESS DAYS BEFORE THEY MUST MAKE THEIR INVESTMENT
DECISIONS.
2
<PAGE>
THE SELLER
Delta Funding Corporation, a New York corporation is a specialty consumer
finance company that has engaged in originating, acquiring, selling and
servicing home equity loans since 1982. Throughout its operating history, the
company has focused on lending to individuals who generally do not qualify for
conforming credit. The company makes loans to these borrowers for a variety of
purposes, for example debt consolidation, home improvement, refinancing or
education, and these loans are primarily secured by first mortgages on one- to
four-family residential properties.
The company primarily originates and purchases home equity loans through
three distribution channels. The company originates home equity loans through
licensed mortgage brokers who submit loan applications on behalf of the
borrower, through its retail subsidiary, Fidelity mortgage, and through its
in-house loan officers. Prior to July 1, 2000, the company purchased from
approved licensed mortgage bankers and financial institutions, loans that
conform to the company's underwriting guidelines ("Correspondent Channel").
Effective July 1, 2000, the company closed its Correspondent Channel. The
company believes that it has a competitive advantage in serving brokers and
retail borrowers and correspondents in the nonconforming home equity market that
stems from its substantial experience in this sector and its emphasis on
providing quality service that is prompt, responsive and consistent. The members
of the company's senior management have an average of over 14 years of
nonconforming mortgage loan experience. The company believes this industry- and
company-specific experience, coupled with the systems and programs it has
developed over its history, enable the company to provide quality services
including preliminary approval of most loans from brokers within one day,
consistent application of its underwriting guidelines and funding of loans
within 14 to 21 days of preliminary approval. In addition, the company seeks to
establish and maintain productive relationships with its network of brokers by
servicing each one with a business development representative, a team of
experienced underwriters and a team of loan officers and processors who are
assigned to specific brokers to process all applications submitted by each
broker.
In February 1997, in an effort to broaden its direct origination sources
and to expand its geographic presence, the company's parent company, Delta
Financial Corporation, acquired two related retail originators of home equity
loans, Fidelity Mortgage Inc., based in Cincinnati, Ohio, and Fidelity Mortgage
(Florida), Inc., based in West Palm Beach, Florida, and subsequently merged the
two companies into Fidelity Mortgage Inc. This affiliate develops retail loan
leads primarily through its telemarketing system and its network of 14 loan
production centers located in Florida (3), Illinois, Indiana, Missouri, North
Carolina, Ohio (4), Pennsylvania (2) and Tennessee. In March 2000, the company
decided to close a loan production center in Georgia.
During its first 12 years of operation, the company concentrated its
efforts on serving brokers and correspondents primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the company began to implement a program
to expand its geographic focus into the New England, Mid-Atlantic, Midwest and
Southeast regions. The company has opened regional branch offices which are
typically staffed with a combination of experienced company personnel and local
employees to supplement its lending
3
<PAGE>
operations in some of its newer geographic regions. Currently, the company
maintains regional branch offices in the Southeast, Midwest and West. Final
underwriting approval is required from the Woodbury, NY headquarters or
Southeast branch office for all mortgage loans. The company is not dependent on
any single or affiliated group of brokers or correspondents.
The company's corporate headquarters is located in approximately 135,000
square feet in a 230,000 square foot building located at 1000 Woodbury Road,
Woodbury, New York 11797. Its telephone number is (516) 364-8500. The company's
servicing operation is located in approximately 40,000 square feet located at
99 Sunnyside Blvd., Woodbury, NY 11797. Its telephone number is (516) 364-8500.
4
<PAGE>
UNDERWRITING
All of the company's brokers and correspondents are provided with the
company's underwriting guidelines. Loan applications received from brokers and
correspondents are classified according to particular characteristics, including
but not limited to: ability to pay, credit history of the applicant,
loan-to-value ratio and general stability of the applicant in terms of
employment history, time in residence and condition and location of the
collateral. The company has established classifications with respect to the
credit profile of the applicant, and each loan is placed into one of four letter
ratings "A" through "D," with subratings within those categories. Terms of loans
made by the company, as well as maximum loan-to-value ratios and debt-to-income
ratios, vary depending on the classification of the applicant. Loan applicants
with less favorable credit ratings are generally offered loans with higher
interest rates and lower loan-to-value ratios than applicants with more
favorable credit ratings. The general criteria used by the company's
underwriting staff in classifying loan applicants are set forth below.
UNDERWRITING CRITERIA OF DELTA FUNDING CORPORATION
<TABLE>
<CAPTION>
"A" RISK "B" RISK "C" RISK "D" RISK
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Credit profile....... Excellent credit Good overall credit Good to fair credit Fair to poor credit
history
Existing mortgage
history............ Current at Current at Up to 30 days 90 days delinquent or
application time and application time and delinquent at more
a maximum of two a maximum of four application time and
30-day late payments 30-day late payments a maximum of four
in the last in the last 30-day late payments
12 months 12 months and one 90-day late
payment in the last
12 months
Other credit......... Minor 30-day late Some slow pays Slow pays, some open Not a factor.
items allowed with a allowed but majority delinquencies Derogatory credit
letter of of credit and allowed. Isolated must be paid with
explanation; no open installment debt paid charge-offs, proceeds. Must
collection accounts, as agreed. Small collection accounts demonstrate ability
charge-offs, isolated charge-offs, or judgments case-by- to pay
judgments collections, or case
judgments allowed
case-by-case
Bankruptcy filings... Discharged more than Discharged more than Discharged more than May be open at
three years prior to two years prior to one year prior to closing, but must be
closing and excellent closing and excellent closing and good paid off with
reestablished credit reestablished credit reestablished credit proceeds
Maximum loan-to-
value ratio:
Owner-occupied..... Generally 80% (up to Generally 80% (up to Generally 75% (up to Generally 65% (up to
90%*) for a one- to 85%*) for a one- to 80%*) for a one- to 70%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Non-owner
occupied......... Generally 75% (up to Generally 70% (up to Generally 65% (up to Generally 55% (up to
80%*) for a one- to 80%*) for a one- to 75%*) for a one- to 60%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Employment........... Minimum 2 years Minimum 2 years No minimum required No minimum required
employment in the employment in the
same field same field
</TABLE>
------------------
* On an exception basis
5
<PAGE>
The company uses the foregoing categories and characteristics as guidelines
only. On a case-by-case basis, the company may determine that the prospective
borrower warrants an exception, if sufficient compensating factors exist.
Examples of compensating factors are:
o low loan-to-value ratio,
o low debt ratio,
o long-term stability of employment and/or residence,
o excellent payment history on past mortgages, or
o a significant reduction in monthly expenses.
The mortgage loans originated by the company have amortization schedules
ranging from 5 years to 30 years, generally bear interest at fixed rates and
require equal monthly payments which are due as of a scheduled day of each month
which is fixed at the time of origination. Substantially all of the company's
mortgage loans are fully amortizing loans. The company primarily purchases fixed
rate loans which amortize over a period not to exceed 30 years. Loans that are
not fully amortizing generally provide for scheduled amortization over
30 years, with a due date and a balloon payment at the end of the fifteenth
year. The principal amounts of the loans purchased or originated by the company
generally range from a minimum of $10,000 to a maximum of $350,000. The company
generally does not acquire or originate any mortgage loans where the combined
loan-to-value ratio exceeds 90%. The collateral securing loans acquired or
originated by the company are generally one- to four-family residences,
including condominiums and townhomes, and these properties may or may not be
occupied by the owner. It is the company's policy not to accept commercial
properties or unimproved land as collateral. However, the company will accept
mixed-use properties such as a property where a portion of the property is used
for residential purposes and the balance is used for commercial purposes and
will accept small multifamily properties of 5 to 8 units, both at reduced loan-
to-value ratios. The company does not purchase loans where any senior mortgage
contains open-end advance, negative amortization or shared appreciation
provisions.
The company's mortgage loan program includes:
o a full documentation program for salaried borrowers,
o a limited documentation program,
o a non-income verification program for self-employed borrowers and
o a stated income program.
The total monthly debt obligations, which include principal and interest on
the new loan and all other mortgages, loans, charge accounts and scheduled
indebtedness, generally is 50% or less of the borrower's monthly gross income.
