<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 19, 1996)
$1,250,000,000
THE MONEY STORE (R)
THE MONEY STORE TRUST 1996-B
The Money Store Asset Backed Certificates, Series 1996-B (the
"Certificates"), will represent fractional undivided ownership interests in a
trust fund, designated as The Money Store Trust 1996-B (the "Trust"). The
primary assets of the Trust will be four
(cover continued on next page)
-----------------
SEE "RISK FACTORS" ON PAGE S-40 HEREIN AND PAGE 31 OF THE PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE CERTIFICATES OFFERED HEREBY.
-----------------
THE CLASS A CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE MONEY STORE INC., MBIA INSURANCE
CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES OR SUBSIDIARIES. EXCEPT
FOR THE FHA LOANS, THE LOANS ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY, AND NO GOVERNMENTAL AGENCY HAS PASSED UPON THE
ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INITIAL CLASS PASS-
CERTIFICATE THROUGH PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE PUBLIC (1) DISCOUNT ORIGINATORS (1)(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1 Certifi-
cates................. $ 168,932,000 6.72% 100.000000% 0.1000% 99.900000%
- ----------------------------------------------------------------------------------------------------
Class A-2 Certifi-
cates................. $ 84,260,000 6.61% 100.000000% 0.1000% 99.900000%
- ----------------------------------------------------------------------------------------------------
Class A-3 Certifi-
cates................. $ 84,673,000 6.82% 100.000000% 0.1250% 99.875000%
- ----------------------------------------------------------------------------------------------------
Class A-4 Certifi-
cates................. $ 95,170,000 6.97% 100.000000% 0.1500% 99.850000%
- ----------------------------------------------------------------------------------------------------
Class A-5 Certifi-
cates................. $ 157,038,000 7.18% 99.984375% 0.2000% 99.784375%
- ----------------------------------------------------------------------------------------------------
Class A-6 Certifi-
cates................. $ 65,967,000 7.38% 99.984375% 0.2250% 99.759375%
- ----------------------------------------------------------------------------------------------------
Class A-7 Certifi-
cates................. $ 98,867,000 7.55% 99.984375% 0.3000% 99.684375%
- ----------------------------------------------------------------------------------------------------
Class A-8 Certifi-
cates................. $ 107,254,000 7.91% 99.953125% 0.4250% 99.528125%
- ----------------------------------------------------------------------------------------------------
Class A-9 Certifi-
cates................. $ 67,839,000 8.14% 99.984375% 0.5500% 99.434375%
- ----------------------------------------------------------------------------------------------------
Class A-10 Certifi-
cates................. $ 125,000,000 (3) 100.000000% 0.2250% 99.775000%
- ----------------------------------------------------------------------------------------------------
Class A-11 Certifi-
cates................. $ 75,000,000 (4) 100.000000% 0.2250% 99.775000%
- ----------------------------------------------------------------------------------------------------
Class A-12 Certifi-
cates................. $ 18,958,000 6.54% 100.000000% 0.1000% 99.900000%
- ----------------------------------------------------------------------------------------------------
Class A-13 Certifi-
cates................. $ 46,341,000 6.90% 99.984375% 0.1825% 99.801875%
- ----------------------------------------------------------------------------------------------------
Class A-14 Certifi-
cates................. $ 14,337,000 7.35% 99.953125% 0.3000% 99.653125%
- ----------------------------------------------------------------------------------------------------
Class A-15 Certifi-
cates................. $ 20,364,000 7.90% 99.968750% 0.4000% 99.568750%
- ----------------------------------------------------------------------------------------------------
Class A-16 Certifi-
cates................. $ 20,000,000 8.01% 100.000000% 0.2250% 99.775000%
- ----------------------------------------------------------------------------------------------------
Total.................. $1,250,000,000 $1,249,868,507.34 $2,812,832.33 $1,247,055,675.01
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus, for each Class of Class A Certificates (other than the Class A-11
Certificates), accrued interest at the applicable Pass-Through Rate from
June 1, 1996 (or, with respect to the Class A-10 Certificates, from June 15,
1996) to but not including the Closing Date.
(2) Before deducting expenses payable by The Money Store Inc., estimated to be
$400,000.
(3) The Pass-Through Rate for the Class A-10 Certificates will adjust based on
one-month LIBOR, as described herein. See "Description of the Certificates--
The Distribution Amounts."
(4) The Pass-Through Rate for the Class A-11 Certificates will be determined
pursuant to the Auction Procedures described in Annex I hereto.
-----------------
The Class A Certificates are offered by the Underwriters, when, as and if
issued to and accepted by the Underwriters, subject to approval of certain
legal matters by counsel for the Underwriters. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Class A Certificates will be
made in book-entry form only through the Same Day Funds Settlement System of
The Depository Trust Company in the United States or Cedel Bank, societe
anonyme ("Cedel Bank") or the Euroclear System ("Euroclear") in Europe on or
about June 27, 1996.
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
BEAR, STEARNS & CO. INC.
CS FIRST BOSTON
June 21, 1996
<PAGE>
(cover continued from previous page)
separate cross-supported sub-trusts, each consisting of a pool ("Pool I,"
"Pool II," "Pool III" and "Pool IV," respectively, and collectively, the
"Pools") of loans (the "Loans") having the characteristics described
herein. Pool I and Pool II will consist of one- to four-family ("single
family") residential first and, in the case of Pool I, second mortgage
loans (collectively, the "Home Equity Loans") having original terms to
stated maturity of up to 30 years, and with fixed rates, in the case of
Pool I, and adjustable rates, in the case of Pool II. Pool III will
consist primarily of fixed rate, single family residential first, second
and more junior home improvement mortgage loans (the "Home Improvement
Loans"), certain of which loans (the "FHA Loans") are partially insured by
the Federal Housing Administration (the "FHA") of the United States
Department of Housing and Urban Development ("HUD") under Title I of the
National Housing Act of 1934 ("Title I"). The FHA Loans will have
original terms to stated maturity of up to 20 years and the other Home
Improvement Loans will have original terms to stated maturity of up to 25
years. Pool IV will consist of fixed rate five or more unit residential
or mixed-use residential and commercial first mortgage loans (the
"Multifamily Loans") having original terms to stated maturity of up to 30
years. The Trust will also include funds on deposit in a separate trust
account (the "Pre-Funding Account") to be established with the Trustee (as
defined herein). All of the Loans were originated or purchased by certain
wholly-owned subsidiaries (the "Originators") of The Money Store Inc. (the
"Representative"). The Money Store Inc. will act as the servicer (in such
capacity, the "Servicer") of the Loans and the administrator (in such
capacity, the "Claims Administrator") of the FHA Loans. Except for
certain representations and warranties relating to the Loans and certain
other matters, The Money Store Inc.'s obligations with respect to the
Loans are limited to its contractual servicing obligations.
Certificate guaranty insurance policies (the "MBIA Policies") with
respect to the Class A Certificates, as defined herein, will be issued by:
MBIA INSURANCE CORPORATION
Full and complete payment to The Bank of New York, as Trustee for the
holders of the Class A Certificates, of Insured Payments (as defined
herein), consisting primarily of interest due to such holders in respect
of the Certificates on each Remittance Date and principal at the times
described herein, is unconditionally and irrevocably guaranteed pursuant
to the terms of the Certificate Guaranty Insurance Policies. See "The
MBIA Policies and MBIA" herein for a more complete description of the MBIA
Policies. MBIA does not insure any Certificateholders' Interest Carryover
(as defined herein).
Additional loans (collectively, the "Subsequent Loans") may be
purchased by the Trust from the Originators from time to time on or before
the close of business on September 25, 1996 from funds on deposit in the
Pre-Funding Account. Each of the Subsequent Loans will have been
originated and identified prior to the Closing Date. Any Subsequent Loan
acquired by the Trust will be assigned to the appropriate sub-trust based
upon the characteristics of such Subsequent Loan. See "The Loan Pools--
General." On the Closing Date (as defined herein), an aggregate cash
amount not to exceed approximately $233,200,000, in the case of Pool I,
approximately $46,700,000, in the case of Pool II, approximately
$21,200,000, in the case of Pool III, and approximately $4,700,000, in the
case of Pool IV will be deposited into the Pre-Funding Account. See "The
Agreement--Pre-Funding Account" herein.
The Certificates will consist of the 16 classes of regular
certificates set forth on the front cover (collectively, the "Class A
Certificates") and one class of residual certificates (the "Class R
Certificates"). Only the Class A Certificates are offered hereby. The
Class A-1 through Class A-9 Certificates generally will represent the
right to receive payments distributable on or with respect to the Home
Equity Loans in Pool I. The Class A-10 and Class A-11 Certificates
generally will represent the right to receive payments distributable on or
with respect to the Home Equity Loans in Pool II. The Class A-12 through
Class A-15 Certificates generally will represent the right to receive
payments distributable on or with respect to the Home Improvement Loans in
Pool III. The Class A-16 Certificates generally will represent the right
to receive payments distributable on or with respect to the Multifamily
Loans in Pool IV. HOWEVER, DUE TO THE CROSS-SUPPORT PROVISIONS DESCRIBED
HEREIN, THE HOLDERS OF EACH CLASS OF CLASS A CERTIFICATES MAY RECEIVE CASH
AS CREDIT SUPPORT FROM ANY LOAN IN ANY POOL. See "Description of the
Certificates--Cross-Support Provisions and Spread Amount" herein.
S-2
<PAGE>
Distributions of principal and interest to the holders of the Class A
Certificates (the "Class A Certificateholders" or "Holders") will be made
on the 15th day of each month or, if the 15th day is not a business day,
the first business day thereafter, commencing July 1996 (each such day, a
"Remittance Date"). On each Remittance Date, the owners of each Class of
Class A Certificates as of the preceding Record Date (as defined herein)
will be entitled to receive interest on the outstanding principal balances
of the respective Class at the rates or in the manner set forth on the
front cover, and distributions with respect to principal as described
herein. Additionally, any Pre-Funded Amount (as defined herein) remaining
in the Pre-Funding Account at the close of business on September 25, 1996
will be distributed as a principal prepayment on September 26, 1996
(together with accrued interest at the applicable Pass-Through Rates on
the amount of such prepayment) to the Class A Certificates then entitled
to receive distributions of principal. The interest due such Class A
Certificates on the October 1996 Remittance Date will be adjusted to take
account of such distribution.
By purchasing a Class A-11 Certificate (the "Auction Rate
Certificates"), whether in an Auction or otherwise, each prospective
purchaser will be deemed to have agreed (i) to participate in Auctions on
the terms described herein and (ii) so long as the beneficial ownership of
the Auction Rate Certificates is maintained in book-entry form to sell,
transfer or otherwise dispose of the Auction Rate Certificates only
pursuant to a Bid or a Sell Order in an Auction, or to or through a
Broker-Dealer, provided that in the case of all transfers other than those
pursuant to an Auction, the owner of the Auction Rate Certificates so
transferred, its Participant or Broker-Dealer advises the Auction Agent of
such transfer.
There is currently no secondary market for the Class A Certificates.
The Underwriters intend to make a secondary market for the Class A
Certificates, but have no obligation to do so. There can be no assurance
that a secondary market for the Class A Certificates will develop or, if
one does develop, that it will offer sufficient liquidity of investment or
continue.
As described herein, a real estate mortgage investment conduit
("REMIC") election will be made in connection with certain assets of the
Trust for federal income tax purposes. As described more fully herein,
the Class A Certificates will constitute "regular interests" in the REMIC
and the Class R Certificates will constitute the single class of "residual
interest" in the REMIC. See "Federal Income Tax Consequences" in the
Prospectus and "Federal Income Tax Considerations" herein.
The Class A Certificates offered by this Prospectus Supplement
constitute a separate series of Certificates being offered by the
Representative and the Originators pursuant to the Prospectus dated March
19, 1996, of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
(end of cover page)
----------------------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING
TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
S-3
<PAGE>
SUMMARY OF TERMS
This following summary of certain pertinent information is qualified
in its entirety by reference to the detailed information appearing
elsewhere in this Prospectus Supplement and the accompanying Prospectus.
Capitalized terms used but not defined in this Summary of Terms have the
meanings assigned to such terms elsewhere in this Prospectus Supplement.
Securities Offered.............. The Money Store Asset Backed Certificates,
Series 1996-B, Class A-1 through Class
A-16 (collectively, the "Class A
Certificates").
Each Class of Class A Certificates will
be issued in the initial Class
Principal Balance set forth for such
Class on the cover page hereof. Each
Class of Class A Certificates (other
than the Class A-10 and Class A-11
Certificates) will bear interest for
each Remittance Date at the per annum
rate set forth for such Class on the
cover page hereof.
For the first Remittance Date, the Class
A-10 Certificates will bear interest at
the rate of 5.78% per annum. For each
Remittance Date thereafter, the Class
A-10 Certificates will bear interest at
a rate equal to LIBOR (as defined
herein) plus 0.32% (or 0.64% for each
Remittance Date occurring after the
Optional Servicer Termination Date),
subject to the Net Funds Cap (as
defined herein)(but in no event
exceeding 14.50% per annum).
For the first Remittance Date, the Class
A-11 Certificates will bear interest at
the rate of 5.46% per annum. For each
Remittance Date thereafter, the Class
A-11 Certificates will bear interest
based upon the Auction Procedures
described in Annex I hereto, subject to
the Net Funds Cap (but in no event
exceeding 14.50% per annum).
The per annum rate of interest at which a
Class of Class A Certificates bears
interest is referred to herein as the
"Pass-Through Rate" for such Class.
The statistical information presented in
this Prospectus Supplement concerning
the Pool I, Pool II, Pool III and Pool
IV Loans (each as defined herein) is
based on preliminary Pools expected to
be delivered to the Trustee and Co-
Trustee on the Closing Date. The
Representative expects that loans
(including the Subsequent Loans) that
were not contained in the preliminary
Pools will be added to the final Pools.
S-4
<PAGE>
While the statistical distribution of
the characteristics for the final Pools
of Loans will vary somewhat from the
statistical distribution of such
characteristics for the preliminary
Pools of Loans presented in this
Prospectus Supplement, the
Representative does not believe that
the characteristics of the final Pools
will differ materially.
References in this Prospectus Supplement
to the characteristics of the Loans as
of the Cut-off Date are deemed to
include the characteristics, as of the
date of their origination, of those
Loans originated after the Cut-off Date
and up to the Closing Date.
Transaction Structure.............. The primary assets of the Trust will be
four separate cross-supported sub-
trusts consisting of the Pool I, Pool
II, Pool III and Pool IV Loans. The
Trust will issue the following Classes
of Certificates:
Pool I Certificates................ Class A-1, Class A-2, Class A-3, Class A-
4, Class A-5, Class A-6, Class A-7,
Class A-8 and Class A-9 Certificates.
Pool II Certificates............... Class A-10 and Class A-11 Certificates.
Pool III Certificates.............. Class A-12, Class A-13, Class A-14 and
Class A-15 Certificates.
Pool IV Certificates............... Class A-16 Certificates.
Residual Certificates.............. Class R Certificates.
Other Designations................. As used herein, certain Classes of
Certificates have been assigned the
following additional designations:
Adjustable Rate Certificates....... Class A-10 Certificates.
Auction Rate Certificates.......... Class A-11 Certificates.
Credit Support..................... As described herein, certain excess
interest received on the Loans will be
available to fund any shortfalls in
amounts required to be distributed to
the Certificates of the related Pool
and for Certificates of any other Pool
of Class A Certificates. Such excess
interest will then be used to make
accelerated payments of principal on
the Certificates of the related Pool
and for Certificates of any other Pool
of Class A Certificates. Thereafter,
certain excess interest
S-5
<PAGE>
received on the Loans will be deposited
into the Spread Account.
AS A RESULT OF THE FOREGOING, THE HOLDERS
OF EACH CLASS OF CLASS A CERTIFICATES
MAY RECEIVE CASH AS CREDIT SUPPORT FROM
ANY LOAN IN ANY POOL. See "Description
of the Certificates--Cross-Support and
Spread Amount." The holders of each
Class of Class A Certificates also will
have the benefit of the protection
afforded by the MBIA Policies. See
"The MBIA Policies and MBIA."
Cut-Off Date.................. May 31, 1996.
Closing Date.................. June 27, 1996.
Issuer........................ The Money Store Trust 1996-B
(the "Trust").
Representative, Servicer and
Claims Administrator.......... The Money Store Inc.,
a New Jersey corporation (in its
capacity as sponsor of the Trust, the
"Representative," in its capacity as
the servicer of the Loans, the
"Servicer," and in its capacity as the
administrator of the insurance claims
to the FHA (the "Claims") with respect
to the FHA Loans, the "Claims
Administrator"). In the Agreement (as
defined herein), the Claims
Administrator will appoint its
subsidiary, TMS Mortgage Inc., a New
Jersey corporation, to assist in
performing the functions of the Claims
Administrator. The principal offices
of The Money Store Inc. are located at
3301 C Street, Suite 100-M, Sacramento,
California 95816 (telephone number
(916) 446-5000) and 2840 Morris Avenue,
Union, New Jersey 07083 (telephone
number (908) 686-2000). See "The
Representative and the Originators"
herein and in the Prospectus.
Trustee....................... The Bank of New York, a New
York banking corporation, in its
capacity as trustee. See "The Trustee"
herein.
Co-Trustee.................... First Bank (N.A.), a
national banking association
headquartered in Milwaukee, Wisconsin
will be the Co-Trustee with respect to
the Home Improvement Loans. The Co-
Trustee is a subsidiary of First Bank
Systems, Minneapolis, Minnesota. See
"The Co-Trustee" herein.
S-6
<PAGE>
Custodian..................... First Trust National Association, a
national banking association,
headquartered in St. Paul, Minnesota
will be the Custodian with respect to
the Home Improvement Loans. In such
capacity, it will retain the files
relating to the Home Improvement Loans.
The Custodian is a subsidiary of First
Bank Systems, Minneapolis, Minnesota.
See "The Custodian" herein.
Auction Agent................. Bankers Trust Company, a New York banking
corporation, will act as auction agent
(in such capacity, the "Auction Agent")
with respect to the Auction Rate
Certificates. See "The Auction Agent"
herein.
Originators of the Loans...... Each Loan
will have been originated and
underwritten, or purchased and re-
underwritten, by certain wholly-owned
subsidiaries of the Representative (the
"Originators"). Additionally, each
Subsequent Loan to be included in the
Trust will have been originated and
underwritten, or purchased and re-
underwritten, by an Originator.
Description of the Certificates The Certificates will be issued pursuant
to a Pooling and Servicing Agreement
(the "Agreement"), dated as of the Cut-
Off Date, among the Representative, the
Originators and The Bank of New York,
as trustee (the "Trustee").
The Certificates will represent
fractional undivided ownership
interests in the Trust, the assets of
which will consist primarily of four
separate cross-supported sub-trusts,
each consisting of a pool ("Pool I,"
"Pool II," "Pool III" and "Pool IV,"
respectively) of Loans having the
characteristics described herein.
Pool I and Pool II will consist of one-
to four-family ("single family")
residential first and, in the case of
Pool I, second mortgage loans expected
to have aggregate principal balances as
of the Cut-Off Date of approximately
$696,800,000 and $153,300,000,
respectively, and original terms to
stated maturity of up to 30 years. As
described herein, each of the Loans in
Pool I (the "Pool I Home Equity Loans"
or the "Pool I Loans," which terms
include any Subsequent Loans acquired
by Pool I, unless the context requires
otherwise) will bear interest at a
fixed rate and each of the Loans in
Pool II (the
S-7
<PAGE>
"Pool II Home Equity Loans" or the
"Pool II Loans," which terms include
any Subsequent Loans acquired by Pool
II, unless the context requires
otherwise) will bear interest at an
adjustable rate as described below.
See "The Loan Pools--The Home Equity
Loan Pools" herein.
Pool III will consist primarily of fixed
rate, single family residential first,
second and more junior home improvement
loans (the "Home Improvement Loans" or
the "Pool III Loans," which terms
include any Subsequent Loans acquired
by Pool III, unless the context
requires otherwise) expected to have an
aggregate principal balance as of the
Cut-Off Date of approximately
$78,800,000 and original terms to
stated maturity of up to 25 years or,
in the case of the FHA Loans, 20 years.
Certain of the Pool III Loans are
insured by the FHA under Title I. See
"Lending Programs-- The Home
Improvement Lending Program."
Pool IV will consist of five or more unit
residential or mixed-use residential
and commercial first mortgage loans
(the "Multifamily Loans" or the "Pool
IV Loans," which terms include any
Subsequent Loans acquired by Pool IV,
unless the context requires otherwise)
expected to have an aggregate principal
balance as of the Cut-Off Date of
approximately $15,300,000 and original
terms to stated maturity of up to 30
years. See "The Loan Pools--The
Multifamily Loan Pool" herein.
Collectively, the Home Equity Loans, the
Home Improvement Loans and the
Multifamily Loans are at times referred
to herein as the "Loans."
The Class A-1 through Class A-9
Certificates generally will be entitled
to receive payments distributable on or
with respect to the Pool I Home Equity
Loans. The Class A-10 and Class A-11
Certificates generally will be entitled
to receive payments distributable on or
with respect to the Pool II Home Equity
Loans. The Class A-12 through Class A-
15 Certificates generally will be
entitled to receive payments
distributable on or with respect to the
Pool III Home Improvement Loans. The
Class A-16 Certificates generally will
be entitled to receive payments
distributable on or with respect to the
Pool IV Multifamily Loans. HOWEVER, DUE
TO THE CROSS-
S-8
<PAGE>
SUPPORT PROVISIONS DESCRIBED HEREIN,
THE HOLDERS OF EACH CLASS OF CLASS A
CERTIFICATES MAY RECEIVE CASH AS CREDIT
SUPPORT FROM ANY LOAN IN ANY POOL. See
"Description of the Certificates--
Cross-Support Provisions and Spread
Amount" herein. Also, amounts, if any,
on deposit in the Spread Account
described herein will be available to
cover shortfalls in amounts due
Certificateholders, without distinction
as to Pool.
The holders of the Pool I Certificates are
also referred to herein as the "Pool I
Certificateholders." The holders of the
Pool II Certificates are also referred
to herein as the "Pool II
Certificateholders." The holders of the
Pool III Certificates are also referred
to herein as the "Pool III
Certificateholders." The holders of the
Pool IV Certificates are also referred
to herein as the "Pool IV
Certificateholders." Each holder of a
Class A Certificate is referred to
herein as a "Certificateholder."
The projected last Remittance Dates for
each Class of Class A Certificates is
as set forth herein under "Maturity,
Prepayment and Yield Considerations."
It is expected that the actual last
Remittance Date for each Class of Class
A Certificates will occur significantly
earlier than its projected last
Remittance Date. See "Maturity,
Prepayment and Yield Considerations"
herein.
The Class A Certificates (other than the
Auction Rate Certificates) are issuable
in book-entry form in minimum
denominations of $1,000 original
principal amount and integral multiples
of $1,000 in excess thereof and the
Auction Rate Certificates are issuable
in book-entry form in minimum
denominations of $25,000 original
principal amount and integral multiples
of $25,000 in excess thereof, except
that one certificate of each Class of
Class A Certificates may be issued in a
different denomination and, if so
issued, will be held in physical form.
Pre-Funding Account........... On the Closing Date, an aggregate cash
amount (the "Pre-Funded Amount") will
be deposited into the Pre-Funding
Account in an amount not to exceed
approximately $233,200,000, in the case
of Pool I, approximately $46,700,000,
in the case of Pool II, approximately
$21,200,000, in the case of Pool III,
S-9
<PAGE>
and approximately $4,700,000, in the
case of Pool IV. Amounts allocated to
Pool I, Pool II, Pool III and Pool IV,
as the case may be, may be used only
(i) to acquire Subsequent Loans for the
related Pool and (ii) to make
accelerated payments of principal on
the Certificates of the related Pool.
During the period (the "Funding
Period") from the Closing Date until
the earliest of (i) the date on which
the amount on deposit in the Pre-
Funding Account is less than $100,000,
(ii) the date on which an Event of
Default occurs under the Agreement or
(iii) the close of business on
September 25, 1996, amounts will, from
time to time, be withdrawn from the
Pre-Funding Account to purchase
Subsequent 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 on the next
Remittance Date to the Class A
Certificates of the related Pool as set
forth herein under "--Principal."
However, any Pre-Funded Amount
remaining at the close of business on
September 25, 1996 will be distributed
as a principal prepayment on September
26, 1996 (the "Special Remittance
Date") to the Class A Certificates.
Capitalized Interest Account....... On the Closing Date, the Representative
also will make a cash deposit in an
account (the "Capitalized Interest
Account") in the name of the Trustee on
behalf of the Trust. The amount
deposited in the Capitalized Interest
Account will be used by the Trustee on
the Remittance Dates occurring in July,
August and September 1996 to fund the
excess, if any, of (i) the amount of
interest accrued for each such
Remittance Date at the weighted average
Pass-Through Rates of the Class A
Certificates on the portion of the
Class A Certificates having principal
balances exceeding the principal
balances of the Loans over (ii) the
amount of any earnings on funds in the
Pre-Funding Account that are available
to pay interest on the Class A
Certificates on each such Remittance
Date. Additionally, if a principal
prepayment is made on the Special
Remittance Date to any Class of Class A
Certificates, such Class A Certificates
also will receive on such date, from
the Capitalized Interest Account,
accrued interest at the applicable
Pass-Through Rates on the amount of
such principal prepayment. Any amounts
remaining in the Capitalized Interest
Account on the Special Remittance Date
and not used for such purposes are
S-10
<PAGE>
required to be paid directly to the
holders of the Class R Certificates on
such Special Remittance Date.
Remittance and Record Dates......... Distributions on the Class A
Certificates will be made by or on
behalf of the Trustee on the 15th day
of each month, or if such day is not a
business day, on the first business day
thereafter, commencing July 15, 1996
(each, a "Remittance Date"), to each
person in whose name a Class A
Certificate is registered on the last
day of the preceding calendar month
(the "Record Date"), except that the
final distribution on each Class of
Class A Certificates will be made only
upon presentation and surrender of such
Certificates at the office or agency
designated for that purpose. Any Pre-
Funded Amount remaining at the close of
business on September 25, 1996
(together with interest thereon) will
be distributed by or on behalf of the
Trustee on the Special Remittance Date
to the Classes of Class A Certificates
of the related Pool then entitled to
receive payments of principal in the
order and percentages as described
herein under "--Principal." Such
distribution will be made to each
person in whose name a Class A
Certificate of any such Class is
registered on August 31, 1996.
Interest........................... To the extent funds are available
therefor from receipts on the Loans of
the applicable Pool, advances by the
Servicer, payments under the related
MBIA Policy (and, with respect to the
Pool III Certificates, any FHA
Payments, as defined below under "--
Obligations of the Claims
Administrator") and, for the Remittance
Dates occurring in July, August and
September 1996, any amounts transferred
to the Certificate Account (as defined
under "The Agreement--Payments on the
Loans" herein) from the Pre-Funding
Account or the Capitalized Interest
Account, on each Remittance Date the
holders of each Class of Certificates
will receive 30 days' interest (or in
the case of the Adjustable Rate and
Auction Rate Certificates, the actual
number of days since the last
Remittance Date (or, in the case of the
first Remittance Date, from June 15,
1996 with respect to the Adjustable
Rate Certificates and from the Closing
Date with respect to the Auction Rate
Certificates) up to but not including
the upcoming Remittance Date) at the
related Pass-Through Rate on the
respective Class Principal Balance
S-11
<PAGE>
outstanding immediately prior to such
Remittance Date.
The amount of interest each Class of
Certificates is entitled to receive on
each Remittance Date is referred to as
the "Current Interest Requirement" for
such Class.
The aggregate Current Interest
Requirement for the Class A-1 through
Class A-9 Certificates is also referred
to herein as the "Pool I Current
Interest Requirement." The aggregate
Current Interest Requirement for the
Class A-10 and Class A-11 Certificates
is also referred to herein as the "Pool
II Current Interest Requirement." The
aggregate Current Interest Requirement
for the Class A-12 through Class A-15
Certificates is also referred to herein
as the "Pool III Current Interest
Requirement." The Current Interest
Requirement for the Class A-16
Certificates is also referred to herein
as the "Pool IV Current Interest
Requirement."
Notwithstanding the foregoing, if a
principal prepayment is made to a Class
of Class A Certificates on the Special
Remittance Date, each such Class also
will receive on such date accrued
interest at the applicable Pass-Through
Rate on the amount of such prepayment.
Further, the Current Interest
Requirement for each such Class for the
October 1996 Remittance Date will be
based on the related Principal Balance
on September 26, 1996, after giving
effect to such principal prepayment.
With respect to the Remittance Date in
July 1996, the holders of the
Adjustable Rate and Auction Rate
Certificates will be entitled to
receive interest on the applicable
Class Principal Balance at the related
Pass-Through Rate from June 15, 1996 or
the Closing Date, respectively, to but
not including the Remittance Date in
July 1996.
As to any Remittance Date, the "Net Funds
Cap" will be a percentage equal to the
difference between (A) the weighted
average Pool II Mortgage Interest Rate
and (B) the sum of (i) the percentages
used in determining the Servicing Fee,
the Contingency Fee, the fee due the
Trustee and the premium due MBIA, (ii)
commencing with the Remittance Date in
July
S-12
<PAGE>
1997, 0.50% and (iii) with respect to
the Auction Rate Certificates, the
percentage used in determining the fees
due the Auction Agent and the Broker-
Dealer (as defined in the Auction
Procedures described in Annex I
hereto).
If on any Remittance Date the Pass-
Through Rate for a Class of Adjustable
Rate Certificates or Auction Rate
Certificates is based upon the Net
Funds Cap, the excess of (i) the amount
of interest such Class of Certificates
would be entitled to receive on such
Remittance Date had interest been
calculated based on LIBOR plus the
applicable margin or the Auction
Procedures, as the case may be (but in
no event exceeding 14.50% per annum),
over (ii) the amount of interest such
Class will receive on such Remittance
Date at the Net Funds Cap, together
with the unpaid portion of any such
excess from prior Remittance Dates (and
interest accrued thereon at the then
applicable Pass-Through Rate, without
giving effect to the Net Funds Cap, but
in no event exceeding 14.50% per annum)
is referred to herein as the
"Certificateholders' Interest
Carryover." Any Certificateholders'
Interest Carryover will be paid on
future Remittance Dates as set forth
herein under "The Agreement--Flow of
Funds." No Certificateholders'
Interest Carryover will be paid to a
Class of Certificates after its Class
Principal Balance is reduced to zero.
The ratings of the Adjustable Rate
Certificates and the Auction Rate
Certificates do not address the
likelihood of the payment of the amount
of any Certificateholders' Interest
Carryover and the MBIA Policies do not
guaranty payment of any such amount.
Interest with respect to the
Class A Certificates will accrue on the
basis of a 360-day year consisting of
twelve 30-day months (or, in the case
of the Adjustable Rate and Auction Rate
Certificates, on the basis of a 360-day
year consisting of the actual number of
days elapsed since interest was last
paid). See "Description of the
Certificates" herein.
Principal.......................... To the extent funds are
available therefor from receipts on the
Loans of the related Pool, payments
under the related MBIA Policy (and,
with respect to the Pool III
Certificates, any FHA Payments received
with respect to the Pool III Loans)
and, if applicable, for the Remittance
Dates occurring in
S-13
<PAGE>
July, August and September 1996, any
amounts transferred to the Certificate
Account from the Pre-Funding Account or
the Capitalized Interest Account, and
after payment of interest as described
above, on each Remittance Date, the
Class A Certificateholders will receive
an amount (with respect to each Pool,
the "Principal Distribution Amount" for
such Pool) equal to the excess of (X)
the sum, without duplication, of (i)
each payment of principal received by
the Servicer or any Subservicer
(exclusive of Curtailments, Principal
Prepayments and amounts described in
clause (iii) hereof) during the related
Due Period with respect to the Loans of
the related Pool, (ii) all Curtailments
and all Principal Prepayments received
by the Servicer or any Subservicer
during the related Due Period with
respect to the Loans of the related
Pool, (iii) the principal portion of
all Insurance Proceeds, Released
Mortgaged Property Proceeds and Net
Liquidation Proceeds received by the
Servicer or any Subservicer during the
related Due Period with respect to the
Loans of the related Pool (and, with
respect to the Pool III Loans, any FHA
Payments received by the Claims
Administrator with respect to principal
on a Pool III Loan during the related
Due Period), (iv) that portion of the
purchase price for any Loan of the
related Pool repurchased by The Money
Store Inc. as a remedy for breaches of
representations and warranties which
represents principal and any
Substitution Adjustments, in either
case to the extent received by the
Trustee as of the related Determination
Date, (v) any proceeds representing
principal received by the Trustee in
connection with the liquidation of a
Pool or termination of the Trust, (vi)
the amount of any Subordination Deficit
(as defined under "Description of the
Certificates--Cross Support Provisions
and Spread Amount" herein) with respect
to a Pool for such Remittance Date,
(vii) any moneys released from the Pre-
Funding Account on the July, August or
September 1996 Remittance Date as a
prepayment of the Certificates of the
related Pool, and (viii) the amount of
any Subordination Increase Amount (as
defined under "Description of the
Certificates--Cross-Support Provisions
and Spread Amount" herein) with respect
to a Pool for such Remittance Date,
over (Y) the amount of any
Subordination Reduction Amount (as
defined under "Description of the
Certificates--Cross-Support
S-14
<PAGE>
Provisions and Spread Amount" herein)
with respect to a Pool for such
Remittance Date.
On each Remittance Date, the Principal
Distribution Amount for Pool I will be
distributed to the holders of the Pool
I Certificates in the following order
of priority: (i) first, concurrently
to the holders of the Class A-1 and
Class A-2 Certificates, in the
proportions of approximately 50% and
50%, respectively, until the Class
Principal Balance of the Class A-2
Certificates is reduced to zero and
such Certificateholders have received
an amount equal to the amount described
in clause (iv) of the definition of
Distribution Amount that is recovered
from such Certificateholders, (ii)
second, concurrently to the holders of
the Class A-1 and Class A-3
Certificates, in the proportions of
approximately 50% and 50%,
respectively, until the Class Principal
Balances of the Class A-1 and Class A-3
Certificates are reduced to zero and
such Certificateholders have received
an amount equal to the amount described
in clause (iv) of the definition of
Distribution Amount that is recovered
from such Certificateholders, and (iii)
third, to the holders of the Class A-4
through the Class A-9 Certificates,
sequentially in that order, until the
Class Principal Balance of each such
Class with a lower numerical
designation is reduced to zero and the
Certificateholders of such Class have
received an amount equal to the amount
described in clause (iv) of the
definition of Distribution Amount that
is recovered from such
Certificateholders.
On each Remittance Date, the Principal
Distribution Amount for Pool II will be
distributed concurrently to the holders
of the Class A-10 and Class A-11
Certificates, pro rata based on the
Class Principal Balance of each such
Class, until the Class Principal
Balance of each such Class is reduced
to zero and such Certificateholders
have received an amount equal to the
amount described in clause (iv) of the
definition of Distribution Amount that
is recovered from such
Certificateholders.
On each Remittance Date, the Principal
Distribution Amount for Pool III will
be distributed to the holders of the
Class A-12 through Class A-15
Certificates, sequentially in that
order, until the Class Principal
Balance of each such Class with a lower
numerical designation is reduced to
zero and
S-15
<PAGE>
such Certificateholders have received
an amount equal to the amount described
in clause (iv) of the definition of
Distribution Amount that is recovered
from such Certificateholders.
On each Remittance Date, the Principal
Distribution Amount for Pool IV will be
distributed to the holders of the Class
A-16 Certificates until the Class
Principal Balance of such Certificates
is reduced to zero and such
Certificateholders have received an
amount equal to the amount described in
clause (iv) of the definition of
Distribution Amount that is recovered
from such Certificateholders.
The portion of the Distribution Amount
being distributed to a Class of Class A
Certificates (other than the portion
being distributed to a Class of Auction
Rate Certificates) will be allocated
among all Certificateholders of such
Class pro rata based upon their
respective Percentage Interests. The
portion of the Current Interest
requirement being distributed to a
Class of Auction Rate Certificates will
be allocated to all Certificateholders
of such Class pro rata based upon their
respective Percentage Interests. The
portion of the remainder of the
Distribution Amount being distributed
to a Class of Auction Rate Certificates
will be allocated as principal to the
specific Certificates of such Class
selected no later than 5 business days
prior to the related Remittance Date by
lot or such other manner as may be
determined, which allocations will be
made only in amounts equal to $25,000
and integral multiples of $25,000 in
excess thereof.
Notwithstanding the foregoing, if on the
Special Remittance Date the amount of
principal allocated to the Auction Rate
Certificates is not equal to $25,000 or
an integral multiple of $25,000 in
excess thereof, the entire amount (if
less than $25,000) or the amount
exceeding an integral multiple of
$25,000 will, instead, be distributed
to the Adjustable Rate Certificates.
On any Remittance Date, the "Distribution
Amount" for each Pool will equal the
sum of (i) the Current Interest
Requirement for such Pool, (ii) the
Principal Distribution Amount for such
Pool, (iii) the Carry-Forward Amount
for such Pool and (iv) any amount
received by the Trustee from the
Servicer
S-16
<PAGE>
that constitutes a Monthly Advance with
respect to a Loan in such Pool that is
recoverable and sought to be recovered
as a voidable preference by a trustee
in bankruptcy pursuant to the United
States Bankruptcy Code in accordance
with a final, nonappealable order of a
court having competent jurisdiction.
The "Due Period" with respect to any
Remittance Date is the calendar month
preceding the month of such Remittance
Date.
The "Carry-Forward Amount" for each Pool
with respect to any Remittance Date
will equal the sum of (i) the amount,
if any, by which (x) the Distribution
Amount for such Pool as of the
immediately preceding Remittance Date
exceeded (y) the amount of the actual
distribution to the holders of the
Certificates of such Pool made on such
Remittance Date (less the amount of
Insured Payments, if any, on such date)
and (ii) interest on the amount, if
any, described in clause (i) at one-
twelfth the applicable Pass-Through
Rate for the related Class of
Certificates. The Carry-Forward Amount
does not include any
Certificateholders' Interest Carryover.
As described above, the Holders of the
Class A Certificates will be entitled
to receive monthly distributions of
principal on each Remittance Date that
generally reflects actual (as opposed
to scheduled) collections of principal
during the related Due Period.
Recoveries for losses on Loans that
were finally liquidated during a Due
Period (the "Unrecovered Amounts") may
or may not be distributed to the
holders of the Class A Certificates on
the related Remittance Date. However,
Holders of Class A Certificates are
entitled to receive ultimate recovery
of any Unrecovered Amounts relating to
the applicable Pool of Loans. See
"Description of the Certificates--The
Distribution Amounts" herein.
Credit Enhancement............ The credit enhancement provided for the
benefit of the Class A Certificates
consists of (i) the Spread Amount (as
defined below), the Spread Account and
cross-support features, which utilize
the internal cash flows of the Trusts as
described herein and (ii) the MBIA
Policies. Additionally, the Pool III
S-17
<PAGE>
Certificates have the benefit of the
FHA Insurance described herein.
Spread Amount................. Certain provisions of the Trust are
intended to provide for limited
acceleration of the Class A
Certificates relative to the
amortization of the Loans, generally in
the early months of the transaction.
This limited accelerated amortization
is achieved by applying certain excess
interest collected on the Loans to the
payment of principal on the Class A
Certificates, first for the related
Pool and then for any other Pool. This
acceleration feature is intended to
create, with respect to each Pool of
Loans, an amount (the "Spread Amount"),
resulting from, and equal to, the
excess of the aggregate principal
balances of the Loans of the related
Pool (plus any amounts allocated to
such Pool on deposit in the Spread
Account referred to below and the Pre-
Funding Account) over the principal
balances of the Certificates of the
related Pool. The Agreement provides
that, subject to certain floors, caps
and triggers, the required level of the
Spread Amount with respect to each Pool
of Loans may increase or decrease over
time. An increase would result in a
temporary period of accelerated
amortization of the Certificates of the
related Pool to increase the actual
level of the Spread Amount to its
required level; a decrease would result
in a temporary period of decelerated
amortization to reduce the actual level
of the Spread Amount to its required
level. The Agreement also provides that
such excess interest, together with
certain other excess amounts, generated
by one Pool of Loans may be used to
fund shortfalls and increase the Spread
Amount in the other Pools of Loans,
subject to certain prior requirements
for application of such excess amounts.
See "Description of the Certificates--
Cross-Support Provisions and Spread
Amount" herein.
Spread Account................ The Agreement will provide for an initial
cash deposit into an account (the
"Spread Account") to be maintained with
the Trustee. The Agreement also will
provide that following the Funding
Period the required level of the Spread
Amount with respect to each Pool of
Loans may be increased. In such event,
cash up to the amount of such increase
may be deposited into the Spread
Account. Amounts, if any, on deposit in
the Spread Account will be available to
fund any Insured Payments (as defined
S-18
<PAGE>
below) otherwise required to be made on
a Remittance Date with respect to the
Class A Certificates, without
distinction as to the Pool, and, in
certain circumstances, to make
accelerated payments of principal on
the Class A Certificates.
Additionally, if the level of
delinquencies for the Pool III Loans
exceeds certain specified levels,
excess interest received on the Pool
III Loans will be deposited into the
Spread Account. The Agreement also
will provide that certain excess
interest otherwise payable to the
holders of the Class R Certificates
with respect to the Loans will,
instead, be deposited into the Spread
Account.
MBIA Policies................. MBIA Insurance Corporation, a New York
stock insurance corporation ("MBIA"),
will provide separate insurance
policies (collectively, the "MBIA
Policies") relating to the Certificates
of each Pool. Subject to the
requirements of the MBIA Policies
described under "The MBIA Policies and
MBIA," MBIA unconditionally and
irrevocably guarantees that the full
amount of each Insured Payment (defined
herein) will be received by the
Insurance Paying Agent (the "Insurance
Paying Agent"), which initially will be
The Bank of New York, for distribution
by the Trustee. MBIA's obligations
under the MBIA Policies will be
discharged to the extent funds equal to
the amount required to be paid
thereunder are received by the
Insurance Paying Agent, whether or not
such funds are properly applied by the
Trustee or the Insurance Paying Agent.
The MBIA Policies are noncancellable
for any reason.
"Insured Payment" means (i) as of any
Remittance Date, any Deficiency Amount
(as defined below under "The MBIA
Policies and MBIA") and (ii) any
Preference Amount (as defined below
under "The MBIA Policies and MBIA").
As stated above, amounts, if any, in the
Spread Account will be used to fund
Insured Payments prior to draws being
made on the MBIA Policies.
The MBIA Policies do not (i) cover The
Money Store Inc.'s obligation under the
Agreement to repurchase or substitute
for Loans with respect to which there
has been a breach of representation,
(ii) cover any
S-19
<PAGE>
Certificateholders' Interest Carryover,
(iii) guarantee any specified rate of
prepayments, or (iv) provide funds to
redeem the Certificates on any
specified date.
Subject to the terms of the Agreement,
MBIA will be subrogated to the rights
of the Holders of the Class A
Certificates to the extent of any
Insured Payments made under the
applicable MBIA Policy, but its right
to reimbursement will be subject to the
prior rights of the Holders of the
Class A Certificates to amounts to
which such Holders are entitled under
the Agreement.
FHA Insurance................. Subject to the then remaining Reserve
Amount (as defined below) of the Co-
Trustee, each FHA Loan will be insured
by the FHA in an amount currently equal
to 90% of the sum of the following: (i)
the unpaid principal and uncollected
interest earned to the date of default,
calculated on the actuarial method even
if the Note (as defined herein)
relating to such FHA Loan provides for
simple interest, reduced by certain
amounts received by the Claims
Administrator in connection with
enforcing a lien on the related
Mortgaged Property prior to the lien of
the related FHA Loan; (ii) the unpaid
amount of interest on the unpaid
principal from the date of default to
the date of the initial submission of
the related Claim to the FHA for
payment plus 15 calendar days, but not
for any period greater than nine months
from the date of default, calculated at
7% per annum; and (iii) the amount of
certain uncollected court costs,
attorney's fees, and expenses for
recording the assignment of the related
Mortgage to the United States. See "The
Trusts--FHA Loans" in the Prospectus
and "Risk Factors--Limitations on FHA
Insurance" and "Lending Programs--The
Home Improvement Lending Program--FHA
Loans" herein.
The Co-Trustee's Reserve Amount Each of the FHA Loans will be insured by
the FHA, to the extent described
herein, under each Originator's FHA
contract of insurance. In connection
with the transfer of the FHA Loans from
the Originators to the Co-Trustee, the
Originators also will file with the FHA
all documents necessary to effect the
transfer of the FHA insurance reserves
applicable to the FHA Loans to the Co-
Trustee's FHA contract of insurance.
S-20
<PAGE>
Based upon information provided by the
FHA, The Money Store Inc. believes that
upon the transfer referred to above and
after the Funding Period, the FHA
insurance available to the Co-Trustee
will be equal to at least (A) 10% of
the principal balance of the FHA Loans
as of the Cut-Off Date or Subsequent
Cut-Off Date, as the case may be; or
(B) thereafter, 10% of the principal
balance of all Title I loans originated
or purchased and currently reported for
FHA insurance by the Co-Trustee, less
amounts for annual reductions as
described below and for insurance
claims previously paid to the Co-
Trustee by the FHA, including payments
in respect of loans other than the FHA
Loans, and increased by an amount equal
to 10% of the lesser of the original
principal balance or the purchase price
paid for Title I loans subsequently
originated or purchased of record by
the Co-Trustee (in the case of clause
(A) or (B), the "Reserve Amount"). See
"The Trusts--FHA Insurance" in the
Prospectus and "Risk Factors--
Limitations on FHA Insurance" herein.
FHA Claims paid to the Co-Trustee by the
FHA with respect to Title I loans other
than the FHA Loans may affect the total
amount of the Reserve Amount. The Co-
Trustee will agree not to own any other
loans insured by the FHA under the
Title I program unless such loans (i)
were originated or purchased by an
Originator or their affiliates, (ii)
are part of a pool formed for the
purpose of issuing certificates and
(iii) such certificates are insured by
MBIA and receive from each Rating
Agency (as defined herein) the same
rating assigned to the Certificates.
Since the adequacy of the Co-Trustee's
Reserve Amount is dependent upon future
events, including the reductions for
the payment of claims, no assurance can
be given that the Reserve Amount is or
will be adequate to cover 90% of all
potential losses on the FHA Loans. See
"Risk Factors--Limitations on FHA
Insurance" herein.
Obligation of the Claims
Administrator............... If any FHA Loan becomes a 90 Day
Delinquent FHA Loan (as defined below),
and if sufficient coverage is available
in the Reserve Amount to make an FHA
Payment with respect to such FHA Loan,
the Claims Administrator may, in its
sole discretion, during any subsequent
Due Period, determine to file a Claim
S-21
<PAGE>
with the FHA with respect to such 90
Day Delinquent FHA Loan. If the Claims
Administrator determines to file such a
Claim, the Claims Administrator will so
notify the Co-Trustee and the Custodian
no later than the Determination Date
following such determination and shall
request delivery of the related loan
file (the "Trustee's Loan File"). Upon
receipt of such certification and
request, the Custodian shall, no later
than the related Remittance Date,
release to the Claims Administrator the
related Trustee's Loan File and the Co-
Trustee and the Custodian shall execute
and deliver such instruments necessary
to enable the Claims Administrator to
file a Claim with the FHA on behalf of
the Co-Trustee. Within 120 days of its
receipt of the related Trustee's Loan
File, the Claims Administrator shall,
in its sole discretion, either file a
Claim with the FHA for an FHA Payment
with respect to such 90 Day Delinquent
FHA Loan or, if the Claims
Administrator determines not to file
such a Claim, return to the Co-Trustee
the related Trustee's Loan File.
With respect to any 90 Day Delinquent FHA
Loan transferred to the Claims
Administrator as described above, the
Claims Administrator shall deposit (or,
if the Claims Administrator is not also
the Servicer, the Claims Administrator
shall instruct the Servicer to deposit)
in the Principal and Interest Account
within 24 hours of receipt or
determination thereof the following
amounts (such amounts to be net of
certain amounts that would be
reimbursable to the Servicer under the
Agreement with respect to amounts in
the Principal and Interest Account):
(i) any FHA Payments; (ii) the amount,
if any, by which the FHA Payment was
reduced in accordance with FHA
Regulations due to the Claims
Administrator enforcing a lien on the
related Mortgaged Property prior to the
lien of the related 90 Day Delinquent
FHA Loan; and (iii) any principal and
interest payments received with respect
to a 90 Day Delinquent FHA Loan after
the Due Period in which the FHA Loan is
transferred to the Claims Administrator
and before either the related FHA
Payment is paid or the related
Trustee's Loan File is returned to the
Co-Trustee, as the case may be (the
amounts referred to in (ii) and (iii)
above are referred to herein as
"Related Payments").
S-22
<PAGE>
If an FHA Loan becomes a 90 Day
Delinquent FHA Loan when there is
insufficient coverage in the Reserve
Amount or if the Claims Administrator
determines not to file a Claim with the
FHA with respect to such 90 Day
Delinquent FHA Loan, the Co-Trustee
will not transfer such FHA Loan to the
Claims Administrator, no Claim will be
made to the FHA and the Servicer may
take other action, including the
commencement of foreclosure
proceedings, on the related Mortgaged
Property, if any. The Servicer will
continue to make Monthly Advances with
respect to interest on 90 Day
Delinquent FHA Loans as described under
"Monthly Advances" herein.
The Certificateholders will not have any
direct right to receive the FHA
Payments from the FHA. See "Risk
Factors--Dependence on Claims
Administrator, Representative and
Servicer for Making FHA Claims, Paying
the FHA Payments or Repurchasing the
Loans" herein.
A "90 Day Delinquent FHA Loan" is a Loan
with respect to which four consecutive
Monthly Payments have not been received
by the Servicer as of the last day of
the related Due Period unless, on or
prior to the last day of the Due Period
in which the fourth Monthly Payment is
due, the Servicer has received from the
related Obligor an amount at least
equal to one unpaid Monthly Payment.
An "FHA Payment" is any amount paid by
the FHA pursuant to a Claim with
respect to a 90 Day Delinquent FHA
Loan.
FHA Premium Account.......... The Trustee will establish with itself a
separate account (an "FHA Premium
Account") to reimburse the Claims
Administrator or MBIA for the payment
to the FHA of the annual insurance
premium (the "FHA Insurance Premium")
on each FHA Loan. The FHA Insurance
Premium is an annual premium equal to
0.5% of the original principal balance
of each FHA Loan. If the related
Obligor pays the FHA Insurance Premium
in addition to the Monthly Payment, any
payment of the FHA Insurance Premium
received during a Due Period will be
deposited in the FHA Premium Account on
the related Remittance Date by the
Trustee from the related Certificate
Account. In certain states, the
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Servicer is prohibited from directly
collecting the FHA Insurance Premium
from the Obligor. With respect to FHA
Loans secured by Mortgaged Properties
located in such states, the Servicer
will cause to be deposited in the FHA
Premium Account a specified percentage
of each scheduled interest payment.
Since an Obligor pays interest on the
declining principal balance of the
related FHA Loan and the FHA Insurance
Premium is based upon the original
principal balance of the FHA Loan, the
amount of interest allocated to the FHA
Premium Account may be more or less
than the amount of the related FHA
Insurance Premium. The Servicer has
agreed to satisfy any resulting
shortfall from its own funds.
The Pools
General....................... Unless otherwise noted, all statistical
percentages in this Prospectus
Supplement concerning the Loans are
measured by the aggregate principal
balances of the related Pool of Loans
described herein at the close of
business on the Cut-Off Date and all
dollar amounts are based on the
principal balances of such Loans at the
close of business on the Cut-Off Date.
The Loans that will comprise Pool I and
Pool II as of the Closing Date are
referred to herein as the "Initial Pool
I Home Equity Loans" and the "Initial
Pool II Home Equity Loans,"
respectively, and collectively, as the
"Initial Home Equity Loans." The Loans
that will comprise Pool III as of the
Closing Date are referred to herein as
the "Initial Home Improvement Loans."
The Loans that will comprise Pool IV as
of the Closing Date are referred to
herein as the "Initial Multifamily
Loans" and, together with the Initial
Home Equity Loans and the Initial Home
Improvement Loans, the "Initial Loans."
Pool I and Pool II............ The Pool I and Pool II Home Equity Loans
will consist of mortgages, deeds of
trust or other security instruments
(the "Home Equity Mortgages" or
"Mortgages"), and the related
promissory notes (the "Home Equity
Mortgage Notes" or "Notes") secured by
one- to four-family residences, units
in planned unit developments ("PUDs")
and units in condominium developments
(the "Home Equity Mortgaged Properties"
or "Mortgaged Properties").
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<PAGE>
As stated above, the Agreement will
provide that Subsequent Home Equity
Loans may be purchased by the Trust
from the Originators from time to time
on or before the close of business on
September 25, 1996 from funds on
deposit in the Pre-Funding Account
allocated to Pools I and II. Prior to
the Closing Date, each Subsequent Home
Equity Loan will have been identified
and originated and underwritten, or
purchased and re-underwritten, by one
of the Originators, substantially in
accordance with the Originators'
underwriting criteria described in the
Prospectus under the caption "The
Single Family Loan Lending Program--
Underwriting Criteria." The purchase
price for each Subsequent Home Equity
Loan will be no greater than its unpaid
principal balance as of the last day of
the month preceding the month in which
it is purchased by the Trust (each such
date, a "Subsequent Cut-Off Date"). The
Agreement will provide that the Pool I
and Pool II Home Equity Loans,
following the conveyance of any
Subsequent Home Equity Loans to the
appropriate Pool, must, in the
aggregate, conform to certain specified
characteristics. See "The Agreement--
Representations and Warranties" in the
Prospectus.
No more than approximately 15%, 10%, 10%,
8%, 7%, 7% and 7% and of the Pool I
Home Equity Loans will be secured by
Home Equity Mortgaged Properties
located in California, New York,
Pennsylvania, Illinois, New Jersey,
Ohio and Washington, respectively. No
more than approximately 11%, 11%, 9%,
8%, 8%, 7% and 6% of the Pool II Home
Equity Loans will be secured by Home
Equity Mortgaged Properties located in
California, Illinois, Michigan,
Washington, Ohio, New Jersey and New
York, respectively. No more than
approximately 5% of the Pool I Home
Equity Loans and 5% of the Pool II Home
Equity Loans will be secured by Home
Equity Mortgaged Properties located in
any other state. Based on
representations made by the obligor on
a Home Equity Mortgage Note (the "Home
Equity Mortgagor" or the "Mortgagor"),
all of the Home Equity Loans will be
secured by one- to four-family
residences, no more than approximately
6% and 4% of the Pool I and Pool II
Home Equity Loans, respectively, will
be secured by vacation homes, secondary
residences, or investment
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<PAGE>
properties, less than 1% and 1% of the
Pool I and Pool II Home Equity Loans,
respectively, will be secured by
individual units in low rise
condominiums, no more than
approximately 8% and 5% of the Pool I
and Pool II Home Equity Loans,
respectively, will be secured by two-,
three- or four-family houses, and no
Home Equity Loan will be secured by
individual units of other types
including high rise condominiums and
mixed-use buildings. No Home Equity
Loan will be secured by a mobile home
or a cooperative residence.
No less than approximately 75% of the Pool
I Home Equity Loans and all of the Pool
II Home Equity Loans will constitute
first mortgage liens on the related
Home Equity Mortgaged Property and the
remainder of the Pool I Home Equity
Loans will constitute second mortgage
liens on the related Home Equity
Mortgaged Property.
The "Combined Loan-to-Value Ratio" of a
Home Equity Loan is the ratio,
expressed as a percentage, determined
by dividing (x) the sum of the original
principal balance of the Home Equity
Loan (less the amount, if any, of the
premium for credit life insurance) plus
the then-current principal balance of
the related first lien, if any, by (y)
the value of the Home Equity Mortgaged
Property, based upon the appraisal or
valuation made at the time of
origination of the Home Equity Loan.
Based upon the original principal
balances of the Home Equity Loans, no
more than approximately 20% and 11% of
the Pool I and Pool II Home Equity
Loans, respectively, will have a
Combined Loan-to-Value Ratio exceeding
80%. No Pool I or Pool II Home Equity
Loan will have a Combined Loan-to-Value
Ratio exceeding 100%. The weighted
average Combined Loan-to-Value Ratio,
based upon appraisals or valuations
made at the times of origination of the
Pool I and Pool II Home Equity Loans,
will be no more than approximately 73%
and 73%, respectively. The Home Equity
Loans are not insured or guaranteed by
any governmental entity.
The Home Equity Loans, other than Balloon
Home Equity Loans discussed below, will
provide for a schedule of payments
which will be, if timely paid,
sufficient to amortize fully the
principal balance of
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<PAGE>
the Home Equity Loan on or before its
maturity date. The Home Equity Loans
will be either (i) "simple interest"
loans, which means that payments are
applied as they are received first to
accrued interest, then to principal or
(ii) "actuarial" loans, which means
that payments received either earlier
or later (other than delinquent) than
the scheduled due dates of such Home
Equity Loans will not affect the
amortization schedule or the relative
application of such payments to
principal and interest. The Pool I
Home Equity Loans will bear interest at
fixed rates (each, a "Pool I Mortgage
Interest Rate").
The Pool II Home Equity Loans will bear
interest at adjustable rates (each, a
"Pool II Mortgage Interest Rate") which
will adjust on the date set forth in
the Mortgage Note for such Pool III
Home Equity Loan and, except as set
forth in the next sentence, either
every one month, every six months or
every 12 months thereafter (each, a
"Change Date"). Certain of the Pool II
Home Equity Loans bear Pool II Mortgage
Interest Rates that have Change Dates
occurring three months and six months
after the date of origination and every
one month thereafter (such Loans, the
"Variable Adjustable Rate Loans"). The
Pool II Mortgage Interest Rate relating
to approximately 95% of the Pool II
Home Equity Loans will adjust on each
applicable Change Date to equal the sum
of (i) the London Interbank Offered
Rate for one-month, six-month or one
year U.S. dollar deposits (the "LIBOR
Index") either as announced by the
Federal National Mortgage Association,
and available as of the date 45 days
before each Change Date, or as
published in The Wall Street Journal
-----------------------
generally on a day of the month
preceding the month of the Change Date
and (ii) the number of basis points set
forth in the related Mortgage Note (the
"Gross Margin"), subject to rounding
and to the effects of the Periodic Rate
Cap, the applicable Lifetime Cap and
the applicable Lifetime Floor. The
Pool II Mortgage Interest Rate relating
to approximately 5% of the Pool II Home
Equity Loans will adjust on each
applicable Change Date to equal the sum
of (i) the One-Year Constant Maturity
Treasury Index (the "Treasury Index")
as published by the Federal Reserve
Board in the most recent edition of
Federal Reserve Board Statistical
Release No. H.15 (519) that is
available 45 days
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<PAGE>
before each Change Date, and (ii) the
related Gross Margin, subject to
rounding and to the effects of the
Periodic Rate Cap, the applicable
Lifetime Cap and the applicable
Lifetime Floor.
The Gross Margins for the Pool II Home
Equity Loans will range from
approximately 1% to 13%. The weighted
average Gross Margin of the Pool II
Home Equity Loans will be approximately
5.90%. The "Periodic Rate Cap" limits
changes in the Pool II Mortgage
Interest Rate for each Pool II Home
Equity Loan on each Change Date to (i)
200 basis points with respect to Pool
II Home Equity Loans that have a LIBOR
Index adjusting every month and not
more than 200 basis points in any 12
month period (or 200 basis points with
respect to Variable Adjustable Rate
Loans after the first two Change
Dates), (ii) 100 basis points with
respect to Pool II Home Equity Loans
that have a LIBOR Index adjusting every
six months and with respect to the
first two Change Dates for the Variable
Adjustable Rate Loans, (iii) 200 basis
points with respect to Pool II Home
Equity Loans that have a LIBOR Index
adjusting every 12 months and (iv) 200
basis points with respect to Pool II
Home Equity Loans that have a Treasury
Index. The Lifetime Cap for each Pool
II Home Equity Loan having a LIBOR
Index is the rate which is generally
600 basis points greater than the
initial Pool II Mortgage Interest Rate
for such Pool II Home Equity Loan and
the Lifetime Floor is as set forth in
the Mortgage Note related to such Pool
II Home Equity Loan. The Lifetime Cap
for each Pool II Home Equity Loan
having a Treasury Index is the rate
which is generally 400 to 600 basis
points greater than the initial Pool II
Mortgage Interest Rate for such Pool II
Home Equity Loan and the Lifetime Floor
is as set forth in the Mortgage Note
related to such Pool II Home Equity
Loan.
The weighted average Pool I Mortgage
Interest Rate of the Initial Pool I
Home Equity Loans will be approximately
10.8%. The weighted average current
Pool II Mortgage Interest Rate of the
Initial Pool II Home Equity Loans will
be approximately 9.1%. The lowest
principal balances of any Initial Pool
I and Initial Pool II Home Equity Loan
as of the Cut-Off Date will be
approximately $3,000 and $14,000,
respectively, and the highest will be
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<PAGE>
approximately $500,000 and $450,000,
respectively. As of the Cut-Off Date,
the average principal balances of the
Initial Pool I and Initial Pool II Home
Equity Loans will be approximately
$53,000 and $83,000, respectively.
Initial Home Equity Loans not
originated by an Originator or having
original principal balances less than
or equal to $15,000 may not be covered
by title insurance policies. As of the
Cut-Off Date, the weighted average
remaining terms to stated maturity of
the Initial Pool I and Initial Pool II
Home Equity Loans will be approximately
265 months and 356 months,
respectively. The weighted average
terms to stated maturity of the Initial
Pool I and Initial Pool II Home Equity
Loans at origination will be
approximately 266 months and 359
months, respectively.
Less than approximately 16% of the Pool I
Home Equity Loans will provide for a
stated maturity of less than the period
of time of the corresponding
amortization schedule ("Balloon
Loans"). As a result, upon the maturity
of a Balloon Loan, the Home Equity
Mortgagor will be required to make a
final payment which will be
substantially larger than such Home
Equity Mortgagor's previous monthly
payments. No Pool II Home Equity Loan
will be a Balloon Loan. See "Risk
Factors--Nature of the Security" in the
Prospectus.
Pool III...................... The Home Improvement Loans in Pool III
will consist of fixed rate home
improvement mortgages (the "Home
Improvement Mortgages") and the related
promissory notes, retail installment
contracts or obligations, or sales
agreements (the "Home Improvement
Mortgage Notes" or "Notes") secured,
except as set forth below, by one- to
four-family residences, units in
planned unit developments ("PUDs") and
units in condominium developments (the
"Home Improvement Mortgaged Properties"
or "Mortgaged Properties").
As stated above, the Agreement will
provide that Subsequent Home
Improvement Loans may be purchased by
the Trust from the Originators from
time to time on or before the close of
business on September 25, 1996 from
funds on deposit in the Pre-Funding
Account allocated to Pool III. Prior to
the Closing Date, each Subsequent Home
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<PAGE>
Improvement Loan (including Dealer
Loans, as defined herein under "Lending
Programs--The Home Improvement Lending
Program--Dealer Loans") will have been
identified and originated and
underwritten, or purchased and re-
underwritten, by one of the
Originators, substantially in
accordance with the Originators'
underwriting criteria described herein
under the caption "Lending Programs--
The Home Improvement Lending Program--
FHA Loans--Title I Underwriting
Requirements," in connection with
Subsequent Home Improvement Loans that
are FHA Loans, and "Lending Programs--
The Home Improvement Lending Program--
Conventional Home Improvement Loans--
Underwriting Criteria," in connection
with Subsequent Home Improvement Loans
that are Conventional Home Improvement
Loans. The purchase price for each
Subsequent Home Improvement Loan will
be no greater than its unpaid principal
balance as of the related Subsequent
Cut-Off Date. The Agreement will
provide that the Home Improvement
Loans, following the conveyance of any
Subsequent Home Improvement Loans to
Pool III, must, in the aggregate,
conform to certain specified
characteristics. See "The Agreement--
Representations and Warranties" in the
Prospectus.
Approximately 34% and 66% of the Initial
Home Improvement Loans will be FHA
Loans and Conventional Home Improvement
Loans, respectively. The Home
Improvement Loans will have been
originated and underwritten, or
purchased and re-underwritten, by one
of the Originators substantially in
accordance with the Originators'
underwriting criteria described herein
under the caption "Lending Programs--
The Home Improvement Lending Program--
FHA Loans--Title I Underwriting
Requirements," in connection with FHA
Loans, and "Lending Programs--The Home
Improvement Lending Program--
Conventional Home Improvement Loans--
Underwriting Criteria," in connection
with Conventional Home Improvement
Loans.
No more than approximately 36%, 12%, 10%,
8%, 6% and 6% of the Home Improvement
Loans will be secured by Home
Improvement Mortgaged Properties
located in California, Texas, Arizona,
New Jersey, Georgia and Nevada,
respectively. No
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<PAGE>
more than approximately 5% of the Home
Improvement Loans will be secured by
Home Improvement Mortgaged Properties
located in any other state. Based on
representations made by the mortgagor
on a Home Improvement Mortgage Note
(the "Home Improvement Mortgagor" or
"Obligor"), no less than approximately
97% of the Home Improvement Loans will
be secured by one-to four-family
residences, no more than approximately
3% of the Home Improvement Loans will
be secured by vacation homes, secondary
residences, or investment properties,
less than 1% of the Home Improvement
Loans will be secured by individual
units in low rise condominiums, no more
than approximately 1% of the Home
Improvement Loans will be secured by
two-, three- or four-family houses, no
more than approximately 1% of the Home
Improvement Loans will be secured by
Multifamily Mortgaged Properties and no
Home Improvement Loan will be secured
by individual units of other types
including high rise condominiums and
mixed-use buildings. No Home
Improvement Loan will be secured by a
mobile home or a cooperative residence.
Approximately 1% of the Home Improvement
Loans will be secured by first mortgage
liens on the related Home Improvement
Mortgaged Property, no more than
approximately 99% of the Home
Improvement Loans will be secured by
second mortgage liens on the related
Home Improvement Mortgaged Property and
the remainder of the Home Improvement
Loans will be secured by more junior
mortgage liens on the related Home
Improvement Mortgaged Property.
The FHA Loans are insured by the FHA to
the extent described herein. The
Conventional Home Improvement Loans are
not insured by any governmental entity.
The Home Improvement Loans will provide
for a schedule of payments which will
be, if timely paid, sufficient to
amortize fully the principal balance of
the Home Improvement Loan on or before
its maturity date. The Home Improvement
Loans will be "simple interest" loans.
However, with respect to FHA Loans
secured by Mortgaged Properties located
in states where the Servicer collects
the FHA Insurance Premium directly from
the related
S-31
<PAGE>
Obligor, payments are applied to the
FHA Insurance Premium prior to accrued
interest. The Home Improvement Loans
will bear interest at fixed rates
(each, a "Pool III Home Improvement
Interest Rate").
The weighted average Pool III Home
Improvement Interest Rate of the
Initial Home Improvement Loans will be
approximately 12.50%. The lowest
principal balances of any Initial Home
Improvement Loan as of the Cut-Off Date
will be approximately $1,500, and the
highest will be approximately $54,000.
As of the Cut-Off Date, the average
principal balance of the Initial Home
Improvement Loans will be approximately
$15,000. As of the Cut-Off Date, the
weighted average remaining term to
stated maturity of the Initial Home
Improvement Loans will be approximately
195 months. The weighted average term
to stated maturity of the Initial Home
Improvement Loans at origination will
be approximately 198 months. Each Home
Improvement Loan that is a first lien
is covered by a title insurance policy.
Pool IV....................... The Multifamily Loans will consist of
mortgages, deeds of trust or other
security instruments (the "Multifamily
Mortgages"), and the related promissory
notes (the "Multifamily Mortgage Notes"
or "Notes") secured by five or more
unit residential or mixed-use
residential and commercial properties
(the "Multifamily Mortgaged Properties"
or "Mortgaged Properties").
As stated above, the Agreement will
provide that Subsequent Multifamily
Loans may be purchased by the Trust
from the Originators from time to time
on or before the close of business on
September 25, 1996 from funds on
deposit in the Pre-Funding Account
allocated to Pool IV. Prior to the
Closing Date, each Subsequent
Multifamily Loan will have been
identified and originated and
underwritten, or purchased and re-
underwritten, by one of the
Originators, substantially in
accordance with the Originators'
underwriting criteria described under
"Lending Programs -- The Multifamily
Lending Program" herein. The purchase
price for each Subsequent Multifamily
Loan will be no greater than its unpaid
principal balance as of the related
Subsequent Cut-Off Date. The Agreement
will
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<PAGE>
provide that the Multifamily Loans,
following the conveyance of any
Subsequent Multifamily Loans to Pool
IV, must, in the aggregate, conform to
certain specified characteristics. See
"The Agreement--Representations and
Warranties" in the Prospectus.
The Initial Multifamily Loans were
originated and underwritten, or
purchased and re-underwritten, by one
of the Originators, substantially in
accordance with the Originators'
underwriting criteria described under
"Lending Programs--The Multifamily
Lending Program" herein.
No more than approximately 20%, 18%, 18%,
14%, 10% and 8% of the Multifamily
Loans will be secured by Multifamily
Mortgaged Properties located in
California, Florida, New York, New
Jersey, Texas and Arizona,
respectively. No more than
approximately 5% of the Multifamily
Loans will be secured by Multifamily
Mortgaged Properties located in any
other state. Based on representations
made by the obligor on a Multifamily
Mortgage Note (the "Multifamily
Mortgagor" or "Obligor"), all of the
Multifamily Loans will be secured by
five or more unit residential or mixed-
use residential and commercial
properties.
All of the Multifamily Loans will
constitute first mortgage liens on the
related Multifamily Mortgaged Property.
No Multifamily Loan will have a Combined
Loan-to-Value Ratio exceeding
approximately 67%. The Multifamily
Loans will not be insured or guaranteed
by any governmental entity.
The Multifamily Loans will provide for a
schedule of payments which will be, if
timely paid, sufficient to amortize
fully the principal balance of the
Multifamily Loan on or before its
maturity date. The Multifamily Loans
will be "simple interest" loans. The
Multifamily Loans will bear interest at
fixed rates (each, a "Multifamily
Mortgage Interest Rate").
The weighted average Multifamily Mortgage
Interest Rate of the Initial
Multifamily Loans will be approximately
11.25%. The lowest principal
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<PAGE>
balance of any Initial Multifamily Loan
as of the Cut-Off Date will be
approximately $50,000, and the highest
will be approximately $850,000. The
average principal balance of the
Initial Multifamily Loans will be
approximately $181,000. All Initial
Multifamily Loans will be covered by
title insurance policies. The weighted
average remaining term to stated
maturity of the Initial Multifamily
Loans will be approximately 333 months.
The weighted average term to stated
maturity of the Initial Multifamily
Loans at origination will be
approximately 340 months.
Each Multifamily Loan contains provisions
requiring the related Mortgagor to pay
a penalty in connection with certain
prepayments made within three or five
years, depending on the terms of such
Multifamily Loan, of its origination.
Servicing of the Loans........ The Servicer will serve as master servicer
for the Loans in accordance with the
Agreement. The Servicer may act through
subservicers, including the Originators
or other affiliates of the Servicer.
Monthly Advances.............. The Servicer is required to remit to the
Trustee no later than the day of each
month which is at least three business
days prior to the Remittance Date and
is in no case earlier than the seventh
business day of such month (the
"Determination Date") the amount (a
"Monthly Advance"), if any, by which,
for each Pool (a) the sum of (x) 30
days' interest (or, with respect to the
Adjustable Rate and Auction Rate
Certificates, the actual number of days
since the last Remittance Date (or, in
the case of the first Remittance Date,
from June 15, 1996 with respect to the
Adjustable Rate Certificates and from
the Closing Date with respect to the
Auction Rate Certificates) up to but
not including the upcoming Remittance
Date) at the weighted average Adjusted
Mortgage Loan Remittance Rates of such
Pool on the aggregate outstanding Class
Principal Balances of each Class of
Certificates in such Pool immediately
prior to the related Remittance Date
and (y) the Monthly Excess Spread (as
defined herein under "Description of
the Certificates--Spread Amount"), if
any, for the related Remittance Date
relating to the Loans of the related
Pool exceeds (b) the amount received by
the Servicer in respect of interest on
the Loans of the related Pool as of the
S-34
<PAGE>
related Record Date (and with respect
to the Remittance Dates in July, August
and September, 1996, the sum of (i) all
funds to be transferred to the
applicable Certificate Account from the
Capitalized Interest Account for such
Remittance Date and (ii) certain
investment earnings on amounts in the
Pre-Funding Account for the applicable
Remittance Date). Such advances by the
Servicer are reimbursable in the first
instance from late collections of
interest including amounts received in
connection with the liquidation of
defaulted Loans ("Liquidation
Proceeds"), amounts paid by any insurer
pursuant to any insurance policy
covering a Loan, Mortgaged Property or
REO Property ("Insurance Proceeds"),
FHA Payments and proceeds received by
the Servicer in connection with
condemnation, eminent domain or a
release of lien ("Released Mortgaged
Property Proceeds") collected with
respect to the related Loan as to which
the advances were made, and any other
amount that otherwise would be
distributed on the Class R
Certificates. Monthly Advances will
not cover any Certificateholders'
Interest Carryover.
The "Adjusted Mortgage Loan Remittance
Rate," for a Class of Certificates will
equal the sum of the Pass-Through Rate
for such Class and a rate used to
determine certain expenses of the
Trust. Certain of the Loans in each
Pool may bear interest at a rate below
the Adjusted Mortgage Loan Remittance
Rate for the related Class. Any such
Loan will be sold to the Trust at a
discount so as to create, for each such
Loan, a mortgage interest rate that,
when applied to the purchase price paid
by such Trust for such Loan, will at
least equal the related Adjusted
Mortgage Loan Remittance Rate.
Compensating Interest......... Not later than each Determination Date,
with respect to each Loan to which the
Servicer received a principal payment
in full in advance of the final
scheduled due date (a "Principal
Prepayment") or received a principal
payment that is in excess of five times
the scheduled monthly payment due, but
which was not intended by the Mortgagor
to satisfy the Loan in full or to cure
a delinquency (a "Curtailment") during
the related Due Period, the Servicer is
required to remit to the Trustee from
amounts otherwise payable to the
Servicer as servicing compensation
(including the Contingency Fee), an
amount ("Compensating
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<PAGE>
Interest") equal to any excess of (a)
30 days' interest (or, with respect to
a Pool II Loan, the actual number of
days since the last Remittance Date
(or, in the case of the first
Remittance Date, from June 15, 1996
with respect to the Adjustable Rate
Certificates and from the Closing Date
with respect to the Auction Rate
Certificates) up to but not including
the upcoming Remittance Date) on the
principal balance of each such Loan as
of the beginning of the related Due
Period, at the weighted average
Adjusted Mortgage Loan Remittance Rates
of the related Pool applicable to the
Remittance Date on which the
Compensating Interest will be
distributed over (b) the amount of
interest actually received on the
related Loan during such Due Period.
Servicing and Contingency Fees.. The Servicer is entitled to a servicing
fee of 0.25% per annum of the principal
balance of each Loan (the "Servicing
Fee"), and a contingency fee of 0.25%
per annum of the principal balance of
each Loan (the "Contingency Fee"), each
calculated and payable monthly from the
interest portion of scheduled monthly
payments, Liquidation Proceeds and
certain other Proceeds collected.
Rating........................ It is a condition to the issuance of the
Class A Certificates that each Class be
rated "AAA" by Standard & Poor's
Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") and
"Aaa" by Moody's Investors Service,
Inc. ("Moody's"). The ratings assigned
by S&P and Moody's to the Class A
Certificates are based, in large part,
on the creditworthiness of MBIA and the
MBIA Policies. A security rating is not
a recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time. No
person is obligated to maintain the
rating on any Class of Class A
Certificates. The ratings of the
Adjustable Rate and Auction Rate
Certificates by S&P and Moody's do not
address the likelihood of the payment
of the amount of any
Certificateholders' Interest Carryover.
See "Rating of the Class A
Certificates" herein.
Optional Termination by the Servicer
On any Remittance Date from and after
the Remittance Date on which the
aggregate principal balances of the
Loans are less than 10% of the sum of
(i) the aggregate principal balances of
the Initial Home
S-36
<PAGE>
Equity Loans, the Initial Home
Improvement Loans and the Initial
Multifamily Loans (collectively, the
"Initial Loans") as of the Cut-Off Date
(the "Original Pool Principal Balance")
and (ii) the original Pre-Funded Amount
(such date, the "Optional Servicer
Termination Date"), the Servicer may,
at its option, and in the absence of
the exercise thereof by the Servicer,
MBIA may, at its option, purchase, on
the next succeeding Remittance Date,
all of the Loans and any related
Mortgaged Property title to which has
been acquired in foreclosure or by deed
in lieu of foreclosure (an "REO
Property") at a price set forth in the
Agreement (the "Termination Price") at
least equal to the sum of (x) 100% of
the Principal Balances of the Loans,
including those evidenced by REO
Properties, and including the portion
of the principal balance of each 90 Day
Delinquent FHA Loan for which the
Certificateholders have not received
payment and for which a Claim was
submitted to the FHA, and (y) 30 days'
interest (or, with respect to the
Adjustable Rate and Auction Rate
Certificates, the actual number of days
from the last Remittance Date to but
not including the upcoming Remittance
Date) thereon at the then applicable
weighted average Pass-Through Rates of
the Class A Certificates plus an amount
equal to the interest portion of any
unreimbursed Insured Payments made by
MBIA with respect to the applicable
Pool of Loans. See "The Agreement"
herein and in the Prospectus. As
described above, after the Optional
Servicer Termination Date, the margin
used in calculating the Pass-Through
Rate for the Class A-10 Certificates
will increase from 0.32% to 0.64%. See
"Summary of Terms--Securities Offered."
Optional Termination by
MBIA....................... On and after the date on which the
Maximum Subordinated Amount is zero
(the "Cross-Over Date"), on any
Remittance Date on which Loans with
aggregate principal balances as of the
Cut-Off Date equal to or exceeding 25%
or more of the sum of (i) the Original
Pool Principal Balance and (ii) the
original Pre-Funded Amount, if any,
have become Liquidated Loans, MBIA may
purchase all of the Loans and any
related REO Properties in respect
thereof at a price equal to the sum of
the Termination Prices for all Pools
and the outstanding and unpaid fees and
expenses of the Trustee and the
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Servicer. See "The Agreement" herein
and in the Prospectus.
REMIC Election and Tax Status. For Federal income tax purposes, an
election will be made to treat certain
assets of the Trust as a real estate
mortgage investment conduit ("REMIC").
Each Class of Class A Certificates will
constitute regular interests in the
REMIC and the Class R Certificates will
constitute the residual interest in the
REMIC. See "Federal Income Tax
Considerations" herein and "Federal
Income Tax Consequences" in the
Prospectus.
ERISA Considerations.......... As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by a pension or other
employee benefit plan subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or by
individual retirement accounts or Keogh
plans covering only a sole proprietor
or partner which are not subject to
ERISA but are subject to Section 4975
of the Code ("Plans"), pursuant to
certain exemptions from potential
prohibited transaction rules of ERISA
which prohibit a broad range of
transactions involving Plan assets and
persons having certain specified
relationships to a Plan and related
excise tax provisions of Section 4975
of the Code. One such exemption is
Prohibited Transaction Exemption 91-14,
56 Fed. Reg. 7,413 (February 22, 1991)
(the "Exemption"), which provides an
exemption for transactions involving
the purchase, holding or transfer of
certain asset backed certificates by
Plans. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment Considerations. No Class of Class A Certificates will
constitute "mortgage related
securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). Investors should consult
their own legal advisers in determining
whether and the extent to which a Class
of Class A Certificates constitutes
legal investments for such investors.
See "Legal Investment Considerations"
herein.
Registration of the Certificates. The Class A Certificates will be
represented by global certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of The
Depository Trust Company ("DTC") in the
United States, or Cedel Bank, societe
anonyme ("Cedel Bank") or the
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Euroclear System ("Euroclear") in
Europe. No Class A Certificateholder
will be entitled to receive definitive
certificates ("Definitive Class A
Certificates") representing such
person's interest, except in the event
that Definitive Class A Certificates
are issued under the limited
circumstances described herein. All
references herein to
"Certificateholders" or "Holders" will
reflect the rights of the beneficial
owners of Class A Certificates, as such
rights may be exercised through DTC and
Participants except as otherwise
specified herein. See "Risk Factors--
Book-Entry Registration" in the
Prospectus and "Description of the
Certificates--Book-Entry Registration
of Class A Certificates" herein.
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RISK FACTORS
Prospective Certificateholders should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following
factors.
DEPENDENCE ON CLAIMS ADMINISTRATOR, REPRESENTATIVE, AND SERVICER FOR MAKING
FHA CLAIMS AND PAYING THE FHA PAYMENTS
The Trustee, the Co-Trustee and the Certificateholders are dependent on
the Claims Administrator to (1) assure that the FHA Loans will be insured
by the FHA, (2) make Claims on 90 Day Delinquent FHA Loans and (3) remit
all FHA Payments received from the FHA to the Trustee in accordance with
the terms of the Agreement. See "Description of the Certificates--
Obligations of The Claims Administrator" herein.