Loans to borrowers who are salaried employees must be supported by current
employment information in addition to employment history. This information for
salaried borrowers is verified based on written confirmation from employers, one
or more pay-stubs, recent W-2 tax forms, recent tax returns or telephone
confirmation from the employer. For the company's limited documentation program,
the company requires a job letter to be submitted which contains the same
information one would find on a standard verification of employment form:
o job position,
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<PAGE>
o length of time on job,
o current salary, and
o the job letter should appear on the employer's letterhead.
For the company's non-income verification program, proof of self-employment
in the same business plus proof of current self-employed status is required. The
company's stated income program, which represents a very small percentage of the
company's loans, is only offered for better credit quality borrowers where a
telephone verification is done by an underwriter to verify that the borrower is
employed. The company usually requires lower combined loan-to-value ratios with
respect to loans made under programs other than the full documentation program.
Assessment of an applicant's ability and willingness to pay is one of the
principal elements in distinguishing the company's lending specialty from
methods employed by traditional lenders, such as savings and loans and
commercial banks. All lenders utilize debt ratios and loan-to-value ratios in
the approval process. Many lenders simply use software packages to score an
applicant for loan approval and fund the loan after auditing the data provided
by the borrower. In contrast, the company employs experienced non-conforming
mortgage loan credit underwriters to scrutinize the applicant's credit profile
and to evaluate whether an impaired credit history is a result of adverse
circumstances or a continuing inability or unwillingness to meet credit
obligations in a timely manner. Personal circumstances including divorce, family
illnesses or deaths and temporary job loss due to layoffs and corporate
downsizing will often impair an applicant's credit record.
The company has a staff of 96 underwriters with an average of five years of
non-conforming lending experience. With the exception of the company's Atlanta,
Georgia office, all underwriting functions for broker and correspondent
originations are centralized in its Woodbury, New York office. All underwriting
functions for retail originations are centralized in the company's two retail
underwriting "hubs," located in Cincinnati, Ohio and West Palm Beach, Florida.
The company does not delegate underwriting authority to any broker or
correspondent. The company's underwriting department functions independently of
its business development and mortgage origination departments and does not
report to any individual directly involved in the origination process. No
underwriter at the company is compensated on an incentive or commission basis.
The company has instituted underwriting checks and balances that are
designed to ensure that every loan is reviewed and approved by a minimum of two
underwriters, with some higher loan amounts requiring a third approval. The
company believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process and before funding.
The company's underwriting of every loan submitted consists not only of a
thorough credit review, but also
o a separate appraisal review conducted by the company's appraisal review
department and
o a full compliance review, to ensure that all documents have been properly
prepared, all applicable disclosures given in a timely fashion, and
proper compliance with all federal and state regulations.
7
<PAGE>
Appraisals are performed by third party, fee-based appraisers or by the
company's approved appraisers and generally conform to current Fannie Mae and
Freddie Mac secondary market requirements for residential property appraisals.
Each appraisal includes, among other things, an inspection of both the exterior
and interior of the subject property and data from sales within the preceding
12 months of similar properties within the same general location as the subject
property.
The company performs an appraisal review on each loan prior to closing or
prior to purchasing. While the company recognizes that the general quality
control practices of conventional mortgage lenders is to perform only drive-by
appraisals after closings, the company believes this practice does not provide
sufficient protection. In addition to reviewing each appraisal for accuracy, the
company accesses other sources to validate sales used in the appraisal to
determine market value. These sources include:
o Multiple Listing Services in nine states;
o assessment and sales services, such as Comps, Inc., Pace, 1st American
and Transamerica;
o internet services such as Realtor.com; and
o other sources for verification, including broker price opinions and
market analyses by local real estate agents.
Post closing, in addition to its normal due diligence, the company randomly
selects one out of every ten appraisals, and performs a drive-by appraisal. This
additional step gives the company an added degree of comfort with respect to
appraisers with which the company has had limited experience. The company
actively tracks and grades, on criteria that it has developed over time, all
appraisers from which it accepts appraisals for quality control purposes and
does not accept work from appraisers who have not conformed to its review
standards.
Upon completion of a broker loan's underwriting and processing, the closing
of the loan is scheduled with a closing attorney or agent approved by the
company. The closing attorney or agent is responsible for completing the loan
closing transaction in accordance with applicable law and the company's
operating procedures. Title insurance that insures the company's interest as
mortgagee and evidence of adequate homeowner's insurance naming the company as
an additional insured party are required on all loans.
The company performs a post-funding quality control review to monitor and
evaluate the company's loan origination policies and procedures. The quality
control department is separate from the underwriting department, and reports
directly to a member of senior management.
At least 10% of all loan originations and purchases are subjected to a full
quality control re-underwriting and review, the results of which are reported to
senior management on a monthly basis. Discrepancies noted by the audit are
analyzed and corrective actions are instituted. A typical quality control review
currently includes:
o obtaining a new drive-by appraisal for each property;
o running a new credit report from a different credit report agency;
8
<PAGE>
o reviewing loan applications for completeness, signatures, and for
consistency with other processing documents;
o obtaining new written verification of income and employment;
o obtaining new written verification of mortgage to re-verify any
outstanding mortgages; and
o analyzing the underwriting and program selection decisions.
The quality control process is updated from time to time as the company's
policies and procedures change.
SERVICING
The company has been servicing loans since its inception in 1982, and has
serviced or is servicing substantially all of the loans that it originated or
purchased. Servicing involves, among other things, collecting payments when due,
remitting payments of principal and interest and furnishing reports to the
current owners of the loans and enforcing the current owners' rights with
respect to the loans, including, recovering delinquent payments, instituting
foreclosure and liquidating the underlying collateral.
The company services all loans out of its headquarters in Woodbury, New
York, utilizing a leading in-house loan servicing system called LSAMS, which it
purchased in 1995. LSAMS replaced the company's former service bureau loan
servicing system, and has provided the company with considerably more
flexibility to adapt the system to the company's specific needs as a
nonconforming home equity lender. As such, the company has achieved significant
cost efficiencies by automating a substantial number of previously manual
servicing procedures and functions since its conversion to LSAMS on July 1,
1995.
At the same time that it upgraded its primary servicing system, the company
purchased a default management sub-servicing system with separate modules for
foreclosure, bankruptcy, and REO, to provide it with the ability to more
efficiently monitor and service loans in default. These sub-servicing modules
provide
o detailed tracking of all key events in foreclosure and bankruptcy on a
loan-by-loan and portfolio-wide basis;
o the ability to track and account for all pre- and post-petition payments
received in bankruptcy from the borrower and trustee; and
o the ability to monitor, market and account for all aspects necessary to
liquidate an REO property after foreclosure.
The company's management information systems department also has created a
market value analysis program to run with LSAMS, which provides the company with
the ability to monitor its equity position on a loan-by-loan and portfolio-wide
basis.
Centralized controls and standards have been established by the company for
the servicing and collection of mortgage loans in its portfolio. The company
revises its policies and procedures from time to time in connection with
changing economic and market conditions and changing legal and regulatory
requirements.
The company's collections policy is designed to identify payment problems
sufficiently early to permit the company to quickly address delinquency problems
and,
9
<PAGE>
when necessary, to act to preserve equity in a preforeclosure property. The
company believes that these policies, combined with the experience level of
independent appraisers engaged by the company, help to reduce the incidence of
charge-offs of a first or second mortgage loan.
Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by the
company's automated servicing system using the company's proprietary payment
profiling software. If timely payment is not received, LSAMS automatically
places the loan in the assigned collector's auto queue and collection procedures
are generally initiated on the day determined by the proprietary software to be
after the borrower's typical payment date. This payment profiling allows the
company to focus its collections efforts on those borrowers who are delinquent
and outside their typical payment date as opposed to those borrowers who are
delinquent but typically pay on or about a specific date each month. These loans
are automatically queued into LSAMS auto queue as well as a Davox Predictive
Dialer. The predictive dialer initiates the telephone calls and transfers the
calls to a collector when a borrower is reached. If the predictive dialer
determines a line is busy or receives a no answer, it automatically cycles those
calls through the same day at pre-determined intervals. If the predictive dialer
contacts an answering machine, an automated message is left. The account remains
in the queue unless and until payment is received, at which point LSAMS
automatically removes the loan from the collector's auto queue until the next
payment profile pattern is broken. In the case of seriously delinquent accounts,
collection calls can begin as soon as two days after the payment due date.
When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment arrangements have been
made. Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances, to supplement the phone contacts.