LIMITATIONS ON FHA INSURANCE
The FHA Loans are covered by FHA insurance to the extent described
herein. The Agreement provides that if an FHA Loan becomes a 90 Day
Delinquent FHA Loan and if sufficient coverage is available in the related
Reserve Amount, the Claims Administrator may, in its sole option, file a
Claim with the FHA with respect to such 90 Day Delinquent FHA Loan. If
such a Claim is submitted and assuming the Representative, the Originators
and the Claims Administrator comply with the provisions described herein,
the FHA will pay with respect to such 90 Day Delinquent FHA Loan the amount
set forth under "The Title I Loan Program--Insurance Claims Procedures for
Title I Loans" herein regardless of whether, in the case of FHA Loans, the
related Mortgaged Property has available equity over and above all liens on
such property.
The availability of FHA insurance following a default on an FHA Loan is
subject to a number of conditions, including strict compliance with FHA
regulations in originating and servicing the FHA Loan and limits on the
aggregate insurance coverage available with respect to all FHA Title I
loans then owned and reported for FHA insurance by the Co-Trustee.
Although the Claims Administrator is an FHA-approved lender and believes,
and represents and warrants in the Agreement, that it has complied with FHA
regulations, such regulations are susceptible to substantial
interpretation. The Claims Administrator is not required to obtain, and
has not obtained, approval from the FHA of its origination and servicing
practices. Failure to comply with FHA regulations may result in a denial
of FHA insurance claims, and there can be no assurance that the FHA's
enforcement of its regulations will not change in the future. In addition,
any Claim paid by the FHA will cover only 90% of the sum of the unpaid
principal (determined on the actuarial basis) on the FHA Loan, a portion of
the unpaid interest and certain other liquidation costs.
Prior to the transfer of the FHA Loans to the Co-Trustee, the FHA Loans
will be insured by the FHA, to the extent described herein, under the
related Originator's FHA contract of insurance. In connection with the
transfer of the FHA Loans from the Originators to the Co-Trustee, the
Originators also will file with the FHA all documents necessary to effect
the transfer of the FHA insurance reserves applicable to the FHA Loans to
the Co-Trustee's FHA contract of insurance.
Based upon information provided by the FHA, The Money Store Inc.
believes that upon the transfer referred to above and after the Funding
Period, the FHA insurance available to the Co-Trustee will be equal to at
least (A) 10% of the principal balance of the FHA Loans as of the Cut-Off
Date or Subsequent Cut-Off Date, as the case may be; or (B) thereafter, 10%
of the principal balance of all Title I loans originated or purchased and
currently reported for FHA insurance by the Co-Trustee, less amounts for
insurance claims previously paid to the Co-Trustee by the FHA, including
payments in respect of loans other than the FHA Loans, and increased by an
amount equal to 10% of the lesser of the original principal balance or the
purchase price paid for Title I loans subsequently originated or purchased
of record by the Co-Trustee.
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FHA Claims paid to the Co-Trustee by the FHA with respect to Title I
loans other than the FHA Loans may affect the total amount of the Reserve
Amount. The Co-Trustee will agree not to own any other loans insured by
the FHA under the Title I program unless such loans (i) were originated by
an Originator or their affiliates, (ii) are part of a pool formed for the
purpose of issuing certificates and (iii) such certificates are insured by
MBIA and receive from each Rating Agency the same rating assigned to the
Certificates.
Since the adequacy of the Co-Trustee's Reserve Amount is dependent upon
future events, including the annual reductions in the Reserve Amount and
the reductions for the payment of claims, no assurance can be given that
the Reserve Amount is or will be adequate to cover 90% of all potential
losses on the FHA Loans.
In connection with the FHA Loans, pursuant to FHA underwriting criteria
in effect at the time substantially all the FHA Loans were originated,
there was no requirement that the Mortgaged Property have any available
equity over and above the total of all liens on such property, including
the Title I loan. However, loans originated between October 18, 1991 and
August 15, 1994 that exceeded $15,000 were limited to a maximum encumbrance
of 100% loan to value of all liens on such property, including the Title I
loan, and non-owner occupied property loans originated after October 18,
1991 were limited to a maximum encumbrance of 100% loan to value of all
liens on such property, including the Title I loan. See "The Trusts--FHA
Loans" in the Prospectus and "Lending Programs--The Home Improvement
Lending Program--FHA Loans--The Title I Loan Program" herein.
MULTIFAMILY LOANS
Multifamily lending may be viewed as exposing the lender to a greater
risk of loss than single family residential lending. Owners of
multifamily residential properties rely on monthly lease payments from
tenants to pay for maintenance and other operating expenses of such
properties, to fund capital improvements and to service any mortgage loan
and any other debt that may be secured by such properties. Various
factors, many of which are beyond the control of the owner or operator of
such a property, may affect the economic viability of that property.
Changes in payment patterns by tenants may result from a variety of
social, legal and economic factors. Economic factors including the rate of
inflation, unemployment levels and relative rates offered for various types
of housing may be reflected in changes in payment patterns including
increased risks of defaults by tenants and higher vacancy rates. Adverse
economic conditions, either local or national, may limit the amount of rent
that can be charged and may result in a reduction in timely lease payments
or a reduction in occupancy levels. Occupancy and rent levels may also be
affected by construction of additional housing units, competition and local
politics, including rent stabilization or rent control laws and policies.
In addition, the level of mortgage interest rates may encourage tenants to
purchase single family housing. The Money Store Inc. is unable to
determine and has no basis to predict whether, or to what extent, economic,
legal or social factors will affect future rental or payment patterns.
The location and construction quality of a particular building may
affect the occupancy level as well as the rents that may be charged for
individual units. The characteristics of a neighborhood may change over
time or in relation to newer developments. The effects of poor
construction quality will increase over time in the form of increased
maintenance and capital improvements. Even good construction will
deteriorate over time if adequate maintenance is not performed in a timely
fashion.
Many of the foregoing conditions may not have been present or
significant on the Closing Date, and certain of those conditions may
change.
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NET FUNDS CAP AND CERTIFICATEHOLDERS' INTEREST CARRYOVER
The Pass-Through Rate for the Adjustable Rate Certificates is based
generally on LIBOR and the Pass-Through Rate for the Auction Rate
Certificates will be determined pursuant to the Auction Procedures
described in Annex I. Although the Mortgage Interest Rates on the Pool II
Loans (which rates will be used in determining the Net Funds Cap) are also
subject to adjustment, the Mortgage Interest Rates with respect to most of
the Pool II Loans adjust less frequently than the Pass-Through Rates on the
Adjustable Rate Certificates and Auction Rate Certificates and adjust by
reference to either the London Interbank Offered Rate, which will be
calculated differently for the Pool II Loans and the Adjustable Rate
Certificates, or the Treasury Index, which may not necessarily correspond
to changes in one-month LIBOR or the Pass-Through Rates determined pursuant
to the Auction Procedures.
If in respect of any Remittance Date there does not exist a positive
spread between (a) the Net Funds Cap applicable to the Adjustable Rate and
the Auction Rate Certificates and (b) the interest accrued on each such
Class at LIBOR plus the applicable margin (in the case of the Adjustable
Rate Certificates) or the Auction Rate determined for such Remittance Date
(in the case of the Auction Rate Certificates), but in no event exceeding
14.50% per annum, the Pass-Through Rate for such Class on such Remittance
Date will be based upon the applicable Net Funds Cap. Any
Certificateholders' Interest Carryover arising as a result of the
applicable Pass-Through Rate being based upon the Net Funds Cap, together
with interest thereon at the then applicable Pass-Through Rate (without
giving effect to the Net Funds Cap but in no event exceeding 14.50% per
annum), will be paid on the following Remittance Date or on any succeeding
Remittance Date to the extent funds are allocated and available therefor
after making all required prior distributions and deposits with respect to
such Remittance Date. Further, such payments will be made to the
Certificateholders of record of such Class for such Remittance Date,
regardless of whether they owned Class A Certificates when the related
Certificateholders' Interest Carryover was created. See "The Agreement--
Flow of Funds." The ratings of the Adjustable Rate Certificates and the
Auction Rate Certificates do not address the likelihood of the payment of
any Certificateholders' Interest Carryover and the MBIA Policies do not
guaranty payment of any such amount.
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LENDING PROGRAMS
Prospective Certificateholders should consider, in addition to the
information described under "The Single Family Loan Lending Program" in the
Prospectus, the following with respect to the Home Improvement Loans and
the Multifamily Loans.
THE HOME IMPROVEMENT LENDING PROGRAM
FHA LOANS
The Title I Loan Program-General
--------------------------------
The National Housing Act of 1934 (the "NHA Act"), in Sections 1 and
2(a) thereof, authorized the creation of the FHA and the Title I credit
insurance program (the "Title I Loan Program"). Several types of loans may
be made under the Title I Loan Program, including, among others, property
improvement loans (the "Title I Property Improvement Loans") which may be
made by approved lenders to finance alterations, repair or improvement of
existing single family, multifamily and nonresidential structures. See
"The Trusts--FHA Loans" in the Prospectus for a general description of the
Title I Loan Program.
Requirements for Title I Property Improvement Loans
---------------------------------------------------
The following is a description of the requirements for Title I Property
Improvement Loans currently in effect.
A Title I Property Improvement Loan cannot be used to purchase
property. The loan proceeds may only be used to finance property
improvements which substantially protect or improve the basic livability or
utility of the property to be improved. The loan amount may include the
cost of the proposed improvements and (i) architectural and engineering
services; (ii) building permit costs; (iii) flood insurance premiums; (iv)
credit report costs; (v) a fee for an actual inspection of the property by
the lender or its agent, not to exceed $75, but only where the total
principal obligation is $7,500 or more; (vi) title examination costs; (vii)
appraisal fees in connection with a loan or combination of loans on the
same property with a total principal balance in excess of $15,000; and
(viii) commencing June 5, 1995, origination fees charged by the lender.
One borrower may have multiple loans on multiple properties. In
addition, a borrower may obtain more than one loan to improve one property
as long as the total balance does not exceed the maximum permitted for the
particular type of loan involved.
The following maximum dollar limits applied to Title I property
improvement loans when the FHA Loans were originated:
Type of Property Loan Limit
---------------- ----------
Single Family $25,000 per property
Multifamily $60,000 per property or an average of
$12,000 per unit
Nonresidential $25,000 per property
Unsecured $7,500 per property
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Title I loans bear fixed rates of interest and are fully amortizing
with equal installment payments (except for the first or last payments,
which may not exceed 150% of the regular installment payment). Weekly,
biweekly, semi-monthly or monthly payments are permitted at the lender's
option. Where the borrower has an irregular flow of income, the loan may
be repaid in quarterly or semi-annual installments which correspond with
the borrower's flow of income. The loan maturity may not be less than six
months nor greater than 20 years plus 32 days. The interest rate is
established by each lender. Lenders may not charge any prepayment penalty.
The lender is entitled to recover the following costs from the
borrower: (i) origination fee; (ii) discount points (which may be payable
by the borrower or dealer, if applicable); and (iii) certain other
specified fees and charges. These costs set forth in item (i) with respect
to loans for which the credit application was received prior to June 5,
1995, and the costs set forth in items (ii) and (iii) cannot be paid out of
the loan proceeds.
An eligible borrower of a secured Title I loan must have at least a
one-half interest in one of the following: (i) fee simple title to the
related mortgaged property; (ii) a lease on the mortgaged property which
runs at least six months longer than the loan term; or (iii) a recorded
land installment contract on the mortgaged property.
There are two different types of FHA Loans and Conventional Home
Improvement Loans: (1) direct loans ("Direct Loans") and (2) dealer or
dealer-contractor loans ("Dealer Loans"). On a Direct Loan, the proceeds
of the loan are disbursed directly to the borrower, and there is no
participation in the loan application process by a dealer-contractor. On a
Dealer Loan, the dealer-contractor participates in the financing in some
fashion, such as presenting the loan application to the lending
institution, receiving the check or money order (although made payable to
the borrower) or accompanying the borrower to the institution for the
purpose of receiving payment. On Dealer Loans, before it may disburse
funds, the lender must have in its possession a properly signed and dated
completion certificate, a copy of the dealer-contractor's contract or sales
agreement, and a borrower's authorization certificate, if the loan proceeds
are to be disbursed to the dealer-contractor.
Title I Underwriting Requirements
---------------------------------
Specified loan underwriting requirements must be satisfied prior to
loan approval and disbursement of funds. For secured Title I loans the
lender must verify that the borrower has at least a one-half interest in
the mortgaged property. Additionally, the Originator requires that all
owners in fee simple have signed the lien instrument. A copy of the cost
estimated on a direct loan or a contract signed by the contractor and
borrower must be reviewed with the nature of the work to be done
specifically described in the contract. In addition, the loan file must
contain the promissory note, lien instrument and other documents required
by regulation.
The borrower's current paying habits and previous credit history must
be ascertained by obtaining a consumer credit report and by other credit
investigation. Written verification of income and employment is also
required. This may include any one of the following: (i) recent payroll
stubs (year-to-date plus current); (ii) verification of employment forms;
(iii) signed tax returns (self-employed); or (iv) financial statements
(self-employed).
Generally, any Title I loan originated after August 1994 in excess of
$7,500 must be secured by a recorded lien on the improved property which is
evidenced by a mortgage or deed of trust executed by the borrower and all
other owners in fee simple. Prior to August 1994, any Title I loan in
excess of $5,000 was required to be secured by such a recorded lien. In
order to facilitate the financing of small home improvement projects, the
FHA does not require loans of $7,500 or less, in the case of Title I loans
originated after August 1994, and $5,000 or less, in the case of Title I
loans originated prior to August 1994, to be secured by the property being
improved. Notwithstanding the preceding sentence, such loans must be
secured by a recorded lien on the improved property, if, including such
loan, the total amount of all Title I loans obtained by the borrower
exceeds $7,500, or $5,000, as the case may be.
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Effective November 18, 1991, for any secured Title I loan or
combination of loans on the same property with a total unpaid principal
balance in excess of $15,000, the borrower is required to have equity in
the property being improved in an amount at least equal to the loan amount,
except for certain loans originated by a governmental institution.
Effective August 15, 1994, for secured Title I loans the requirement
that the borrower have equity in the property was eliminated for owner-
occupied properties if the structure being improved has been completed and
occupied at least six months prior to the date of the related application.
For non-owner occupied properties, or owner occupied properties not meeting
this requirement, the borrower is required to have equity in the property
being improved in an amount at least equal to the loan amount and all
existing liens on such property.
Insurance Claims Procedures for Title I Loans
---------------------------------------------
The FHA has specific requirements for servicing of loans in default
and filing of claims. The FHA requires the lender to make a reasonable
effort to contact the borrower and have a face-to-face meeting prior to
accelerating the maturity of the note and filing an insurance claim.
If the lender's efforts to have the loan brought current are
unsuccessful, the lender is required to notify credit reporting agencies,
file a claim with the FHA for insurance and assign the loan to the United
States government, unless the lender chooses to proceed against the
mortgaged property under its Title I security instrument. If the lender
chooses so to proceed, it may not, without the approval of FHA, also file
an insurance claim. However, if the lender holds an obligation secured by
the mortgaged property which is senior to the Title I loan, it may both
proceed against the mortgaged property under the senior lien instrument and
file an insurance claim for the Title I loan. When a lender files an
insurance claim with the FHA, the FHA reviews the claim, the submitted loan
documents relating to the loan and the lender's servicing practices in
order to verify compliance with FHA Title I requirements. Based upon this
review, the loan is either accepted or rejected for insurance claims.
Subject to the then remaining reserve amount, the amount of the
insurance claim payment, when made, is equal to 90% of the sum of the
following amounts:
(1) The unpaid amount of the loan obligation (net of unpaid
principal and the uncollected interest earned to the date of default
calculated according to the actuarial method).
(2) The unpaid amount of interest on the unpaid amount of the
loan obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days, calculated at the rate of 7%
per annum. (However, interest will not be paid for any period greater than
nine months from the date of default).
(3) The amount of uncollected court costs including fees paid
for issuing, serving and filing a summons.
(4) The amount of attorneys' fees on an hourly or other basis
for time actually expended and billed, not to exceed $500.
(5) The amount of expenses for recording the assignment of the
loan to the United States.
Because Certificateholders do not hold a contract of insurance, the
FHA will not recognize the Certificateholders as owners of the FHA Loans,
or any portion thereof, who are entitled to submit Claims to the FHA.
Certificateholders will have no direct right to receive insurance payments
from the FHA.
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DEALER/CONTRACTOR ORIGINATION
The Originators originate loans through and purchase contracts from
home improvement contractors located in various states throughout the
United States. An Originator employs Account Executives who contact home
improvement contractors and explain the merits and features of the
Originator's available financing plans. Account Executives review
contractor needs and discuss the Originator's prevailing home improvement
loan rates, terms, credit standards and policies. If a contractor desires
to utilize the Originator's financing programs, it must make application to
the Originator for contractor approval. The Originator has a contractor
approval process pursuant to which the financial condition, business
experience, and qualifications of the contractor are reviewed prior to its
approval to sell or refer loans to the Originator. An approved
contractor's qualifications are reviewed annually in order to determine
whether such approval will be continued. The annual re-approval process
includes the updating of financial and business reference information.
Contractors are also monitored as to default levels, delinquency trends and
customer complaint resolution.
All contractor loans are written on an Originator's approved documents
and are either executed by the borrower in the presence (i) of the
Originator's employees or designated agents or (ii) of the contractor. All
contracts which are purchased are written on forms provided or approved by
the Originator. Each loan or contract is individually approved in
accordance with the Originator's guidelines. The contractor submits the
customer credit application and construction contract to the appropriate
Originator office where the customer's credit worthiness is determined.
Credit analysis includes a review of the customer's previous credit
experience, paying habits, length and likelihood of continued employment,
ability to repay the debt, and other factors. The credit analysis also
includes the determination of the ratio of a customer's long-term debt
payments in relation to their gross monthly income.
The Originators require that all secured home improvement loans and
contracts be secured by a recorded lien on the property to be improved.
Liens may be in first, second or more junior position. Certain other
criteria for FHA insured loans and contracts are described under the
caption "--FHA Loans." If an Originator determines that the application
meets the Originator's underwriting guidelines (and FHA regulations where
applicable) and the credit is approved, the Originator originates the loan
or purchases the contract. Unless a customer has specifically requested
staged funding of a contract, contracts are not purchased until the
customer has verified satisfactory completion of the home improvement
project. Where staged funding is used, the Originator requests a
completion certificate from the customer within 60 days of funding.
Property values are generally determined by a drive-by "as-is"
appraisal with 50% of the cost of the improvement added to the appraisal to
reflect the "after improvement" value of the property. Title insurance is
required on some FHA Loans where the mortgage is in first position.
CONVENTIONAL HOME IMPROVEMENT LOANS - UNDERWRITING CRITERIA
Conventional Home Improvement Loans are underwritten in the same
manner as the FHA Loans except that the loan proceeds may be used for
projects that do not qualify for FHA Loans, the amount of the loan may
exceed applicable FHA limits and the loan maturity may be for up to 25
years from origination. However, the maximum amount of an unsecured
Conventional Home Improvement Loan is $10,000.
Conventional Home Improvement Loans and contracts are not insured by
the FHA.
The original principal amount of a Conventional Home Improvement Loan
generally may not exceed $35,000 for the Originator's secured no equity
program, a program in which no appraisal is required and no LTV is
calculated, and generally may not exceed $75,000 for the Originator's other
secured contractor programs.
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THE MULTIFAMILY LENDING PROGRAM
The Originators originate Multifamily Loans in several states.
Typically, Multifamily Loans are 25 to 30 year term fully amortizing loans
consisting of 5 or more units (some of which may be non-residential units)
for non-purchase money loans. All of the Multifamily Loans are first liens
with a minimum loan amount of $50,000 and a maximum loan amount of
$1,000,000, a maximum Loan-to-Value ratio of approximately 65% and minimum
debt service coverage of approximately 1.25 to 1, although these guidelines
can be varied with the approval of senior management. All Multifamily
Loans are underwritten centrally in Sacramento, California. Appraisals,
field inspections and environmental inspections (performed by outside and
certified inspectors) are required for each Multifamily Loan. Title
insurance is obtained for all Multifamily Loans. Substantially all of the
mixed used properties securing Multifamily Loans will be properties with no
less than approximately 90%, measured by square footage, number of units
and projected rent, being allocated to residential units.
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THE REPRESENTATIVE AND THE ORIGINATORS
The Money Store Inc. will act as the Servicer of the Loans. Except
for certain representations and warranties relating to the Loans and
certain other matters, The Money Store Inc.'s obligations with respect to
the Loans are limited to its contractual servicing obligations.
The Money Store Inc. is a New Jersey corporation and the parent
company of the Originators and their affiliates. The Money Store Inc. is
headquartered in Sacramento, California and Union, New Jersey.
The Money Store Inc. is a financial services company engaged, through
its subsidiaries (including the Originators), in the business of
originating, purchasing, selling and servicing consumer and commercial
loans of specified types and offering related services. Loans originated by
The Money Store Inc. and its subsidiaries primarily consist of home equity
loans, loans (the "SBA Loans") guaranteed in part by the United States
Small Business Administration (the "SBA") and government guaranteed student
loans ("Student Loans"). The Money Store Inc. began providing financing
for new and used vehicles (the "Auto Loans") in early 1995.
Since 1967, The Money Store Inc. and its subsidiaries have been active
in the development of the residential home equity lending industry in the
United States. Based upon industry sources, the Representative believes
that during 1995 The Money Store Inc. and its subsidiaries were among the
largest originators, by principal amount, of home equity loans in the
United States. In 1979, The Money Store Inc. and its subsidiaries began to
originate SBA Loans and, based upon statistics compiled by the SBA, the
Representative believes that during each of the last 13 SBA fiscal years it
originated a greater principal amount of SBA Loans than any other
originator of such loans in the United States. In 1984, The Money Store
Inc. and its subsidiaries entered into the government guaranteed student
loan origination market.
For the year ended December 31, 1995 and the three months ended March
31, 1996, The Money Store Inc. and its subsidiaries originated or purchased
approximately $3.8 billion and 1.2 billion of loans, respectively. Of
those loans, approximately 75% and 75%, respectively, by principal amount
were home equity loans, approximately 12% and 9%, respectively, by
principal amount were SBA Loans, approximately 10% and 10%, respectively,
by principal amount were Student Loans and approximately 3% and 6%,
respectively, by principal amount were Auto Loans. The business strategy
of The Money Store Inc. has been to identify and pursue niche lending
opportunities which management believes have had widespread unsatisfied
demand.
At March 31, 1996, The Money Store Inc. and its subsidiaries operated
out of 183 branch locations in 49 states, the District of Columbia and the
Commonwealth of Puerto Rico.
S-48
<PAGE>
The following table shows the originations and portfolio balances of
The Money Store Inc. and its subsidiaries for the periods indicated:
ORIGINATIONS AND SERVICED LOAN PORTFOLIO BY LOAN TYPE
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1993 1994
Originations ----------------
-------------- Originations
----------------
Number Serviced Number Serviced
Amount of Loans Loan Amount of Loans Loan
----------- --------- Portfolio ----------- ----------- Portfolio
----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Home Equity Loans.. $1,127,926 20,915 $2,291,799 $2,013,027 38,644 $3,725,918
% of Total......... 66.4% 59.2% 72.4% 63.2%
SBA Loans.......... 319,025 871 1,270,453 420,416 1,143 1,605,645
% of Total......... 18.8% 32.8% 15.1% 27.2%
Student Loans...... 252,059 91,527 310,456 345,965 136,354 566,906
% of Total......... 14.8% 8.0% 12.5% 9.6%
Total $1,699,010 113,313 $3,872,708 $2,779,408 176,141 $5,898,469
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
1995 1996
Originations Originations
------------ ------------
Number Serviced
of Loan Number of Serviced Loan
Amount Loans Portfolio Amount Loans Portfolio
---------- -------- ------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Home Equity Loans.. $2,885,044 67,828 $5,751,677 $ 906,729 19,450 $6,362,829
% of Total......... 75.5% 66.7% 74.5% 67.3%
SBA Loans.......... 440,728 1,461 1,907,050 115,436 413 1,966,042
% of Total......... 11.5% 22.1% 9.5% 20.8%
Student Loans...... 369,129 139,946 845,501 120,454 18,235 948,506
% of Total......... 9.7% 9.8% 10.0% 10.0%
Auto Loans......... 128,070 13,141 117,239 74,312 7,592 179,978
% of Total......... 3.3% 1.4% 6.0% 1.9%
Total.......... $3,822,971 222,376 $8,621,467 $1,216,931 45,690 $9,457,355
</TABLE>
S-49
<PAGE>
Although the Originators have no maximum dollar amount for home equity
loans, the actual maximum amount that the Originators will lend is determined
by the applicant's ability to repay the loan, the value of the borrower's
equity in the real estate and the ratio of such equity to the home's appraised
value. For home equity loans originated in 1993, 1994, 1995 and the first three
months of 1996, the average loan size was approximately $54,000, $52,000,
$43,000 and $47,000, respectively.
In July 1993, the Originators introduced a revised program of originating
home equity loans (the "Equity Advantage Loans") with Combined Loan-to-Value
Ratios exceeding 80%. Equity Advantage Loans are secured by first or second
liens, generally possess lower debt-to-income ratios and bear a higher rate of
interest than home equity loans with lower Combined Loan-to-Value Ratios.
The following table illustrates The Money Store Inc.'s delinquency and
charge-off experience with respect to home equity loans in its servicing
portfolio:
HOME EQUITY LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS
ENDED DECEMBER 31,
----------------------------
AS OF AND FOR THE THREE MONTHS
1993 1994 1995 ENDED MARCH 31, 1996
-------- -------- -------- -------------------------------
<S> <C> <C> <C> <C>
30-59 days past due......................... 2.14% 1.77% 1.76% 1.82%
60-89 days past due......................... 0.64% 0.42% 0.68% 0.71%
90+ days past due........................... 3.33% 1.86% 2.42% 2.57%
Loans charged-off, net...................... $23,861 $19,942 $24,205 $7,680
Loans charged-off, net, as a percentage of 1.06% 0.54% 0.42% 0.48%
the home equity loan portfolio(1)........
</TABLE>
- -------------
(1) The percentage of Home Equity Loan charge-offs is calculated based
upon the dollar amount of charge-offs divided by the dollar amount of
Home Equity Loans contained in the Serviced Loan Portfolio. The
percentage reported for the three months ended March 31, 1996
represents an annualized rate.
While the above delinquency and charge-off experience represents the
Servicer's recent experience, there can be no assurance that the future
delinquency and charge-off experience on the Home Equity Loans included in
the Trust will be similar. The Servicer can neither quantify the impact of
any recent property value declines on the Home Equity Loans nor predict
whether, to what extent or how long such declines may continue. In a period
of such decline, the rates of delinquencies, foreclosures and losses on the
Home Equity Loans could be higher than those heretofore experienced in the
mortgage lending industry in general. In addition, adverse economic
conditions (which may or may not affect real property values) may affect
the timely payment by borrowers of scheduled payments of principal and
interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses. See "Description of the
Certificates--The Distribution Amounts" herein for a discussion of the
effect to Certificateholders of delinquencies in payments on The Home
Equity Loans.
The Money Store Inc. does not separately report the delinquency and
charge-off experience of its Home Improvement Loans and Multifamily Loans
and there can be no assurance, and no representation is made, that the
delinquency and charge-off experience with respect to the Home Improvement
Loans and the Multifamily Loans will be similar to that reflected in the
table above.
S-50
<PAGE>
LEGAL PROCEEDINGS
Because the nature of the business of The Money Store Inc. involves
the collection of numerous accounts, the validity of liens and compliance
with state and federal lending laws, The Money Store Inc. is subject to
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 such claims and actions, The Money Store Inc.
believes that the aggregate amount of such liabilities will not result in
monetary damage which would have a material adverse effect on the financial
condition of The Money Store Inc.
THE LOAN POOLS
GENERAL
Certain data with respect to the Initial Loans expected to be included
in the Trust is set forth below. References in this Prospectus Supplement
to the characteristics of the Loans as of the Cut-Off Date are deemed to
include the characteristics, as of the date of their origination, of those
Loans originated after the Cut-Off Date and up to the Closing Date. A
Current Report on Form 8-K containing a detailed description (the "Detailed
Description") of the Initial Loans will be available to purchasers of the
Class A Certificates upon request at or before the initial issuance of the
Class A Certificates and will be filed with the Securities and Exchange
Commission within 15 days after such issuance. The Detailed Description
will specify the principal balance of the Loans of each Pool as of the Cut-
Off Date, the initial principal balance of each Class of the Class A
Certificates and will also include the following information regarding such
Loans of each Pool (in each case, presented by (i) principal balance of the
applicable Pool as of the Cut-Off Date; (ii) percentage of the applicable
Pool by principal balance and (iii) number of Initial Loans for the
applicable Pool): geographical distribution of the Mortgaged Properties,
Combined Loan-to-Value Ratios (except with respect to the Initial Pool III
Home Improvement Loans), interest rates, original principal balances,
number of months since origination, months remaining to stated maturity,
Gross Margins with respect to the Initial Pool II Home Equity Loans,
Lifetime Caps with respect to the Initial Pool II Home Equity Loans,
Lifetime Floors with respect to the Initial Pool II Home Equity Loans and
the months to next Change Date with respect to the Initial Pool II Home
Equity Loans.
The statistical information presented in this Prospectus Supplement
concerning the Loans is based on preliminary Pools expected to be delivered
to the Trustee and the Co-Trustee on the Closing Date. The Representative
expects that loans (including the Subsequent Loans) that were not contained
in the preliminary Pools will be added to the final Pools. While the
statistical distribution of the characteristics for the final Pools of
Loans will vary somewhat from the statistical distribution of such
characteristics for the preliminary Pools of Loans presented in this
Prospectus Supplement, the Representative does not believe that the
characteristics of the final Pools will differ materially.
The Agreement will provide that Subsequent Loans may be purchased by
the Trust from the Originators from time to time on or before the close of
business on September 25, 1996 from funds on deposit in the Pre-Funding
Account. Each of the Subsequent Loans will have been originated and
identified prior to the Closing Date. Any Subsequent Pool I or Pool II
Loan so acquired will have been originated and underwritten, or purchased
and re-underwritten, by one of the Originators, substantially in accordance
with the Originator's underwriting criteria described in the Prospectus
under the caption "The Home Equity Lending Program--Underwriting Criteria."
Any Subsequent Pool III Loan so acquired will have been originated and
underwritten, or purchased and re-underwritten, by one of the Originators,
substantially in accordance with the Originator's underwriting criteria
described herein under the caption "Lending Programs--The Home Improvement
Lending Program--FHA Loans--Title I Underwriting Requirements," in the case
of FHA Loans, or "Lending Programs--The Home Improvement Lending Program--
Conventional Home Improvement Loans--Underwriting Criteria," in the case of
Conventional Home Improvement Loans. Any Subsequent Pool IV Loan so
acquired will have been originated and underwritten, or purchased and re-
underwritten, by one of the Originators, substantially in accordance with
the Originator's underwriting criteria
S-51
<PAGE>
described herein under the caption "Lending Program--The Multifamily
Lending Program." The purchase price for each Subsequent Loan will be no
greater than its unpaid principal balance as of the related Subsequent Cut-
Off Date. The Agreement will provide that each Pool of Loans, following
the conveyance of any Subsequent Loans to the appropriate Pool, must, in
the aggregate, conform to certain specified characteristics. See "The
Agreement--Representations and Warranties" in the Prospectus.
HOME EQUITY LOANS
The Home Equity Loans consist of mortgages, deeds of trust or other
security instruments (the "Home Equity Mortgages" or "Mortgages"), and the
related promissory notes (the "Home Equity Mortgage Notes" or "Notes")
secured by one- to four-family residences, units in planned unit
developments and units in condominium developments (the "Home Equity
Mortgaged Properties" or "Mortgaged Properties"). The aggregate principal
balance of the Initial Pool I Home Equity Loans as of the Cut-Off Date will
be approximately $696,800,000, and the aggregate principal balance of the
Initial Pool II Home Equity Loans as of the Cut-Off Date will be
approximately $153,300,000. The Home Equity Loans will be originated and
underwritten, or purchased and re-underwritten, by one of the Originators,
substantially in accordance with the underwriting criteria described in the
Prospectus under the heading "The Home Equity Lending Program--Underwriting
Criteria." However, with respect to Home Equity Loans with an aggregate
outstanding principal balance as of the Cut-Off Date of up to $1,000,000
the Originators may not have independently verified the income of the
related Obligors. Unless otherwise noted, all percentages in this general
discussion are measured by the expected principal balance of the Initial
Home Equity Loans described herein on the Cut-Off Date, and the statistics
are given as of the Cut-Off Date.
Each Pool II Home Equity Loan (including Subsequent Pool II Home
Equity Loans) will bear an adjustable rate. The interest rate borne by
each Pool II Home Equity Loan adjusts on the date set forth in the Mortgage
Note for such Pool II Home Equity Loan and every Change Date thereafter.
The Pool II Mortgage Interest Rate relating to approximately 95% of the
Pool II Home Equity Loans will adjust on each applicable Change Date to
equal the sum of (i) the London Interbank Offered Rate for one-month, six-
month or one-year U.S. dollar deposits (the "LIBOR Index") either as
announced by the Federal National Mortgage Association, and available as of
the date 45 days before each Change Date, or as published in The Wall
--------
Street Journal generally on a day of the month preceding the month of the
--------------
Change Date, and (ii) the Gross Margin set forth in the related Mortgage
Note, subject to rounding and to the effects of the Periodic Rate Cap, the
applicable Lifetime Cap and the applicable Lifetime Floor. The Pool II
Mortgage Interest Rate relating to no more than approximately 5% of the
Pool II Home Equity Loans will adjust on each applicable Change Date to
equal the sum of (i) the one-year Constant Maturity Treasury Index as
published by the Federal Reserve Board in the most recent edition of
Federal Reserve Board Statistical Release No. H.15(519) that is available
45 days before each Change Date, and (ii) the related Gross Margin, subject
to rounding and to the effects of the Periodic Rate Cap, the applicable
Lifetime Cap and the applicable Lifetime Floor.
The Gross Margins for the Pool II Home Equity Loans will range from
approximately 1% to 13%. The weighted average Gross Margin of the Pool II
Home Equity Loans will be approximately 5.90%. The "Periodic Rate Cap"
limits changes in the Pool II Mortgage Interest Rate for each Pool II Home
Equity Loan on each Change Date to (i) 200 basis points with respect to
Pool II Home Equity Loans which have a LIBOR Index adjusting every month
and not more than 200 basis points in any 12 month period (or 200 basis
points with respect to Variable Adjustable Rate Loans after the first two
Change Dates), (ii) 100 basis points with respect to Pool II Home Equity
Loans which have a LIBOR Index adjusting every six months and with respect
to the first two Change Dates for the Variable Adjustable Rate Loans, (iii)
200 basis points with respect to Pool II Home Equity Loans which have a
LIBOR Index adjusting every 12 months and (iv) 200 basis points with
respect to Pool II Home Equity Loans that have a Treasury Index. The
"Lifetime Cap" for each Pool II Home Equity Loan having a LIBOR Index is
the rate which is generally 600 basis points greater than the initial Pool
II Mortgage Interest Rate for such Pool II Home Equity Loan, and the
Lifetime Floor is the lowest rate to which the Pool II Mortgage Interest
Rate can adjust for such Pool II Home Equity Loan. The Lifetime Cap for
each Pool II Home Equity Loan having a Treasury Index is the rate which is
400 to 600 basis points greater than the initial Pool II Mortgage Interest
Rate for such Pool II
S-52
<PAGE>
Home Equity Loan and the Lifetime Floor is as set forth in the Mortgage
Note related to such Pool II Home Equity Loan. The Lifetime Caps of the
Pool II Home Equity Loans will range from 10.25% to 20.0%. The Lifetime
Floors of the Pool II Home Equity Loans will range from 1.0% to 16.5%. The
weighted average Lifetime Cap of the Pool II Home Equity Loans will be
approximately 15.32%. The weighted average Lifetime Floor of the Pool II
Home Equity Loans will be approximately 8.82%. The months to the next
Change Date of the Pool II Home Equity Loans will range from one month to
twelve months. The weighted average months to next Change Date will be
approximately five months. The Pool II Home Equity Loans do not provide
for negative amortization.
No less than approximately 75% of the Pool I Home Equity Loans and all
of the Pool II Home Equity Loans will be secured by first mortgage liens
and the remainder of the Pool I Home Equity Loans will be secured by second
mortgage liens. Based on representations made by the Obligors, all of the
Home Equity Loans will be secured by one-to four-family residences, no more
than approximately 6% and 4% of the Pool I and Pool II Home Equity Loans,
respectively, are secured by vacation homes, secondary residences, or
investment properties, less than 1% and 1% of the Pool I, and Pool II Home
Equity Loans, respectively, will be secured by individual units in low-rise
condominiums, no more than approximately 8% and 5% of the Pool I and Pool
II Home Equity Loans, respectively, will be secured by two-, three- or
four-family houses, and no Home Equity Loan will be secured by individual
units of other types including high-rise condominiums and mixed-use
buildings. No Home Equity Loan will be secured by a mobile home or a
cooperative residence.
No more than approximately 15%, 10%, 10%, 8%, 7%, 7% and 7% of the
Pool I Home Equity Loans are secured by Mortgaged Properties located in
California, New York, Pennsylvania, Illinois, New Jersey, Ohio and
Washington. No more than approximately 11%, 11%, 9%, 8%, 8%, 7% and 6% of
the Pool II Home Equity Loans will be secured by Mortgaged Properties
located in California, Illinois, Michigan, Washington, Ohio, New Jersey and
New York, respectively. No more than approximately 5% of the Pool I Home
Equity Loans and 5% of the Pool II Home Equity Loans will be secured by
Mortgaged Properties located in any other state.
Improvements on Mortgaged Properties located in California may be more
susceptible to certain types of special hazards not covered by insurance
(such as earthquakes) than properties located in other parts of the
country. In addition, the economy of the State of California may be
adversely affected to a greater degree than that of other areas of the
country by certain developments affecting industries concentrated in such
state. Moreover in recent periods, California has experienced significant
downturns in the market value of real estate.
Based upon the original principal balances of the Home Equity Loans,
no more than approximately 20% and 8% of the Pool I and Pool II Home Equity
Loans, respectively, will have a Combined Loan-to-Value Ratio exceeding
80%. No Pool I or Pool II Home Equity Loan will have a Combined Loan-to-
Value Ratio exceeding 100%. The weighted average Combined Loan-to-Value
Ratios of the Pool I and Pool II Home Equity Loans will be no more than
approximately 73% and 73%, respectively. The Home Equity Loans will not be
insured or guaranteed by any governmental entity.
The Initial Pool I Home Equity Loans will bear interest at fixed rates
which range from 6.5% to 19.0% per annum. The Initial Pool II Home Equity
Loans will bear interest at adjustable rates which currently range from
5.5% to 13.5% per annum. The weighted average Pool I Mortgage Interest
Rate on the Initial Pool I Home Equity Loans will be approximately 10.8%
per annum. The weighted average current Pool II Mortgage Interest Rate on
the Initial Pool II Home Equity Loans will be approximately 9.1% per annum.
The lowest principal balances of any Initial Pool I and Initial Pool II
Home Equity Loans will be approximately $3,000 and $14,000, respectively,
and the highest will be approximately $500,000 and $450,000, respectively.
The average principal balances of the Initial Pool I and Initial Pool II
Home Equity Loans will be approximately $53,000 and $83,000, respectively.
Home Equity Loans not originated by an Originator or Home Equity Loans
having original principal balances less than or equal to $15,000 may not be
covered by title insurance policies. The weighted average remaining terms
to stated maturity of the Initial Pool I and Initial Pool II Home Equity
Loans will be approximately 265 months and 356 months, respectively. The
weighted average terms to stated maturity of the Initial Pool I and Initial
Pool II Home Equity Loans at origination will be approximately 266 months
and 359 months, respectively. Less than
S-53
<PAGE>
approximately 16% of the Pool I Home Equity Loans will be Balloon Loans.
No Pool II Home Equity Loan will be a Balloon Loan.
HOME IMPROVEMENT LOANS
The Home Improvement Loans consist of fixed-rate, residential home
improvement mortgages, deeds of trust or other security instruments (the
"Home Improvement Mortgages" or "Mortgages"), and the related promissory
notes, retail installment contracts or obligations, or sales agreements
(the "Home Improvement Mortgage Notes" or "Notes") secured, except as set
forth below, by one- to four-family residences, units in planned unit
developments and units in condominium developments (the "Home Improvement
Mortgaged Properties" or "Mortgaged Properties"). Approximately 34% and
66% of the Initial Home Improvement Loans will be FHA Loans and
Conventional Home Improvement Loans, respectively. The Initial Home
Improvement Loans will have been originated and underwritten, or purchased
and re-underwritten, by one of the Originators, substantially in accordance
with the Originators' underwriting criteria described herein under the
caption "Lending Programs--The Home Improvement Lending Program--Title I
Underwriting Requirements," in the case of FHA Loans, or "Lending Programs-
-The Home Improvement Lending Programs--Conventional Home Improvement
Loans--Underwriting Criteria," in the case of Conventional Home Improvement
Loans. Unless otherwise noted, all percentages in this general discussion
are measured by the expected principal balance of the Initial Home
Improvement Loans described herein on the Cut-Off Date and the statistics
are given as of the Cut-Off Date.
Approximately 1% of the Home Improvement Loans will be secured by
first mortgage liens, no more than approximately 99% of the Home
Improvement Loans will be secured by second mortgage liens and the
remainder of the Home Improvement Loans will be secured by more junior
mortgage liens. Based on representations made by the Obligors, no less
than approximately 97% of the Home Improvement Loans will be secured by
one-to four-family residences, no more than approximately 3% of the Home
Improvement Loans are secured by vacation homes, secondary residences, or
investment properties, less than 1% of the Home Improvement Loans will be
secured by individual units in low-rise condominiums, no more than
approximately 1% of the Home Improvement Loans will be secured by two-,
three- or four-family houses, no more than approximately 1% of the Home
Improvement Loans will be secured by Multifamily Mortgaged Properties and
no Home Improvement Loan will be secured by individual units of other types
including high-rise condominiums and mixed-use buildings. No Home
Improvement Loan will be secured by a mobile home or a cooperative
residence.
No more than approximately 36%, 12%, 10%, 8%, 6% and 6% of the Home
Improvement Loans are secured by Mortgaged Properties located in
California, Texas, Arizona, New Jersey, Georgia and Nevada, respectively.
No more than approximately 5% of the Home Improvement Loans will be secured
by Mortgaged Properties located in any other state.
The FHA Loans are insured by the FHA to the extent described herein.
The Conventional Home Improvement Loans are not insured or guaranteed by
any governmental entity.
The Initial Home Improvement Loans will bear interest at fixed rates
which range from 5% to 19% per annum. The weighted average Mortgage
Interest Rate on the Initial Home Improvement Loans will be approximately
12.5% per annum. The lowest principal balance of any Initial Home
Improvement Loans will be approximately $1,500 and the highest will be
approximately $54,000. The average principal balance of the Initial Home
Improvement Loans will be approximately $15,000. The weighted average
remaining terms to stated maturity of the Initial Home Improvement Loans
will be approximately 195 months. The weighted average terms to stated
maturity of the Initial Home Improvement Loans at origination will be
approximately 198 months. None of the Home Improvement Loans will be
Balloon Loans.
S-54
<PAGE>
MULTIFAMILY LOANS
The Multifamily Loans consist of home improvement mortgages, deeds of
trust or other security instruments (the "Multifamily Mortgages" or
"Mortgages"), and the related promissory notes (the "Multifamily Mortgage
Notes" or "Notes") secured by five or more unit residential or mixed-use
residential and commercial properties (the "Multifamily Mortgaged
Properties" or "Mortgaged Properties"). The Multifamily Loans will have
been originated and underwritten, or purchased and re-underwritten, by one
of the Originators, substantially in accordance with the underwriting
criteria described herein under the heading "Lending Programs--The
Multifamily Lending Program--Underwriting Criteria."
No more than approximately 20%, 18%, 18%, 14%, 10% and 8% of the
Multifamily Loans will be secured by Mortgaged Properties located in
California, Florida, New York, New Jersey, Texas and Arizona, respectively.
No more than approximately 5% of the Initial Multifamily Loans will be
secured by Mortgaged Properties located in any other state. All the
Multifamily Loans will be secured by first mortgage liens.
Based upon the original principal balances of the Multifamily Loans,
none of the Multifamily Loans will have a Combined Loan-to-Value Ratio
exceeding approximately 67%. The weighted average Combined Loan-to-Value
Ratios of the Multifamily Loans will be approximately 62%. The Multifamily
Loans will not be insured or guaranteed by any governmental entity.
The Initial Multifamily Loans will bear interest at fixed rates which
range from 9.5% to 13.5% per annum. The weighted average Mortgage Interest
Rate on the Initial Multifamily Loans will be approximately 11.25% per
annum. The lowest principal balance of any Initial Multifamily Loans will
be approximately $50,000 and the highest will be approximately $850,000.
The average principal balance of the Initial Multifamily Loans will be
approximately $181,000. All Initial Multifamily Loans will be covered by
title insurance policies. The weighted average remaining term to stated
maturity of the Initial Multifamily Loans will be approximately 333 months.
The weighted average term to stated maturity of the Initial Multifamily
Loans at origination will be approximately 340 months.
PAYMENTS ON THE LOANS
The Initial Loans, other than Balloon Loans, will generally provide
for a schedule of payments which will be, if timely paid, sufficient to
amortize fully the principal balance of the related Initial Loan on or
before its maturity date. Interest with respect to the Initial Loans will
accrue on either an actuarial interest method or a simple interest method.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the
time of origination. Scheduled monthly payments on such Loans received
either earlier or later (other than delinquent) than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest. With respect to
the Pool II Home Equity Loans, on each Change Date, the Mortgagor's monthly
payment will be adjusted prospectively to fully amortize such Pool II Home
Equity Loans at the then current Pool II Mortgage Interest Rate over its
stated remaining term to maturity.
The simple interest method provides for the amortization of the amount
of each loan over a series of equal monthly payments. However, unlike the
monthly payment under the actuarial interest method, each monthly payment
consists of an installment of interest which is calculated on the basis of
the outstanding principal balance at the stated interest rate and based
upon the period elapsed since the preceding payment of principal was made,
using the method permitted by applicable law. As payments are received
under the loan, the amount received is applied first to interest accrued to
the date of payment and the balance, if any, is applied to reduce the
unpaid principal balance; provided, however, that with respect to FHA Loans
secured by Mortgaged Properties located in states where the Servicer
collects the FHA Insurance Premium directly from the related Mortgagor,
payments are applied first to
S-55
<PAGE>
the FHA Insurance Premium. Accordingly, if a borrower pays a fixed monthly
installment on such a loan before its scheduled due date, the portion of
the payment allocable to interest for the period since the preceding
payment was made will be less than it would have been had the payment been
made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if a
borrower pays a fixed monthly installment on the loan after its scheduled
due date, the portion of the payment allocable to interest for the period
since the preceding payment was made will be greater than it would be had
the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly reduced. In
addition, a late charge may be imposed with respect to the past due amount.
The amount of interest payable to the Class A Certificateholders on
each Remittance Date will not be affected by interest accruing on the Loans
based on the simple interest method. On each Remittance Date, the Class A
Certificateholders are entitled to receive 30 days' interest (or, with
respect to the Adjustable Rate and Auction Rate Certificates, the actual
number of days from the last Remittance Date (or since the Closing Date in
the case of the first Remittance Date) to but not including the upcoming
Remittance Date) at the applicable Pass-Through Rate on the outstanding
principal balances of the applicable Class of Certificates. The Servicer
is required to remit to the Trustee the excess, if any, of the amount of
interest the Class A Certificateholders are entitled to receive on each
Remittance Date over the interest collected on the Loans during the related
Due Period and available to pay interest on the Class A Certificates. See
"The Agreement--Monthly Advances and Compensating Interest" herein.
Similarly, the compensation payable to the Servicer will not be
affected by interest accruing on the Loans based on the simple interest
method. The Servicer is entitled to receive a fee based on the principal
balance of the Loans, not upon the portion of a monthly payment allocable
to interest. See "The Agreement--Servicing and Other Compensation" herein.
If a payment is received on a Loan before its due date, more of such
payment will be used on the related Remittance Date to pay principal on the
Class A Certificates than if such payment was received on such due date.
Conversely, if a payment is received on a Loan after its scheduled due
date, less of such payment will be used on the related Remittance Date to
pay principal on the Class A Certificates than if such payment was received
on its due date. This will not affect the total amount of principal to be
received by the Class A Certificateholders over the life of the
transaction, but it may affect the weighted average lives of the Class A
Certificates.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The effective yield on the Certificates (other than the Adjustable
Rate and Auction Rate Certificates) will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate because, while
interest will accrue on such Certificates from the first day of each month,
the distribution of such interest will not be made until the 15th day (or
if such 15th day is not a business day, the next succeeding business day)
of the month following the month of accrual. For the Adjustable Rate and
Auction Rate Certificates, interest will accrue generally from the 15th day
of each month until the 14th day of the next month.
In general, because the Pool I, Pool III and Pool IV Loans will bear
fixed interest rates, when the level of prevailing interest rates for
similar loans significantly declines, the rate of prepayment of such Loans
is likely to increase, although the prepayment rate is influenced by a
number of other factors, including general economic conditions and
homeowner mobility. Similarly, when the level of interest rates for
similar loans significantly rises, the rate of prepayment of such Loans may
decrease. No prediction can be made as to the prepayment rate that the
Loans will actually experience.
All of the Pool II Loans bear adjustable rates. However, the Pool II
Loans still may be subject to increased principal prepayments in a low
interest rate environment. For example, if prevailing interest rates were
to fall, Mortgagors with Pool II Loans may be inclined to refinance their
Pool II Loans with a fixed rate loan to "lock in" a lower interest rate.
The existence of the Periodic Rate Cap, Lifetime Cap and Lifetime Floor
also may affect the likelihood of prepayments resulting from refinancings.
In addition, the delinquency and loss experience on the Pool
S-56
<PAGE>
II Loans may differ from that on the Loans in the other Pools because the
amount of the monthly payments on the Pool II Loans are subject to
adjustment on each Change Date. If such different experience were to
occur, the prepayment experience on the Adjustable Rate Certificates and
the Auction Rate Certificates may differ from that on the other Classes of
Certificates.
Generally, junior priority mortgage loans have smaller average
principal balances than first priority mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, the Loans included in the
Trust that are secured by junior liens may experience a higher rate of
prepayment than traditional first priority mortgage loans. In addition, any
future limitations on the right of borrowers to deduct interest payments on
mortgage loans for Federal income tax purposes may result in a higher rate
of prepayment of such junior Loans. The obligation of the Servicer to
enforce the "due-on-sale" provisions of the Loans may also increase
prepayments. The prepayment experience of the Pools may be affected by a
wide variety of factors, including general and local economic conditions,
mortgage market interest rates, the availability of alternative financing
and homeowner mobility. The Money Store Inc. is unaware of any reliable
studies that would project the prepayment risks associated with the Loans
based upon current interest rates and economic conditions and the
historical prepayment experience of The Money Store Inc.'s portfolio of
home equity loans.
Unscheduled payments, delinquencies, repurchases of defective Loans,
defaults on the Loans and distributions from the Pre-Funding Account will
affect the amount of funds available to make distributions on each
Remittance Date. In addition, the Servicer may, at its option, and in the
absence of the exercise thereof by the Servicer, MBIA may, at its option,
on any Remittance Date on and after the Optional Servicer Termination Date,
purchase from the Trust all of the Loans and any related REO Properties at
the Termination Prices for all Pools. MBIA may, at its option, similarly
purchase all the Loans and REO Properties on any Remittance Date, on or
after the Cross-Over Date, on which the aggregate principal balances as of
the Cut-Off Date of the Loans that have been liquidated (each, a
"Liquidated Loan") is equal to or exceeds 25% of the sum of (i) the
Original Pool Principal Balance and (ii) the original Pre-Funded Amount.
The Cross-Over Date is defined in the Agreement as the date on which the
Maximum Subordinated Amount is reduced to zero. See "The MBIA Policies and
MBIA" herein.
If prepayments of principal are received on the Loans at a rate
greater than that assumed by an investor (including distributions from the
Pre-Funding Account and receipt of Subordination Increase Amounts), the
yield will be increased on Class A Certificates purchased by such investor
at a price less than par (i.e., the principal balance of a Class A
Certificate at the time of its purchase). Similarly, if prepayments of
principal are received on the Loans at a rate greater than that assumed by
an investor, the yield will be decreased on Class A Certificates purchased
at a price greater than par. The effect on an investor's yield of principal
prepayments on the 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 applicable Class of Class A Certificates may
not be offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted average lives of the Class A Certificates
will also be affected by the amount and timing of delinquencies and
defaults on the Loans in the related Pool and the liquidations of defaulted
Loans, respectively. Delinquencies and defaults will generally slow the
rate of payment of principal to the Class A Certificateholders since (i)
neither the Servicer nor MBIA is obligated to advance for delinquent
payments of principal and (ii) Insured Payments with respect to principal
generally are not required until the occurrence of a Subordination Deficit
(as defined herein under "Description of the Certificates--Cross-Support
Provisions and Spread Amount"). However, this effect will be offset to the
extent that lump sum recoveries on defaulted Loans and foreclosed Mortgaged
Properties result in principal payments on the Loans faster than otherwise
scheduled. Additionally, the holders of the Pool III Certificates will be
entitled to any FHA Payments received by the Claims Administrator.
As described herein, certain Classes of Certificates in a Pool will be
entitled to receive payments of principal prior to other Classes of
Certificates in the related Pool. As a result, the Classes of Certificates
in a Pool receiving payments of principal first will immediately be
affected by the prepayment rate on the Loans in the related Pool. However,
the timing of commencement of principal distributions and the weighted
average lives of each Class
S-57
<PAGE>
of Class A Certificates will be affected by the prepayment rate experienced
both before and after the commencement of principal distributions on any
such Class.
If during the Funding Period the entire original Pre-Funded Amount has
not been used to purchase Subsequent Loans, on the Special Remittance Date,
certain Classes of Class A Certificates will be prepaid in part from and to
the extent of such remaining amounts. Although no assurances can be given,
it is anticipated by the Representative that the principal amount of
Subsequent Loans sold to the Trust will require the application of
substantially all the amounts on deposit in the Pre-Funding Account, and
that there should be no material principal prepaid on the Class A
Certificates from such amounts.
The Loans are either (i) "simple interest" or "date-of-payment loans"
or (ii) "actuarial method" loans. If a payment is received on a Loan which
is a "simple interest" loan later than scheduled, a smaller portion of such
payment will be applied to principal and a greater portion will be applied
to interest than would have been the case had the payment been received on
the scheduled due date, resulting in such Loan having a longer weighted
average life than would have been the case had the payment been made as
scheduled. Conversely, if a payment on a Loan is received earlier than
scheduled, more of such payment will be applied to principal and less to
interest than would have been the case had the payment been received on its
scheduled due date, resulting in such Loan having a shorter weighted
average life than would have been the case had the payment been made as
scheduled.
In the event that less than 30 days' interest is collected on a Loan
during a Due Period, whether due to prepayment in full or a Curtailment,
the Servicer is obligated to pay Compensating Interest with respect
thereto, but only to the extent of the aggregate Servicing Fee and
Contingency Fee for the related Remittance Date. To the extent such
shortfalls exceed the amount of Compensating Interest that the Servicer is
obligated to pay, and are not otherwise covered by Monthly Excess Spread
(as defined herein under "Description of the Certificates--Cross-Support
Provisions and Spread Amount") or Insured Payments, the yield on the
Certificates of the related Pool will be adversely affected. Any shortfall
in collections of interest resulting from the early receipt of a scheduled
payment will not be covered by Compensating Interest, but will be covered
by Monthly Advances.
The Pass-Through Rate on the Adjustable Rate Certificates will be
adjusted by reference to changes in the level of one-month LIBOR and the
Pass-Through Rate on the Auction Rate Certificates will be adjusted
pursuant to the Auction Procedures attached hereto as Annex I, in each case
subject to the effects of the applicable Net Funds Cap. Although the Pool
II Mortgage Interest Rates also are subject to adjustment, the Pool II
Mortgage Interest Rates with respect to most of the Pool II Loans adjust
less frequently than the Pass-Through Rate on the Adjustable Rate
Certificates and the Auction Rate Certificates, and adjust by reference to
either the London Interbank Offered Rate, which will be calculated
differently for the Pool II Loans and the Adjustable Rate Certificates, or
the Treasury Index, which will not necessarily correspond to changes in
one-month LIBOR or the Pass-Through Rates determined pursuant to the
Auction Procedures. Changes in one-month LIBOR or changes in the LIBOR
Index or the Treasury Index may not correlate to each other or to changes
in prevailing interest rates. It is possible that an increased level of
one-month LIBOR could occur simultaneously with a lower level of prevailing
interest rates, which would be expected to result in faster prepayments,
thereby reducing the weighted average life of the Adjustable Rate
Certificates and the Auction Rate Certificates.
Certain of the Pool II Loans were originated with initial Pool II
Mortgage Interest Rates that were based on competitive conditions and did
not equal the sum of the applicable Index and the related Gross Margin. As
a result, the Pool II Mortgage Interest Rates on such Pool II Loans are
more likely to adjust on their first, and possibly subsequent, Change
Dates, subject to the effects of the Periodic Rate Cap and the Lifetime
Cap. Because the Pass-Through Rate on the Adjustable Rate Certificates and
the Auction Rate Certificates is limited by the applicable Net Funds Cap,
on each Remittance Date, limits on changes in the Pool II Mortgage Interest
Rates of the Pool II Loans may limit changes in the Pass-Through Rate on
the Adjustable Rate Certificates and the Auction Rate Certificates.
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<PAGE>
The Net Funds Cap on a Remittance Date will depend, in part, on the
weighted average of the then-current Pool II Mortgage Interest Rates. If
the Pool II Loans bearing higher Mortgage Interest Rates were to prepay,
the weighted average Mortgage Interest Rate of the Pool II Loan, and
consequently the Net Funds Cap, would be lower than otherwise would be the
case.
The projected last Remittance Dates for each Class of Class A
Certificates is as follows:
<TABLE>
<CAPTION>
Class Projected Last Class Projected Last
- ------- Remittance Date ----- Remittance Date
----------------- ----------------
A-1 February 15, 2010 A-9 October 15, 2027
A-2 November 15, 2004 A-10 October 15, 2027
A-3 February 15, 2010 A-11 October 15, 2027
A-4 March 15, 2011 A-12 January 15, 2002
A-5 December 15, 2014 A-13 April 15, 2010
A-6 March 15, 2017 A-14 April 15, 2012
A-7 February 15, 2020 A-15 October 15, 2022
A-8 May 15, 2024 A-16 July 15, 2027
<S> <C> <C> <C>
</TABLE>
The projected last Remittance Date for the Class A-9, Class A-10,
Class A-11, Class A-15 and Class A-16 Certificates is the Remittance Date
following the latest date upon which a Loan in the related Pool matures,
including Subsequent Loans, plus 12 months. The projected last Remittance
Date for each other Class of Class A Certificates is the date on which the
Class Principal Balance of the respective Class would be reduced to zero,
assuming that no prepayments are received on the Loans, that payment of
principal of and interest on each of the Loans is timely received, each
Class of Class A Certificates receives payments of principal as described
herein and the Spread Amount is equal to zero. The weighted average lives
of the Class A Certificates are likely to be shorter than would be the case
if payments actually made on the Loans conformed to the foregoing
assumptions, and the final Remittance Dates with respect to each Class of
Class A Certificates could occur significantly earlier than the last
projected Remittance Dates because (i) Monthly Excess Spread will be used
to make accelerated payments of principal (i.e., Subordination Increase
Amounts) and (ii) the Servicer or MBIA may purchase all of the Loans under
the limited circumstances described herein. In addition, prepayments are
likely to occur on the Loans, which also would shorten the weighted average
life of the Class A Certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of
principal of such security will be repaid to the investor. The weighted
average lives of the Class A Certificates will be influenced by the
priorities established in the Agreement, and by the rate at which principal
payments on the Loans in the related Pool are paid, which may be in the
form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes Principal Prepayments, Curtailments, FHA Payments and
liquidations due to default). Prepayments on mortgage loans are commonly
measured relative to a prepayment standard or model.
The following tables have been prepared assuming that each of the
Pools are comprised of loan groups having the following characteristics:
S-59
<PAGE>
<TABLE>
<CAPTION>
Pool I
Assumed Initial Original Remaining Remaining Amortization Assumed
Cut-off Date Mortgage Term of Term of Term to Method Delivery of
Principal Interest Amortization Amortization Maturity Loans
Balance Rate (in months) (in months) (in months)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. $ 40,292,237.68 11.502% 111 110 110 Level Closing
2. 194,587,148.76 11.007 180 179 179 Level Closing
3. 50,486,814.68 11.071 262 261 261 Level Closing
4. 355,852,169.94 10.464 360 359 359 Level Closing
5. 114,809,860.40 11.110 360 358 177 Balloon Closing
6. 76,054,163.76 10.742 282 281 281 Level July 1996
7. 10,931,720.51 11.110 360 359 179 Balloon July 1996
8. 76,054,163.76 10.742 282 280 280 Level August 1996
9. 10,931,720.51 11.110 360 358 178 Balloon August 1996
</TABLE>
S-60
<PAGE>
<TABLE>
<CAPTION>
Pool II
Remaining
Assumed Initial Original Term of Remaining Assumed
Cut-off Date Mortgage Term of Amortiza- Term to Months to Amortiza-Delivery
Principal Interest Amortization ion Maturity Gross Lifetime Lifetime Rest Rest ion of
Balance Rate (in months) (in months) (in months) Margin Cap Floor Date Frequency Method Loans
- ------------------------------------------------------------------------------------------------------------------------------------
6-month LIBOR
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. $ 4,261,682.45 9.972% 360 355 355 5.954% 15.958% 9.416% 2 6 Level Closing
2. 4,367,366.14 10.164 360 356 356 6.405 16.351 9.425 3 6 Level Closing
3. 10,709,747.58 9.789 359 357 357 6.162 15.883 9.260 4 6 Level Closing
4. 21,672,928.24 9.305 360 359 359 5.948 15.316 8.975 5 6 Level Closing
5. 35,445,993.94 9.259 359 359 359 5.792 15.324 8.915 6 6 Level Closing
6. 35,291,905.53 8.998 360 359 359 5.549 15.054 8.807 7 6 Level Closing
7. 16,190,928.79 9.299 360 359 359 5.811 15.355 8.965 5 6 Level July 1996
8. 16,190,928.79 9.299 360 358 358 5.811 15.355 8.965 4 6 Level August 1996
1-month LIBOR
- ---------------------------
9. $ 6,759,834.00 8.737% 360 356 356 6.047% 14.791% 7.828% 2 3/3/1 Level Closing
10. 7,579,231.19 8.052 360 360 360 6.093 14.909 7.936 3 3/3/1 Level Closing
11. 10,203,484.60 8.095 360 360 360 6.098 14.894 7.909 4 3/3/1 Level Closing
12. 3,555,865.89 8.258 360 359 359 6.082 14.870 7.895 2 3/3/1 Level July 1996
13. 3,555,865.89 8.258 360 358 358 6.082 14.870 7.895 1 3/3/1 Level August 1996
1-year LIBOR
- ---------------------------
14. $ 3,717,815.46 9.062% 360 358 358 5.821% 15.056% 8.783% 4 12 Level Closing
15. 4,734,094.11 8.859 360 360 360 5.761 14.808 8.811 6 12 Level Closing
16. 6,529,288.88 9.057 360 360 360 5.801 15.057 8.917 7 12 Level Closing
17. 3,792,853.18 10.117 360 357 357 5.719 15.763 8.912 11 12 Level Closing
18. 2,720,092.67 9.222 360 359 359 5.778 15.137 8.863 5 12 Level July 1996
19. 2,720,092.67 9.222 360 358 358 5.778 15.137 8.863 4 12 Level August 1996
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Pool III
Assumed Initial Original Remaining Remaining Amortization Assumed
Cut-off Date Mortgage Term of Term of Term to Method Delivery of Loans
Principal Interest Amortization Amortization Maturity
Balance Rate (in months) (in months) (in
months)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. $ 15,078,682.32 12.583% 107 105 105 Level Closing
2. 23,386,269.65 12.530 180 179 179 Level Closing
3. 40,802,106.67 12.525 244 242 242 Level Closing
4. 10,366,470.68 12.537 199 198 198 Level July
1996
5. 10,366,470.68 12.537 199 197 197 Level August
1996
Pool IV
Assumed Initial Original Remaining Remaining Amortization Assumed
Cut-off Date Mortgage Term of Term of Term to Method Delivery
Principal Interest Amortization Amortization Maturity of Loans
Balance Rate (in months) (in months) (in
months)
- --------------------------------------------------------------------------------------------------------------
$ 20,000,000.00 11.501% 330 328 328 Level Closing
</TABLE>
The following tables also have been prepared assuming (i) all distributions
with respect to the Certificates will be made at the scheduled times as
described below under "Description of the Certificates--Distributions on the
Class A Certificates," (ii) distributions on the Class A Certificates are
received in cash on the 15th day of each month, commencing July, 1996, (iii)
prepayments represent payment in full of individual Loans and are received on
the last day of each month (commencing in June, 1996) and include 30 days'
interest thereon at the applicable Mortgage Interest Rate, (iv) the Servicing
Fee and Contingency Fee for each Loan will be 0.25% and 0.25% per annum,
respectively, of the principal balance thereof, (v) no delinquencies or defaults
in payments by Obligors of principal and interest on the Loans are experienced,
(vi) no right of optional termination is exercised except as noted below, (vii)
the Class A Certificates are purchased on June 27, 1996, (viii) one-month LIBOR,
six-month LIBOR and one-year LIBOR remain constant at 5.46%, 5.77% and 6.19%,
respectively, and (ix) the Specified Subordinated Amount (as defined herein
under "Description of the Certificates--Cross-Support and Spread Amount") with
respect to each Pool initially is set at the highest level specified by the
Agreement and thereafter decreases in accordance with the provisions of the
Agreement.
For each Class of Class A Certificates, the scenarios presented below assume
that the Representative exercises its option to establish the Pre-Funding
Account and that the Pre-Funded Amount equals its maximum permitted amount. The
scenarios also assume that the entire Pre-Funded Amount is used to purchase
Subsequent Loans by August, 1996.
The model used in this Prospectus Supplement is a prepayment assumption (the
"Prepayment Assumption") which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. The tables relating to the Pool I,
Pool II and Pool III Certificates are priced at various Home Equity Prepayment
("HEP") assumptions. HEP assumes that a pool of loans prepays in the first month
at a constant prepayment rate ("CPR") that corresponds in CPR to one-tenth the
given HEP percentage and increases by an additional one-tenth each month
thereafter until the tenth month, where it remains at a CPR equal to the given
HEP percentage. With respect to Pool I and Pool II, the "100% Prepayment
Assumption" assumes a constant prepayment rate ("CPR") of 2.3% per annum of the
then outstanding principal balance of the respective Home Equity Loans in the
first month of the life of such Home Equity Loans and an additional 2.3% per
annum in each month thereafter until the tenth month. Beginning in the tenth
month and in each month thereafter during the life of the respective Home Equity
Loans, the 100% Prepayment Assumption assumes
S-62
<PAGE>
CPR of 23% per annum each month. With respect to Pool III, the "100% Prepayment
Assumption" assumes a CPR of 1.7% per annum of the then outstanding principal
balance of the Home Improvement Loans in the first month of the life of such
Home Improvement Loans and an additional 1.7% per annum in each month thereafter
until the tenth month. Beginning in the tenth month and in each month thereafter
during the life of the Home Improvement Loans 100% Prepayment Assumption assumes
a CPR of 17% per annum each month. With respect to Pool IV, the "100% Prepayment
Assumption" assumes a CPR of 8% per annum of the then outstanding principal
balance of the Multifamily Loans in Pool IV each month, commencing in the forty-
ninth month of the life of such Multifamily Loans. As used in the table below,
0% Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption, i.e., no prepayments on the mortgage loans having the
characteristics described below. Correspondingly, 100% Prepayment Assumption
assumes a CPR equal to 100% of the related Prepayment Assumption, 125%
Prepayment Assumption assumes a 125% increase in each of the rates described
above; and so forth. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool, including the related Loans.
Neither the Prepayment Assumption nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Loans included in the Trust. Variations in the actual
prepayment experience and the balance of the Loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such Loans
equals any of the specified percentages of the Prepayment Assumption.
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<PAGE>
CLASS A-1 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 7.22 8/15/09
75% 1.18 10/15/98
100% (2) 0.96 4/15/98
125% 0.82 12/15/97
150% 0.72 10/15/97
CLASS A-2 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 3.86 3/15/04
75% 0.65 8/15/97
100% (2) 0.56 6/15/97
125% 0.50 4/15/97
150% 0.45 3/15/97
CLASS A-3 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 10.56 8/15/09
75% 1.71 10/15/98
100% (2) 1.36 4/15/98
125% 1.14 12/15/97
150% 0.99 10/15/97
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<PAGE>
CLASS A-4 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 14.16 3/15/11
75% 2.72 8/15/99
100% (2) 2.11 11/15/98
125% 1.72 6/15/98
150% 1.46 2/15/98
CLASS A-5 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 15.46 6/15/14
75% 3.96 5/15/01
100% (2) 3.03 3/15/00
125% 2.45 7/15/99
150% 2.04 12/15/98
CLASS A-6 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 19.24 11/15/16
75% 5.39 5/15/02
100% (2) 4.11 1/15/01
125% 3.30 2/15/00
150% 2.74 6/15/99
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<PAGE>
CLASS A-7 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 21.93 11/15/19
75% 6.85 6/15/04
100% (2) 5.23 7/15/02
125% 4.19 5/15/01
150% 3.46 6/15/00
CLASS A-8 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED EARLIEST
OF PREPAYMENT AVERAGE MATURITY RETIREMENT
ASSUMPTION LIFE (YEARS) DATE (1)
0% 25.79 5/15/24 2/15/24
75% 9.68 6/15/08 12/15/07
100% (2) 7.43 9/15/05 5/15/05
125% 5.95 11/15/03 9/15/03
150% 4.90 8/15/02 6/15/02
CLASS A-9 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED EARLIEST
OF PREPAYMENT AVERAGE MATURITY RETIREMENT
ASSUMPTION LIFE (YEARS) DATE (1)
0% 28.86 4/15/26 2/15/24
75% 14.81 12/15/17 12/15/07
100% (2) 11.78 8/15/13 5/15/05
125% 9.54 12/15/10 9/15/03
150% 7.87 7/15/08 6/15/02
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<PAGE>
CLASS A-10 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED EARLIEST
OF PREPAYMENT AVERAGE MATURITY RETIREMENT
ASSUMPTION LIFE (YEARS) DATE (1)
0% 21.45 5/15/26 2/15/24
75% 5.07 12/15/20 12/15/07
100% (2) 3.83 11/15/15 5/15/05
125% 3.06 12/15/11 9/15/03
150% 2.53 2/15/09 6/15/02
CLASS A-11 CERTIFICATES (3)
PERCENTAGE WEIGHTED EXPECTED EARLIEST
OF PREPAYMENT AVERAGE MATURITY RETIREMENT DATE (1)
ASSUMPTION LIFE (YEARS)
0% 21.45 5/15/26 2/15/24
75% 5.07 12/15/20 12/15/07
100% (2) 3.83 11/15/15 5/15/05
125% 3.06 12/15/11 9/15/03
150% 2.53 2/15/09 6/15/02
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<PAGE>
CLASS A-12 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 1.34 12/15/99
75% 0.64 7/15/97
100% (2) 0.58 6/15/97
125% 0.52 5/15/97
150% 0.48 4/15/97
CLASS A-13 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 8.29 3/15/09
75% 2.80 9/15/01
100% (2) 2.26 8/15/00
125% 1.90 12/15/99
150% 1.65 5/15/99
CLASS A-14 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED
OF PREPAYMENT AVERAGE MATURITY
ASSUMPTION LIFE (YEARS)
0% 13.94 7/15/11
75% 6.44 4/15/04
100% (2) 5.20 11/15/02
125% 4.31 10/15/01
150% 3.65 1/15/01
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CLASS A-15 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED EARLIEST
OF PREPAYMENT AVERAGE MATURITY RETIREMENT
ASSUMPTION LIFE (YEARS) DATE (1)
0% 17.55 7/15/16 7/15/16
75% 11.51 6/15/15 12/15/07
100% (2) 9.74 1/15/14 5/15/05
125% 8.30 5/15/12 9/15/03
150% 7.15 10/15/10 6/15/02
CLASS A-16 CERTIFICATES
PERCENTAGE WEIGHTED EXPECTED EARLIEST
OF PREPAYMENT AVERAGE MATURITY RETIREMENT
ASSUMPTION LIFE (YEARS) DATE (1)
0% 15.30 10/15/23 10/15/23
75% 9.94 8/15/23 12/15/07
100% (2) 8.96 7/15/23 5/15/05
125% 8.18 5/15/23 9/15/03
150% 7.56 1/15/23 6/15/02
________________________
(1) Assuming early termination of the related Pool of Loans when the aggregate
principal balance thereof declines to a level equal to 10% of the sum of
(i) the Original Pool Principal Balance and (ii) the original Pre-Funded
Amount.
(2) Pricing Assumption.
(3) Reflects experience of the Auction Rate Certificates in the aggregate,
without taking into account random distributions of principal by lot or
distributions of principal in integral multiples of $25,000. Therefore, it
is unlikely that any individual holder of an Auction Rate Certificate will
realize the Weighted Average Life and Expected Maturity set forth for the
Percentage of Prepayment Assumptions listed above.
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DESCRIPTION OF THE CERTIFICATES
The Class A Certificates will be issued pursuant to the Agreement, a
copy of which will be included as an exhibit to a Current Report on Form 8-
K to be filed by the Representative on behalf of the Trust. The following
summaries describe material provisions of the Certificates and the
Agreement, but do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement. Terms used herein and not otherwise defined will have the
meanings set forth in the Agreement.
GENERAL
The Pool I Certificates generally will represent the right to receive
payments distributable on or with respect to the Home Equity Loans in Pool
I. The Pool II Certificates generally will represent the right to receive
payments distributable on or with respect to the Home Equity Loans in Pool
II. The Pool III Certificates generally will represent the right to
receive payments distributable on or with respect to the Home Improvement
Loans in Pool III. The Pool IV Certificates generally will represent the
right to receive payments distributable on or with respect to the
Multifamily Loans in Pool IV. The Trust also will issue the Class R
Certificates. Only the Class A Certificates are offered hereby.
However, as a result of the cross-support provisions described herein,
the holders of each Class of Certificates may receive cash as credit
support from any Loan in any Pool. See "--Cross Support Provisions and
Spread Amount." Also, amounts, if any, on deposit in the Spread Account
will be available to cover shortfalls in amounts otherwise distributable to
Certificateholders, regardless of Pool.
The Certificates will not represent obligations of the Representative,
the Originators or any of their respective affiliates. The Class A
Certificates (other than the Auction Rate Certificates) will be issued in
book-entry form in minimum denominations of $1,000 original principal
amount and integral multiples of $1,000 in excess thereof and the Auction
Rate Certificates will be issued in book-entry form in minimum
denominations of $25,000 original principal amount and integral multiples
of $25,000 in excess thereof, except that one certificate of each Class of
Class A Certificates may be issued in a different denomination and, if so
issued, will be held in physical form.
Definitive Class A Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the
election of the Trustee, at the office of a Certificate Registrar appointed
by the Trustee. No service charge will be made for any registration of
exchange or transfer, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
The assets of the Trust will consist of (a) the Home Equity Loans,
Home Improvement Loans and, Multifamily Loans that from time to time are
subject to the Agreement; (b) amounts that from time to time are required
by the Agreement to be deposited in the Certificate Account, the Principal
and Interest Account, the Expense Account, the Insurance Account, the FHA
Premium Account, the Spread Account, the Pre-Funding Account and the
Capitalized Interest Account, or to be invested in Permitted Investments;
(c) all rights under any insurance policy covering a Loan or the related
Mortgaged Property; (d) property and any proceeds thereof acquired by
foreclosure of a Loan, deed in lieu of foreclosure or a comparable
conversion; and (e) the MBIA Policies and any proceeds thereof.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
On the 15th day of each month or, if such 15th day is not a Business
Day, the first Business Day immediately following, commencing in July 1996
(each such day being a "Remittance Date," provided, however, that in no
event shall the Remittance Date occur less than three business days
following the Determination Date), until the Class Principal Balance of
each Class of Class A Certificates has been reduced to zero, the Trustee or
Paying Agent will be required to distribute to the persons in whose name a
Class A Certificate (other than the Auction Rate Certificates) is
registered at the close of business on the last day of the month
immediately preceding the month of
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the related Remittance Date (the "Record Date"), such Holder's Percentage
Interest multiplied by that portion of the Distribution Amount for the
applicable Pool allocable to the respective Class of Class A Certificates
for such Remittance Date. Any Pre-Funded Amount remaining at the close of
business on September 25, 1996 will be distributed by or on behalf of the
Trustee on the Special Remittance Date (together with accrued interest) at
the applicable Pass-Through Rates on the amount of such prepayment) to the
Classes of Class A Certificates then entitled to receive payments of
principal as described herein under "--The Distribution Amounts." Such
distribution will be made to each person in whose name a Class A
Certificate of any such Class is registered on August 31, 1996. For so
long as the Class A Certificates are in book-entry form with DTC, the only
"Holder" of the Class A Certificates will be Cede. See "--Book-Entry
Registration of Class A Certificates."
With respect to the Auction Rate Certificates, on each Remittance
Date, the Trustee or Paying Agent will be required to distribute to the
persons in whose name an Auction Rate Certificate is registered at the
close of business on the related Record Date, such Holder's Percentage
Interest multiplied by that portion of the Current Interest Requirement
allocable to the respective Class of Auction Rate Certificates for such
Remittance Date. The remainder of the Distribution Amount being
distributed to such Class of Auction Rate Certificates on such Remittance
Date will be allocated as principal to the specific Certificates of such
Class selected no later than 5 business days prior to the related
Remittance Date by lot or such other manner as may be determined, which
allocations will be made only in amounts equal to $25,000 and integral
multiplies of $25,000 in excess thereof.
Notwithstanding the foregoing, if on the Special Remittance Date the
amount of principal allocated to the Auction Rate Certificates is not equal
to $25,000 or an integral multiple of $25,000 in excess thereof, the entire
amount (if less than $25,000) or the amount exceeding an integral multiple
of $25,000 will, instead, be distributed to the Adjustable Rate
Certificates.
The "Class Principal Balance" of a Class of Certificates as of any
date of determination is the original principal balance of such Class of
Certificates, less (i) the sum of all amounts (including the principal
portion of any related Insured Payments and, with respect to the Pool III
Certificates, FHA Payments) previously distributed to the Trustee as
principal on the applicable Class of Certificates, and (ii) any actual loss
of principal suffered by the related Class A Certificateholders due to the
failure of MBIA to perform its obligations under the related MBIA Policy.
Any such loss with respect to a Loan will be allocated among all then
outstanding Classes of Class A Certificates of the related Pool pro rata
based upon the then outstanding Class Principal Balances of such Classes.
A Class A Certificateholder's "Percentage Interest" is that fraction,
expressed as a percentage, the numerator of which is the original
denomination of such Class A Certificateholder's Class A Certificate and
the denominator of which is the original aggregate Class Principal Balance
of the respective Class of Class A Certificate.
A "Business Day" is any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in the States of New York, New
Jersey, Minnesota or Wisconsin are authorized or obligated by law or
executive order to be closed.
THE DISTRIBUTION AMOUNTS
On any Remittance Date, the "Distribution Amount" for each Pool will
equal the sum of (i) the Current Interest Requirement for such Pool, (ii)
the Principal Distribution Amount for such Pool, (iii) the Carry-Forward
Amount for such Pool, and (iv) any amount received by the Trustee from the
Servicer that constitutes a Monthly Advance with respect to a Loan in such
Pool and that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the Bankruptcy Code in
accordance with a final, nonappealable order of a court having competent
jurisdiction. The Distribution Amount does not include any
Certificateholders' Interest Carryover.
On any Remittance Date the Current Interest Requirement for a Class of
Certificates will equal 30 days' interest (or, in the case of the
Adjustable Rate and Auction Rate Certificates, the actual number of days
since the
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preceding Remittance Date, or since the Closing Date with respect to the
first Remittance Date), at the related Pass-Through Rate on the respective
Class Principal Balance immediately prior to the related Remittance Date
(calculated on the basis of a 360-day year, consisting of twelve 30-day
months or, in the case of the Adjustable Rate and Auction Rate
Certificates, the actual number of days elapsed since interest was last
paid or, for the first Remittance Date, since June 15, 1996 with respect to
the Class A-10 Certificates and since the Closing Date with respect to the
Class A-11 Certificates). On any Remittance Date, (i) the "Pool I Current
Interest Requirement" will equal the sum of the Class A-1 through Class A-9
Current Interest Requirements, (ii) the "Pool II Current Interest
Requirement" will equal the sum of the Class A-10 through Class A-11
Current Interest Requirements, (iii) the "Pool III Current Interest
Requirement" will equal the sum of the Class A-12 through Class A-15
Current Interest Requirements and (iv) the "Pool IV Current Interest
Requirement" will equal the Class A-16 Current Interest Requirement.