During the delinquency period, the collector will continue to contact the
borrower and property inspections are performed on or about the 45th day of
delinquency. The company's collectors have computer access to telephone numbers,
payment histories, loan information and all past collection notes. All
collection activity, including the date collection letters were sent and
detailed notes on the substance of each collection telephone call, is entered
into a permanent collection history for each account on LSAMS. Additional
guidance with the collection process is derived through frequent communication
with the company's senior management.
On or about the ninety-first day of delinquency, the loan is referred to
the loss mitigation department. This department is comprised of the collectors
with the ability to negotiate payment plans, deeds in lieu, short sales, etc. If
their efforts have also been exhausted without success, the loss mitigation
representative responsible for the account recommends the loan be sent to
foreclosure at one of several foreclosure committee meetings held each month.
The foreclosure committee is comprised of the loss mitigation representative,
the foreclosure department manager and two members of the executive department.
This meeting is held to determine whether foreclosure proceedings are
appropriate, based upon the analysis of all relevant factors, including a market
value analysis, reason for default and efforts by the borrower to cure the
default.
10
<PAGE>
Regulations and practices regarding the liquidation of properties and the
rights of a borrower in default vary greatly from state to state. As a result,
all foreclosures are assigned to outside counsel, located in the same state as
the secured property. Bankruptcies filed by borrowers are similarly assigned to
appropriate local counsel. All aspects of foreclosures and bankruptcies are
monitored by the company through its sub-servicing loan system described above
and through monthly status reports from attorneys.
Prior to foreclosure sale, the company performs an in-depth market value
analysis on all defaulted loans. This analysis includes:
o a current valuation of the property obtained through a drive-by appraisal
or broker's price opinion conducted by an independent appraiser or a
broker from the company's network of real estate brokers, complete with a
description of the condition of the property, recent price lists of
comparable properties, recent closed comparables, estimated marketing
time and required or suggested repairs, and an estimate of the sales
price;
o an evaluation of the amount owed, if any, for real estate taxes;
o an evaluation of the amount owed, if any, to a senior mortgagee; and
o estimated carrying costs, brokers' fee, repair costs and other related
costs associated with real estate owned properties.
The company bases the amount it will bid at foreclosure sales on this
analysis.
If the company acquires title to a property at a foreclosure sale or
otherwise, the REO department immediately begins working the file by obtaining
an estimate of the sale price of the property by sending at least two local real
estate brokers to inspect the premises, and then hiring one to begin marketing
the property. If the property is not vacant when acquired, local eviction
attorneys are hired to commence eviction proceedings or negotiations are held
with occupants in an attempt to get them to vacate without incurring the
additional time and cost of eviction. Repairs are performed if it is determined
that they will increase the net liquidation proceeds, taking into consideration
the cost of repairs, the carrying costs during the repair period and the
marketability of the property both before and after the repairs.
The company loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of that lapse and notifying the borrower that the company will obtain
force-placed insurance at the borrower's expense. The company also has an
insurance policy in place that provides coverage automatically for the company
in the event that the company fails to obtain force-placed insurance.
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<PAGE>
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth information relating to the delinquency and
loss experience of the company for its servicing portfolio of mortgage loans
including mortgage loans serviced for others, for the periods indicated.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the company's mortgage loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of mortgage loans serviced for each
period would be higher than those shown if a group of mortgage loans were
artificially isolated at a point in time and the information showed the activity
only in that isolated group. However, since most of the mortgage loans in the
company's mortgage loan portfolio are not fully seasoned, the delinquency and
loss information for an isolated group would also be distorted to some degree
since newly originated loans have not been in existence long enough to give rise
to some or all of the indicated periods of delinquency in the table.
DELTA FUNDING CORPORATION'S HISTORIC SERVICING PORTFOLIO INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance (end of period)......... $310,228,743 $468,846,079 $932,958,188 $1,840,150,403 $2,950,434,922
Average Outstandings(1)........... $300,678,046 $373,384,417 $667,368,565 $1,376,108,923 $2,436,343,233
DELINQUENCY
30-59 Days:
Principal Balance............... $ 22,569,938 $ 35,052,951 $ 54,582,550 $ 90,052,724 $ 153,726,410
Percent of Delinquency by
Dollar(2)..................... 7.28% 7.48% 5.9% 4.9% 5.2%
60-89 Days:
Principal Balance............... $ 6,398,055 $ 8,086,230 $ 14,272,587 $ 28,864,099 $ 50,034,005
Percent of Delinquency by
Dollar(2)..................... 2.06% 1.72% 1.5% 1.6% 1.7%
90 Days or More
Principal Balance............... $ 6,517,506 $ 6,748,506 $ 9,224,525 $ 17,695,594 $ 47,886,542
Percent of Delinquency by
Dollar(2)..................... 2.10% 1.44% 1.0% 1.0% 1.6%
Total Delinquencies:
Principal Balance............... $ 35,485,499 $ 49,887,687 $ 78,079,663 $ 136,612,417 $ 251,646,956
Percent of Delinquency by
Dollar(2)..................... 11.44% 10.64% 8.4% 7.4% 8.5%
FORECLOSURES
Principal Balance............... $ 20,768,336 $ 23,506,751 $ 34,765,638 $ 85,500,439 $ 145,678,781
Percent of Foreclosures by
Dollar(2)..................... 6.69% 5.01% 3.7% 4.7% 4.9%
REO
Principal Balance............... $ 1,926,922 $ 4,020,295 $ 5,672,811 $ 10,292,208 $ 18,811,007
Percent of REO by Dollar(2)..... 0.6% 0.9% 0.6% 0.6% 0.6%
Gross Losses...................... $ (693,902) $ (2,142,099) $ (3,223,525) $ (5,514,944) $ (10,324,682)
Recoveries........................ $ 6,812 $ 0 $ 357,320 $ 529,406 $ 1,620,479
Net Losses on liquidated
loans(3)........................ $ (687,090) $ (2,142,099) $ (2,866,204) $ (4,985,538) $ (8,704,203)
Percentage of Net Losses on
liquidated loans (based on
Average Outstanding Principal
Balance)........................ 0.23% 0.57% 0.43% 0.36% 0.36%
</TABLE>
(footnotes on next page)
12
<PAGE>
(footnotes from previous page)
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Percentages are expressed based upon the total outstanding principal balance
as of the indicated date.
(3) Net Losses equal Gross Losses plus recoveries.
The company believes that the increase in Total Delinquencies, Percent of
Delinquency by Dollar, from 1997 to 1998 is attributable primarily to a
combination of (a) the seasoning of the loans in its servicing portfolio and (b)
the reduction, on a percentage basis, in the size of the increase in the average
servicing portfolio in 1998 (77% over 1997) from the increase in 1997 (106% over
1996).
While the above delinquency and foreclosure and loss experiences reflect
the company's experiences for the periods indicated, there can be no assurance
that the delinquency and foreclosure and loss experiences on the mortgage loans
in any trust will be similar. Accordingly, this information should not be
considered to reflect the credit quality of the mortgage loans included in any
trust, or as a basis of assessing the likelihood, amount or severity of losses
on the mortgage loans. The statistical data in the table is based on all of the
loans in the company's servicing portfolio. The mortgage loans in a trust may,
in general, be more recently originated than, and are likely to have other
characteristics which distinguish them from, the majority of the mortgage loans
in the company's servicing portfolio.
13
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
Each series of notes will be issued pursuant to an indenture between the
related trust fund and the entity named in the related prospectus supplement as
trustee with respect to that series. A form of indenture has been filed as an
exhibit to the registration statement of which this prospectus forms a part. The
certificates will also be issued in series pursuant to either a separate pooling
and servicing agreement or trust agreement among the seller, the servicer, if
the series relates to loans, and the trustee. A form of the pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part. A series may consist of both notes and
certificates.
The following summaries describe the material provisions in the agreements
common to each series of securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the agreements and the prospectus supplement relating to each
series of securities. Where particular provisions or terms used in the
agreements are referred to, the actual provisions, including definitions of
terms, are incorporated in this prospectus by reference as part of the
summaries.
Each series of securities will consist of one or more classes of
securities, one or more of which may have different payment characteristics. A
series may also include one or more classes of subordinate securities. The
securities of each series will be issued only in fully registered form, without
coupons, in the authorized denominations for each class specified in the related
prospectus supplement. Upon satisfaction of the conditions, if any, applicable
to a class of a series, as described in the related prospectus supplement, the
transfer of the securities may be registered and the securities may be exchanged
at the office of the trustee specified in the prospectus supplement without the
payment of any service charge other than any tax or governmental charge payable
in connection with the registration of transfer or exchange. If specified in the
related prospectus supplement, one or more classes of a series may be available
in book-entry form only.
Payments of principal of and interest on a series of securities will be
made on the distribution dates specified in the related prospectus supplement,
which may be different for each class or for the payment of principal and
interest. Payments will be made by check mailed to holders of the applicable
series, registered at the close of business on the record date specified in the
related prospectus supplement applicable to that distribution date at their
addresses appearing on the security register. However, payments may be made by
wire transfer which shall be at the expense of the holder requesting payment by
wire transfer in the circumstances described in the related prospectus
supplement. In addition, the final payment of principal in retirement of each
security will be made only upon presentation and surrender of that security at
the office of the trustee specified in the prospectus supplement. Notice of the
final payment on a security will be mailed to the holder of that security before
the distribution date on which the final principal payment is expected to be
made to the holder of that security.
Payments of principal of and interest on the securities will be made by the
trustee, or a paying agent on behalf of the trustee, as specified in the related
prospectus supplement.
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<PAGE>
All payments with respect to the primary assets for a series, amounts withdrawn
from any reserve fund, and amounts available pursuant to any other credit
enhancement will be deposited directly into the collection account or the
certificate account. If provided in the related prospectus supplement, the
deposited amounts may be net of amounts payable to the servicer and any other
person specified in the prospectus supplement. These amounts may subsequently be
deposited into the distribution account and will be available to make payments
on the securities of the applicable series on the next applicable distribution
date.
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement, one or more classes of
securities may be issued in book-entry form. Persons acquiring beneficial
ownership interests in the book-entry securities will hold their securities
through the Depository Trust Company in the United States, or Clearstream,
Luxembourg or the Euroclear System in Europe if they are participants of those
systems, or indirectly through organizations which are participants in those
systems. The Depository Trust Company is referred to as DTC, Clearstream,
Luxembourg is referred to as Clearstream and the Euroclear System is referred to
as Euroclear. The book-entry securities will be issued in one or more
certificates which equal the aggregate principal balance of the applicable class
or classes of securities and will initially be registered in the name of Cede &
Co., the nominee of DTC, referred to as Cede. Clearstream and Euroclear will
hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream's and Euroclear's names on the books of their
respective depositaries which in turn will hold the omnibus positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank N.A. will act as depositary for Clearstream and The Chase Manhattan
Bank will act as depositary for Euroclear. Except as described below, no person
acquiring a book-entry security will be entitled to receive a physical
certificate representing that security called a "definitive security." Unless
and until definitive securities are issued, it is anticipated that the only
"certificateholder" or noteholder, as applicable, will be Cede & Co., as nominee
of DTC. Owners are only permitted to exercise their rights indirectly through
participants and DTC.
Ownership of a book-entry security will be recorded on the records of the
brokerage firm, bank, thrift institution or other financial intermediary that
maintains the beneficial owner's account for that purpose. In turn, the
financial intermediary's ownership of that book-entry security will be recorded
on the records of DTC, or of a participating firm that acts as agent for the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's financial intermediary is not a DTC
participant and on the records of Clearstream or Euroclear, as appropriate.
Owners will receive all distributions of principal of, and interest on, the
book-entry securities from the trustee through DTC and DTC participants. While
the book-entry securities are outstanding, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the securities and is required to receive and transmit distributions
of principal of, and interest on, the securities. Participants and indirect
participants with whom beneficial owners have accounts with respect to
securities are
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similarly required to make book-entry transfers and receive and transmit
distributions on behalf of their respective owners. Accordingly, although owners
will not possess certificates, the rules provide a mechanism by which owners
will receive distributions and will be able to transfer their interests.
Beneficial owners will not receive or be entitled to receive certificates
representing their respective interests in the securities, except under the
limited circumstances described below. Unless and until definitive securities
are issued, beneficial owners who are not participants may transfer ownership of
securities only through participants and indirect participants by instructing
those participants and indirect participants to transfer securities, by
book-entry transfer, through DTC for the account of the purchasers of those
securities, which account is maintained with their respective participants.
Under the rules of DTC and in accordance with DTC's normal procedures, transfers
of ownership of securities will be executed through DTC and the accounts of the
respective participants at DTC will be debited and credited. Similarly, the
participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing beneficial
owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Those credits or any transactions in the
securities settled during processing will be reported to the relevant Euroclear
or Clearstream participants on that business day. Cash received in Clearstream
or Euroclear as a result of sales of securities by or through a Clearstream
participant or Euroclear participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream participants and Euroclear participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, those cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established European time
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Clearstream participants and Euroclear participants may not deliver instructions
directly to the European depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which, and/or their representatives, own
DTC. In
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accordance with its normal procedures, DTC is expected to record the positions
held by each DTC participant in the book-entry certificates, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of book-entry certificates will be subject to the rules, regulations
and procedures governing DTC and DTC participants as in effect from time to
time.
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Clearstream participants through electronic book-entry changes in accounts of
Clearstream participants, thus eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream in any of 28
currencies, including United States dollars. Clearstream provides to its
Clearstream participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. As a professional depository, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations. Indirect access to Clearstream is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants and
to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thus eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Morgan Guaranty
Trust Company of New York, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Morgan Guaranty Trust Company of
New York, not Euroclear Clearance Systems S.C. Euroclear Clearance Systems S.C.
establishes policy for Euroclear on behalf of Euroclear participants. Euroclear
Participants include banks, including central banks, securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
Morgan Guaranty Trust Company of New York is the Belgian branch of a New
York banking corporation which is a member bank of the Federal Reserve System.
As such, it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with Morgan Guaranty Trust
Company of New York are governed by the Terms and Conditions Governing Use of
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Euroclear and the related operating procedures of the Euroclear System and
applicable Belgian law. Terms and conditions and the related operating
procedures govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Morgan Guaranty Trust Company of New York acts under the
terms and conditions and the related operating procedures only on behalf of
Euroclear participants, and has no record of or relationship with persons
holding through Euroclear participants.
Distributions on the book-entry securities will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of these payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing these payments to the owners that it represents and
to each financial intermediary for which it acts as agent. Each financial
intermediary will be responsible for disbursing funds to the owners that it
represents.
Under a book-entry format, owners may experience some delay in their
receipt of payments, since payments will be forwarded by the trustee to Cede.
Distributions with respect to securities held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. These distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of an owner to pledge book-entry securities to persons or entities that
do not participate in the depository system, or otherwise take actions in
respect of book-entry securities, may be limited due to the lack of physical
certificates for book-entry securities. In addition, issuance of the book-entry
securities in book-entry form may reduce the liquidity of these securities in
the secondary market since potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
Monthly and annual reports on the applicable trust fund will be provided to
Cede, as nominee of DTC, and may be made available by Cede to owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the financial intermediaries to whose DTC
accounts the owners' book-entry securities are credited.
DTC has advised the trustee that, unless and until definitive securities
are issued, DTC will take any action permitted to be taken by the holders of the
book-entry securities under the applicable agreement only at the direction of
one or more financial intermediaries to whose DTC accounts the book-entry
securities are credited, to the extent that these actions are taken on behalf of
financial intermediaries whose holdings include book-entry securities. Cedel or
Morgan Guaranty Trust Company of New York, as the case may be, will take any
other action permitted to be taken by a holder under the applicable agreement on
behalf of a Clearstream participant or Euroclear participant only in accordance
with its relevant rules and procedures and subject to the ability of the
relevant depositary to effect actions on its behalf through DTC. DTC may take
actions, at the direction of the related
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participants, with respect to some securities which conflict with actions taken
with respect to other securities.
Definitive securities will be issued to owners, or their nominees, rather
than to DTC, only if:
o DTC or the seller advises the trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the book-entry securities and the
seller or the trustee is unable to locate a qualified successor,
o the seller, at its sole option, elects to terminate a book-entry system
through DTC, or
o after the occurrence of an event of default, owners owning a majority in
principal amount of the applicable securities advise the trustee and DTC
through the financial intermediaries and the DTC participants in writing
that the continuation of a book-entry system through DTC, or its
successor, is no longer in the best interests of owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all applicable
owners of the occurrence of the event and the availability through DTC of
definitive securities. Upon surrender by DTC of the global certificate or
certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue definitive securities, and thereafter
the trustee will then recognize the holders of the definitive securities as
certificateholders or noteholders, as applicable, under the applicable
agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform these procedures and the procedures may be discontinued at
any time.