Notwithstanding the foregoing, if a principal prepayment is made to a Class
of Class A Certificates on the Special Remittance Date, each such Class
also will receive on such date accrued interest at the applicable Pass-
Through Rate on the amount of such prepayment. Further, the Current
Interest Requirement for each such Class for the October, 1996 Remittance
Date will be based on the related Class Balance after giving effect to such
principal prepayment.
For the first Remittance Date the Class A-10 Certificates will bear
interest at the rate of 5.78% per annum. For each Remittance Date
thereafter, the Class A-10 Pass-Through Rate will equal a per annum rate
equal to the sum of LIBOR and 0.32% (or 0.64% for each Remittance Date
occurring after the Optional Servicer Termination Date), subject to the Net
Funds Cap (but in no event exceeding 14.50% per annum).
For the first Remittance Date the Class A-11 Certificates will bear
interest at the rate of 5.46% per annum. For each Remittance Date
thereafter, the Class A-11 Certificates will bear interest based upon the
Auction Procedures described in Annex I hereto, subject to the Net Funds
Cap (but in no event exceeding 14.50% per annum).
If on any Remittance Date the Pass-Through Rate for a Class of
Adjustable Rate or Auction Rate Certificates is based upon the Net Funds
Cap, the excess of (i) the amount of interest such Class of Certificates
would be entitled to receive on such Remittance Date had interest been
calculated based on LIBOR plus the applicable margin or the Auction Rate,
as the case may be (but in no event exceeding 14.50% per annum), over (ii)
the amount of interest such Class will receive on such Remittance Date at
the Net Funds Cap, together with the unpaid portion of any such excess from
prior Remittance Dates (and interest accrued thereon at the then applicable
Pass-Through Rate, without giving effect to the Net Funds Cap but in no
event exceeding 14.50% per annum) is referred to herein as the
"Certificateholders' Interest Carryover." Any Certificateholders' Interest
Carryover will be paid on future Remittance Dates only as set forth herein
under "The Agreement--Flow of Funds." The ratings of the Adjustable Rate
Certificates and the Auction Rate Certificates do not address the
likelihood of the payment of the amount of any Certificateholder's Interest
Carryover. The MBIA Policy's do not insure payment of Certificateholder's
Interest Carryover.
The Carry-Forward Amount for each Pool with respect to any Remittance
Date will equal the sum of (i) the amount, if any, by which (x) the
Distribution Amount for such Pool as of the immediately preceding
Remittance Date exceeded (y) the amount of the actual distribution to the
Holders of the Certificates of such Pool made on such Remittance Date (less
the amount of Insured Payments, if any, on such date), and (ii) interest on
the amount, if any, described in clause (i) at one-twelfth the applicable
Pass-Through Rate for the related Class of Certificates.
The Carry-Forward Amounts are primarily intended to measure the amount
of money for which MBIA is entitled to reimbursement. As set forth herein,
MBIA is subrogated to the rights of Class A Certificateholders to receive
payments under the Class A Certificates to the extent of any Insured
Payments made under the applicable MBIA Policy. See "The MBIA Policies and
MBIA." This right of subrogation, however, is subordinate to the right of
the Class A Certificateholders to receive the entire Distribution Amount on
each Remittance Date.
On any Remittance Date, the Principal Distribution Amount for each
Pool of Certificates will equal the excess of:
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(X) the sum, without duplication, of the following:
(i) each payment of principal received by the Servicer or any
Subservicer (exclusive of Curtailments, Principal Prepayments and
amounts described in clause (iii) hereof) during the related Due
Period with respect to the Loans of the related Pool,
(ii) all Curtailments and all Principal Prepayments received by
the Servicer or any Subservicer during the related Due Period with
respect to the Loans of the related Pool,
(iii) the principal portion of all Insurance Proceeds, Released
Mortgaged Property Proceeds and Liquidation Proceeds net of certain
reimbursements to the Servicer and amounts required by law to be
released to the related Mortgagor ("Net Liquidation Proceeds")
received by the Servicer or any Subservicer during the related Due
Period with respect to the Loans of the related Pool (and, with
respect to the Pool III Loans, the principal portion of all FHA
Payments received by the Claims Administrator with respect to
principal during the related Due Period),
(iv) that portion of the purchase price for any Loan of the
related Pool repurchased pursuant to the Agreement which represents
principal and any Substitution Adjustments, in either case to the
extent received by the Trustee as of the related Determination Date,
(v) any proceeds representing principal received by the Trustee
in connection with the liquidation of a Pool or the termination of the
Trust,
(vi) the amount of any Subordination Deficit (as defined below
under "--Spread Amount") with respect to a Pool for such Remittance
Date,
(vii) any moneys released from the Pre-Funding Account on the
July, August and September, 1996 Remittance Date as a prepayment of
the Certificates of the related Pool and
(viii) the amount of any Subordination Increase Amount (as
defined below under "--Cross-Support Provisions and Spread Amount")
with respect to a Pool for such Remittance Date, OVER
(Y) the amount of any Subordination Reduction Amount (as
defined below under "--Cross-Support Provisions and Spread Amount")
with respect to a Pool for such Remittance Date.
In the event any amounts referenced in clause (iv) of the definition
of Distribution Amount or clause (iv) of the definition of Principal
Distribution Amount are covered by Insured Payments or any portion thereof,
payment of such amounts will be disbursed to the trustee in bankruptcy
named in the final order of the court exercising jurisdiction and not to
any Class A Certificateholder directly unless such Class A
Certificateholder has returned principal or interest paid on a Class A
Certificate to such trustee in bankruptcy, in which case such payment will
be disbursed to such Class A Certificateholder.
The definitions of the Principal Distribution Amount for each Pool are
determined with regard to actual amounts received on the Loans and without
any regard to a schedule for the recovery of principal.
Pursuant to the MBIA Policies, MBIA has agreed to make Insured
Payments on each Remittance Date. See "The MBIA Policies and MBIA." MBIA
DOES NOT INSURE PAYMENT OF CERTIFICATEHOLDERS' INTEREST CARRYOVER.
The Agreement provides that the Trustee or Paying Agent will (i)
receive as attorney-in-fact of each Holder of the Class A Certificates any
Insured Payment from MBIA and (ii) disburse such payment pursuant to the
Agreement. The Agreement provides that to the extent MBIA makes Insured
Payments, either directly or indirectly
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(as by paying through the Trustee), to the Holders of the Class A
Certificates, MBIA will be subrogated to the rights of such Holders with
respect to such Insured Payments, will be deemed, to the extent of the
payments so made, to be a registered Holder of Class A Certificates and
will receive reimbursement for such Insured Payments as provided in the
Agreement, but only from the sources (other than Insured Payments) and in
the manner provided in the Agreement.
Each Holder of a Class A Certificate is required by the Agreement to
notify the Trustee promptly upon the receipt of a court order to the effect
that amounts previously received by such Class A Certificateholder and
described in clause (iv) of the definition of Principal Distribution Amount
or clause (iv) of the definition of Distribution Amount constitute voidable
preferences and to provide a copy of such order with such notice.
As set forth above, clause (i) of the definition of Principal
Distribution Amount for each Pool includes only payments of principal
actually received by the Servicer or any Subservicer. Neither the Servicer
nor MBIA is required to advance any delinquent payments of principal.
Accordingly, the Certificateholders will not receive delinquent payments of
principal until such time as the delinquency is cured or, if such
delinquency is not cured, following the time such Loan becomes a Liquidated
Loan or, with respect to 90 Day Delinquent FHA Loans, following the time
the related FHA Payment is received.
CROSS-SUPPORT PROVISIONS AND SPREAD AMOUNT
As a result of the cross-support provisions described below, on each
Remittance Date the "Monthly Excess Spread" for each Pool of Loans (i.e.,
----
an amount generally equal to the interest due on the Loans remaining after
each Class of Certificates in the related Pool has been allocated its
interest for such Remittance Date and certain expenses of the Trust have
been paid) and certain other amounts (collectively, the "Total Monthly
Excess Cashflow") will be available to fund any shortfalls in amounts
required to be distributed to Certificates of the related Pool and for
Certificates of any other Pool. Any remaining Total Monthly Excess
Cashflow, net of certain amounts used to reimburse MBIA, will be applied in
the following order of priority on such Remittance Date:
(i) first, to make accelerated payments of principal to the
Class A Certificates of the related Pool until the Subordinated Amount
(as defined below) of such Pool equals its Specified Subordinated
Amount (as defined below);
(ii) second, to make accelerated payments of principal to the
Class A Certificates of the other Pools until the Subordinated Amount
of each such Pool equals its related Specified Subordinated Amount
(the amount of Monthly Excess Spread applied from one Pool to make
accelerated payments of principal on another Pool is the
"Subordination Increase Amount" for such latter Pool);
(iii) third, to make deposits into the Spread Account until the
amount therein is at its required level; and
(iv) fourth, to reimburse the Servicer for certain amounts owing
to it, to pay the holders of the Adjustable Rate and Auction Rate
Certificates any Certificateholders' Interest Carryover owing for such
Remittance Date and all prior Remittance Dates (but only with respect
to distributions relating to Pool II Home Equity Loans), and to pay
any remainder to the holders of the Class R Certificates.
Notwithstanding the foregoing, if the level of delinquencies for the
Pool III Loans exceeds certain specified levels, any Monthly Excess Spread
relating to the Pool III Loans remaining after the application described in
clause (i) above will be deposited into the Spread Account, until the
Spread Account reaches certain specified levels. The amounts so deposited
will be available to fund any Insured Payments relating to the Class A
Certificates otherwise required to be made on a Remittance Date, without
distinction as to Pool. Furthermore, certain excess interest otherwise
payable to the holders of the Class R Certificates with respect to the
Loans will, instead, be deposited into the Spread Account.
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The acceleration feature described above is intended to create, with
respect to each Pool of Loans, an amount (the "Spread Amount"), resulting
from, and generally equal to, the excess of the aggregate principal
balances of the Loans of the related Pool, over the principal balances of
the Certificates of the related Pool. Applying Monthly Excess Spread to
payment of principal on the Class A Certificates has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Loans. As a result of the foregoing, the holders of
each Class of Class A Certificates may receive cash as credit support from
any Loan in any Pool.
For any Remittance Date and for each Pool, the difference, if any,
between (x) the sum of (i) the aggregate principal balances of the Loans of
the related Pool as of the close of business on the last day of the related
Due Period and (ii) any amount on deposit in the Pre-Funding Account at
such time and allocated to the related Pool and (y) the aggregate principal
balances of the Certificates of the related Pool after making all
distributions on such Remittance Date is the "Subordinated Amount" with
respect to such Pool as of such Remittance Date.
Pursuant to the Agreement and an insurance agreement relating to the
Certificates among MBIA, The Money Store Inc., the Originators and the
Trustee (the "Insurance Agreement"), Monthly Excess Spread will be applied
as accelerated payments of principal on the Class A Certificates until the
Subordinated Amount for each Pool has increased to the level required by
the Agreement. The required level of the Subordinated Amount with respect
to a Pool of Loans and Remittance Date is the "Specified Subordinated
Amount" with respect to such Pool of Loans and Remittance Date. The
Agreement generally provides that the Specified Subordinated Amount may,
over time, decrease, or increase, subject to certain floors, caps and
triggers. In addition, the level of the Specified Subordinated Amount with
respect to each Pool of Loans may be increased to a limited extent in
connection with the delivery of Subsequent Loans to the related Pool.
Following the Funding Period, cash up to the amount of any such increase
may be deposited in the Spread Account.
The Agreement also provides that, except in limited circumstances, if
the aggregate amount of Monthly Excess Spread applied to payments of
principal on the Certificates exceeds the amount specified therein (such
amount the "Maximum Subordinated Amount") no further Monthly Excess Spread
will be applied to payment of principal on the Certificates and the
Specified Subordinated Amount will thereafter be zero.
If with respect to any Pool of Loans and any Remittance Date, the
Subordinated Amount exceeds the related Specified Subordinated Amount (the
amount of such excess being referred to as the "Excess Subordinated Amount"
with respect to such Pool of Loans and Remittance Date), then any amounts
relating to principal which would otherwise be distributed to the Class A
Certificates of the related Pool on such Remittance Date will instead be
distributed to Certificates of other Pools in an amount up to such Excess
Subordinated Amount. The amount of principal received on a Pool of Loans
and transferred to the other Pools pursuant to this provision is referred
to as the "Subordination Reduction Amount" with respect to the Pool from
which such amounts are being transferred.
The Subordinated Amount for a Pool constitutes the first level of
credit support for the related Certificates. If any Loan becomes a
Liquidated Loan, the Net Liquidation Proceeds related thereto and allocated
to principal may be less than the principal balance of the related Loan.
The amount of any such insufficiency is an "Unrecovered Portion." The
occurrence of an Unrecovered Portion will reduce the Subordinated Amount
with respect to the related Pool of Loans. However, Certificateholders of
the related Pool will be entitled to receive Monthly Excess Spread, either
from the related Pool of Loans or the other Pools, in an amount equal to
the Unrecovered Portion, subject to the limits described above. Therefore,
if sufficient Monthly Excess Spread is available (either on the current
Remittance Date or on future Remittance Dates), Certificateholders will not
realize a loss with respect to an Unrecovered Portion.
If insufficient Monthly Excess Spread is available to pay Unrecovered
Portions, the related Pool may experience a Subordination Deficit. The
Agreement defines a "Subordination Deficit" with respect to a Pool of Loans
and Remittance Date to be the amount, if any, by which (x) the Principal
Balances of the Class A Certificates of the related Pool, after taking into
account all distributions to be made on such Remittance Date (other than
amounts payable with respect to principal under the applicable MBIA Policy)
exceeds (y) the aggregate principal
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balances of the related Pool of Loans as of the close of business on the
last day of the prior Due Period plus the amount, if any, on deposit in the
Pre-Funding Account on such date and allocated to such Pool of Loans. The
Trustee is required to make a claim for an Insured Payment under the
related MBIA Policy with respect to any Remittance Date as to which the
Trustee has determined that a Subordination Deficit will occur for the
purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Certificateholders of the related Pool on such Remittance
Date. The MBIA Policies are thus similar to the provisions described above
insofar as the MBIA Policies guarantee ultimate, rather than current,
payment of the amounts of any Unrecovered Portions.
Investors in the Class A Certificates should realize that, under
extreme loss or delinquency scenarios applicable to the related Pool of
Loans, so long as a Subordination Deficit has not resulted, they may
temporarily receive no distributions of principal.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT AND CERTAIN OTHER RISKS
In general, the protection afforded by the subordination provisions
and by the MBIA Policies is protection for credit risk and not for
prepayment risk and does not apply to the Certificateholders' Interest
Carryover. The subordination provisions may not be adjusted, nor may a
claim be made under the MBIA Policies to guarantee or insure that any
particular rate of prepayment is experienced by the Trust.
REPORTS TO CLASS A CERTIFICATEHOLDERS
On each Remittance Date, the Trustee will be required to forward to
each Class A Certificateholder (which will be Cede, as registered Holder of
the Class A Certificates and the nominee of DTC, unless and until
Definitive Certificates are issued), a statement which will set forth,
among other things:
(a) the Distribution Amounts for each Pool on such Remittance
Date, in the aggregate and by component and listed separately for the
portions relating to each Class of Class A Certificates;
(b) the Principal Distribution Amounts for each Pool for such
Remittance Date, in the aggregate and listed separately for the
portion relating to each Class of Class A Certificates;
(c) the Current Interest Requirements for each Class of
Certificates for such Remittance Date;
(d) the total amount of any Insured Payments included in the
Distribution Amount for each Pool on such Remittance Date, listed
separately for each Class of Class A Certificates;
(e) the Subordinated Amount and Specified Subordinated Amount for
such Remittance Date, listed separately for each Pool;
(f) the Principal Balances for each Class of Certificates and the
Principal Factors after giving effect to the distribution of the
Principal Distribution Amounts on such Remittance Date;
(g) the number and aggregate Principal Balances of Loans in each
Pool delinquent (i) 31 to 59 days, (ii) 60 days to 89 days and (iii)
90 days or more as of the end of the related Due Period;
(h) the number and aggregate Principal Balances of all Loans in
each Pool in foreclosure or other similar proceedings and the number
and aggregate Principal Balance of all Loans in each Pool relating to
any REO Properties;
(i) the applicable rate of LIBOR for such Remittance Date and the
applicable Auction Rate for such Remittance Date;
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(j) the Pass-Through Rate for each Class of Auction Rate
Certificates and each Class of Adjustable Rate Certificates for such
Remittance Date and if such Pass-Through Rate for any such Class was
based on the Net Funds Cap, what it would be if based the Auction Rate
or on LIBOR plus the applicable margin, as the case may be;
(k) the Net Funds Cap for such Remittance Date, stated separately
for each Class of Auction Rate and Adjustable Rate Certificates;
(l) if the Pass-Through Rate for any Class of Adjustable Rate
Certificates or Auction Rate Certificates for such Remittance Date is
based on the Net Funds Cap, the amount of any Certificateholders'
Interest Carryover allocated to such Class of Certificates for such
Remittance Date;
(m) the amount of the distribution, if any, allocable to
Certificateholders' Interest Carryover and the amount of any unpaid
Certificateholders' Interest Carryover for all prior Remittance Dates
after giving effect to such distribution for each Class of Adjustable
Rate Certificates and Auction Rate Certificates; and
(n) with respect to the FHA Loans, the dollar amounts of Claims
filed, paid and denied during the related Due Period.
As to any Remittance Date, the "Principal Factor" for a Class of
Certificates will be a fraction, expressed as a percentage, the numerator
of which is the Class Principal Balance for such Class (after giving effect
to the distribution of the Principal Distribution Amount on such Remittance
Date), and the denominator of which is the original Class Principal Balance
for such Class.
In the case of information furnished pursuant to clauses (a) through
(c) above, the amounts will be expressed as a dollar amount per Certificate
with a $1,000 principal denomination.
Within 90 days after the end of each calendar year, the Trustee will
be required to mail to each person who at any time was a Class A
Certificateholder during such year, a statement containing the information
set forth in clauses (a)-(c) above aggregated for such calendar year, or,
in the case of each person who was a Class A Certificateholder for a
portion of such calendar year, setting forth such information for each
month thereof.
All reports prepared by the Trustee will be based upon statements
supplied to the Trustee by the Servicer and the Claims Administrator.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the "Book-
Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificate Owners") will hold their Class A
Certificates through DTC in the United States, or Cedel Bank or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Class A Certificates and will initially
be registered in the name of Cede & Co., the nominees of DTC. Cedel Bank
and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Cedel Bank's and Euroclear's
names on the books of their respective depositaries which in turn will hold
such positions in customers' securities accounts in the depositaries' names
on the books of DTC. Citibank N.A. will act as depositary for Cedel Bank
and Morgan Guaranty Trust Company of New York, Brussels Office, will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing original Certificate Principal Balances of
$1,000 and integral multiples of $1,000 in excess thereof (except for the
Auction Rate Certificates, which may be held in minimum denominations
representing original Certificate Principal Balances of $25,000 and
integral multiplies of $25,000 in excess thereof). Except as described
below, no person acquiring
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a Book-Entry Certificate (each, a "beneficial owner") will be entitled to
receive a physical certificate representing such Certificate (a "Definitive
Class A Certificate"). Unless and until Definitive Class A Certificates
are issued, it is anticipated that the only "Certificateholder" of the
Class A 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.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm that acts as
agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's Financial
Intermediary is not a DTC participant and on the records of Cedel Bank or
Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC
is required to make book-entry transfers among Participants on whose behalf
it acts with respect to the Class A Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Class A
Certificates. Participants and indirect participants with whom Certificate
Owners have accounts with respect to Class A Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners.
Accordingly, although Certificate Owners will not possess certificates, the
Rules provide a mechanism by which Certificate Owners will receive
distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below.
Unless and until Definitive Class A Certificates are issued, Certificate
Owners who are not Participants may transfer ownership of Class A
Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer Class A
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Class A Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with
DTC's normal procedures, transfers of ownership of Class A Certificates
will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Certificate Owners.
Because of time zone differences, credits of securities received in
Cedel Bank or Euroclear as a result of a transaction with a Participant
will be made during subsequent securities settlement processing and dated
the business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Cedel Bank Participants on such
business day. Cash received in Cedel Bank or Euroclear as a result of
sales of securities by or through a Cedel Bank Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be
available in the relevant Cedel Bank or Euroclear cash account only as of
the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Certificates, see "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex III hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between Cedel Bank Participants and Euroclear
Participants will occur in accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel Bank
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
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Depositary; however, such cross market transactions will require delivery
of instructions to the relevant European international clearing system by
the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or
receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Cedel Bank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-
Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry
Certificates will be subject to the rules, regulations and procedures
governing DTC and DTC participants as in effect from time to time.
Cedel Bank is incorporated under the laws of Luxembourg as a
professional depository. Cedel Bank holds securities for its participating
organizations ("Cedel Bank Participants") and facilitates the clearance and
settlement of securities transactions between Cedel Bank Participants
through electronic book-entry changes in accounts of Cedel Bank
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Cedel Bank in any of 28
currencies, including United States dollars. Cedel Bank provides to its
Cedel Bank Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel Bank interfaces
with domestic markets in several countries. As a professional depository,
Cedel Bank is subject to regulation by the Luxembourg Monetary Institute.
Cedel Bank Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Cedel Bank is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Cedel Bank Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York
(the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers
and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The
Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts
of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions
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only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing such payments to the
beneficial owners of the Book-Entry Certificates that it represents and to
each Financial Intermediary for which it acts as agent. Each such
Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Certificates held through Cedel Bank or Euroclear will be
credited to the cash accounts of Cedel Bank Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures,
to the extent received by the Relevant Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax
laws and regulations. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for
such Book-Entry Certificates. In addition, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may
be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to
beneficial owners upon request, in accordance with the rules, regulations
and procedures creating and affecting the Depository, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates of such
beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Class A
Certificates are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Certificates under the Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Certificates, Cedel Bank or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a Cedel Bank Participant
or Euroclear Participant only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Class A
Certificates which conflict with actions taken with respect to other Class
A Certificates.
Definitive Class A Certificates will be issued to beneficial owners of
the Book-Entry Certificates, or their nominees, rather than to DTC, only if
(a) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Depositor or the Trustee is unable to locate a
qualified successor, (b) the Depositor, at its sole option, with the
consent of the Trustee, elects to terminate a book-entry system through DTC
or (c) after the occurrence of an Event of Servicing Termination (as
defined herein), beneficial owners having Percentage Interests aggregating
not less than 51% of the aggregate Class A Principal Balance of the Book-
Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of
a book-entry system through DTC (or a successor thereto) is no longer in
the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Class A Certificates. Upon surrender by DTC of the global
certificate or certificates representing the
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Book-Entry Certificates and instructions for re-registration, the Trustee
will issue Definitive Class A Certificates, and thereafter the Trustee will
recognize the holders of such Definitive Class A Certificates and
Certificateholders under the Agreement.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Cedel Bank and Euroclear, they are under no obligation
to perform or continue to perform such procedures and such procedures may
be discontinued at any time.
None of the 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 such beneficial ownership interests.
THE MBIA POLICIES AND MBIA
The following information has been furnished by MBIA for use herein.
The MBIA Policies unconditionally and irrevocably guarantee to any
Owner (as described below) that an amount equal to each full and complete
Insured Payment will be received by the Trustee, on behalf of the Owners,
for distribution by the Trustee to each Owner of each Owner's proportionate
share of the Insured Payment. MBIA's obligations under the MBIA Policies
with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee.
Insured Payments shall be made only at the time set forth in the MBIA
Policies and no accelerated Insured Payments shall be made regardless of
any acceleration of the Class A Certificates, unless such acceleration is
at the sole option of MBIA. See "The Agreement--Termination; Purchase of
Loans" herein.
Notwithstanding the foregoing paragraph, the MBIA Policies do not
cover shortfalls, if any, attributable to the liability of the Trust or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability). Further, the MBIA Policies do not guaranty
payment of any Certificateholders' Interest Carryover.
MBIA will pay any Insured Payment that is a Preference Amount on the
Business Day (as described below) following receipt on a Business Day by
the Fiscal Agent (as defined below) of (i) a certified copy of such order,
(ii) an opinion of counsel satisfactory to MBIA that such order is final
and not subject to appeal, (iii) an assignment in such form as is
reasonably required by MBIA, irrevocably assigning to MBIA all rights and
claims of the Owner relating to or arising under the applicable Class of
Class A Certificates against the debtor which made such preference payment
or otherwise with respect to such preference payment and (iv) appropriate
instruments to effect the appointment of MBIA as agent for such Owner in
any legal proceeding related to such preference payment, such instruments
being in a form satisfactory to MBIA, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they
will be deemed to be received on the following Business Day. Such payments
shall be disbursed to the receiver or trustee in bankruptcy named in the
final order of the court exercising jurisdiction on behalf of the Owner and
not to any Owner directly unless such Owner has returned principal or
interest paid on the applicable Class of Class A Certificate to such
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
MBIA will pay any other amount payable under the MBIA Policies no
later than 12:00 noon New York City time on the later of the Remittance
Date on which the Distribution Amount is due or the Business Day following
receipt in New York, New York on a Business Day by State Street Bank and
Trust Company, N.A., as Fiscal Agent for MBIA or any successor fiscal agent
appointed by MBIA (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City
time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is
not in proper form or is otherwise insufficient for the purpose of making
claim under the MBIA Policies, such Notice shall
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be deemed not to have been received by the Fiscal Agent for purposes of
this paragraph, and MBIA or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under the MBIA Policies unless otherwise stated
in the MBIA Policies will be disbursed by the Fiscal Agent to the Trustee
on behalf of the Owners by wire transfer of immediately available funds in
the amount of the Insured Payment less, in respect of Insured Payments
related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of MBIA only and the Fiscal Agent shall
in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of MBIA to deposit, or cause to be deposited, sufficient funds to
make payments due under the MBIA Policies.
As used in the MBIA Policies, the following terms shall have the
following meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement is located are
authorized or obligated by law or executive order to close.
"Deficiency Amount" means with respect to any Remittance Date and any
Pool of Certificates, (i) the excess, if any, of (a) the Current Interest
Requirement for such Pool over (b) the sum of the Available Remittance
Amount for such Pool (minus amounts withdrawn to pay required premiums to
MBIA), and the Monthly Excess Spread and the Subordination Reduction Amount
applicable to such Pool, plus (ii) the Subordination Deficit, if any, for
such Pool with respect to such Remittance Date.
"Insured Payment" means (i) as of any Remittance Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the related MBIA Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying the
Insured Payment which shall be due and owing on the applicable Remittance
Date.
"Owner" means each Class A Certificateholder (other than the Trust)
who, on the applicable Remittance Date, is entitled under the terms of the
applicable Class of Class A Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Certificates that is recoverable and sought to be recovered as
a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the MBIA Policies and not otherwise defined
therein shall have the respective meanings set forth in the Agreement as of
the date of execution of the MBIA Policies, without giving effect to any
subsequent amendment or modification to the Agreement.
The MBIA Policies were issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect
to the conflict of laws principles thereof.
The insurance provided by the MBIA Policies are not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
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The MBIA Policies are not cancelable for any reason. The premiums on
the MBIA Policies are not refundable for any reason including payment, or
provision being made for payment, prior to maturity of the Class A
Certificates.
MBIA is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against MBIA. MBIA is a limited liability corporation rather
than a several liability association. MBIA is domiciled in the State of
New York and licensed to do business in all 50 states, the District of
Columbia and the Commonwealth of Puerto Rico.
The table below presents selected financial information of MBIA
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally
accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
------------------------- -------------------------
DECEMBER 31 MARCH 31 DECEMBER 31 MARCH 31
1995 1996 1995 1996
------------ ----------- ------------ -----------
(AUDITED) (UNAUDITED) (AUDITED) (UNAUDITED)
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
Admitted Assets...... $3,814 $3,989 Assets.............. $4,463 $4,548
Liabilities.......... 2,540 2,672 Liabilities......... 1,937 2,006
Capital and Surplus.. 1,274 1,317 Shareholder's Equity 2,526 2,542
</TABLE>
Audited financial statements of MBIA as of December 31, 1995 and 1994 and
each of the three years in the period ended December 31, 1995 are included
herein as Exhibit A. Unaudited financial statements of MBIA for the three-
month period ended March 31, 1996 are included herein as Exhibit B. Such
financial statements have been prepared on the basis of generally accepted
accounting principles. Copies of MBIA's 1995 year end audited financial
statements prepared in accordance with statutory accounting practices are
available from MBIA. The address of MBIA is 113 King Street, Armonk, New
York 10504.
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus Supplement or the Prospectus or any information or
disclosure contained herein or therein, or omitted herefrom or therefrom,
other than with respect to the accuracy of the information regarding the
MBIA Policies and MBIA set forth under the heading "The MBIA Policies and
MBIA" herein and in Exhibits A and B hereto.
THE AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in this
Prospectus Supplement, set forth below is a summary of certain other
provisions thereof. Certain capitalized terms used in this section and not
otherwise defined, have the meanings set forth in the Prospectus.
REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties as to each Loan described
under the caption "The Agreements--Representations and Warranties" in the
Prospectus, (i) the Representative will represent in the Agreement that
each FHA Loan is an FHA Title I loan, underwritten in accordance with
applicable FHA requirements and submitted to the FHA for insurance; (ii)
each Originator will represent that, assuming sufficient coverage remains
available in the Reserve Amount, each Claim filed by the Claims
Administrator with respect to a 90 Day Delinquent FHA Loan will be honored
by the FHA in accordance with the rules and regulations of the FHA; (iii)
substantially all the proceeds of each Pool III Loan have been or will be
used to acquire or to improve or protect an interest in real property that,
at the origination date of such Pool III Loan, was the only security for
such Pool III Loan, (iv) for each Pool III Loan, after giving effect to all
improvements to be made on the related Mortgaged Property with the proceeds
of such Loan, and based upon representations of the related Obligor, the
value
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of the related Mortgaged Property will at least be equal to the amount of
such Pool III Loan and the outstanding amount of all other loans secured by
prior liens on such Mortgaged Property; and (v) TMS Mortgage Inc. is a
mortgagee approved by the Secretary of Housing and Urban Development
pursuant to sections 203 and 211 of the National Housing Act.
The Servicer will also covenant that it will: (a) comply with all FHA rules
and regulations and will maintain its status as an approved lender and will
at all times hold a valid contract of insurance (unless such contract is
terminated so as not to affect the obligation of FHA to provide insurance
coverage with respect to the FHA Loans); (b) promptly pay all insurance
charges and take all action necessary to maintain insurance on the FHA
Loans; (c) immediately pay, or, if the Servicer is no longer the Claims
Administrator, cause the Claims Administrator to pay, in full, any FHA
Payment into the Principal and Interest Account; and (d) with certain
exceptions, not allow any modifications or assumptions of the FHA Loans
that would vary their terms.
OBLIGATION OF THE CLAIMS ADMINISTRATOR
If any FHA Loan becomes a 90 Day Delinquent FHA Loan, and if sufficient
coverage is available in the Reserve Amount to make an FHA Payment with
respect to such FHA Loan, the Claims Administrator may, in its sole
discretion, during any subsequent Due Period, determine to file a Claim
with the FHA with respect to such 90 Day Delinquent FHA Loan. If the
Claims Administrator determines to file such a Claim, the Claims
Administrator will so notify the Co-Trustee and the Custodian no later than
the Determination Date following such determination and shall request
delivery of the related Trustee's Loan File. Upon receipt of such
certification and request, the Custodian shall, no later than the related
Remittance Date, release to the Claims Administrator the related Trustee's
Loan File and the Co-Trustee and the Custodian shall execute and deliver
such instruments necessary to enable the Claims Administrator to file a
Claim with the FHA on behalf of the Co-Trustee. Within 120 days of its
receipt of the related Trustee's Loan File, the Claims Administrator shall,
in its sole discretion, either file a Claim with the FHA for an FHA Payment
with respect to such 90 Day Delinquent FHA Loan or, if the Claims
Administrator determines not to file such a Claim, return to the Co-Trustee
the related Trustee's Loan File.
With respect to any 90 Day Delinquent FHA Loan transferred to the Claims
Administrator as described above, the Claims Administrator shall deposit
(or, if the Claims Administrator is not also the Servicer, the Claims
Administrator shall instruct the Servicer to deposit) in the Principal and
Interest Account within 24 hours of receipt or determination thereof the
following amounts (such amounts to be net of certain amounts that would be
reimbursable to the Servicer under the Agreement with respect to amounts in
the Principal and Interest Account): (i) any FHA Payments; (ii) the
amount, if any, by which the FHA Payment was reduced in accordance with FHA
Regulations due to the Claims Administrator enforcing a lien on the FHA
Property prior to the lien of the related 90 Day Delinquent FHA Loan; and
(iii) any principal and interest payments received with respect to a 90 Day
Delinquent FHA Loan after the Due Period in which the FHA Loan is
transferred to the Claims Administrator and before either the related FHA
Payment is paid or the related Trustee's Loan File is returned to the Co-
Trustee, as the case may be (the amounts referred to in (ii) and (iii)
above are referenced to herein as "Related Payments").
If an FHA Loan becomes a 90 Day Delinquent FHA Loan when there is
insufficient coverage in the Reserve Amount, or if the Claims Administrator
determines not to file a Claim with the FHA with respect to such 90 Day
Delinquent FHA Loan, the Co-Trustee will not transfer such FHA Loan to the
Claims Administrator, no Claim will be made to the FHA and the Servicer may
take other action, including the commencement of foreclosure proceedings,
on the related Mortgaged Property.
FHA PREMIUM ACCOUNT
The FHA Premium Account will be established with the Trustee and will be
available to reimburse the Claims Administrator or MBIA for the payment to
the FHA of the FHA Insurance Premium on each FHA Loan. The FHA Insurance
Premium is an annual premium equal to 0.5% of the original principal
balance of the FHA Loan. If the related Mortgagor pays the FHA Insurance
Premium in addition to the Monthly Payment, any payment of the
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FHA Insurance Premium received during a Due Period will be deposited in the
FHA Premium Account on the related Remittance Date. In certain states, the
Servicer is prohibited from directly collecting the FHA Insurance Premium
from the related Mortgagor. With respect to FHA Loans secured by Mortgaged
Properties located in such states, the Servicer will cause to be deposited
in the FHA Premium Account a specified percentage of each scheduled
interest payment. Since a Mortgagor pays interest on the declining
principal balance of the related FHA Loan and the FHA Insurance Premium is
based upon the original principal balance of the FHA Loan, the amount of
interest allocated to the FHA Premium Account may be more or less than the
amount of the related FHA Insurance Premium. The Servicer has agreed to
satisfy any resulting shortfall from its own funds.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount") will
be deposited into the Pre-Funding Account in an amount not to exceed
approximately $233,200,000, in the case of Pool I, approximately
$46,700,000, in the case of Pool II, approximately $21,200,000, in the case
of Pool III and approximately $4,700,000, in the case of Pool IV. Amounts
allocated to Pool I, Pool II, Pool III and Pool IV, as the case may be, may
be used only (i) to acquire Subsequent Loans for the related Pool and (ii)
to make accelerated payments of principal on the Certificates of the
related Pool. During the period (the "Funding Period") from the Closing
Date until the earliest of (i) the date on which the amount on deposit in
the Pre-Funding Account is less than $100,000, (ii) the date on which an
Event of Default occurs under the Agreement or (iii) at the close of
business on September 25, 1996, amounts will, from time to time, be
withdrawn from the Pre-Funding Account to purchase Subsequent 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 on the
next Remittance Date to the Class A Certificates of the related Pool.
However, any Pre-Funded Amount remaining at the close of business on
September 25, 1996 will be distributed as a principal prepayment on the
Special Remittance Date to the Class A Certificates of the related Pool.
The Pre-Funding Account moneys funded from the sale of the Certificates of
a given Pool, may not be used to acquire Loans relating to the other Pool.
All funds in the Pre-Funding Account are required to be held (i) uninvested,
up to the limits insured by the Federal Deposit Insurance Corporation or
(ii) invested in instruments designated as "Permitted Instruments" in the
Agreement. Any investment earnings on funds in the Pre-Funding Account
will be applied to payment of interest on the Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Representative also will make a cash deposit in an
account (the "Capitalized Interest Account") in the name of the Trustee on
behalf of the Trust. The amount deposited therein will be used by the
Trustee on the Remittance Dates occurring in July, August and September
1996 to fund the excess, if any, of (i) the amount of interest accrued for
each such Remittance Date at the weighted average Pass-Through Rate of the
Class A Certificates on the portion of the Class A Certificates having
principal balances exceeding the principal balances of the Loans over (ii)
the amount of any earnings on funds in the Pre-Funding Account that are
available to pay interest on the Class A Certificates on each such
Remittance Date. Additionally, if a principal prepayment is made on the
Special Remittance Date to the Class A Certificates, such Class A
Certificates also will receive on such date, from the Capitalized Interest
Account, accrued interest at the applicable Pass-Through Rates on the
amount of such principal prepayment. Any amounts remaining in the
Capitalized Interest Account on the Special Remittance Date and not used
for such purposes are required to be paid directly to the holders of the
Class R Certificates on such Special Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment
earnings on funds in the Capitalized Interest Account will be applied to
payment of interest on the Certificates.
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PAYMENTS ON THE LOANS
The Agreement requires the Servicer to establish and maintain one or more
principal and interest accounts (each, a "Principal and Interest Account")
at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment
earnings on funds held in the Principal and Interest Accounts are for the
account of the Servicer.
The Servicer is required to deposit in the related Principal and Interest
Account (within 24 hours of receipt) all payments received after the Cut-
Off Date on account of principal and interest on the related Loans (but net
of the Servicing Fee and the Contingency Fee with respect to each Loan,
other servicing compensation payable to the Servicer as permitted by the
Agreement and any amounts required to be deposited into the Servicing
Accounts referred to below).
Not later than the day of each month which is the later of (i) the third
Business Day prior to the 15th day of such month and (ii) the seventh
Business Day of such month (each such day a "Determination Date"), the
Servicer is required to wire transfer to the Trustee the Available
Remittance Amounts for each Pool for deposit in the segregated trust
accounts maintained with the Trustee for such purpose (each a "Certificate
Account").
The "Available Remittance Amount" for each Pool is defined in the Agreement
to include, with respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Servicer or any
Subservicer on the Loans of such Pool (including amounts paid by the
Servicer and the Representative and excluding (a) any Excess Spread
and Subordination Reduction Amounts included in such amounts, (b)
amounts paid as reimbursement to the Servicer of advances, (c) amounts
deposited into the Servicing Accounts and (d) amounts recovered as
voidable preferences), during the immediately preceding calendar month
(the "Due Period"), plus
(ii) the amount of any Monthly Advances and Compensating Interest
payments with respect to the Loans of such Pool remitted by the
Servicer for such Remittance Date, plus
(iii) amounts to be transferred to the applicable Certificate
Account from the Pre-Funding Account and the Capitalized Interest
Account.
The term Available Remittance Amount does not include Insured
Payments.
The Agreement also will require the Servicer to establish and
maintain, in addition to the Principal and Interest Accounts one or more
accounts (each a "Servicing Account") in a depository institution the
deposits of which are insured by the Federal Deposit Insurance Corporation
to the maximum extent permitted by law. The Servicer will deposit and
retain therein all collections from the Obligors for the payment of taxes,
assessments, insurance premiums, or comparable items as agent of the
Obligors and in trust as provided in the Agreement. Amounts in any
Servicing Account may relate to mortgage loans in more than one mortgage
pool or to mortgage loans not yet included in a mortgage pool. All funds
in the Servicing Accounts are required to be held (i) uninvested, up to the
limits insured by the Federal Deposit Insurance Corporation or (ii)
invested in Permitted Instruments. Any investment earnings on funds held
in the Servicing Accounts are for the account of the Servicer. Withdrawals
of amounts from the Servicing Accounts may be made only to effect timely
payment of taxes, assessments, insurance premiums, or comparable items, to
reimburse the Servicer for any advances made with respect to such items, to
refund to any Obligors any sums as may be determined to be overages, to pay
interest, if required, to Obligors on balances in the Servicing Accounts,
to pay earnings not required to be paid to Obligors to the Servicer or to
clear and terminate the Servicing Accounts at or at any time after the
termination of the Agreement.