Neither the seller, the servicer nor the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
VALUATION OF THE PRIMARY ASSETS
If specified in the related prospectus supplement for a series of notes,
each mortgage loan or underlying security--sometimes called the primary
asset--included in the related trust fund for a series will be assigned an
initial asset value. At any time the asset value of the primary assets will be
equal to the product of the asset value percentage as set forth in the indenture
and the lesser of:
o the stream of remaining regularly scheduled payments on the primary
assets, net of amounts payable as expenses, together with income earned
on each regularly scheduled payment received through the day preceding
the next distribution date at
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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
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the related prospectus supplement. The holders of one or more classes of
securities may have the right to request that principal distributions allocable
to that class of securities be distributed to such holder. If the requests of
holders exceed the amount of principal to be distributed, the requests generally
will be filled in the order in which they were received. If the amount of
principal to be distributed exceeds the amount of requests, the trustee will
select random lots of $1,000 each to receive the principal distribution. Thus,
some holders of the applicable class of securities may receive no principal
distributions or a disproportionate amount of principal distributions. If so
specified in the related prospectus supplement, the distribution date for the
payment of principal of a class may be different from, or occur more or less
frequently than, the distribution date for the payment of interest for the
class.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of notes
is the latest date by which the principal of that class will be fully paid and
with respect to each class of certificates will be the date on which the entire
aggregate principal balance of the class is expected to be reduced to zero, in
each case calculated on the basis of the assumptions applicable to the related
series described in the related prospectus supplement. The final scheduled
distribution date for each class of a series will be specified in the related
prospectus supplement. Since payments on the primary assets will be used to make
distributions in reduction of the outstanding principal amount of the
securities, it is likely that the actual final distribution of principal of any
class will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, as a result of delinquencies, defaults and liquidations of the
primary assets in the trust fund, the actual final distribution of principal of
any certificate may occur later than its final scheduled distribution date. No
assurance can be given as to the actual prepayment experience with respect to a
series.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
securities of a series may be subject to special redemption, in whole or in
part, on the day specified in the related prospectus supplement if, as a result
of prepayments on the primary assets or low yields then available for
reinvestment the entity specified in the related prospectus supplement
determines, based on assumptions specified in the applicable agreement, that the
amount available for the payment of interest that will have accrued on such
securities through the designated interest accrual date specified in the related
prospectus supplement is less than the amount of interest that will have accrued
on the securities to the designated interest accrual date. In this event and as
further described in the related prospectus supplement, the trustee will redeem
a sufficient principal amount of outstanding securities of the series so that
the available interest amount will equal the amount of interest that will have
accrued through the designated interest accrual date for such series of
securities outstanding immediately after this redemption.
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OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The seller, the servicer, or another entity designated in the related
prospectus supplement may, at its option, cause an early termination of one or
more classes of securities by purchasing all or part of the primary assets from
the trust fund on or after a date specified in the related prospectus
supplement, or on or after the time when the aggregate outstanding principal
amount of the securities or primary assets, as specified in the related
prospectus supplement is less than the amount or percentage, not more than 25%,
specified in the related prospectus supplement. In addition, if so specified in
the related prospectus supplement upon particular events of insolvency or
receivership of the seller or another affiliated entity specified in the related
prospectus supplement, the related primary assets of the trust fund will be
liquidated and the trust fund will be terminated, subject to the conditions set
forth in the related prospectus supplement. The redemption, purchase or
repurchase price will be set forth in the related prospectus supplement. If
specified in the related prospectus supplement, in the event that a REMIC
election has been made, the trustee will receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be conducted
so as to constitute a "qualified liquidation" under Section 860F of the Internal
Revenue Code of 1986, as amended.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of a class of
the securities will be influenced by the rate at which the principal of the
related primary assets is paid, which may be in the form of scheduled
amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for a series of
securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each class of
securities of a series, and the percentage of the original principal amount of
each class of securities of the series that would be outstanding on specified
distribution dates for the series, in each case based on the assumptions stated
in the related prospectus supplement, including assumptions that prepayments on
the loans or underlying loans relating to the private securities, as applicable,
included in the related trust fund are made at rates corresponding to various
percentages of the prepayment standard or model specified in the related
prospectus supplement.
There is, however, no assurance that prepayment of the loans or underlying
loans relating to the private securities, as applicable, included in the related
trust fund will conform to any level of any prepayment standard or model
specified in the related prospectus supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest
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payments, and servicing decisions also affect the rate of principal prepayments.
As a result, there can be no assurance as to the rate or timing of principal
prepayments of the loans or underlying loans either from time to time or over
the lives of the loans or underlying loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the loans or
underlying loans for a series, these loans are likely to prepay at rates higher
than if prevailing interest rates remain at or above the interest rates borne by
these loans. In this regard, it should be noted that the loans or underlying
loans for a series may have different interest rates. In addition, the weighted
average life of the securities may be affected by the varying maturities of the
loans or underlying loans. If any loans or underlying loans for a series have
actual terms-to-stated maturity that are less than those assumed in calculating
the final scheduled distribution date of the related securities, one or more
classes of the series may be fully paid prior to their respective final
scheduled distribution dates, even in the absence of prepayments and a
reinvestment return higher than the assumed reinvestment rate.
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THE TRUST FUNDS
The notes of each series will be secured by the pledge of the assets of the
related trust fund, and the certificates of each series will represent interests
in the assets of the related trust fund. Each trust fund will include:
o the primary assets,
o amounts available from the reinvestment of payments on the primary assets
at the assumed reinvestment rate, if any, specified in the related
prospectus supplement,
o any credit enhancement or the rights to that credit enhancement,
o any mortgaged property that secured a mortgage loan but which is acquired
by foreclosure or deed in lieu of foreclosure or repossession, and
o the amount, if any, initially deposited in the pre-funding account,
capitalized interest account, collection account, certificate account or
distribution account for a series as specified in the related prospectus
supplement.
The securities will be non-recourse obligations of the related trust fund.
The assets of the trust fund specified in the related prospectus supplement for
a series of securities will serve as collateral only for that series of
securities. Holders of a series of notes may only proceed against collateral
securing that series of notes in the case of a default with respect to that
series of notes and may not proceed against any assets of the seller or the
related trust fund not pledged to secure the notes.
The primary assets for a series will be transferred by the seller to the
trust fund. Loans relating to a series will be serviced by the servicer pursuant
to a pooling and servicing agreement, with respect to a series consisting of
only certificates or a sale and servicing agreement between the seller, the
trust fund and the servicer, with respect to a series that includes notes.
As used in this prospectus, agreement means, with respect to a series of
certificates, the pooling and servicing agreement or trust agreement, and with
respect to a series that includes notes, the indenture and the sale and
servicing agreement, as the context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement between the seller and the trustee of the related trust fund specified
in the related prospectus supplement.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding the related primary assets and other assets contemplated in
this prospectus and in the related prospectus supplement and the proceeds of the
primary assets and other contemplated assets, issuing securities and making
payments and distributions on the issued securities and certain related
activities. No trust fund is expected to have any source of capital other than
its assets and any related credit enhancement.
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Primary assets included in the trust fund for a series may consist of any
combination of loans and private securities, to the extent and as specified in
the related prospectus supplement.
An applicable agreement may provide that additional loans may be added to
the trust fund if these loans were originated or acquired by the seller in the
ordinary course of its business, the inclusion of the loans will maintain or
increase the level of overcollateralization and the inclusion of the loans will
not result in the withdrawal or downgrading of the ratings then assigned to the
securities of the related series.
THE LOANS
The primary assets for a series may consist, in whole or in part, of
closed-end home equity loans secured by mortgages primarily on single family
mortgaged properties which may be subordinated to other mortgages on the same
mortgaged property. The home equity loans may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics.
The full principal amount of a home equity loan is advanced at origination
of the loan and generally is repayable in equal, or substantially equal,
installments of an amount sufficient to fully amortize the loan at its stated
maturity. As more fully described in the related prospectus supplement, interest
on each home equity loan is calculated on the basis of the outstanding principal
balance of the loan multiplied by the home equity loan rate on the loan and, in
the case of simple interest loans, further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on the loan. Interest on home
equity loans also may be calculated on the actuarial basis, in which case each
monthly payment consists of a decreasing amount of interest and an increasing
amount of principal, and the payment either earlier or later then the due date
payment will not affect the relative applications of principal and interest. The
loans for a series may include home equity loans that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity, as
specified in the related prospectus supplement. The original terms to stated
maturity of home equity loans will generally not exceed 360 months.
The mortgaged properties will include single family property, including
one- to four-family residential housing, condominium units and cooperative
dwellings, five- to eight-family residential properties and mixed-use property.
Mixed-use properties will consist of structures of no more than three stories,
which include one to four residential dwelling units and space used for retail,
professional or other commercial uses. Uses may include doctor, dentist or law
offices, real estate agencies, boutiques, newsstands, convenience stores or
other similar types of uses intended to cater to individual customers as
specified in the related prospectus supplement. The properties may be located in
suburban or metropolitan districts. Any non-residential use will be in
compliance with local zoning laws and regulations. The mortgaged properties may
consist of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and other
attached dwelling units. The mortgaged properties also may
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include module or manufactured homes which are treated as real estate under
local law. Each single family property will be located on land owned in fee
simple by the borrower or on land leased by the borrower for a term at least ten
years greater than the term of the related loan. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common or dwelling units
subject to a proprietary lease or occupancy agreement in a cooperatively owned
apartment building. Mortgages on cooperative dwellings consist of a lien on the
shares issued by the cooperative dwelling and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by mortgaged properties
that are owner-occupied will be disclosed in the related prospectus supplement.
The sole basis for determining that a given percentage of the loans are secured
by single family property that is owner-occupied will be either:
o the making of a representation by the mortgagor at origination of the
home equity loan either that the underlying mortgaged property will be
used by the mortgagor for a period of at least six months every year or
that the mortgagor intends to use the mortgaged property as a primary
residence, or
o a finding that the address of the underlying mortgaged property is the
mortgagor's mailing address as reflected in the servicer's records.
The mortgaged properties also may include non-owner occupied investment
properties and vacation and second homes.
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets as of the cut-off date, including,
among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
o the range and weighted average home equity loan rate on the loans, and,
in the case of adjustable rate loans, the range and weighted average of
the current home equity loan rates and the lifetime rate caps, if any;
o the range and average outstanding principal balance of the loans;
o the weighted average original and remaining term-to-stated maturity of
the loans and the range of original and remaining terms-to-stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage, by outstanding principal balance as of the cut-off date,
of loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the geographic distribution of the mortgaged properties securing the
loans;
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o the percentage of loans, by principal balance as of the cut-off date,
that are secured by single family mortgaged properties, shares relating
to cooperative dwellings, condominium units, investment property and
vacation or second homes;
o the lien priority of the home equity loans; and
o the delinquency status and year of origination of the loans.
The related prospectus supplement will also specify any other limitations on the
types or characteristics of loans for a series.
If information of the nature described above respecting the loans is not
known to the seller at the time the securities are initially offered,
approximate or more general information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series and to be filed with the Securities and
Exchange Commission within 15 days after the initial issuance of the related
securities.
PRIVATE SECURITIES
Primary assets for a series may consist, in whole or in part, of private
securities which include pass-through certificates representing beneficial
interests in loans of the type that would otherwise be eligible to be loans or
collateralized obligations secured by underlying loans. The pass-through
certificates or collateralized obligations will comply with the then-current
position of the Securities and Exchange Commission for inclusion in a re-
securitization transaction.
Private securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement. The seller/servicer
of the underlying loans will have entered into the applicable agreement with a
trustee. The trustee or its agent, or a custodian, will possess the underlying
loans. Underlying loans will be serviced by a servicer directly or by one or
more sub-servicers who may be subject to the supervision of the private
securities servicer.
The sponsor of the private securities will be a financial institution or
other entity engaged generally in the business of lending; a public agency or
instrumentality of a state, local or federal government; or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling loans to the established trusts, and selling
beneficial interests in these trusts. The obligations of the private securities
sponsor will generally be limited to certain representations and warranties with
respect to the assets conveyed by it to the related trust. Additionally,
although the underlying loans may be guaranteed by an agency or instrumentality
of the United States, the private securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the private
securities on the dates specified in the related prospectus supplement. The
private securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the private securities by the private securities
trustee or the private securities servicer. The private securities sponsor or
the
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private securities servicer may have the right to repurchase the underlying
loans after a certain date or under other circumstances specified in the related
prospectus supplement. The underlying loans may be fixed rate, level payment,
fully amortizing loans or adjustable rate loans or loans having balloon or other
irregular payment features.
Credit support in the form of reserve funds, subordination of other private
securities issued under the applicable agreement, guarantees, letters of credit,
cash collateral accounts, insurance policies or other types of credit support
may be provided with respect to the underlying loans or with respect to the
private securities themselves. The type, characteristics and amount of credit
support will be a function of certain characteristics of the underlying loans
and other factors, such as the operating history and degree of securitization
experience of the seller/servicer of the underlying loans and the then current
market for various types of credit enhancement, and will have been established
for the private securities on the basis of requirements of the nationally
recognized statistical rating organization that rated the private securities.
The prospectus supplement for a series for which the primary assets include
private securities will specify on an approximate basis and as of the date
specified in the related prospectus supplement, to the extent relevant and to
the extent information is reasonably available to the seller and the seller
reasonably believes the information to be reliable:
(a) the aggregate approximate principal amount and type of the private
securities to be included in the trust fund for the series;
(b) certain characteristics of the underlying loans including
o the payment features of the underlying loans, for example whether
they are fixed rate or adjustable rate and whether they provide for
fixed level payments or other payment features,
o the approximate aggregate principal balance, if known, of the
underlying loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying
loans;
(c) the maximum original term-to-stated maturity of the private securities;
(d) the weighted average term-to-stated maturity of the private securities;
(e) the pass-through or certificate rate or ranges this rate for the
private securities;
(f) the private securities sponsor, the private securities servicer and the
private securities trustee for private securities;
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(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
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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
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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.
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ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider
of credit enhancement, if applicable, with respect to a series or any class of
securities will be set forth in the related prospectus supplement. If specified
in the applicable prospectus supplement, credit enhancement for any series of
securities may cover one or more classes of notes or certificates, and
accordingly may be exhausted for the benefit of a particular class of notes or
certificates and subsequently be unavailable to other classes of notes or
certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
prospectus supplement.
If and to the extent provided in the related prospectus supplement, credit
enhancement may include one or more of the following or any combination of the
following:
o Financial Guaranty Insurance Policy which will be issued by a monoline
insurance company and which, subject to the terms of the policy, will
guarantee timely payment of interest on, and ultimate, as opposed to
timely, payment of principal of, the applicable class or classes of
securities;
o Overcollateralization which will equal the excess of the aggregate
principal balance of the primary assets over the aggregate principal
balance of the securities. Overcollateralization may take the form of the
initial or subsequent deposit of primary assets to create this excess or
may build over time from the application of excess cash amounts generated
by the primary assets to accelerate the amortization of the applicable
class or classes of securities;
o Letter of Credit which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws
are made or may be replenished as previous draws are repaid from excess
cash amounts generated by the primary assets. Draws may be made to cover
shortfalls generally in collections, with respect to particular types of
shortfalls such as those due to particular types of losses or with
respect to specific situations such as shortfalls in amounts necessary to
pay current interest;
o Cash Reserve Fund which may be partially or fully funded on the date of
issuance or may be funded over time from excess cash amounts generated by
the primary assets. Withdrawals may be made in circumstances similar to
those for which draws may be made on a letter of credit;
o Insurance Policies which may insure a portion of the loans or underlying
loans against credit losses, bankruptcy losses, fraud losses or special
hazard losses not covered by typical homeowners insurance policies;
o Subordinate securities which will be subordinated in the right to receive
distributions to one or more other classes of securities of the same
series, some or all of which may themselves be subordinated to other
classes of that series. Subordination may be with respect to
distributions of interest, principal or both. In addition, all or
portions of particular types of losses on the primary assets may be
allocated to one or more classes of the subordinate securities prior to
the allocation
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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.