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MONTHLY ADVANCES AND COMPENSATING INTEREST
Not later than the close of business on each Determination Date, the
Servicer is required to remit to the Trustee for deposit in the applicable
Certificate Account an amount equal to the amount, if any, by which, for
each Pool (a) the sum of (x) 30 days' interest (or, with respect to the
Auction Rate and Adjustable Rate Certificates, the actual number of days
from the last Remittance Date (or, in the case of the first Remittance
Date, from June 15, 1996 with respect to the Adjustable Rate Certificates
and from the Closing Date with respect to the Auction Rate Certificates) up
to but not including the upcoming Remittance Date) at the weighted average
Adjusted Mortgage Loan Remittance Rates of such Pool on the aggregate
outstanding Class Principal Balances of each Class of Certificates in such
Pool immediately prior to the related Remittance Date and (y) the Monthly
Excess Spread, if any, for the related Remittance Date relating to the
Loans of the related Pool exceeds (b) the amount received by the Servicer
in respect of interest on the Loans of the related Pool as of the related
Record Date (and, with respect to the Remittance Dates in July, August and
September 1996, the sum of (i) all funds to be transferred to the
applicable Certificate Account from the Capitalized Interest Account for
such Remittance Date and (ii) certain investment earnings on amounts in the
Pre-Funding Account for the applicable Remittance Date). Such excess is
defined as the "Monthly Advance." Monthly Advances will not cover any
Certificateholders' Interest Carryover.
Not later than the close of business on each Determination Date, with
respect to each Loan for which a Principal Prepayment in full or
Curtailment was received during the related Due Period, the Servicer is
required to remit to the Trustee for deposit in the applicable Certificate
Account from amounts otherwise payable to it as servicing compensation, an
amount equal to the excess of (a) 30 days' interest (or, with respect to a
Pool II Loan, the actual number of days since the last Remittance Date (or,
in the case of the first Remittance Date, from June 15, 1996 with respect
to the Adjustable Rate Certificates and from the Closing Date with respect
to the Auction Rate Certificates) up to but not including the upcoming
Remittance Date) on the principal balance of each such Loan as of the
beginning of the related Due Period at the weighted average Adjusted
Mortgage Loan Remittance Rates of the related Pool applicable to the
Remittance Date on which such amount will be distributed, over (b) the
amount of interest actually received on the related Loan for such Due
Period (such difference, "Compensating Interest").
FLOW OF FUNDS
The Agreement requires the Servicer to withdraw on each Determination
Date that portion of the Available Remittance Amount for each Pool in the
applicable Principal and Interest Account and to remit such amounts
together with any Excess Spread, Subordination Reduction Amounts, Monthly
Advances and Compensating Interest for the related Remittance Date to the
Trustee for deposit in the applicable Certificate Account. Upon receipt on
each Determination Date of such amounts, the Trustee is required to deposit
such amounts into the applicable Certificate Account.
The Agreement provides that on each Remittance Date the Trustee is
required to withdraw from the Certificate Accounts the sum of (i) the
Available Remittance Amounts for each Pool (minus the amounts withdrawn
from the Certificate Accounts to deposit amounts related to required
premiums in the Insurance Account and the FHA Premium Account and amounts
required to pay the fees due the Auction Agent and the Broker-Dealer), (ii)
any amounts of Total Monthly Excess Cashflow to be applied to the
Certificates and (iii) amounts transferred from the Spread Account, if any,
and Insured Payments, if any, made by MBIA (such sums, the "Available
Amount" for the related Pool) and make distributions thereof in the
following order of priority:
(i) to the Certificateholders of each Pool, the lesser of the
Available Amount for such Pool and the Distribution Amount for such
Pool;
(ii) then to an expense account, an amount equal to one-twelfth
of the estimated annual fees and expenses of the Trustee and the
Trust;
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(iii) then to the Servicer and/or The Money Store Inc., an amount
equal to certain unreimbursed amounts with respect to the applicable
Pool;
(iv) then to the Adjustable Rate Certificates and the Auction
Rate Certificates, any Certificateholders' Interest Carryover (but
only with respect to distributions relating to the Pool II Loans), pro
rata in accordance with the amounts due each such Class;
(v) then to the Class R Certificateholders, amounts then
remaining with respect to the applicable Pool.
On each Remittance Date, the amount to be distributed to the Pool I
Certificates pursuant to clause (i) above will be allocated in the
following order of priority:
(A) first, concurrently to the Certificateholders of each Class of
Pool I Certificates, the applicable Current Interest Requirements for such
Remittance Date, pro rata in accordance with such amounts; and
(B) second, concurrently to the Class A-1 and Class A-2
Certificateholders, in the proportions of approximately 50% and 50%,
respectively, the excess, if any, of the amount to be distributed to the
Pool I Certificates on such Remittance Date over the amount distributed
pursuant to (A) above, until the Class Principal Balance of the Class A-2
Certificates is reduced to zero and such Class A-2 Certificateholders have
received an amount equal to the amount described in clause (iv) of the
definition of Distribution Amount that is recovered from such
Certificateholders.
(C) third, concurrently to the Class A-1 and Class A-3
Certificateholders, in the proportions of approximately 50% and 50%,
respectively, the excess, if any, of the amount to be distributed to the
Pool I Certificates on such Remittance Date over the amount distributed
pursuant to (A) and (B) above, until the Class Principal Balances of the
Class A-1 and Class A-3 Certificates are reduced to zero and such Class A-1
and Class A-3 Certificateholders have received an amount equal to the
amount described in clause (iv) of the definition of Distribution Amount
that is recovered from such Certificateholders; and
(D) fourth, to the Class A-4 through Class A-9 Certificateholders,
sequentially in that order, the excess, if any, of the amount to be
distributed to the Pool I Certificates on such Remittance Date over the
amount distributed pursuant to (A), (B) and (C) above, until the Class
Principal Balance of each Class with a lower numerical designation is
reduced to zero and such Certificateholders have received an amount equal
to the amount described in clause (iv) of the definition of Distribution
Amount that is recovered from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool II
Certificates pursuant to clause (i) above will be allocated in the
following order of priority:
(A) first, concurrently to the Certificateholders of each Class of
Pool II Certificates, the applicable Current Interest Requirements for such
Remittance Date, pro rata in accordance with such amounts; and
(B) second, concurrently to the Class A-10 and Class A-11
Certificateholders, pro rata based on the Class Principal Balance of each
such Class, the excess, if any, of the amount to be distributed to the Pool
II Certificates on such Remittance Date over the amount distributed
pursuant to (A) above, until the Class Principal Balance of each such Class
is reduced to zero and such Certificateholders have received an amount
equal to the amount described in clause (iv) of the definition of
Distribution Amount that is recovered from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool III
Certificates pursuant to clause (i) above will be allocated in the
following order of priority:
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(A) first, concurrently to the Certificateholders of each Class of
Pool III Certificates, the applicable Current Interest Requirements for
such Remittance Date, pro rata in accordance with such amounts; and
(B) second, to the Class A-12 through Class A-15 Certificateholders,
sequentially in that order, the excess, if any, of the amount to be
distributed to the Pool III Certificates on such Remittance Date over the
amount distributed pursuant to (A) above, until the Class Principal Balance
of each Class with a lower numerical designation is reduced to zero and
such Certificateholders have received an amount equal to the amount
described in clause (iv) of the definition of Distribution Amount that is
recovered from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool IV
Certificates pursuant to clause (i) above will be allocated in the
following order of priority:
(A) first, to the Class A-16 Certificateholders, the applicable
Current Interest Requirement for such Remittance Date; and
(B) second, to the Class A-16 Certificateholders, the excess, if any,
of the amount to be distributed to the Pool IV Certificates on such
Remittance Date over the amount distributed pursuant to (A) above, until
the Class Principal Balance of such Class is reduced to zero and such
Certificateholders have received an amount equal to the amount described in
clause (iv) of the definition of Distribution Amount that is recovered from
such Certificateholders.
Notwithstanding the foregoing, principal payments will be made to each
Class of Auction Rate Certificates only in amounts equal to $25,000 and
integral multiples in excess thereof. If the amount in the applicable
Certificate Account otherwise required to be applied as a payment of
principal either (i) is less than $25,000 or (ii) exceeds an even multiple
of $25,000, then, in the case of (i), such entire amount or, in the case of
(ii), such excess amount, will not be paid as principal on the upcoming
Remittance Date but will be retained in the applicable Certificate Account
until the amount therein available for payment of principal equals $25,000
or an integral multiple thereof.
The Trustee will have the right, on behalf of Class A
Certificateholders, to sue MBIA in the event any required Insured Payment
is not made in accordance with the terms of the applicable MBIA Policy.
CALCULATION OF LIBOR
For the first Remittance Date, the Pass-Through Rate on the Adjustable
Rate Certificates will equal 5.78% per annum. The Trustee will determine
the London interbank offered rate for deposits in U.S. dollars having a
maturity of one month ("LIBOR") commencing on the second LIBOR
Determination Date preceding each Remittance Date (the "One-Month Index
Maturity") which appears on Telerate Page 3750 as of 11:00 a.m., London
time, on such LIBOR Determination Date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis
of the rates at which deposits in U.S. dollars, having the One Month Index
Maturity and in a principal amount of not less than U.S. $1,000,000, are
offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Trustee will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that day will be the arithmetic mean of the rates
quoted by major banks in New York City, selected by the Trustee, at
approximately 11:00 a.m., New York City time, on such LIBOR Determination
Date for loans in U.S. dollars to leading European banks having the One
Month Index Maturity and in a principal amount equal to an amount of not
less than U.S. $1,000,000; provided that if the banks selected as aforesaid
are not quoting as mentioned in this sentence, LIBOR in effect for the
applicable Interest Period will be LIBOR in effect for the previous
Interest Period.
"LIBOR Determination Date" means the date which is both a Business Day
and a London Banking Day prior to the commencement of each related Interest
Period.
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"Business Day" means any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in the States of New York, New
Jersey, Minnesota or Wisconsin are authorized or obligated by law or
executive order to be closed.
"London Banking Day" means any Business Day on which dealings in
deposits in United States dollars are transacted in the London interbank
market.
"Interest Period" means, with respect to the Adjustable Rate
Certificates, (i) initially, the period commencing June 15, 1996 and ending
on the day immediately preceding the Remittance Date in July 1996 and (ii)
thereafter, the period commencing on a Remittance Date and ending on the
day immediately preceding the next Remittance Date.
"Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page
on that service for the purpose of displaying comparable rates or prices)
and "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
The establishment of LIBOR on each Libor Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to
the Adjustable Rate Certificates for the related Remittance Date shall (in
the absence of manifest error) be final and binding. Each such rate of
interest may be obtained by telephoning the Trustee at (212) 815-2793.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer is entitled to a servicing fee of 0.25% per annum of the
principal balance of each Loan (the "Servicing Fee") and a contingency fee
of 0.25% per annum of the principal balance of each Loan (the "Contingency
Fee"). The Contingency Fee is meant to provide additional servicing
compensation to a successor servicer if The Money Store Inc. is replaced as
Servicer under the Agreement. However, as long as The Money Store Inc. acts
as Servicer, it is entitled to receive the Contingency Fee, although such
amount is not deemed servicing compensation. The Servicing Fee and
Contingency Fee are each calculated and payable monthly from the interest
portion of scheduled monthly payments, liquidation proceeds and certain
other collected proceeds. In addition, the Servicer is entitled under the
Agreement to retain additional servicing compensation in the form of
assumption and other administrative fees, prepayment penalties and
premiums, late payment charges, interest paid on funds in the Principal and
Interest Accounts, interest paid on earnings realized on Permitted
Instruments, and certain other excess amounts.
TERMINATION; PURCHASE OF LOANS
The Trust will terminate upon distribution to the Certificateholders
of amounts due them following the earlier to occur of (i) the final payment
or other liquidation of the last Loan remaining in the Trust or the
disposition of all REO Property, (ii) the optional purchase of the assets
of the Trust by the Servicer or MBIA, as described below or (iii) the
occurrence of a "qualified liquidation" of the Trust, as permitted by the
REMIC provisions of the Code as described below; provided, however, that in
no event will the Trust terminate later than twenty-one years after the
death of the last survivor of the person named in the Agreement.
As set forth under "The MBIA Policies and MBIA" no accelerated Insured
Payments will be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of MBIA. This
will not affect the Class A Certificateholders since, as described below,
as a condition to any optional termination of the Trust the
Certificateholders will receive an amount equal to the outstanding Class
Principal Balance of the related Class, plus accrued interest.
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Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances
of the Loans are less than 10% of the sum of (i) the Original Pool
Principal Balance and (ii) the original Pre-Funded Amount the Servicer may,
at its option, and in the absence of the exercise thereof by the Servicer,
MBIA may, at its option, purchase, on the next succeeding Remittance Date,
all of the Loans and any related REO Properties at a price equal to the
Termination Price relating to the Trust.
On any Remittance Date on or after the Cross-Over Date on which Loans
with aggregate principal balances as of the Cut-Off Date that equal or
exceed 25% of the sum of (i) the Original Pool Principal Balance and (ii)
the original Pre-Funded Amount have become Liquidated Loans, MBIA may
determine to purchase and may cause the purchase from the Trust of all
Loans and REO Properties in the Pools at a price equal to the sum of the
Termination Price for each Pool and the outstanding and unpaid fees and
expenses of the Trustee and the Servicer.
Following a final determination by the Internal Revenue Service (the
"IRS") or by a court of competent jurisdiction, in either case from which
no appeal is taken within the permitted time for such appeal, or if any
appeal is taken, following a final determination of such appeal from which
no further appeal can be taken, to the effect that the REMIC does not and
will no longer qualify as a REMIC pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination (i) the Holders of greater
than 50 percent in Percentage Interest of the Class A Certificates (the
"Applicable Majority Certificateholders") may direct the Trustee on behalf
of the Trust to adopt a "plan of complete liquidation" (within the meaning
of Section 860F(a)(4)(B)(i) of the Code) with respect to such REMIC and
(ii) MBIA may notify the Trustee of MBIA's determination to purchase from
the Trust all Loans and all property theretofore acquired by foreclosure,
deed in lieu of foreclosure, or otherwise in respect of any Loan then
remaining in such REMIC at a price equal to the aggregate Termination
Price. Upon receipt of such direction by the Applicable Majority
Certificateholders or of such notice from MBIA, the Trustee will notify the
holders of the Class R Certificates of such election to liquidate or such
determination to purchase, as the case may be (the "Termination Notice").
The Holders of a majority of the percentage interest of the Class R
Certificates then outstanding may, within 60 days from the date of receipt
of the Termination Notice (the "Purchase Option Period"), at their option,
purchase from the Trust all the Loans and all property theretofore acquired
by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Loan then remaining in the REMIC at a purchase price equal to the
Termination Price of the Trust.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period
(i) in the event that the Applicable Majority Certificateholders have given
the Trustee the direction described in clause (i) above, the Trustee is
required to sell the Loans and such other property in the REMIC and
distribute the proceeds of the liquidation of the REMIC, each in accordance
with the plan of complete liquidation, such that, if so directed, the
liquidation of the REMIC and the distribution of the proceeds of the
liquidation occur no later than the close of the 60th day, or such later
day as the Applicable Majority Certificateholders shall permit or direct in
writing, after the expiration of the Purchase Option Period and (ii) in the
event that MBIA has given the Trustee notice of MBIA's determination to
purchase the assets described in clause (ii) preceding, MBIA shall so
purchase such assets within 60 days after the expiration of the Purchase
Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at
their option and upon delivery to the Trustee and MBIA of an opinion of
nationally recognized tax counsel selected by the Holders of such Class R
Certificates, which opinion shall be reasonably satisfactory in form and
substance to the Applicable Majority Certificateholders and MBIA, that the
effect of the Final Determination is to increase substantially the
probability that the gross income of the REMIC will be subject to federal
taxation, purchase from the Trust all Loans and all property theretofore
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in
respect of any Loan then remaining in the REMIC at a purchase price equal
to the Termination Price of the Trust. The foregoing opinion shall be
deemed satisfactory unless the Applicable Majority Certificateholders give
the holders of a majority of percentage interests in the Class R
Certificates notice that such opinion is not satisfactory within thirty
days after receipt of such opinion.
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If the Trust were to lose its qualification as a REMIC, it might be
taxable as a grantor trust, a partnership, or an association taxable as a
corporation. If the Trust is treated as a grantor trust or a partnership,
such Trust would not be subject to a separate entity level tax, and it is
not expected that the tax treatment of the investors would be materially
different from the tax treatment if the REMIC election of such Trust had
not been revoked. However, if the Trust were treated as an association
taxable as a corporation it would be subject to Federal income taxes at
corporate rates on its net income. Moreover, distributions on the Class A
Certificates would probably not be deductible in computing such Trust's
taxable income, and all or part of the distributions to the holders of such
Class A Certificates would probably be treated as dividend income to the
holders. Such an entity level tax could result in reduced distributions to
the Class A Certificateholders and such Class A Certificateholders could
also be liable for a share of such a tax. Any such corporate level tax
would be borne first by the holders of the Class R Certificates from
amounts otherwise distributable to such holders. Any remaining corporate
level tax would be borne by holders of all Classes of Class A Certificates
pro rata in proportion to the outstanding principal balances of such
Classes.
THE TRUSTEE
The Bank of New York will be the Trustee under the Agreement. The
Agreement will provide that the Trustee may resign at any time, in which
event the Representative will be obligated to appoint a successor Trustee.
The Representative may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. 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.
THE CO-TRUSTEE
First Bank (N.A.), a national banking association headquartered in
Milwaukee, Wisconsin, will be the Co-Trustee with respect to the Home
Improvement Loans. The Co-Trustee is a subsidiary of First Bank Systems,
Minneapolis, Minnesota.
THE CUSTODIAN
First Trust National Association, a national banking association
headquartered in St. Paul, Minnesota, will be the Custodian with respect to
the Home Improvement Loans. In such capacity, it will retain the files
relating to the Home Improvement Loans. The Custodian is a subsidiary of
First Bank Systems, Minneapolis, Minnesota.
THE AUCTION AGENT
Bankers Trust Company, a New York banking corporation, will act as
Auction Agent with respect to the Auction Rate Certificates pursuant to an
Auction Agent Agreement to be entered into between the Representative, the
Trustee and the Auction Agent.
FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, an election will be made to treat
certain assets of the Trust as a REMIC. Each Class of Class A Certificates
will constitute "regular interests" in the REMIC and the Class R
Certificates will be designated as the "residual interest" in the REMIC.
See "Federal Income Tax Consequences" in the Prospectus.
Because the Class A Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the
Code, and interest paid or accrued on such Class A Certificates, including
original issue discount with respect to any such Class A Certificates
issued with original issue discount, will be taxable to Certificateholders
in accordance with the accrual method of accounting. See "Federal Income
Tax Consequences--REMIC Regular Certificates--Current Income on REMIC
Regular Certificates."
S-92
<PAGE>
As discussed in "Federal Income Tax Consequences--REMIC Certificates--
Status of REMIC Certificates as Real Property Loans" in the Prospectus, the
Class A Certificates will be "qualifying real property loans" within the
meaning of Section 593(d) of the Code, "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code (assets qualifying under one or more of those
sections, applying each section separately, "qualifying assets") to the
extent that the REMIC's assets are qualifying assets. However, if at least
95 percent of the REMIC's assets are qualifying assets, then 100 percent of
the Class A Certificates will be qualifying assets. Similarly, income on
the Class A Certificates will be treated as "interest on obligations
secured by real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount with respect to the Class A Certificates
is 100% Prepayment Assumption, as 100% Prepayment Assumption is defined
herein with respect to each Pool of Class A Certificates. See "Maturity,
Prepayment and Yield Considerations" herein. However, no representation is
made as to the rate at which prepayments actually will occur.
BACKUP WITHHOLDING
Certain Certificateholders may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Class A Certificates if
the Certificateholders, upon issuance, fail to supply the Trustee or their
broker with their taxpayer identification number, furnish an incorrect
taxpayer identification number, fail to report interest, dividends, or
other "reportable payments" (as defined in the Code) properly, or, under
certain circumstances, fail to provide the Trustee or their broker with a
certified statement, under penalty of perjury, that they are not subject
to backup withholding.
The Trustee will be required to report annually to the IRS, and to
each holder of a Class A Certificate of record, the amount of interest paid
(and OID accrued, if any) on such Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except
as to exempt holders (generally, holders that are corporations, certain
tax-exempt organizations or nonresident aliens who provide certification as
to their status as nonresidents). As long as the only "Class A
Certificateholder" of record is Cede, as nominee for DTC,
Certificateholders and the IRS will receive tax and other information
including the amount of interest paid on such Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to
enable Participants, Indirect Participants and certain other persons to
complete their reports.) Each non-exempt Certificateholder will be
required to provide, under penalty of perjury, a certificate on IRS Form W-
9 containing his or her name, address, correct federal taxpayer
identification number and a statement that he or she is not subject to
backup withholding. Should a non-exempt Certificateholder fail to provide
the required certification, the Participants or Indirect Participants (or
the Paying Agent) will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount
to the IRS as a credit against the holder's federal income tax liability.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income
tax treatment of holders that are not United States persons ("Foreign
Investors"). The term "Foreign Investor" means any person other than (i) a
citizen or resident of the United States, (ii) a corporation, partnership
or other entity organized in or under the laws of the United States or any
state or political subdivision thereof or (iii) an estate or trust the
income of which is includible in gross income for United States federal
income tax purposes, regardless of its source.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate
were changed by an applicable treaty). The withholding tax, however, is
eliminated with respect to certain "portfolio debt investments" issued to
Foreign Investors. Portfolio debt investments include debt instruments
issued in registered form for which the United States payor receives a
statement that the beneficial owner of the instrument is a Foreign
Investor. The Class A Certificates will be issued in registered form;
S-93
<PAGE>
therefore, if the information required by the Code is furnished (as
described below) and no other exceptions to the withholding tax exemption
are applicable, no withholding tax will apply to the Class A Certificates.
For the Class A Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificateholder an executed IRS Form W-8 signed under
penalty of perjury by the Certificateholder stating that the
Certificateholder is a Foreign Investor and providing such
Certificateholder's name and address. The statement must be received by
the withholding agent in the calendar year in which the interest payment is
made, or in either of the two preceding calendar years.
A Certificateholder that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on
the sale, exchange, or redemption of such Class A Certificate, provided
that (i) such gain is not effectively connected with a trade or business
carried on by the Certificateholder in the United States, (ii) in the case
of a Certificateholder that is an individual, such Certificateholder is not
present in the United States for 183 days or more during the taxable year
in which such sale, exchange or redemption occurs and (iii) in the case of
gain representing accrued interest, the conditions described in the
immediately preceding paragraph are satisfied.
Potential purchasers of Class A Certificates are strongly urged to
consult their own tax advisors as to the suitability of an investment in
the Class A Certificates.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and
collective investment funds and separate accounts in which such plans or
arrangements are invested to which it applies and on those persons who are
fiduciaries with respect to such benefit plans. Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA)
and certain church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA. In accordance with ERISA's general fiduciary standards,
before investing in a Class A Certificate a benefit plan fiduciary should
determine whether such an investment is permitted under the governing
benefit plan instruments and is appropriate for the benefit plan in view of
its overall investment policy and the composition and diversification of
its portfolio.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject
to Section 4975 of the Code (each a "Plan") are prohibited from engaging in
a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are
imposed upon such persons by Section 4975 of the Code. The Representative,
the Originators, MBIA, the Underwriter and the Trustee and certain of their
affiliates might be considered "parties in interest" or "disqualified
persons" with respect to a Plan. If so, the acquisition or holding or
transfer of Class A Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless an exemption is available. Furthermore, if an
investing Plan's assets were deemed to include an interest in the Loans and
any other assets of the Trust and not merely an interest in the related
Class A Certificates, transactions occurring in the servicing of the Loans
might constitute prohibited transactions unless an administrative exemption
applies. One exemption which may be applicable to the acquisition and
holding of the Class A Certificates or to the servicing of the Loans is
noted below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the
assets of a Plan (the "Plan Asset Regulations"), which provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed for purposes of ERISA to be assets of
the investing Plan unless certain exceptions apply. Thus, a Plan fiduciary
considering an investment in Class A Certificates should also
S-94
<PAGE>
consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code.
DOL has granted to Lehman Brothers an administrative exemption
(Prohibited Transaction Exemption 91-14, 56 Fed. Reg. 7,413 (February 22,
1991) (the "Exemption")) from certain of the prohibited transaction rules
of ERISA with respect to the initial purchase, the holding and the
subsequent resale in the secondary market by Plans of pass-through
certificates representing a beneficial undivided ownership interest in the
assets of a trust that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption
which may be applicable to the Class A Certificates if Lehman Brothers or
any of its affiliates is either the sole underwriter or the manager or co-
manager of the underwriting syndicate, or a selling or placement agent. The
conditions which must be satisfied for the Exemption to apply to the
purchase, holding and transfer of the Class A Certificates are the
following:
(i) The acquisition of the Class A Certificates by a Plan is on
terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party.
(ii) The rights and interest evidenced by a Class of Class A
Certificates acquired by the Plan are not subordinated to the rights
and interest evidenced by any other Certificates of the Trust.
(iii) The Class A Certificates acquired by the Plan have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from any of Moody's, Duff & Phelps
Credit Rating Co., S & P or Fitch Investors Service, L.P. ("Authorized
Rating Agencies") and the investment pool consists only of assets of
the type enumerated in the Exemption, and which have been included in
other investment pools; certificates evidencing interest in such other
investment pools have been rated in one of the three highest generic
rating categories by an Authorized Rating Agency for at least one year
prior to a Plan's acquisition of certificates; and certificates
evidencing interest in such other investment pools have been purchased
by investors other than Plans for at least one year prior to a plan's
acquisition of the Class A Certificates.
(iv) The sum of all payments made to the Underwriters in
connection with the distribution of the Class A Certificates
represents not more than reasonable compensation for distributing the
Class A Certificates. The sum of all payments made to and retained by
the Representative and the Originators pursuant to the sale of the
Loans to the Trust represents not more than the fair market value of
such Loans. The sum of all payments made to and retained by the
Servicer or any other servicer represents not more than reasonable
compensation for such services under the Agreement and reimbursement
of the servicer's reasonable expenses in connection therewith.
(v) The Trustee and Co-Trustee must not be affiliates of any
member of the Restricted Group as defined below.
In addition, it is a condition that the Plan investing in the Class A
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D under the Securities Act. Any Plan purchasing Class A
Certificates will be deemed to have represented, by virtue of such
purchase, that it is an accredited investor.
The Exemption does not apply to Plans sponsored by the Originators,
the Representative, MBIA, the Underwriters, the Trustee, the Co-Trustee,
the Custodian, the Servicer, any other servicers or any obligor with
respect to Loans included in the Trust constituting more than 5% of the
aggregate unamortized principal balance of the assets in such Trust or any
affiliate of such parties (the "Restricted Group"). No exemption is
provided from the restrictions of ERISA for the acquisition or holding of a
Class A Certificate on behalf of an "Excluded Plan" by any person who is a
fiduciary with respect to the assets of such Excluded Plan. For purposes
of the Class A Certificates, an Excluded Plan is a Plan sponsored by any
member of the Restricted Group. In addition, the Exemption provides relief
from
S-95
<PAGE>
certain self-dealing/conflict of interest prohibited transactions that may
occur when a Plan fiduciary causes a Plan to acquire Class A Certificates
and the fiduciary (or its affiliate) is an obligor on any Loan held in the
Trust provided that, among other requirements, (i) such fiduciary (or its
affiliate) is an obligor with respect to 5% or less of the fair market
value of the Loans contained in the Trust, (ii) the Plan's investment in
any Class of Class A Certificates does not exceed 25% of all of the
Certificates of such Class outstanding at the time of the Plan's
acquisition and after the Plan's acquisition of such Class of Class A
Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in securities of a trust containing
assets which are sold or serviced by the same entity, and (iii) in the case
of initial issuance (but not secondary market transactions), at least 50%
of each Class of Class A Certificates, and at least 50% of the aggregate
interest in the Trust, are acquired by persons independent of the
Restricted Group.
Before purchasing a Class A Certificate in reliance on the Exemption
or any other exemption, a fiduciary of a Plan should confirm that all
applicable requirements would be satisfied. Any Plan fiduciary considering
the purchase of a Class A Certificate should consult with its counsel with
respect to the potential applicability of ERISA and the Code to such
investment. Moreover, each Plan fiduciary should determine whether, under
the general fiduciary standards of investment prudence and diversification,
an investment in the Class A Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Special caution ought to
be exercised before a Plan purchases a Class A Certificate in such
circumstances. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, each Class of Class A
Certificates will be rated in the highest rating category by each Rating
Agency, the Class A Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. Accordingly, many institutions with
legal authority to invest in comparably rated securities based on first
mortgage loans or deeds of trust may not be legally authorized to invest in
the Class A Certificates. No representation is made herein as to whether
the Class A Certificates constitute legal investments for any entity under
any applicable statute, law, rule, regulation or order. Prospective
purchasers are urged to consult with their counsel concerning the status of
the Class A Certificates as legal investments for such purchasers prior to
investing in any Class of Class A Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement dated June 21, 1996 (the "Underwriting Agreement"), the
Representative, on behalf of the Originators, has agreed to sell and each
Underwriter has agreed to purchase the principal amount of each Class of
Class A Certificates set forth below it name.
S-96
<PAGE>
<TABLE>
<CAPTION>
Lehman Prudential Bear, Stearns CS First Total
Brothers Inc. Securities Incorporated & Co. Inc. Boston Corporation ---------------
------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Class A-1 $109,807,000 $ 29,563,000 $ 17,737,000 $ 11,825,000 $ 168,932,000
Class A-2 $ 54,769,000 $ 14,746,000 $ 8,847,000 $ 5,898,000 $ 84,260,000
Class A-3 $ 55,037,000 $ 14,819,000 $ 8,890,000 $ 5,927,000 $ 84,673,000
Class A-4 $ 61,862,000 $ 16,655,000 $ 9,992,000 $ 6,661,000 $ 95,170,000
Class A-5 $102,077,000 $ 27,481,000 $ 16,488,000 $ 10,992,000 $ 157,038,000
Class A-6 $ 19,628,000 $ 19,623,000 $ 19,526,000 $ 7,190,000 $ 65,967,000
Class A-7 $ 29,415,000 $ 29,413,000 $ 29,263,000 $ 10,776,000 $ 98,867,000
Class A-8 $ 31,910,000 $ 31,908,000 $ 31,746,000 $ 11,690,000 $ 107,254,000
Class A-9 $ 20,183,000 $ 20,182,000 $ 20,080,000 $ 7,394,000 $ 67,839,000
Class A-10 $ 75,000,000 $ 32,625,000 $ 10,000,000 $ 7,375,000 $ 125,000,000
Class A-11 $ 75,000,000 $ 0 $ 0 $ 0 $ 75,000,000
Class A-12 $ 5,422,000 $ 5,422,000 $ 5,384,000 $ 2,730,000 $ 18,958,000
Class A-13 $ 13,254,000 $ 13,253,000 $ 13,160,000 $ 6,674,000 $ 46,341,000
Class A-14 $ 4,101,000 $ 4,100,000 $ 4,071,000 $ 2,065,000 $ 14,337,000
Class A-15 $ 5,825,000 $ 5,823,000 $ 5,783,000 $ 2,933,000 $ 20,364,000
Class A-16 $ 10,000,000 $ 10,000,000 $ 0 $ 0 $ 20,000,000
--------------------------------------------------------------------------------------------
Total $673,290,000 $275,613,000 $200,967,000 $100,130,000 $1,250,000,000
============================================================================================
</TABLE>
The Representative has been advised by the Underwriters that the
Underwriters propose initially to offer the Class A Certificates to the
public at the respective public offering prices set forth on the cover page
of this Prospectus Supplement and to certain dealers at such price less a
concession not in excess of the respective amounts set forth in the table
below (expressed as a percentage of the respective Class Principal
Balance). The Underwriters may allow and such dealers may reallow a
discount not in excess of the respective amounts set forth in the table
below to certain other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
- ------- ----------- ------------
<S> <C> <C>
A-1 0.0600% 0.0300%
A-2 0.0600 0.0300
A-3 0.0750 0.0375
A-4 0.1000 0.0500
A-5 0.1500 0.1000
A-6 0.1500 0.1000
A-7 0.2000 0.1000
A-8 0.2750 0.1250
A-9 0.3500 0.1500
A-10 0.1500 0.1000
A-11 0.1500 0.1000
A-12 0.0600 0.0300
A-13 0.1250 0.0750
A-14 0.2000 0.1000
A-15 0.2500 0.1250
A-16 0.1500 0.1000
</TABLE>
The Representative has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended.
S-97
<PAGE>
EXPERTS
The consolidated financial statements of MBIA Insurance
Corporation (formerly known as Municipal Bond Investors Assurance
Corporation) as of December 31, 1995 and 1994 and for the years ended
December 31, 1995, 1994 and 1993 included as Exhibit A to this Prospectus
Supplement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing in Exhibit A
and are included in reliance upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of
the Certificates will be passed upon for the Representative by Eric R.
Elwin, Esq., Corporate Counsel of the Representative. Certain legal
matters relating to the validity of the issuance of the Certificates will
be passed upon for the Underwriters by Stroock & Stroock & Lavan, New York,
New York. Certain legal matters will be passed upon for MBIA by Kutak
Rock, Omaha, Nebraska. Stroock & Stroock & Lavan has performed legal
services for the Representative and it is expected that it will continue to
perform such services in the future.
RATING OF THE CLASS A CERTIFICATES
It is a condition to the issuance of the Class A Certificates
that each Class be rated "AAA" by S&P and "Aaa" by Moody's (collectively,
the "Rating Agencies"). Such ratings are the highest long-term ratings that
such Rating Agencies assign to securities. The ratings given to the Class A
Certificates will be based, among other things, upon the ratings assigned
to the claims paying ability of MBIA. Any reduction in such rating of MBIA
would most likely result in a reduction in the ratings given to the Class A
Certificates. A security 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 Agency. No person is obligated to maintain the rating
on any Class of Class A Certificates. The ratings of the Adjustable Rate
and Auction Rate Certificates by S & P and Moody's do not reflect the
likelihood of payment of the Certificateholder's Interest Carryover since
MBIA does not insure payment of such amounts.
FINANCIAL INFORMATION
The Representative has determined that its financial statements
are not material to the offering made hereby.
The Trust has been formed to own the Loans and to issue the
Certificates. The Trust had no assets or obligations prior to the issuance
of the Certificates and will not engage in any activities other than those
described herein. Accordingly, no financial statements with respect to the
Trust are included in this Prospectus Supplement.
S-98
<PAGE>
INDEX OF PRINCIPAL TERMS
Adjustable Rate Certificates S-5
Adjusted Mortgage Loan Remittance Rate... S-35
Agreement................................ S-7
Applicable Majority Certificateholders... S-91
Auction Rate Certificates................ S-3
Authorized Rating Agencies............... S-95
Available Amount......................... S-87
Available Remittance Amount.............. S-86
Balloon Loans............................ S-29
Business Day............................. S-71
Capitalized Interest Account............. S-10
Carry-Forward Amount..................... S-17
Cede..................................... S-38
Certificateholder........................ S-9
Certificates............................. S-1
Certificate Account...................... S-86
Certificateholders' Interest Carryover... S-13
Change Date.............................. S-27
Claims................................... S-6
Claims Administrator..................... S-2
Class A Certificates..................... S-2
Class A Certificateholders or Holders.... S-3
Class A-1 Certificates................... S-2
Class A-2 Certificates................... S-2
Class A-3 Certificates................... S-2
Class A-4 Certificates................... S-2
Class A-5 Certificates................... S-2
Class A-6 Certificates................... S-2
Class A-7 Certificates................... S-2
Class A-8 Certificates................... S-2
Class A-9 Certificates................... S-2
Class A-10 Certificates.................. S-2
Class A-11 Certificates.................. S-2
Class A-12 Certificates.................. S-2
Class A-13 Certificates.................. S-2
Class A-14 Certificates.................. S-2
Class A-15 Certificates.................. S-2
Class A-16 Certificates.................. S-2
Class Principal Balance.................. S-71
Class R Certificates..................... S-2
Closing Date............................. S-6
Combined Loan-to-Value Ratio............. S-26
Compensating Interest.................... S-35
Constant Prepayment Rate or CPR.......... S-62
Contingency Fee.......................... S-36
Co-Trustee............................... S-6
Current Interest Requirement............. S-12
Curtailment.............................. S-35
Custodian................................ S-7
S-99
<PAGE>
Cut-Off Date............................. S-6
Dealer Loans............................. S-44
Definitive Class A Certificates.......... S-39
Designated Depository Institution........ S-86
Detailed Description..................... S-51
Determination Date....................... S-34
Direct Loans............................. S-44
Distribution Amount...................... S-16
DTC...................................... S-38
Due Period............................... S-17
ERISA.................................... S-38
ERISA Considerations..................... S-38
Excess Subordinated Amount............... S-75
Exemption................................ S-38
Equity Advantage Loans................... S-50
FHA Insurance Premium.................... S-23
FHA Loans................................ S-2
FHA Payment.............................. S-23
FHA Premium Account...................... S-23
Fiscal Agent............................. S-81
Final Determination...................... S-91
Funding Period........................... S-10
Gross Margin............................. S-27
HEP...................................... S-62
Home Equity Loans........................ S-2
Home Equity Mortgages.................... S-24
Home Equity Mortgage Notes............... S-24
Home Equity Mortgaged Properties......... S-24
Home Equity Mortgagor.................... S-25
Home Improvement Loans................... S-2
Home Improvement Mortgages............... S-29
Home Improvement Mortgage Notes.......... S-29
Home Improvement Mortgaged Properties.... S-29
Home Improvement Mortgagor............... S-31
HUD...................................... S-2
Initial Home Equity Loans................ S-24
Initial Home Improvement Loans........... S-24
Initial Loans............................ S-37
Initial Multifamily Loans................ S-24
Initial Pool I Home Equity Loans......... S-24
Initial Pool II Home Equity Loans........ S-24
Insurance Agreement...................... S-75
Insurance Paying Agent................... S-19
Insurance Proceeds....................... S-35
Insured Payment.......................... S-19
Interest Period.......................... S-88
LIBOR.................................... S-90
LIBOR Determination Date................. S-89
LIBOR Index.............................. S-27
Liquidated Loan.......................... S-57
Liquidation Proceeds..................... S-35
Loans.................................... S-2
S-100
<PAGE>
London Banking Day....................... S-90
Maximum Subordinated Amount.............. S-75
MBIA..................................... S-19
MBIA Policies............................ S-19
Monthly Advances......................... S-34
Monthly Excess Spread.................... S-74
Mortgages................................ S-24
Mortgagor................................ S-25
Mortgaged Properties..................... S-24
Multifamily Loans........................ S-2
Multifamily Mortgages.................... S-32
Multifamily Mortgage Interest Rate....... S-33
Multifamily Mortgage Notes............... S-32
Multifamily Mortgaged Properties......... S-32
Net Funds Cap............................ S-12
Net Liquidation Proceeds................. S-73
NHA Act.................................. S-43
90 Day Delinquent FHA Loan............... S-23
Notes.................................... S-24
Notice................................... S-82
Obligors................................. S-31
One Month Index Maturity................. S-89
Optional Servicer Termination Date....... S-37
Original Pool Principal Balance.......... S-37
Originators.............................. S-2
Owner.................................... S-82
Participants............................. S-73
Pass-Through Rate........................ S-4
Percentage Interest...................... S-71
Periodic Rate Cap........................ S-28
Permitted Instruments.................... S-85
Plans.................................... S-38
Pool I................................... S-2
Pool I Certificateholders................ S-9
Pool I Certificates...................... S-5
Pool Current Interest Requirement........ S-12
Pool I Home Equity Loans................. S-7
Pool I Loans............................. S-7
Pool I Mortgage Interest Rate............ S-27
Pool II.................................. S-2
Pool II Certificateholders............... S-9
Pool II Certificates..................... S-5
Pool II Home Equity Loans................ S-8
Pool II Current Interest Requirement..... S-12
Pool II Loans............................ S-8
Pool II Mortgage Interest Rate........... S-27
Pool III................................. S-2
Pool III Certificateholders.............. S-9
Pool III Certificates.................... S-5
Pool III Current Interest Requirement.... S-12
Pool III Home Improvement Interest Rate.. S-32
Pool III Loans........................... S-8
S-101
<PAGE>
Pool IV.................................. S-2
Pool IV Certificateholders............... S-9
Pool IV Certificates..................... S-5
Pool IV Loans............................ S-8
Pools.................................... S-2
Pre-Funded Amount........................ S-9
Pre-Funding Account...................... S-2
Principal Distribution Amount............ S-14
Principal Factor......................... S-77
Principal and Interest Account........... S-86
Principal Prepayment..................... S-35
PUDS..................................... S-24
Rating Agencies.......................... S-98
Record Date.............................. S-11
Reference Banks.......................... S-90
Related Payments......................... S-22
Released Mortgaged Property Proceeds..... S-35
REMIC.................................... S-3
Remittance Date.......................... S-3
REO Property............................. S-37
Representative........................... S-2
Reserve Amount........................... S-21
Restricted Group......................... S-95
Rules.................................... S-78
SBA...................................... S-48
SBA Loans................................ S-48
Servicer................................. S-2
Servicing Account........................ S-86
Servicing Fee............................ S-36
SMMEA.................................... S-38
Special Remittance Date.................. S-10
Specified Subordinated Amount............ S-75
Spread Account........................... S-18
Spread Amount............................ S-18
Student Loans............................ S-48
Subordinated Amount...................... S-75
Subordination Deficit.................... S-75
Subordination Increase Amount............ S-74
Subordination Reduction Amount........... S-75
Subsequent Cut-Off Date.................. S-25
Subsequent Loans......................... S-2
Termination Notice....................... S-91
Termination Price........................ S-37
Title I.................................. S-2
Title I Loan Program..................... S-43
Title I Property Improvement Loans....... S-43
Total Monthly Excess Cashflow............ S-74
Treasury Index........................... S-27
Trust.................................... S-1
Trustee.................................. S-6
Trustee's Loan File...................... S-22
Underwriter.............................. S-1
S-102
<PAGE>
Unrecovered Amounts...................... S-17
Variable Adjustable Rate Loans........... S-27
Weighted average life.................... S-59
S-103
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ANNEX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each
Class of Auction Rate Certificates. The term "Certificate," as used in
this Annex, refers to each Class of Auction Rate Certificates, and the term
"Certificateholder" refers to Certificateholders holding Auction Rate
Certificates.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the
meanings ascribed in the accompanying Prospectus and Prospectus Supplement.