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SERVICING OF LOANS
Customary servicing functions with respect to loans comprising the primary
assets in the trust fund will be provided by the servicer directly pursuant to
the related sale and servicing agreement or pooling and servicing agreement, as
the case may be, with respect to a series of securities. The servicer will be
Delta Funding Corporation or another entity identified in the related prospectus
supplement.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the related
agreement for a series and any applicable credit enhancement, follow the same
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the servicer may, in its discretion,
(a) waive any assumption fee, late payment charge, or other charge in connection
with a home equity loan and (b) arrange with an obligor a schedule for the
liquidation of delinquencies by extending the due dates for scheduled payments
on that loan.
The servicer, to the extent permitted by law, will establish and maintain
escrow or impound accounts with respect to loans in which payments by obligors
with respect to taxes, assessments, mortgage and hazard insurance premiums, and
other comparable items will be deposited. Loans may not require these payments
under the related loan documents, in which case the servicer would not be
required to establish any escrow account with respect to the loans. Withdrawals
from the escrow accounts are to be made to effect timely payment of taxes,
assessments and mortgage and hazard insurance, to refund to obligors amounts
determined to be overages, to pay interest to obligors on balances in the escrow
account to the extent required by law, to repair or otherwise protect the
property securing the related home equity loan and to clear and terminate the
escrow account. The servicer will be responsible for the administration of the
escrow accounts and generally will make advances to these accounts when a
deficiency exists in any of these escrow accounts.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT OR THE CERTIFICATE
ACCOUNT
The trustee or the servicer will establish a separate account in the name
or for the benefit of the trustee. The collection account and/or certificate
account will be an account maintained:
o at a depository institution, the long-term unsecured debt obligations of
which at the time of any deposit in the account are rated by each rating
agency rating the securities of the related series at levels satisfactory
to each rating agency or
o in an account or accounts the deposits in which are insured to the
maximum extent available by the federal deposit insurance corporation,
referred to as FDIC, or which are secured in a manner meeting
requirements established by each rating agency.
The funds held in the collection account or the certificate account may be
invested, pending remittance to the trustee, in eligible investments. The
servicer will be entitled to
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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,
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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
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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 is
customary in the state in which the related property is located. The standard
hazard insurance policies will provide for coverage at least equal to the
applicable state standard form of fire insurance policy with extended coverage
for property of the type securing the related loans.
In general, the standard form of fire and extended coverage insurance
policy covers physical damage to or destruction of the improvements on the
property by fire, lightning, explosion, smoke, windstorm and hail, and riot,
strike and civil commotion, subject to the conditions and exclusions specified
in each policy. Although the policies relating to the loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms of these policies are dictated by respective state
laws, and most policies typically do not cover any physical damage resulting
from any of the following:
o war,
o revolution,
o governmental actions,
o floods and other water-related causes,
o earth movement, including earthquakes, landslides and mudflows,
o nuclear reactions,
o wet or dry rot,
o vermin,
o rodents,
o insects or domestic animals,
o theft and,
o in some cases, vandalism
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all-inclusive. When a mortgaged property is located in
a federally designated special flood hazard area at the time of origination of
the related loan, the applicable agreement requires the servicer to cause to be
maintained flood insurance, to the extent available, in an amount equal in
general to the lesser of the maximum insurance
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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.
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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
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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,
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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
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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.
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THE AGREEMENTS
The following summaries describe the material provisions of the agreements
common to each series of securities. The summaries do not purport to be complete
and are subject to, and qualified in their entirety by reference to, the
provisions of the agreements. Where particular provisions or terms used in the
agreements are referred to, these provisions or terms are as specified in the
related agreements.
ASSIGNMENT OF PRIMARY ASSETS
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the trust fund all right, title and interest of
the seller in the primary assets and other property to be transferred to the
trust fund for a series. An assignment will include all principal and interest
due or received on or with respect to the primary assets after the cut-off date
to the extent specified in the related prospectus supplement, except for any
retained interests. The trustee will, concurrently with an assignment, execute
and deliver the securities.
Assignment of loans. The seller will, as to each loan, deliver or cause
to be delivered to the trustee, or, as specified in the related prospectus
supplement a custodian on behalf of the trustee,
o the mortgage note endorsed without recourse to the order of the trustee
or in blank,
o the original mortgage with evidence of recording indicated thereon,
except for any mortgage not returned from the public recording office, in
which case the seller will certify that the original of such mortgage was
delivered to such recording office, and
o an assignment of the mortgage in recordable form.
The trustee or the custodian, will hold such documents in trust for the benefit
of the holders.
The seller will, at the time of issuance of the securities, cause
assignments to the trustee of the mortgages relating to the loans for a series
to be recorded in the appropriate public office for real property records,
except in states where, in the opinion of counsel acceptable to the trustee,
recording is not required to protect the trustee's interest in the related
loans. If specified in the related prospectus supplement, the seller will cause
assignments to the trustee to be so recorded within the time after issuance of
the securities as is specified in the related prospectus supplement, in which
event, the applicable agreement may require the seller to repurchase from the
trustee any loan the related mortgage of which is not recorded within the
specified time, at the price described below with respect to repurchases by
reason of defective documentation. The enforcement of the repurchase obligation
would constitute the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
Each loan will be identified in a schedule appearing as an exhibit to the
related agreement. This schedule will specify with respect to each loan:
o the original principal amount and unpaid principal balance as of the
cut-off date;
o the current interest rate;
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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.
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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,
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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-
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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.
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During the continuance of any event of default of the servicer under an
agreement for a series of securities, the trustee for the series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the holders of the related series, and,
unless otherwise specified in the related prospectus supplement, holders of
securities evidencing not less than 51% of the aggregate voting rights of the
securities for the series may direct the time, method and place of conducting
any proceeding for any remedy available to the trustee or exercising any trust
or power conferred upon that trustee. However, the trustee will not be under any
obligation to pursue any remedy or to exercise any trusts or powers unless the
holders have offered the trustee reasonable security or indemnity against the
cost, expenses and liabilities which may be incurred by the trustee in or by
pursuit of a remedy or exercise of any trusts or powers. The trustee may decline
to follow any direction if the trustee determines that the action or proceeding
so directed may not lawfully be taken or would involve it in personal liability
or be unjustly prejudicial to the nonassenting holders.
Indenture. Events of default under the indenture for each series of notes
will include:
(a) a default for 30 days or more in the payment of any principal of or
interest on any note of a series;
(b) failure to perform any other covenant of the seller or the trust fund
in the indenture which continues for a period of 60 days after notice
of the failure to perform is given in accordance with the procedures
described in the related prospectus supplement;
(c) any representation or warranty made by the seller or the trust fund in
the indenture or in any certificate or other writing delivered pursuant
to the indenture or in connection with the indenture with respect to or
affecting the series having been incorrect in a material respect as of
the time made, and the breach is not cured within 60 days after notice
of it is given in accordance with the procedures described in the
related prospectus supplement;
(d) some events of bankruptcy, insolvency, receivership or liquidation of
the seller or the trust fund; or
(e) any other event of default provided with respect to notes of that
series.
If an event of default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of the series
with, if specified in the related prospectus supplement, the consent of the
enhancer, may declare the principal amount, or, if the notes of that series are
zero coupon securities, a portion of the principal amount as may be specified in
the terms of that series, as provided in the related prospectus supplement, of
all the notes of the series to be due and payable immediately. This declaration
may, under some circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the notes of the series.
If, following an event of default with respect to any series of notes, the
notes of that series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply distributions on the collateral as if there had
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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
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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.
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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
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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.
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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
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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.
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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.
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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
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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
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mortgagor was insolvent and within one year, or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law, of the filing of bankruptcy. Similarly, a suit
against the debtor on the related mortgage note may take several years and,
generally, is a remedy alternative to foreclosure, the mortgagee being precluded
from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where 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
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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.
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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
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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.
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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.
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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.
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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'
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and Sailors' Civil Relief Act of 1940 will be allocated to each class of
securities of the related series that is entitled to receive interest in respect
of the loans or underlying loans in proportion to the interest that each class
of securities would have otherwise been entitled to receive in respect of the
loans or underlying loans had an interest shortfall not occurred.
USE OF PROCEEDS
The seller will apply all or substantially all of the net proceeds from the
sale of each series of securities for one or more of the following purposes:
o to establish any reserve fund, pre-funding account or segregated trust
account,
o to pay costs of structuring and issuing the securities, including the
costs of obtaining enhancement and
o for its general corporate purposes.