Additionally, the following terms have the meanings ascribed to them:
"Agreement" means the Pooling and Servicing Agreement dated as of May
31, 1996 among The Bank of New York, as Trustee, The Money Store Inc., as
Representative, Servicer and Claims Administrator, and the Originators
listed therein, including the Auction Procedures set forth therein as
Schedule II.
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR.
"Auction" means the implementation of the Auction Procedures on an
Auction Date.
"Auction Agent" means the initial auction agent under the initial
Auction Agent Agreement unless and until a substitute Auction Agent
Agreement becomes effective, after which "Auction Agent" shall mean the
substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement
unless and until a substitute Auction Agent Agreement is entered into,
after which "Auction Agent Agreement" shall mean such substitute Auction
Agent Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Auction Date" means, with respect to the Initial Period for each
Class of Certificates, July 12, 1996 and thereafter, the Business Day
immediately preceding the first day of each Auction Period for each
Certificate, other than:
(A) each Auction Period commencing after the ownership of the
Certificates is no longer maintained in Book-Entry Form by the
Depository;
(B) each Auction Period commencing after and during the continuance
of a Certificate Insurer Default; or
(C) each Auction Period commencing less than two Business Days after
the cure or waiver of a Certificate Insurer Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction
Periods may be changed pursuant to the Agreement, as described herein.
"Auction Period" means, with respect to each Certificate, the Interest
Period applicable to such Certificate during which time the applicable
Certificate Interest Rate is determined, which Auction Period (after the
Initial
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Period for such Certificate) shall commence on each Remittance Date and
shall continue through the day immediately preceding the next Remittance
Date for such Certificate, as the same may be adjusted pursuant to the
Agreement.
"Auction Procedures" means the procedures set forth in the Agreement,
and described herein by which the Auction Rate applicable to a Certificate
is determined.
"Auction Rate" means, with respect to any Certificate, the rate of
interest per annum that results from the implementation of the Auction
Procedures and is determined as described in the Agreement and this Annex
I.
"Authorized Denominations" means, with respect to any Certificate,
$25,000 and any integral multiple in excess thereof.
"Broker-Dealer" means Lehman Brothers or any other broker or dealer
(each as defined in the Securities Exchange Act of 1934, as amended),
commercial bank or other entity permitted by law to perform the functions
required of a Broker-Dealer set forth in the Auction Procedures that (a) is
a Participant (or an affiliate of a Participant), (b) has been appointed as
such by the Representative and (c) has entered into a Broker-Dealer
Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction
Agent and a Broker-Dealer pursuant to which the Broker-Dealer agrees to
participate in Auctions as set forth in the Auction Procedures, as from
time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Business Day" means any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in the States of New York, New
Jersey, Minnesota or Wisconsin are authorized or obligated by law or
executive order to be closed.
"Certificate Initial Rate" means 5.46% per annum.
"Certificate Initial Rate Adjustment Date" means July 15, 1996.
"Certificate Insurer Default" means a default by MBIA under the MBIA
Policy relating to the Auction Rate Certificates.
"Certificate Interest Rate" means, with respect to any Class of
Auction Rate Certificate, initially the Certificate Initial Rate until the
first Auction Date for such Class of Auction Rate Certificates, at which
time the related Certificate Interest Rate will be reset pursuant to the
Auction Procedures.
"Existing Certificateholder" means (i) with respect to and for the
purpose of dealing with the Auction Agent in connection with an Auction, a
Person who is a Broker-Dealer listed in the Existing Certificateholder
Registry at the close of business on the Business Day immediately preceding
such Auction and (ii) with respect to and for the purpose of dealing with
the Broker-Dealer in connection with an Auction, a Person who is a
beneficial owner of any Certificate.
"Existing Certificateholder Registry" means the registry of Persons
who are owners of the Securities, maintained by the Auction Agent as
provided in the Auction Agent Agreement.
"Initial Period" means, as to any Certificate, the period commencing
on the Closing Date and continuing through the day immediately preceding
the Certificate Initial Rate Adjustment Date for such Certificate.
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"Interest Period" means, with respect to a Certificate, the Initial
Period for such Certificate and each period commencing on the Rate
Adjustment Date for such Certificate and ending on the day before (i) the
next Rate Adjustment Date for such Certificate or (ii) the Final Maturity
Date of such Certificate, as applicable.
"LIBOR Determination Date" means the date which is both a Business Day
and a London Banking Day prior to the commencment of each related Interest
Period.
"London Banking Day" means any Business Day on which dealings in
deposits in United States dollars are transacted in the London interbank
market.
"Market Agent" means Lehman Brothers, in such capacity under the
Agreement, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" means, either (A) One-Month LIBOR plus 0.60%
(if both ratings assigned by the Rating Agencies to the Auction Rate
Certificates are "Aa3" or "AA-" or better) or (B) One-Month LIBOR plus 1.0%
(if any one of the ratings assigned by the Rating Agencies to the Auction
Rate Certificates is less than "Aa3" or "AA-"). For purposes of the
Auction Agent and the Auction Procedures, the ratings referred to in this
definition shall be the last ratings of which the Auction Agent has been
given notice pursuant to the Auction Agent Agreement.
"Non-Payment Rate" means One-Month LIBOR plus 0.60%.
"One-Month LIBOR" means the London interbank offered rate for deposits
in U.S. dollars having a maturity of one month commencing on the related
LIBOR Determination Date (the "One-Month Index Maturity") which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR
Determination Date. If such rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the rates at which
deposits in U.S. dollars, having the One Month Index Maturity and in a
principal amount of not less than U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market by the Reference Banks. The
Auction Agent will request the principal London office of each of such
Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for
that day will be the arithmetic mean of the rates quoted by major banks in
New York City, selected by the Auction Agent, at approximately 11:00 a.m.,
New York City time, on such LIBOR Determination Date for loans in U.S.
dollars to leading European banks having the One Month Index Maturity and
in a principal amount equal to an amount of not less than U.S. $1,000,000;
provided that if the banks selected as aforesaid are not quoting as
mentioned in this sentence, One-Month LIBOR in effect for the applicable
Interest Period will be One-Month LIBOR in effect for the previous Interest
Period.
"Person" means any individual, corporation, estate, partnership,
limited liability company, joint venture, association, joint stock company,
trust (including any beneficiary thereof), unincorporated organization or
government or any agency or political subdivision thereof.
"Potential Certificateholder" means any Person (including an Existing
Certificateholder that is (i) a Broker-Dealer when dealing with the Auction
Agent and (ii) a potential beneficial owner when dealing with a Broker-
Dealer) who may be interested in acquiring Certificates (or, in the case of
an Existing Certificateholder thereof, an additional principal amount of
Certificates).
"Rate Adjustment Date" means, with respect to each Certificate, the
date on which the applicable Certificate Interest Rate is effective and
means, with respect to each such Certificate, the date of commencement of
each Auction Period.
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"Rate Determination Date" means, with respect to any Certificate, the
Auction Date, or if no Auction Date is applicable to such Certificate, the
Business Day immediately preceding the date of commencement of an Auction
Period.
"Reference Banks" means leading banks selected by the Auction Agent
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
EXISTING CERTIFICATEHOLDERS AND POTENTIAL CERTIFICATEHOLDERS
Participants in each Auction will include: (1) "Existing
Certificateholders," which shall mean any Certificateholder according to
the records of the Auction Agent at the close of business on the Business
Day preceding each Auction Date; and (ii) "Potential Certificateholders,"
which shall mean any person, including any Existing Certificateholder or a
Broker/Dealer, who may be interested in acquiring Certificates (or, in the
case of an Existing Certificateholder, an additional principal amount of
the Certificate such Certificateholder then holds). See "--Broker-Dealer."
By purchasing a Certificate, whether in an Auction or otherwise, each
prospective purchaser of Certificates or its Broker-Dealer must agree and
will be deemed to have agreed: (i) to participate in Auctions on the terms
described herein; (ii) so long as the beneficial ownership of the
Certificates is maintained in Book-Entry Form to sell, transfer or
otherwise dispose of the Certificates only pursuant to a Bid (as defined
below) or a Sell Order (as defined below) in an Auction, or to or through a
Broker-Dealer, provided that in the case of all transfers other than those
pursuant to an Auction, the Existing Certificateholder of the Certificates
so transferred, its Participant or Broker-Dealer advises the Auction Agent
of such transfer; (iii) to have its beneficial ownership of Certificates
maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial
ownership, and to authorize such Participant to disclose to the Auction
Agent such information with respect to such beneficial ownership as the
Auction Agent may request; (iv) that a Sell Order placed by an Existing
Certificateholder will constitute an irrevocable offer to sell the
principal amount of the Certificate specified in such Sell Order; (v) that
a Bid placed by an Existing Certificateholder will constitute an
irrevocable offer to sell the principal amount of the Certificate specified
in such Bid if the rate specified in such Bid is greater than, or in some
cases equal to, the Auction Rate of such Certificate, determined as
described herein; and (vi) that a Bid placed by a Potential
Certificateholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Certificate specified in such
Bid if the rate specified in such Bid is, respectively, less than or equal
to the Certificate Interest Rate of the specified Certificate, determined
as described herein.
The principal amount of the Certificates purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale
of Certificates on the Auction Date will be made for settlement on the
first day of the Interest Period immediately following such Auction Date at
a price equal to 100% of the principal amount thereof, plus accrued but
unpaid interest thereon. The Auction Agent is entitled to rely upon the
terms of any Order submitted to it by a Broker-Dealer.
Auction Agent
Bankers Trust Company will be appointed as Auction Agent to serve as
agent for the Trust in connection with Auctions. The Trustee will enter
into the Auction Agreement with Bankers Trust Company, as the Auction
Agent. Any Substitute Auction Agent will be (i) a bank, national banking
association or trust company duly organized under the laws of the United
States of America or any state or territory thereof having its principal
place of business in the Borough of Manhattan, New York, or such other
location as approved by the Trustee and the Market Agent in writing and
having a combined capital stock or surplus of at least $50,000,000, or (ii)
a member of the National Association of Certificates Dealers, Inc. having a
capitalization of at least $50,000,000, and, in either case, authorized by
law to perform all the duties imposed upon it under the Agreement and under
the Auction Agent Agreement and approved by MBIA in writing. The Auction
Agent may at any time resign and be discharged of the
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duties and obligations created by the Agreement by giving at least 90 days
notice to the Trustee and the Market Agent. The Auction Agent may be
removed at any time by the Trustee upon the written direction of MBIA, or,
with the consent of MBIA, the Certificateholders of 66-2/3% of the
aggregate principal amount of the Certificates then outstanding, by an
instrument signed by the MBIA or such Certificateholders or their attorneys
and filed with the Auction Agent, the Trustee and the Market Agent upon at
least 90 days' notice. Neither resignation nor removal of the Auction
Agent pursuant to the preceding two sentences will be effective until and
unless a Substitute Auction Agent has been appointed, has been approved in
writing by MBIA and has accepted such appointment. If required by MBIA,
the Certificateholders of 66-2/3% of the aggregate principal amount of the
Certificates then outstanding or by the Market Agent, a Substitute Auction
Agent Agreement shall be entered into with a Substitute Auction Agent.
Notwithstanding the foregoing, the Auction Agent may terminate the Auction
Agent Agreement if, within 25 days after notifying the Trustee, MBIA and
the Market Agent in writing that it has not received payment of any Auction
Agent Fee due it in accordance with the terms of the Auction Agent
Agreement, the Auction Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or
if the property or affairs of the Auction Agent shall be taken under the
control of any state or federal court or administrative body because of
bankruptcy or insolvency, or for any other reason, the Trustee, at the
direction of the Representative and MBIA (after receipt of a certificate
from the Market Agent confirming that any proposed Substitute Auction Agent
meets the requirements described in the immediately preceding paragraph
above), shall use its best efforts to appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or
negligence on its part, the Auction Agent will not be liable for any action
taken, suffered or omitted or any error of judgment made by it in the
performance of its duties under the Auction Agent Agreement and will not be
liable for any error of judgment made in good faith unless the Auction
Agent will have been negligent in ascertaining (or failing to ascertain)
the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on each
Remittance Date and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent
Agreement or the Broker-Dealer Agreements (including the reasonable
compensation and the expenses and disbursements of its agents and counsel).
The Trust will indemnify and hold harmless the Auction Agent for and
against any loss, liability or expense incurred without negligence or bad
faith on the Auction Agent's part, arising out of or in connection with the
acceptance or administration of its agency under the Auction Agent
Agreement and the Broker-Dealer Agreements including the reasonable costs
and expenses (including the reasonable fees and expenses of its counsel) of
defending itself against any such claim or liability in connection with its
exercise or performance of any of its respective duties thereunder and of
enforcing this indemnification provision; provided that the Trust will not
indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing
its duties under the Auction Agent Agreement and under the Broker-Dealer
Agreements, such fees and expenses being payable as described above.
Broker-Dealer
Existing Certificateholders and Potential Certificateholders may
participate in Auctions only by submitting orders (in the manner described
below) through a "Broker-Dealer," including Lehman Brothers as the sole
Broker-Dealer or any other broker or dealer (each as defined in the
Certificates Exchange Act of 1934, as amended), commercial bank or other
entity permitted by law to perform the functions required of a Broker-
Dealer set forth below which (i) is a Participant or an affiliate of a
Participant, (ii) has been selected by the Trustee and (iii) has entered
into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
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The Broker-Dealers are entitled to a Broker-Dealer Fee on each
Remittance Date, which is payable by the Auction Agent from monies received
from the Trustee.
Market Agent
The "Market Agent," will act solely as agent of the Trust and will not
assume any obligation or relationship of agency or trust for or with any of
the Certificateholders.
AUCTION PROCEDURES
General
Pursuant to the Agreement, Auctions to establish the Auction Rate for
each Certificate issued by the Trust will be held on each applicable
Auction Date, except as described below, by application of the Auction
Procedures described herein. Such procedures are to be applicable
separately to each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All
Hold Rate and One-Month LIBOR on each Auction Date. The Servicer will
calculate and, no later than the Business Day preceding each Auction Date,
will report to the Auction Agent in writing, the Net Funds Cap applicable
to the Certificates. If the ownership of a Certificate is no longer
maintained in Book-Entry Form, the Trustee will calculate the Maximum
Auction Rate, and the Servicer will report to the Trustee in writing the
Net Funds Cap, on the Business Day immediately preceding the first day of
each Interest Period commencing after delivery of such Certificate. If a
Certificate Insurer Default has occurred, the Trustee will calculate the
Non-Payment Rate on the Rate Determination Date for (i) each Interest
Period commencing after the occurrence and during the continuance of such
Certificate Insurer Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Certificate Insurer Default.
The Auction Agent will determine One-Month LIBOR for each Interest Period
other than the Initial Period for a Certificate; provided, that if the
ownership of the Certificates is no longer maintained in Book-Entry Form,
or if a Certificate Insurer Default has occurred, then the Trustee will
determine One-Month LIBOR for each such Interest Period. The determination
by the Trustee or the Auction Agent, as the case may be, of One-Month LIBOR
will (in the absence of manifest error) be final and binding upon the
Certificateholders and all other parties. If calculated or determined by
the Auction Agent, the Auction Agent will promptly advise the Trustee of
One-Month LIBOR.
Submission of Orders
So long as the ownership of the Certificates is maintained in Book-
Entry Form, an Existing Certificateholder may sell, transfer or otherwise
dispose of Certificates only pursuant to a Bid or Sell Order (as
hereinafter defined) placed in an Auction or through a Broker-Dealer,
provided that, in the case of all transfers other than pursuant to
Auctions, such Existing Certificateholder, its Broker-Dealer or its
Participant advises the Auction Agent of such transfer. Auctions for each
Class of Certificates will be conducted on each applicable Auction Date, if
there is an Auction Agent on such Auction Date, in the following manner
(such procedures to be applicable separately to each Class of
Certificates).
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time,
on any Auction Date or such other time on any Auction Date by which Broker-
Dealers are required to submit Orders to the Auction Agent as specified by
the Auction Agent from time to time) on each Auction Date relating to a
Certificate:
(a) each Existing Certificateholder of the applicable Certificate
may submit to a Broker-Dealer by telephone or otherwise information as to:
(i) the principal amount and class of outstanding Certificates, if any,
held by such Existing Certificateholder which such Existing
Certificateholder desires to continue to hold without regard to the
Certificate Interest Rate for such Certificates for the next succeeding
Auction Period (a "Hold Order"); (ii) the principal amount and class of
outstanding Certificates, if any, which such Existing Certificateholder
offers to sell if the Certificate Interest Rate for such Certificates for
the next succeeding Auction Period will be less than
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the rate per annum specified by such Existing Certificateholder (a "Bid");
and/or (iii) the principal amount and class of outstanding Certificates, if
any, held by such Existing Certificateholder which such Existing
Certificateholder offers to sell without regard to the Certificate Interest
Rate for such Certificates for the next succeeding Auction Period (a "Sell
Order"); and
(b) one or more Broker-Dealers may contact Potential
Certificateholders to determine the principal amount and class of
Certificates which each such Potential Certificateholder offers to
purchase, if the Certificate Interest Rate for such Certificates for the
next succeeding Auction Period will not be less than the rate per annum
specified by such Potential Certificateholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Certificateholder and each Potential Certificateholder placing an Order is
referred to as a "Bidder."
Subject to the provisions described below under "Validity of Orders,"
a Bid by an Existing Certificateholder will constitute an irrevocable offer
to sell: (i) the principal amount and class of the outstanding Certificates
specified in such Bid if the Certificate Interest Rate for such
Certificates will be less than the rate specified in such Bid, (ii) such
principal amount or a lesser principal amount and class of the outstanding
Certificates to be determined as described below in "Acceptance and
Rejection of Orders," if the Certificate Interest Rate for such
Certificates will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding
Certificates to be determined as described below under "Acceptance and
Rejection of Orders," if the rate specified therein will be higher than the
Certificate Interest Rate for such Certificates and Sufficient Bids (as
defined below) have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Sell Order by an Existing Certificateholder will constitute an
irrevocable offer to sell: (i) the principal amount of the Certificate
specified in such Sell Order or (ii) such principal amount or a lesser
principal amount of outstanding Certificates of the specified Certificate
as described below under "Acceptance and Rejection of Orders," if
Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Bid by a Potential Certificateholder will constitute an irrevocable offer
to purchase: (i) the principal amount of the Certificate specified in such
Bid if the Auction Rate for such Certificates will be higher than the rate
specified in such Bid or (ii) such principal amount or a lesser principal
amount of such Certificates as described below in "Acceptance and Rejection
of Orders," if the Certificate Interest Rate is equal to the rate specified
in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the
name of the Bidder placing such Order; (ii) the aggregate principal amount
and class of Certificate that are the subject of such Order; (iii) to the
extent that such Bidder is an Existing Certificateholder: (a) the principal
amount and class of Certificates, if any, subject to any Hold Order placed
by such Existing Certificateholder; (b) the principal amount, and class of
Certificates, if any, subject to any Bid placed by such Existing
Certificateholder and the rate specified in such Bid; and (c) the principal
amount, and class of Certificates, if any, subject to any Sell Order placed
by such Existing Certificateholder, and (iv) to the extent such Bidder is a
Potential Certificateholder, the rate specified in such Potential
Certificateholder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up
to the next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Certificates of the applicable
class held by any Existing Certificateholder are not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent will deem
a Hold Order to have been submitted on behalf of such Existing
Certificateholder covering the principal amount of Certificates held by
such Existing Certificateholder and not subject to an Order submitted to
the Auction Agent.
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Neither the Representative, the Trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Certificateholder or Potential
Certificateholder.
An Existing Certificateholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to
Certificates then held by such Existing Certificateholder. An Existing
Certificateholder that offers to purchase additional Certificates is, for
purposes of such offer, treated as a Potential Certificateholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will
(i) be treated as a Sell Order if submitted by a Existing Certificateholder
and (ii) not be accepted if submitted by a Potential Certificateholder.
Validity of Orders
If any Existing Certificateholder submits through a Broker-Dealer to
the Auction Agent one or more Orders covering in the aggregate more than
the principal amount of the class of Certificates held by such Existing
Certificateholder, such Orders will be considered valid as follows and in
the order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to
-----------
the aggregate principal amount of the class of Certificates held by such
Existing Certificateholder, and if the aggregate principal amount of the
class of Certificates subject to such Hold Orders exceeds the aggregate
principal amount of the class of Certificates held by such Existing
Certificateholder, the aggregate principal amount of the class of
Certificates subject to each such Hold Order will be reduced pro rata so
that the aggregate principal amount of the class of Certificates subject to
all such Hold Orders equals the aggregate principal amount of the class of
Certificates held by such Existing Certificateholder.
Bids. Any Bid will be considered valid up to an amount equal to the
----
excess of the principal amount of the class of Certificates held by such
Existing Certificateholder over the aggregate principal amount of such
Certificate, subject to any Hold Orders referred to above. Subject to the
preceding sentence, if multiple Bids with the same rate are submitted on
behalf of such Existing Certificateholder and the aggregate principal
amount of Certificates subject to such Bids is greater than such excess,
such Bids will be considered valid up to an amount equal to such excess.
Subject to the two preceding sentences, if more than one Bid with different
rates are submitted on behalf of such Existing Certificateholder, such Bids
will be considered valid first in the ascending order of their respective
rates until the highest rate is reached at which such excess exists and
then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Certificates, if any, subject to Bids not
valid under the provisions described above will be treated as the subject
of a Bid by a Potential Certificateholder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an amount
-----------
equal to the excess of the principal amount of Certificates of the class
held by such Existing Certificateholder over the aggregate principal amount
of Certificates subject to valid Hold Orders and valid Bids as referred to
above.
If more than one Bid for a class of Certificate is submitted on behalf
of any Potential Certificateholder, each Bid submitted will be a separate
Bid with the rate and principal amount therein specified. Any Bid or Sell
Order submitted by an Existing Certificateholder covering an aggregate
principal amount of Certificates not equal to an Authorized Denomination or
an integral multiple thereof will be rejected and will be deemed a Hold
Order. Any Bid submitted by a Potential Certificateholder covering an
aggregate principal amount of Certificates not equal to an Authorized
Denomination or an integral multiple thereof will be rejected. Any Order
submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted
Hold Order," a "Submitted Bid" and a "Submitted Sell Order," respectively
(collectively, "Submitted Orders").
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Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Certificate, the excess of the total
principal amount of such Certificates over the sum of the aggregate
principal amount of such Certificates subject to Submitted Hold Orders
(such excess being hereinafter referred to as the "Available
Certificates"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Certificates of such class subject to Submitted Bids by Potential
Certificateholders specifying one or more rates equal to or lower than the
Maximum Auction Rate exceeds or is equal to the sum of (i) the aggregate
principal amount of Certificates of such class subject to Submitted Bids by
Existing Certificateholders specifying one or more rates higher than the
Maximum Auction Rate and (ii) the aggregate principal amount of
Certificates of such class subject to Submitted Sell Orders (in the event
such excess or such equality exists other than because all of the
Certificates are subject to Submitted Hold Orders, such Submitted Bids by
Potential Certificateholders above will be hereinafter referred to
collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will
be the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing
Certificateholders of such Certificate specifying such lowest
rate and all other Submitted Bids from Existing
Certificateholders of such Certificate specifying lower rates
were rejected (thus entitling such Existing Certificateholders to
continue to hold the principal amount of Certificates subject to
such Submitted Bids); and
(ii) each such Submitted Bid from Potential
Certificateholders of such Certificate specifying such lowest
rate and all other Submitted Bids from Potential
Certificateholders specifying lower rates, were accepted, the
result would be that such Existing Certificateholders described
in subparagraph (c)(i) above would continue to hold an aggregate
principal amount of Certificates which, when added to the
aggregate principal amount of Certificates to be purchased by
such Potential Certificateholders described in this subparagraph
(ii) would equal not less than the Available Certificates.
Determination of Auction Rate and Certificate Interest Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the applicable Net
Funds Cap, the Maximum Auction Rate, the All Hold Rate and the components
thereof on the Auction Date, and based on such determinations, the Auction
Rate for the next succeeding Interest Period for the applicable Certificate
as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of
the Certificates of the applicable Certificate are subject to Submitted
Hold Orders), that the Auction Rate for the next succeeding Interest Period
will be equal to the Maximum Auction Rate; or
(c) if all Certificates of the applicable Certificate are subject
to Submitted Hold Orders, that the Auction Rate for the next succeeding
Interest Period will be equal to the All Hold Rate.
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Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Certificate
Interest Rate for each applicable Certificate, which rate will be the
lesser of (a) the Auction Rate for each such Certificate and (b) the
applicable Net Funds Cap. In no event shall a Certificate Interest Rate
exceed the rate (the "Certificate Interest Rate Limitation") set forth in
the Prospectus Supplement.
Acceptance and Rejection of Orders
Existing Certificateholders will continue to hold the principal amount
of Certificates of such class that are subject to Submitted Hold Orders.
If, with respect to a Certificate, the Net Funds Cap is equal to or greater
than the Bid Auction Rate and if Sufficient Bids, as described above under
"Determination of Sufficient Bids and Bid Auction Rate," have been received
by the Auction Agent, the Bid Auction Rate will be the Certificate Interest
Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in
the Agreement and described below under "Sufficient Bids."
If the applicable Net Funds Cap is less than the Auction Rate, the
Certificate Interest Rate will be the applicable Net Funds Cap. If the
Auction Rate and the Net Funds Cap are both greater than the Certificate
Interest Rate Limitation, the Certificate Interest Rate for each series
shall be equal to the Certificate Interest Rate Limitation. If the Auction
Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because
all of the Certificates are subject to Submitted Holds Orders), the
Certificate Interest Rate will be the lesser of the Maximum Auction Rate or
the Net Funds Cap. In any of the cases described above in this paragraph,
Submitted Orders will be accepted or rejected and the Auction Agent will
take such other action as described below under "Insufficient Bids."
Sufficient Bids. If Sufficient Bids have been made with a respect to
---------------
a Certificate and the applicable Net Funds Cap is equal to or greater than
the Bid Auction Rate (in which case the Certificate Interest Rate shall be
the Bid Auction Rate), all Submitted Sell Orders will be accepted and,
subject to the denomination requirements described below, Submitted Bids
will be accepted or rejected as follows in the following order of priority
and all other Submitted Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any
rate that is higher than the Certificate Interest Rate will be accepted,
thus requiring each such Existing Certificateholder to sell the aggregate
principal amount of Certificates subject to such Submitted Bids;
(b) Existing Certificateholders' Submitted Bids specifying any
rate that is lower than the Certificate Interest Rate will be rejected,
thus entitling each such Existing Certificateholder to continue to hold the
aggregate principal amount of Certificates subject to such Submitted Bids;
(c) Potential Certificateholders' Submitted Bids specifying any
rate that is lower than the Certificate Interest Rate will be accepted;
(d) Each Existing Certificateholder's Submitted Bid specifying a
rate that is equal to the Certificate Interest Rate will be rejected, thus
entitling such Existing Certificateholder to continue to hold the aggregate
principal amount of Certificates subject to such Submitted Bid, unless the
aggregate principal amount of Certificates subject to such Submitted Bids
will be greater than the principal amount of Certificates (the "remaining
principal amount") equal to the excess of the Available Certificates over
the aggregate principal amount of Certificates subject to Submitted Bids
described in subparagraphs (b) and (c) above, in which event such Submitted
Bid of such Existing Certificateholder will be rejected in part and such
Existing Certificateholder will be entitled to continue to hold the
principal amount of Certificates subject to such Submitted Bid, but only in
an amount equal to the aggregate principal amount of Certificates obtained
by multiplying the remaining principal amount by a fraction, the numerator
of which will be the principal amount of Certificates held by such Existing
Certificateholder subject to such Submitted Bid and the denominator of
which will be the sum of the principal amount of Certificates subject
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<PAGE>
to such Submitted Bids made by all such Existing Certificateholders that
specified a rate equal to the Certificate Interest Rate; and
(e) Each Potential Certificateholder's Submitted Bid specifying a
rate that is equal to the Certificate Interest Rate will be accepted, but
only in an amount equal to the principal amount of Certificates obtained by
multiplying the excess of the aggregate principal amount of Available
Certificates over the aggregate principal amount of Certificates subject to
Submitted Bids described in subparagraphs (b), (c) and (d) above by a
fraction, the numerator of which will be the aggregate principal amount of
Certificates subject to such Submitted Bid and the denominator of which
will be the sum of the principal amount of Certificates subject to
Submitted Bids made by all such Potential Certificateholders that specified
a rate equal to the Certificate Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect
-----------------
to a Certificate (other than because all of the Certificates of such class
are subject to Submitted Hold Orders) or if the applicable Net Funds Cap is
less than the Bid Auction Rate (in which case the Certificate Interest Rate
shall be the Net Funds Cap) or if the Certificate Interest Rate Limitation
applies, subject to the denomination requirements described below,
Submitted Orders will be accepted or rejected as follows in the following
order of priority and all other Submitted Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any
rate that is equal to or lower than the Certificate Interest Rate will be
rejected, thus entitling such Existing Certificateholders to continue to
hold the aggregate principal amount of Certificates subject to such
Submitted Bids;
(b) Potential Certificateholders' Submitted Bids specifying any
rate that is equal to or lower than the Certificate Interest Rate will be
accepted, and specifying any rate that is higher than the Certificate
Interest Rate will be rejected; and
(c) each Existing Certificateholder's Submitted Bid specifying
any rate that is higher than the Certificate Interest Rate and the
Submitted Sell Order of each Existing Certificateholder will be accepted,
thus entitling each Existing Certificateholder that submitted any such
Submitted Bid or Submitted Sell Order to sell the Certificates subject to
such Submitted Bid or Submitted Sell Order, but in both cases only in an
amount equal to the aggregate principal amount of Certificates obtained by
multiplying the aggregate principal amount of Certificates subject to
Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of Certificates
held by such Existing Certificateholder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which will be the aggregate
principal amount of Certificates subject to all such Submitted Bids and
Submitted Sell Orders.
All Hold Orders. If all Certificates of a class are subject to
---------------
Submitted Hold Orders, all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the
------------------------------------
procedures described above regarding Sufficient Bids and Insufficient Bids,
any Existing Certificateholder would be entitled or required to sell, or
any Potential Certificateholder would be entitled or required to purchase,
a principal amount of Certificates that is not equal to an Authorized
Denomination or an integral multiple thereof, the Auction Agent will, in
such manner as in its sole discretion it will determine, round up or down
the principal amount of Certificates to be purchased or sold by any
Existing Certificateholder or Potential Certificateholder so that the
principal amount of Certificates purchased or sold by each Existing
Certificateholder or Potential Certificateholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as
a result of the procedures described above regarding Insufficient Bids, any
Potential Certificateholder would be entitled or required to purchase less
than a principal amount of Certificates equal to an Authorized Denomination
or any integral multiple thereof, the Auction Agent will, in such manner as
in its sole discretion it will determine, allocate Certificates for
purchase among Potential Certificateholders so that only Certificates in an
Authorized Denomination or any integral multiples in excess thereof are
purchased by any
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Potential Certificateholder, even if such allocation results in one or more
of such Potential Certificateholders not purchasing any Certificates.
Based on the results of each Auction, the Auction Agent is to
determine the aggregate principal amount of Certificates of each class to
be purchased and the aggregate principal amount of Certificates of each
class to be sold by Potential Certificateholders and Existing
Certificateholders on whose behalf each Broker-Dealer submitted Bids or
Sell Orders and, with respect to each Broker-Dealer, to the extent that
such aggregate principal amount of Certificates to be sold differs from
such aggregate principal amount of Certificates to be purchased, determine
to which other Broker-Dealer or Broker-Dealers acting for one or more
purchasers such Broker-Dealer will deliver, or from which Broker-Dealers
acting for one or more sellers such Broker-Dealer will receive, as the case
may be, Certificates.
Any calculation by the Auction Agent (or the Trustee, if applicable)
of the Certificate Interest Rate, One-Month LIBOR, the Maximum Auction
Rate, the All Hold Rate, the Net Funds Cap and the Non-Payment Rate will,
in the absence of manifest error, be binding on all other parties.
Notwithstanding anything in the Agreement to the contrary, no Auction
is to be held on any Auction Date on which there are insufficient moneys
held by the Trustee under the Agreement and available to pay the principal
of and interest due on the applicable Certificate on the Remittance Date
immediately following such Auction Date.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that
submitted an Order in an Auction of the Certificate Interest Rate for a
Certificate for the next Interest Period and, if such Order was a Bid or
Sell Order, whether such Bid or Sell Order was accepted or rejected, in
whole or in part, by telephone not later than 3:00 pm., eastern time, on
the Auction Date if the Interest Rate is the Auction Rate and not later
than 4:00 pm. eastern time on the Auction Date if the Interest Rate is the
Net Funds Cap. Each Broker-Dealer that submitted an Order on behalf of a
Bidder is required to then advise such Bidder of the applicable Certificate
Interest Rate for the next Interest Period and, if such Order was a Bid or
a Sell Order, whether such Bid or Sell Order was accepted or rejected, in
whole or in part, confirm purchases and sales with each Bidder purchasing
or selling Certificates as a result of the Auction and advise each Bidder
purchasing or selling Certificates as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery
of such Certificates or to deliver such Certificates against payment
therefor, as appropriate. Pursuant to the Auction Agent Agreement, the
Auction Agent is to record each transfer of Certificates on the Existing
Certificateholders Registry to be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after
the Auction Date, the transactions described above will be executed through
DTC, so long as DTC is the Depository, and the accounts of the respective
Participants at DTC will be debited and credited and Certificates delivered
as necessary to effect the purchases and sales of Certificates as
determined in the Auction. Purchasers are required to make payment through
their Participants in same-day funds to DTC against delivery through their
Participants. DTC will make payment in accordance with its normal
procedures, which now provide for payment against delivery by its
Participants in immediately available funds.
If any Existing Certificateholder selling Certificates in an Auction
fails to deliver such Certificates, the Broker-Dealer of any person that
was to have purchased Certificates in such Auction may deliver to such
person a principal amount of Certificates that is less than the principal
amount of Certificates that otherwise was to be purchased by such person
but in any event equal to an Authorized Denomination or any integral
multiple thereof. In such event, the principal amount of Certificates to
be delivered will be determined by such Broker-Dealer. Delivery of such
lesser principal amount of Certificates will constitute good delivery.
Neither the Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential Certificateholder,
Existing Certificateholder or their respective Broker-Dealer or Participant
to deliver the principal amount of
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Certificates or to pay for the Certificates purchased or sold pursuant to
an Auction or otherwise. For a further description of the settlement
procedures, see "SETTLEMENT PROCEDURES."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer
under the Agreement or under the Auction Agent Agreement, the Market Agent
Agreement or any Broker-Dealer Agreement. The Trustee may conclusively
rely upon any information required to be furnished by the Auction Agent,
the Market Agent or any Broker-Dealer without undertaking any independent
review or investigation of the truth or accuracy of such information.
CHANGES IN THE AUCTION DATE
The Market Agent, at the consent of the Representative and MBIA, may
specify an earlier Auction Date (but in no event more than five Business
Days earlier) than the Auction Date that would otherwise be determined in
accordance with the definition of "Auction Date" with respect to one or
more specified Auction Periods in order to conform with then current market
practice with respect to similar securities or to accommodate economic and
financial factors that may affect or be relevant to the day of the week
constituting an Auction Date and the interest rate borne on the
Certificates. The Representative will not consent to such change in the
Auction Date unless the Representative will have received from the Market
Agent not less than three days nor more than 20 days prior to the effective
date of such change a written request for consent together with a
certificate demonstrating the need for change in reliance on such factors.
The Market Agent will provide notice of its determination to specify an
earlier Auction Date for one or more Auction Periods by means of a written
notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Representative, MBIA, the
Rating Agencies and the Depository.
The changes in Auction terms described above may be made with respect
to any class of Certificates. In connection with any change in Auction
terms described above, the Auction Agent is to provide such further notice
to such parties as is specified in the Auction Agent Agreement.
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<PAGE>
ANNEX II
SETTLEMENT PROCEDURES
(a) Not later than (i) 3:00 p.m. if the Certificate Interest Rate is
the Auction Rate or (2) 4:00 p.m. if the Certificate Interest Rate is the
Net Funds Cap, the Auction Agent is to notify by telephone each Broker-
Dealer that participated in the Auction held on such Auction Date and
submitted an Order on behalf of an Existing Certificateholder or Potential
Certificateholder of:
(i) the Certificate Interest Rate fixed for the next Interest
Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing
Certificateholder, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, and the principal amount of
Certificates, if any, to be sold by such Existing Certificateholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Certificateholder, whether such Bid was
accepted or rejected, in whole or in part, and the principal amount of
Certificates, if any, to be purchased by such Potential
Certificateholder;
(v) if the aggregate amount of Certificates to be sold by all
Existing Certificateholders on whose behalf such Seller's Broker-
Dealer submitted Bids or Sell Orders exceeds the aggregate principal
amount of Certificates to be purchased by all Potential
Certificateholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-
Dealers and the name of the Participant, if any, of each such Buyer's
Broker-Dealer (a "Participant") acting for one or more purchasers of
such excess principal amount of Certificates and the principal amount
of Certificates to be purchased from one or more Existing
Certificateholders on whose behalf such Seller's Broker-Dealer acted
by one or more Potential Certificateholders on whose behalf each of
such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Certificates to be purchased by
all Potential Certificateholders on whose behalf such Buyer's Broker-
Dealer submitted a Bid exceeds the amount of Certificates to be sold
by all Existing Certificateholders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the name or names of
one or more Seller's Broker-Dealers (and the name of the Participant,
if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of Certificates and the
principal amount of Certificates to be sold to one or more Potential
Certificateholders on whose behalf such Buyer's Broker-Dealer acted by
one or more Existing Certificateholder on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Certificateholder or Potential Certificateholder
is to:
(i) advise each Existing Certificateholder and Potential
Certificateholder on whose behalf such Broker-Dealer submitted a Bid
or Sell Order in the Auction on such Auction Date whether such Bid or
Sell Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-
Dealer, advise each Potential Certificateholder on whose behalf such
Buyer's Broker-Dealer submitted a Bid that was accepted, in whole or
in part, to instruct such Potential Certificateholder's Participant to
pay to such Buyer's Broker-Dealer
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<PAGE>
(or its Participant) through the Depository the amount necessary to
purchase the principal amount of the Certificates to be purchased
pursuant to such Bid against receipt of such Certificates together
with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-
Dealer, instruct each Existing Certificateholder on whose behalf such
Seller's Broker-Dealer submitted a Sell Order that was accepted, in
whole or in part, or a Bid that was accepted, in whole or in part, to
instruct such Existing Certificateholder's Participant to deliver to
such Seller's Broker-Dealer (or its Participant) through the
Depository the principal amount of the Certificates to be sold
pursuant to such Order against payment therefor;
(iv) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Certificateholder
on whose behalf such Broker-Dealer submitted a Bid of the Certificate
Interest Rate for the next Interest Period;
(v) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Certificateholder on whose behalf
such Broker-Dealer submitted a Bid that was accepted, in whole or in
part, of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order
in an Auction is required to allocate any funds received by it in
connection with such Auction pursuant to paragraph (b)(ii) above, and any
Certificates received by it in connection with such Auction pursuant to
paragraph (b)(iii) above, among the Potential Certificateholders, if any,
on whose behalf such Broker-Dealer submitted Bids, the Existing
Certificateholder, if any, on whose behalf such Broker-Dealer submitted
Bids or Sell Orders in such Auction, and any Broker-Dealers identified to
it by the Auction Agent following such Auction pursuant to paragraph (a)(v)
or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Certificateholder and Existing
Certificateholder with an Order in the Auction on such Auction Date
will instruct its Participant as provided in (b)(ii) or (b)(iii)
above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant of
the Depository will instruct its Participant to deliver such
Certificates through the Depository to a Buyer's Broker-Dealer (or its
Participant) identified to such Seller's Broker-Dealer pursuant to
(a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in
the Depository will instruct its Participant to pay through the
Depository to Seller's Broker-Dealer (or its Participant) identified
following such Auction pursuant to (a)(vi) above the amount necessary
to purchase the Certificates to be purchased pursuant to (b)(ii) above
against receipt of such Certificates.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in (d)(i) above will instruct the Depository to
execute the transactions described under (b)(ii) or (b)(iii) above for
such Auction, and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions described in
(d)(ii) above for such Auction, and the Depository will execute such
transactions; and
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<PAGE>
(iii) each Buyer's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(iii) above for
such Auction, and the Depository will execute such transactions.