FEDERAL INCOME TAX CONSIDERATIONS
This section sets forth
o certain federal income tax opinions of Stroock & Stroock & Lavan LLP,
special counsel to the seller, referred to as federal tax counsel, and
o a summary, based on the advice of Federal tax counsel, of the material
federal income tax consequences of the purchase, ownership and
disposition of securities.
The summary does not purport to deal with all aspects of federal income taxation
that may affect particular investors in light of their individual circumstances,
nor with certain types of investors subject to special treatment under the
federal income tax laws. The summary focuses primarily upon investors who will
hold securities as capital assets, generally, property held for investment,
within the meaning of Section 1221 of the Internal Revenue Code of 1986, but
much of the discussion is applicable to other investors as well. Because tax
consequences may vary based on the status or tax attributes of the owner of a
security, prospective investors are advised to consult their own tax advisers
concerning the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the securities. For purposes of this
tax discussion, except with respect to information reporting, or where the
context indicates otherwise, any reference to the holder means the beneficial
owner of a security.
The summary is based upon the provisions of the Internal Revenue Code of
1986, the regulations promulgated under the Internal Revenue Code of 1986,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions 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
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(a) the securities of a series are classified as indebtedness for
federal income tax purposes;
(b) an election is made to treat the trust fund, or certain assets of
the trust fund, relating to a particular series of securities as a real
estate mortgage investment conduit, known as a REMIC, under the Internal
Revenue Code of 1986;
(c) the securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the trust fund for a
series; or
(d) for federal income tax purposes the trust fund relating to a
particular series of certificates is classified as a partnership.
The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to each series.
OPINIONS
Federal tax counsel is of the opinion that:
(a) If a prospectus supplement indicates that one or more classes of
securities of the related series are to be treated as indebtedness for
federal income tax purposes, assuming that all of the provisions of the
applicable agreement are complied with, the securities so designated will
be considered indebtedness of the trust fund for federal income tax
purposes;
(b) If a prospectus supplement indicates that one or more REMIC
elections will be made with respect to the related trust fund, assuming
that these REMIC elections are timely made and all of the provisions of the
applicable agreement are complied with
(1) each segregated pool of assets specified in the applicable
agreement will constitute a REMIC for federal income tax purposes,
(2) the class or classes of securities of the related series
which are designated as "regular interests" in the related prospectus
supplement will be considered regular interests in a REMIC for federal
income tax purposes and
(3) the class of securities of the related series which is
designated as the residual interest in the related prospectus
supplement will be considered the sole class of "residual interests" in
the applicable REMIC for federal income tax purposes;
(c) If a prospectus supplement indicates that a trust fund will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable agreement,
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(1) the trust fund will be considered to be a grantor trust under
Subpart E, Part 1 of Subchapter J of the Internal Revenue Code of 1986
and will not be considered to be an association taxable as a
corporation and
(2) a holder of the related securities will be treated for
federal income tax purposes as the owner of an undivided interest in
the primary assets included in the trust fund; and
(d) If a prospectus supplement indicates that a trust fund is to be
treated as a partnership for federal income tax purposes, assuming that all
of the provisions of the applicable agreements are complied with, that
trust fund will be considered to be a partnership for federal income tax
purposes and will not be considered to be an association or publicly traded
partnership taxable as a corporation.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third-party.
TAXATION OF DEBT SECURITIES INCLUDING REGULAR INTEREST SECURITIES
Interest and acquisition discount. Securities representing a regular
interest in a REMIC, which are referred to as regular interest securities, are
generally taxable to holders in the same manner as evidences of indebtedness
issued by the REMIC. Stated interest on the regular interest securities will be
taxable as ordinary income and taken into account using the accrual method of
accounting, regardless of the holder's normal accounting method. Interest, other
than original issue discount, on securities, other than regular interest
securities, that are characterized as indebtedness for federal income tax
purposes will be includible in income by holders of those securities in
accordance with their usual methods of accounting. Securities characterized as
debt for federal income tax purposes and regular interest securities will from
here be referred to in this prospectus collectively as debt securities.
Debt securities that are compound interest securities will, and certain of
the other debt securities may, be issued with original issue discount, known as
OID. The following discussion is based in part on the rules governing OID which
are set forth in Sections 1271-1275 of the Internal Revenue Code of 1986 and the
Treasury regulations issued under the Internal Revenue Code of 1986. A holder
should be aware, however, that the OID regulations do not adequately address
some issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. A holder of
a debt security must include OID in gross income as ordinary interest income as
it accrues under a prescribed method which takes into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a debt
security will be considered to be zero if it is less than a de minimis amount
determined under the Internal Revenue Code of 1986.
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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.
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The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds 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.
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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,
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(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
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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
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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.
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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
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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."
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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.
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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
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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.
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It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the startup day. In
addition, a REMIC is subject to tax, deductible from its income, on any net
income from foreclosure property, determined in accordance with Section
857(b)(4)(B) of the Internal Revenue Code as if the REMIC were a REIT. The
holders of residual interest securities will generally be responsible for the
payment of any taxes imposed on the REMIC. To the extent not paid by the holders
or otherwise, however, the taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a security representing a residual interest will take into
account the daily portion of the taxable income or net loss of the REMIC for
each day during the taxable year on which the holder held the residual interest
security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income 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
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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.
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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 acting on behalf of a disqualified
organization.
If a residual interest security is transferred to a disqualified
organization in violation of the restrictions set forth above, a substantial tax
will be imposed on the transferor of that residual interest security at the time
of the transfer. In addition, if a disqualified organization holds an interest
in a pass-through entity, including, among others, a partnership, trust, real
estate investment trust, regulated investment company, or any person holding as
nominee an interest in a pass-through entity, that owns a residual interest
security, the pass-through entity will be required to pay an annual tax on its
allocable share of the excess inclusion income of the REMIC. For taxable years
beginning after December 31, 1997, all partners of electing partnerships having
100 or more partners will be treated as disqualified organizations for purposes
of the tax imposed on pass-through
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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 the following conditions are met:
(a) the transferor conducts, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee
has historically paid its debts as they came due and finds no
significant evidence to indicate that the transferee will not
continue to pay its debts as they come due in the future, and
(b) the transferee represents to the transferor that
(1) the transferee understands that it might incur tax liabilities in
excess of any cash received with respect to the residual interest and
(2) the transferee intends to pay the taxes associated with owning the
residual interest as they come due.
The Treasury Department has proposed an amendment to the Regulations that
would add a third condition, effective February 4, 2000. According to the
proposed amendment, a transferor of a residual interest would be presumed not to
have improper knowledge only if the present value of the anticipated tax
liabilities associated with holding the residual interest is less than or equal
to the present value of the sum of (i) any consideration given to the transferee
to acquire the residual interest, (ii) expected future distributions on the
residual interest, and (iii) anticipated tax savings associated with holding the
residual interest as the related REMIC trust generates losses. The application
of the proposed amendment to an actual transfer is uncertain, and you should
consult your own tax advisor regarding its effect on the transfer of a residual
interest.
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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
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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. Section 1272(a)(6) has been amended to apply to pools
of debt instruments the yield on which may be affected by prepayments. If
required to report interest income on the pass-through securities to the
Internal Revenue Service under the rules of Section 1286 of the Internal Revenue
Code, it is anticipated that the trustee will calculate the yield of the
pass-through securities based on a representative initial offering price of the
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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
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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.
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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
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(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
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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.
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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;
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(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.
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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.
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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
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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-8BEN in order to assure
appropriate crediting of the taxes withheld. A foreign holder generally would be
entitled to file with the Internal Revenue Service a claim for refund with
respect to taxes withheld by the trust fund taking the position that no taxes
were due because the trust fund was not engaged in a United States trade or
business. However, interest payments made, or accrued, to a certificateholder
who is a foreign person generally will be considered guaranteed payments to the
extent these interest payments are determined without regard to the income of
the trust fund. If these interest payments are properly characterized as
guaranteed payments, then the interest probably will not be considered portfolio
interest. As a result, certificateholders will be subject to United
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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.
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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.
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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.
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$275,000,000
DELTA FUNDING
HOME EQUITY LOAN TRUST 2000-2
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES, SERIES 2000-2
DELTA FUNDING CORPORATION
(SELLER)
COUNTRYWIDE HOME LOANS, INC.
(SERVICER)
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PROSPECTUS SUPPLEMENT
JUNE 28, 2000
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LEHMAN BROTHERS
GREENWICH CAPITAL MARKETS, INC.
COUNTRYWIDE SECURITIES CORPORATION