(f) If an Existing Certificateholder selling Certificates in an
Auction fails to deliver such Certificates (by authorized book-entry), a
Broker-Dealer may deliver to the Potential Certificateholder on behalf of
which it submitted a Bid that was accepted a principal amount of
Certificates that is less than the principal amount of Certificates that
otherwise was to be purchased by such Potential Certificateholder. In such
event, the principal amount of Certificates to be so delivered will be
determined solely by such Broker-Dealer (but only in Authorized
Denominations). Delivery of such lesser principal amount of Certificates
will constitute good delivery. Notwithstanding the foregoing terms of this
paragraph (f), any delivery or nondelivery of Certificates which will
represent any departure from the results of an Auction, as determined by
the Auction Agent, will be of no effect unless and until the Auction Agent
will have been notified of such delivery or nondelivery in accordance with
the provisions of the Auction Agent Agreement and the Broker-Dealer
Agreements. Neither the Trustee nor the Auction Agent will have any
responsibility or liability with respect to the failure of a Potential
Certificateholder, Existing Certificateholder or their Respective Broker-
Dealer or Participant to take delivery of or deliver, as the case may be,
the principal amount of the Certificates purchased or sold pursuant to an
Auction or otherwise.
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<PAGE>
ANNEX III
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Class A
Certificates (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities
through any of The Depository Trust Company, Cedel Bank or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank 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 Asset-Backed
Certificates issues.
Secondary, cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of Cedel Bank and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result,
Cedel Bank and Euroclear will hold positions on behalf of their
participants through their respective Depositaries, which in turn will hold
such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Asset-Backed
Certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel Bank or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global
security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
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Trading between Cedel Bank and/or Euroclear Participants. Secondary
market trading between Cedel Bank Participants or Euroclear Participants
will be settled using the procedures applicable to conventional eurobonds
in same-day funds.
Trading between DTC Seller and Cedel Bank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC
Participant to the account of a Cedel Bank Participant or a Euroclear
Participant, the purchaser will send instructions to Cedel Bank or
Euroclear through a Cedel Bank Participant or Euroclear Participant at
least one business day prior to settlement. Cedel Bank 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 the actual number of
days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance
with its usual procedures, to the Cedel Bank Participant's or Euroclear
Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest
on the Global Securities will accrue from, the value date (which would be
the preceding day when settlement occurred in New York.) If settlement is
not completed on the intended value date (i.e., the trade fails), the Cedel
Bank, or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Bank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within Cedel
Bank or Euroclear. Under this approach, they may take on credit exposure
to Cedel Bank or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Cedel Bank or Euroclear has extended a line of
credit to them, Cedel Bank Participants or Euroclear Participants can elect
not to preposition funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedel Bank Participants or
Euroclear Participants purchasing Global Securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the Global
Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many
cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such
overdraft charges, although this result will depend on each Cedel Bank
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Bank Participants or Euroclear Participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a
trade between two DTC Participants.
Trading between Cedel Bank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Bank Participants and Euroclear
Participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing
system, through the respective Depositary, to a DTC Participant. The
seller will send instructions to Cedel Bank or Euroclear through a Cedel
Bank Participant or Euroclear Participant at least one business day prior
to settlement. In these cases Cedel Bank 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 the
actual number of days in such accrual period and a year assumed to consist
of 360 days. 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
III-2
<PAGE>
account of the Cedel Bank Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedel Bank
Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred
in New York). Should the Cedel Bank Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be
in debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Cedel Bank
Participant's or Euroclear Participant's account would instead be valued as
of the actual settlement date.
Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel Bank or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel Bank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC' Participant is at least
one day prior to the value date for the sale to the Cedel Bank Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
Bank, or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate.
Exception for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must
be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. (Form 1001). Non-U.S. Persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If
the treaty provides only for a reduced rate, withholding tax will be
imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by the Certificate Owners or his agent.
III-3
<PAGE>
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective
for three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof or (iii) an estate
or trust the income of which is includible in gross income for United
States tax purposes, regardless of its source. 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 advise
concerning their holding and disposing of the Global Securities.
III-4
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
<PAGE>
COOPERS & LYBRAND L.L.P.
Coopers
& Lybrand
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, 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, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 22, 1996
A-1
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ------------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838 $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
======= ======== ========== ========== ========== ============
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
. MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the
insurance company to Municipal Bond Investors Assurance Corporation. In
April 1995, the name was again changed to MBIA Insurance Corp. Prior to
the acquisition, all of the obligations of this company were reinsured
and/or indemnified by the former owner.
. Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc.
and entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA
Inc.'s reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the
net insurance in force of the Association. The net assets transferred
from the predecessor included the cash transferred in connection with the
reinsurance agreements, the related deferred acquisition costs and
contingent commissions receivable, net of the related unearned premiums
and contingent commissions payable. The deferred income taxes inherent in
these assets and liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums earned prior to
the effective date of the reinsurance agreements by the Association in
accordance with statutory accounting practices, remained as assets
(liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
-6-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
-7-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and
-8-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
mutual funds as a component of investment income. In addition, MBIA Corp.
records its share of the unrealized gains and losses on these investments, net
of applicable deferred income taxes, as a separate component of shareholder's
equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management
-9-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
believes that the reserves are adequate to cover the ultimate net cost of
claims, but the reserves are necessarily based on estimates, and there can be no
assurance that the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting purposes is
determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result
of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected
directly in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost
and, exclusive of land, are depreciated on the straight-line method over their
estimated service lives ranging from 4 to 31 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
-10-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
. premiums are earned only when the related risk has expired
rather than over the period of the risk;
. acquisition costs are charged to operations as incurred rather
than as the related premiums are earned;
. a contingency reserve is computed on the basis of statutory
requirements and reserves for losses and LAE are established, at
present value, for specific insured issues which are identified as
currently or likely to be in default. Under GAAP reserves are
established based on MBIA Corp.'s reasonable estimate of the
identified and unidentified losses and LAE on the insured obligations
it has written;
. Federal income taxes are only provided on taxable income for which
income taxes are currently payable, while under GAAP, deferred income
taxes are provided with respect to temporary differences;
. fixed-maturity securities are reported at amortized cost rather than
fair value;
-11-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
. tax and loss bonds purchased are reflected as admitted assets as well
as payments of income taxes; and
. certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition . (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses ... (223,635) 71,932 --
Contingent commissions ...... (1,645) (1,706) (1,880)
Contingency reserve ......... (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves ........... 28,024 18,181 26,262
Deferred income taxes ....... 205,425 90,328 99,186
Tax and loss bonds .......... 70,771 50,471 25,771
Goodwill .................... (105,614) (110,543 (115,503)
Other ....................... (12,752) (13,568 (11,679)
------------ ----------- -----------
Statutory capital
and surplus ......... $ 1,274,138 1,110,038 $ 977,736
=========== ========= ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
issuer. The fixed-maturity portfolio is comprised of high-quality (average
-12-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency .. $ 6,742 $ 354 -- $ 7,096
Corporate and other
obligations ............ 592,604 30,536 (212) 622,928
Mortgage-backed .......... 389,943 21,403 (932) 410,414
Tax-exempt bonds municipal
Obligations .............. 2,637,732 175,081 (2,595) 2,810,218
--------- ------- ------ ---------
Total fixed-
maturities $3,627,021 $ 227,374 (3,739) $3,850,656
========== ========== ====== ==========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
Taxable bonds
United States Treasury
and Government Agency $ 15,133 -- (149) $ 14,984
Corporate and other ...
obligations ......... 461,601 2,353 (23,385) 440,569
Mortgage-backed ......... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations ........... 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
-13-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thousands Cost Value
Maturity
Within 1 year ....................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years .... 448,817 477,039
Beyond 5 years but within 10 years .. 1,133,527 1,211,645
Beyond 10 years but within 15 years . 742,790 804,421
Beyond 15 years but within 20 years . 686,871 730,030
Beyond 20 years ..................... 46.745 38,851
-------- --------
3,237,078 3,440,242
Mortgage-backed ..................... 389,943 410,414
------- -------
Total fixed-maturities and short-term
investments ....................... $3,627,021 $3,850,656
========== ==========
6. Investment Income and Gains and Losses
Investment income consists of:
Years ended December 31
-----------------------
(In thousands) ................ 1995 1994 1993
- ------------------------------- ---- ---- ----
Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070
Short-term investments ...... 6,008 3,003 2,844
Other investments ............. 17 12 2,078
-- -- -----
Gross investment income ..... 222,678 196,744 177,992
Investment expenses ........... 2,844 2,778 2,663
----- ----- -----
Net investment income ....... 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains..................... 9,941 9,635 9,070
Losses................ .. (2,537) (8,851) (744)
------ ------ ----
Net..................... 7,404 784 8,326
Other investments:
Gains................... 382 9,551 615
Losses................... (9) -- --
---- ------ ----
Net....................... 373 9,551 615
--- ----- ---
Net realized gains .......... 7,777 10,335 8,941
----- ------ -----
Total investment income ....... $ 227,611 $ 204,301 $ 184,270
=========== =========== ===========
-14-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
-----------------
(In thousands) .................. 1995 1994
- --------------------------------- ---- ----
Fixed-maturities:
Gains ......................... $ 227,374 $ 42,030
Losses ........................ (3,739) (113,962)
Net .......................... 223,635 (71,932)
Other investments:
Gains ......................... 287 --
Losses ........................ (821) (1,042)
------- ------
Net ........................... (534) (1,042)
------ ------
Total ........................... 223,101 (72,974)
Deferred income tax (benefit) ... 78,372 (25,334)
------ -------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------
In thousands 1995 1994 1993
- ------------ ---- ---- ----
Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418
Other investments .............. 508 (8,488) 3,842
--- ------ -----
Total ........................ 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
------- ------- -----
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
-15-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) ................................ 1995 1994
- ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds .......................... $ 71,183 $ 50,332
Unrealized losses ........................... -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves ... 9,809 6,363
Other ....................................... 954 3,981
--- -----
Total gross deferred tax assets ............. 121,018 108,401
======= =======
Deferred tax liabilities
Contingency reserve ......................... 131,174 91,439
Deferred premium revenue .................... 64,709 54,523
Deferred acquisition costs .................. 49,122 48,900
Unrealized gains ............................ 78,372 --
Contingent commissions ...................... 7,158 4,746
Other ....................................... 3,408 6,621
----- -----
Total gross deferred tax liabilities ........ 333,943 206,229
------- -------
Net deferred tax liability .................. $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
-----------------------
(In thousands) .................. 1995 1994 1993
- --------------------------------- ---- ---- ----
Current ......................... $70,357 $58,043 $66,086
Deferred ........................ 11,391 19,082 20,598
------ ------ ------
Total ......................... $81,748 $77,125 $86,684
======= ======= =======
-16-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates .......... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ........................ (12.5) (12.0) (10.6)
Amortization of goodwill ................... 0.5 0.5 0.5
Other ...................................... (1.1) (1.7) --
---- ---- ----
Provision for income taxes ......... 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
-17-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
-18-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- --------------- ---- ----
Net Number % of Net Net Number % of Net
Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3%
New York .... 30.1 4,846 8.7 25.0 4,447 8.2
Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3
Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9
Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio ........ 9.1 1,017 2.6 8.3 996 2.7
Michigan .... 7.9 1,012 2.3 5.7 972 1.9
--- ----- --- --- --- ---
Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4
Other ....... 135.6 11,147 39.1 118.8 10,711 38.8
----- ------ ---- ----- ------ ----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
======== ====== ===== ======== ====== =====
</TABLE>
-19-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------
1995 1994
---- ----
($ in billions) Net Number % of Net Net Number % of Net
Insurance of Issues nsurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ -------- ----------- -------- -------- ----------- --------
MUNICIPAL
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3
Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5
Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education . 15.2 1,261 4.4 14.0 1,208 4.6
======= ======= ====== ======= ======= =====
Other ............ 7.3 134 2.1 3.8 124 1.2
309.2 26,831 89.2 281.3 26,574 91.9
======= ======= ======= ======= ======= =====
Non-municipal
Asset/mortgage-
backed 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities 6.4 3,559 1.8 5.7 2,918 1.9
International .... 5.1 53 1.5 2.5 18 0.8
Other ............ 5.8 246 1.7 3.7 123 1.2
--- --- --- --- --- ---
37.5 4,114 10.8 24.7 3,210 8.1
---- ----- ---- ---- ----- ---
$346.7 30,945 100.0% $306.0 29,784 100.0%
======= ======= ======= ====== ======= =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and
-20-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$42.6 billion, at December 31, 1995 and 1994, respectively. The distribution of
ceded insurance in force by geographic location and type of bond is set forth in
the tables below:
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------- -------- -------- -------- --------
California ......... $ 8.8 17.5% $ 7.5 17.6%
New York ........... 5.7 11.4 4.9 11.5
New Jersey ......... 3.1 6.1 2.0 4.7
Texas .............. 2.8 5.6 2.5 5.9
Pennsylvania ....... 2.7 5.4 2.6 6.1
Florida ............ 2.3 4.6 2.1 4.9
Illinois ........... 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington ......... 1.4 2.7 1.2 2.8
Puerto Rico ........ 1.3 2.6 1.1 2.6
Massachusetts ...... 1.1 2.1 0.9 2.1
Ohio ............... 1.0 2.1 0.9 2.1
--- --- --- ---
Subtotal ........... 33.9 67.6 29.6 69.5
Other .............. 14.4 28.8 12.3 28.9
---- ---- ---- ----
Total U. S ..... 48.3 96.4 41.9 98.4
International ...... 1.8 3.6 0.7 1.6
--- --- --- ---
$ 50.1 100.0% $42.6 100.0%
======= ===== ===== =====
-21-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------ -------- -------- -------- --------
Municipal
General obligation ... $ 11.7 23.3% $ 9.7 22.8%
Utilities ............ 9.0 18.0 8.5 20.0
Health care .......... 6.6 13.1 6.5 15.3
Transportation ....... 5.5 11.0 4.5 10.6
Special revenue ...... 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue 3.0 6.0 2.9 6.8
Housing .............. 1.4 2.8 1.0 2.3
Higher education ..... 1.2 2.4 1.2 2.8
Other ................ 2.4 4.8 1.5 3.5
--- --- --- ---
44.0 87.8 38.5 90.4
==== ==== ==== ====
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International ........ 1.8 3.6 0.7 1.6
Other ................ 0.7 1.4 0.7 1.7
--- --- --- ---
6.1 12.2 4.1 9.6
--- ---- --- ---
$ 50.1 100.0% $ 42.6 100.0%
======== ===== ======== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
-22-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. MBIA Corp recorded $0.1
million of compensation expense in 1995 relating to this program.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
-23-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
-24-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
-25-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
------------------
1995 1994
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments.. 198,035 198,035 121,384 121,384
Other investments ...... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums .............. 200,887 174,444 186,492 159,736
Receivable for
investments sold ...... 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves ..... 42,505 42,505 40,148 40,148
Payable for investments
purchased ........... 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums ---- 235,371 --- 176,944
-26-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
B-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995 (Audited) ............. 3
Consolidated Statements of Income -
Three months ended March 31, 1996 and 1995 (Unaudited) ................. 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1996 (Unaudited) .......................... 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 (Unaudited) ................. 6
Notes to Consolidated Financial Statements (Unaudited) ..................... 7
-2-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
March 31, 1996 December 31, 1995
--------------- ------------------
(Unaudited) (Audited)
ASSETS
Investments:
Fixed-maturity securities
held as available-for-sale
at fair value
(amortized cost $3,664,571
and $3,428,986) .................. $3,784,836 $3,652,621
Short-term investments, at
amortized cost
(which approximates fair value) .. 135,428 198,035
Other investments .................. 13,374 14,064
---------- ----------
TOTAL INVESTMENTS .............. 3,933,638 3,864,720
Cash and cash equivalents .............. 2,499 2,135
Accrued investment income .............. 60,462 60,247
Deferred acquisition costs ............. 140,919 140,348
Prepaid reinsurance premiums ........... 206,383 200,887
Goodwill (less accumulated amortization
of $38,590 and $37,366) ............ 104,390 105,614
Property and equipment, at cost
(less accumulated
depreciation of $12,822 and $12,137) 41,771 41,169
Receivable for investments sold ........ 6,501 5,729
Other assets ........................... 51,534 42,145
---------- ----------
TOTAL ASSETS ................... $4,548,097 $4,462,994
========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue ........... $1,666,945 $1,616,315
Loss and loss adjustment
expense reserves .................. 46,376 42,505
Deferred income taxes .............. 180,843 212,925
Payable for investments purchased .. 15,715 10,695
Other liabilities .................. 96,600 54,682
---------- ----------
TOTAL LIABILITIES .............. 2,006,479 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150
per share; authorized,
issued and outstanding -
100,000 shares .................... 15,000 15,000
Additional paid-in capital ......... 1,025,591 1,021,584
Retained earnings .................. 1,423,157 1,341,855
Cumulative translation
adjustment ........................ 330 2,704
Unrealized appreciation
of investments,
net of deferred income tax
provision of $42,114 and $78,372 .. 77,540 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY ..... 2,541,618 2,525,872
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY ......... $4,548,097 $4,462,994
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
------------------------
1996 1995
--------- ---------
Revenues:
Gross premiums written ...................... $ 121,011 $ 71,112
Ceded premiums .............................. (14,715) (7,080)
--------- ---------
Net premiums written .................... 106,296 64,032
Increase in deferred premium revenue ........ (45,532) (12,680)
--------- ---------
Premiums earned (net of ceded
premiums of $9,220 and $7,839) ...... 60,764 51,352
Net investment income ....................... 59,003 53,065
Net realized gains .......................... 2,692 1,724
Other income ................................ 969 908
--------- ---------
Total revenues .......................... 123,428 107,049
--------- ---------
Expenses:
Losses and loss adjustment expenses ......... 3,178 2,033
Policy acquisition costs, net ............... 5,900 5,140
Underwriting and operating expenses ......... 10,549 9,752
--------- ---------
Total expenses .......................... 19,627 16,925
--------- ---------
Income before income taxes ....................... 103,801 90,124
Provision for income taxes ....................... 22,499 19,476
--------- ---------
Net income ....................................... $ 81,302 $ 70,648
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the three months ended March 31, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $ 144,729
Exercise of stock options .............. -- -- 1,179 -- -- --
Net income ............................. -- -- -- 81,302 -- --
Change in foreign
currency transactions ................ -- -- -- -- (2,374) --
Change in unrealized
appreciation of
investment net of change
in deferred income taxes
of $36,258 ........................... -- -- -- -- -- (67,189)
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 2,828 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1996 ................ 100,000 $ 15,000 $1,025,591 $1,423,157 $ 330 $ 77,540
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
-----------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 81,302 $ 70,648
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Increase) decrease in accrued
investment income ............................ (215) 960
Increase in deferred acquisition costs ......... (571) (1,634)
(Increase) decrease in prepaid
reinsurance premiums .......................... (5,496) 758
Increase in deferred premium revenue ........... 51,028 11,922
Increase in loss and loss adjustment
expense reserves .............................. 3,871 1,885
Depreciation ................................... 719 630
Amortization of goodwill ....................... 1,224 1,232
Amortization of bond discount, net ............. (1,014) (358)
Net realized gains on sale of investments ...... (2,692) (1,724)
Deferred income taxes .......................... 4,176 3,782
Other, net ..................................... 34,288 19,601
--------- ---------
Total adjustments to net income ................ 85,318 37,054
--------- ---------
Net cash provided by operating activities ...... 166,620 107,702
--------- ---------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased ........... (329,252) (182,603)
Sale of fixed-maturity securities, net of
receivable for investments sold ................ 146,729 92,890
Redemption of fixed-maturity securities,
net of receivable for investments redeemed ..... 32,644 16,717
Purchase of short-term investments, net .......... (15,259) (9,908)
Sale (purchase) of other investments, net ........ 215 (863)
Capital expenditures, net of disposals ........... (1,333) (817)
--------- ---------
Net cash used in investing activities .......... (166,256) (84,584)
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... -- (22,500)
--------- ---------
Net cash used by financing activities .......... -- (22,500)
--------- ---------
Net increase in cash and cash equivalents .......... 364 618
Cash and cash equivalents - beginning of period .... 2,135 1,332
--------- ---------
Cash and cash equivalents - end of period .......... $ 2,499 $ 1,950
========= =========
Supplemental cash flow disclosures:
Income taxes paid ................................ $ 1,161 $ 1
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- ------------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1995. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted auditing standards but in the
opinion of management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. The results of
operations for the three months ended March 31, 1996 may not be indicative of
the results that may be expected for the year ending December 31, 1996. The
December 31, 1995 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. Dividends Declared
- ---------------------
No dividends were declared by the Company during the three months ended
March 31, 1996.
-7-
<PAGE>
PROSPECTUS
- ----------
THE MONEY STORE INC.
(REPRESENTATIVE)
TMS ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
---------------
This Prospectus relates to TMS Asset Backed Certificates (the
"Certificates"), issuable in Series, which may be sold from time to time on
terms determined at the time of sale and described in the related Prospectus
Supplement, evidencing specified interests in one or more trust funds (each, a
"Trust"), the primary assets of which will consist of pools (each, a "Pool") of
certain mortgage loans and certain other mortgage-related or other similar
assets more particularly described herein (the "Mortgage Assets"). The Mortgage
Assets and other assets of any Trust will be described in the Prospectus
Supplement for the related Series of Certificates. Certain of the Mortgage
Assets may have been originated by wholly-owned subsidiaries (the "Originators")
of The Money Store Inc. ("The Money Store" or the "Representative"). Certain
other of the Mortgage Assets may have been acquired by The Money Store, an
Originator or an affiliate thereof from other lenders or government agencies, or
may consist of mortgage pass-through or mortgage-backed securities issued by
government agencies or private lenders. In addition, if so specified in the
related Prospectus Supplement, the Trust will include monies on deposit in one
or more trust accounts to be established with a Trustee (as defined herein),
which may include a Pre-Funding Account (as defined herein) which would be used
to purchase additional Mortgage Assets for the related Trust from time to time
during the Funding Period (as defined herein) specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
certain Certificates may evidence a fractional undivided ownership interest in a
Trust which will hold a beneficial ownership interest in another trust fund
which will contain the Mortgage Assets. Certificates may also be entitled to
the benefits of insurance policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees, supplemental interest
payments or other forms of credit enhancement or maturity protection, to the
extent described in the related Prospectus Supplement. The Prospectus
Supplement for each Series of Certificates will name the entities (which will
include The Money Store or one of its affiliates and may include other entities)
which will act, directly or through one or more sub-servicers, as master
<PAGE>
servicers (each, in such capacity, the "Master Servicer") of such Mortgage
Assets.
SEE RISK FACTORS ON PAGE 31 HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES OFFERED
HEREBY.
--------------------------------------
The date of this Prospectus is March 19, 1996.
-2-
<PAGE>
Each Series of Certificates will be issued in one or more classes (each, a
"Class"). Each Class of Certificates will evidence a fractional undivided
ownership interest of a specified percentage or portion of future interest
payments and a specified percentage or portion of future principal payments on
the Mortgage Assets in the related Trust. A Series of Certificates may include
one or more Classes that receive certain preferential treatment with respect to
one or more other Classes. One or more Classes of Certificates may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other Classes of Certificates or after the occurrence of
specified events, or may be required to absorb one or more types of losses prior
to one or more other Classes of Certificates, in each case as specified in the
related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders" or
"Holders") will be made on certain dates specified in the related Prospectus
Supplement (each, a "Remittance Date"), which may be monthly, quarterly, semi-
annually or at such other intervals as are specified therein. The rate (the
"Pass-Through Rate") at which Certificateholders will receive distributions of
interest on any Class of Certificates or the method of calculating such Pass-
Through Rate, which may be fixed or variable, will be set forth in the related
Prospectus Supplement. Distributions on the Certificates of a Series will be
made only from the assets of the related Trust.
The Certificates will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent specified in the related Prospectus Supplement, will not be insured or
guaranteed by any governmental agency or instrumentality or by any other person.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Representative or the Originators with respect to a Series of
Certificates will be pursuant to certain limited representations and warranties.
Except for certain representations and warranties relating to the Mortgage
Assets and certain other exceptions, the Master Servicer's obligations with
respect to the related Series of Certificates will be limited to its contractual
servicing obligations. If the amount available for distribution to
Certificateholders on any Remittance Date is less than the amount due to them,
the Master Servicer, to the extent provided in the related Prospectus
Supplement, may be obligated, under certain terms and conditions, to advance
cash to such Certificateholders, to the extent such deficiency is attributable
to delinquent payments of principal and interest during the immediately
preceding Due Period (as defined herein). See "Description of the Certificates-
- -Monthly Advances and Compensating Interest."
-3-
<PAGE>
The yield to Certificateholders on each Class of Certificates of a Series
may be affected by the rate of payment of principal (including prepayments) of
the Mortgage Assets in the related Trust and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
each Trust as a "real estate mortgage investment conduit" ("REMIC") for federal
income tax purposes. See "Federal Income Tax Consequences."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement. The
intention of any underwriter to make a secondary market in the Certificates will
be set forth in the related Prospectus Supplement. There can be no assurance
that a secondary market for the Certificates will develop, or if it does
develop, that it will continue. This Prospectus may not be used to consummate
sales of a Series of Certificates unless accompanied by a Prospectus Supplement.
-4-
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates to be
offered hereunder, among other things, will set forth with respect to such
Series of Certificates: (i) the aggregate principal amount, Pass-Through Rate
or Rates or other applicable annual rate or rates of interest (or the manner of
determining such rate or rates) and authorized denominations of each Class of
such Certificates; (ii) certain information concerning the Mortgage Assets and
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, supplemental interest payments or
other forms of credit enhancement or maturity protection, if any, relating to
the Pools or all or part of the related Certificates; (iii) the specified
interest of each Class of Certificates in, and manner and priority of, the
distributions on the Mortgage Assets; (iv) information as to the nature and
extent of subordination with respect to such Series of Certificates, if any; (v)
the Remittance Dates; (vi) information as to the Master Servicer; (vii) the
circumstances, if any, under which each Trust may be subject to early
termination; (viii) whether the Representative intends to elect to cause the
Trust to be treated as a REMIC; and (ix) additional information with respect to
the plan of sale of such Certificates.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities an Exchange
Commission (the "Commission") with respect to the Certificates. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor,
New York, New York 10048; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration
Statement and amendments thereof and exhibits thereto may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
-5-
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the Certificateholders as described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, a
Series of Certificates may be issuable in book-entry form. In such event, the
related Certificates will be registered in the name of Cede, the nominee of The
Depository Trust Company. All reports will be provided to Cede, which in turn
will provide such reports to its Participants and Indirect Participants (as
defined herein). Such Participants and Indirect Participants will then forward
such reports to the beneficial owners of Certificates. See "Description of the
Certificates--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus. The Representative will provide without charge to each person to
whom a copy of the Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically
-6-
<PAGE>
incorporated by reference in such documents). Requests for such copies should be
directed to The Money Store Inc., 3301 C Street, Suite 100-M, Sacramento,
California 95816, Attention: Investor Relations, Telephone: (916) 446-5000.
-7-
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Capitalized terms used but not defined in this Prospectus shall
have the meanings assigned to such terms elsewhere in this Prospectus.
Securities
Offered ......... TMS Asset Backed Certificates (the "Certificates"),
evidencing interests in certain Pools of Mortgage Loans and
certain other Mortgage Assets (each, as defined below), may
be issued from time to time in Series pursuant to separate
Pooling and Servicing Agreements (each, an "Agreement")
among The Money Store Inc., as Representative (the
"Representative") of certain Trusts, Originators, a Master
Servicer, and a Trustee, each as defined herein and as
specified in the related Prospectus Supplement for such
Series of Certificates.
Issuers......... Certain trust funds (each, a "Trust") represented by The
Money Store, the primary assets of which will be a Pool of
Mortgage Loans and certain other Mortgage Assets.
Representative
and Master
Servicer........ The Money Store Inc. ("The Money Store"), a New Jersey
corporation. The Prospectus Supplement relating to any
Series of Certificates will name the entities (which may
include The Money Store or one of its affiliates and may
additionally include other unrelated entities) which will
act, directly or through one or more Sub-Servicers (as
defined herein), as master servicers (each, in such
capacity, the "Master Servicer"). The principal offices of
The Money Store are located in Sacramento, California and
Union, New Jersey. See "The Representative and the
Originators."
The Mortgage
Assets......... The Certificates will evidence fractional undivided
ownership interests in certain Trusts further described
herein. The primary assets of each Trust may consist of
one or more pools (each, a "Pool") of
-8-
<PAGE>
Mortgage Loans and certain other mortgage-related assets
("Mortgage Assets") specified in the related Prospectus
Supplements, which may include (i) first, second and more
junior lien mortgage loans, deeds of trust or
participations therein secured by one- to four-family
residential properties, including low-rise condominiums,
single family detached homes, single-family attached homes,
planned unit developments and mixed use properties
(collectively, "Single Family Loans," which Single Family
Loans may be "Conventional Loans" (i.e., loans that are not
----
insured or guaranteed by any governmental agency) or loans
that are insured by the Federal Housing Authority ("FHA")
or partially guaranteed by the Veterans' Administration
("VA") as specified in the related Prospectus Supplement),
(ii) loans or participations therein secured by security
interests or similar liens on shares in private, non-profit
cooperative housing corporations ("Cooperatives") and on
the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings ("Cooperative Loans"),
(iii) first, second and more junior lien mortgage loans,
deeds of trust or participations therein secured by
multifamily residential or mixed-use properties, such as
rental apartment buildings (including buildings owned by
Cooperatives) or projects containing five or more
residential units ("Multifamily Loans"), (iv) conditional
sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing
("Contracts"), (v) mortgage-backed securities issued or
guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") (the "Agency Securities"), (vi) privately issued
mortgage-backed securities ("Private Mortgage-Backed
Securities" or "PMBS"), (vii) first, second and more junior
home improvement mortgage loans that are either
conventional loans ("Secured Conventional Home Improvement
Loans") or loans originated under the Title I credit
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insurance program created under the National Housing Act of
1934 by the Federal Housing Administration ("FHA Loans"),
and (viii) unsecured home improvement loans consisting of
conventional unsecured home improvement loans and FHA
insured home improvement loans (the "Unsecured Home
Improvement Loans"). The Single Family Loans, Cooperative
Loans, Multifamily Loans, Secured Conventional Home
Improvement Loans, FHA Loans and Unsecured Home Improvement
Loans are sometimes referred to herein collectively as the
"Mortgage Loans."
A. Mortgage
Loans The payment terms of the Mortgage Loans to be included in
any Pool will be described in the related Prospectus
Supplement and may include any of the following features,
combinations thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate (a "Fixed Rate")
or may be payable at a rate that is adjustable from time
to time in relation to an index, that may be fixed for a
period of time or under certain circumstances and is
followed by an adjustable rate, a rate that other-wise
varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate (each, an
"Adjustable Rate"). The specified rate of interest on a
Mortgage Loan is its "Mortgage Interest Rate." Changes to
an Adjustable Rate may be subject to periodic
limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be
deferred and added to the principal of a Mortgage Loan
for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage
Loans may permit the payment of interest at a rate lower
than the Mortgage Interest Rate for a period of time or
for the life of the Mortgage Loan, and the amount of any
difference may be contributed from funds supplied by the
seller of the properties securing the related Mortgage
Loan (the
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"Mortgaged Properties") or another source or may be
treated as accrued interest and added to the principal of
the Mortgage Loan.
(b) Principal may be payable on a level basis to fully
amortize the Mortgage Loan over its term, may be
calculated on the basis of an assumed amortization
schedule that is significantly longer than the original
term to maturity or on an interest rate that is different
from the Mortgage Interest Rate, or may not be amortized
during all or a portion of the original term. Payment of
all or a substantial portion of the principal may be due
on maturity (a "balloon" payment). From time to time,
principal may include interest that has been deferred and
added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a
specified period of time ("graduated payments"), or may
change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum
amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan
or may adjust or decline over time, and may be prohibited
for the life of the Mortgage Loan or for certain periods
("Lockout Periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable Lockout
Period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other
Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time
periods. The Mortgage Loans may include due-on-sale
clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or
certain other transfers of the related Mortgaged
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Properties. Other Mortgage Loans may be assumable by
persons meeting the then applicable underwriting
standards of the originator.
The Mortgaged Properties relating to Mortgage Loans may be
located in any one of the fifty states or the District of
Columbia. The Mortgaged Properties generally will be
covered by standard hazard insurance policies ("Standard
Hazard Insurance Policies") insuring against losses due to
fire and various other causes. The Mortgage Loans will be
covered by Primary Mortgage Insurance Policies to the
extent provided in the related Prospectus Supplement. As
set forth in the related Prospectus Supplement, certain of
the Mortgage Loans underlying a given Series of
Certificates may have been originated by the
Representative, the Originators or affiliates thereof and
certain Mortgage Loans may have been purchased by the
Representative, an Originator or an affiliate thereof in
the open market or in privately negotiated transactions,
including transactions with entities affiliated with the
Representative.
Certain of the Mortgage Loans may be partially insured by
the FHA, an agency of the United States Department of
Housing and Urban Development ("HUD"), pursuant to the
Title I credit insurance program (the "Title I Loan
Program") of the National Housing Act of 1934. Several
types of loans may be made under the Title I Loan Program,
including (1) property improvement loans; (2) manufactured
home purchase loans, (3) manufactured home lot loans; and
(4) combination loans (to purchase a manufactured home and
a lot). The Title I Loan Program is a coinsurance program.
The lender initially is at risk for 10% of the principal
balance of each loan. The FHA will insure the remaining
90% of the principal balance of each loan, subject to
certain limits. Such FHA insurance is accorded the full
faith and credit of the United States of America.
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The Prospectus Supplement for each Series of
Certificates will specify with respect to all Mortgage
Loans expected to be included in the related Pool as of the
related closing date, among other things, (i) the expected
aggregate outstanding principal balance and the expected
average outstanding principal balance of the Mortgage Loans
in such Pool as of the date specified in the Prospectus
Supplement, (ii) the largest expected principal balance and
the smallest expected principal balance of any of the
Mortgage Loans, (iii) the types of Mortgaged Properties
and/or other assets securing the Mortgage Loans and the
percentage, if any, of Unsecured Home Improvement Loans
expected to be included in the related Pool, (iv) the
original terms to maturity of the Mortgage Loans, (v) the
expected weighted average term to maturity of the Mortgage
Loans as of the date specified in the Prospectus Supplement
and the expected range of the terms to maturity, (vi) the
earliest origination date and latest maturity date of any
of the Mortgage Loans, (vii) the expected aggregate
principal balance of Mortgage Loans having Combined Loan-
to-Value Ratios at origination exceeding 80%, (viii) the
expected weighted average Mortgage Rate or APR and ranges
of Mortgage Rates or APRs borne by the Mortgage Loans or
Contracts (as the case may be), (ix) in the case of
Mortgage Loans having Adjustable Rates, the expected
weighted average of the Adjustable Rates as of the date set
forth in the Prospectus Supplement and maximum permitted
Adjustable Rates, if any, (x) the expected aggregate
outstanding principal balance, if any, of "buydown"
mortgage loans (as hereinafter described) and Mortgage
Loans having graduated payment provisions, as of the date
set forth in the Prospectus Supplement, (xi) the amount of
any Certificate Guaranty Insurance Policy, Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or
Bankruptcy Bond (each as defined herein) to be maintained
with respect to such Pool, (xii) the amount of any Primary
Mortgage Insurance and Standard Hazard Insurance (as
hereinafter described) required to be maintained with
respect to each Mortgage Loan, (xiii) the
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amount, if any, and terms of any other credit enhancement
to be provided with respect to all or any Mortgage Loans or
the Pool and (xiv) the expected geographic location of the
Mortgaged Properties, if any.
B. Contracts Contracts will consist of conditional sales and installment
sales or loan agreements secured by new or used
Manufactured Homes (as defined herein). To the extent
provided in the related Prospectus Supplement, each
Contract will be fully amortizing and will bear interest at
a fixed annual percentage rate ("APR").
C. Agency
Securities The Agency Securities will consist of (i) fully modified
pass-through mortgage-backed certificates guaranteed as to
timely payment of principal and interest by the Government
National Mortgage Association ("GNMA Certificates"), (ii)
guaranteed mortgage pass-through certificates issued and
guaranteed as to timely payment of principal and interest
by the Federal National Mortgage Association ("FNMA
Certificates"), (iii) Mortgage Participation Certificates
issued and guaranteed as to timely payment of interest and,
unless otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the Federal
Home Loan Mortgage Corporation ("FHLMC Certificates"), (iv)
stripped mortgage-backed securities representing an
undivided interest in all or a part of either the principal
distributions (but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion of the
principal and interest distributions (but not all of such
distributions) on certain GNMA, FNMA, FHLMC or other
government agency or government-sponsored agency
Certificates and, unless otherwise specified in the
Prospectus Supplement, guaranteed to the same extent as the
underlying securities, (v) another type of guaranteed pass-
through certificate issued or guaranteed by GNMA, FNMA,
FHLMC or another government agency or government-sponsored
agency and described in the
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related Prospectus Supplement, or (vi) a combination of
such Agency Securities. All GNMA Certificates will be
backed by the full faith and credit of the United States.
No FNMA or FHLMC Certificates will be backed, directly or
indirectly, by the full faith and credit of the United
States. The Agency Securities may consist of pass-through
securities issued under the GNMA I Program, the GNMA II
Program, FHLMC's Cash or Guarantor Program or another
program specified in the Prospectus Supplement. The payment
characteristics of the Mortgage Loans underlying the Agency
Securities will be described in the related Prospectus
Supplement. See "The Trusts--Agency Securities."
D. Private Mortgage-
Backed
Securities Private Mortgage-Backed Securities may include (i) mortgage
participations or pass-through certificates representing
beneficial interests in certain mortgage loans or (ii)
Collateralized Mortgage Obligations ("CMOs") secured by
such mortgage loans. Although individual mortgage loans
underlying a Private Mortgage-Backed Security may be
insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Private
Mortgage-Backed Securities themselves will not be, so
insured or guaranteed. See "The Trusts--Private Mortgage-
Backed Securities." Unless otherwise specified in the
Prospectus Supplement relating to a Series of Certificates,
payments on the Private Mortgage-Backed Securities will be
distributed directly to the Trustee as registered owner of
such Private Mortgage-Backed Securities. See "The Trusts--
Private Mortgage-Backed Securities."
The Prospectus Supplement for each Series of Certificates
will specify, with respect to any Private Mortgage-Backed
Securities owned by the related Trust: (i) the aggregate
approximate principal amount and type of Private Mortgage-
Backed Securities; (ii) certain characteristics of the
mortgage loans underlying the Private
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Mortgage-Backed Securities, including (A) the payment
features of such mortgage loans, (B) the approximate
aggregate principal amount, if known, of the underlying
mortgage loans which are insured or guaranteed by a
governmental entity, (C) the servicing fee or range of
servicing fees with respect to such mortgage loans, and (D)
the minimum and maximum stated maturities of the mortgage
loans at origination; (iii) the maximum original term-to-
stated maturity of the Private Mortgage-Backed Securities;
(iv) the weighted average term-to-stated maturity of the
Private Mortgage-Backed Securities; (v) the pass-through or
certificate rate or ranges thereof for the Private
Mortgage-Backed Securities; (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-
Backed Securities; (vii) the issuer of the Private
Mortgage-Backed Securities (the "PMBS Issuer"), the
servicer of the Private Mortgage-Backed Securities (the
"PMBS Servicer") and the trustee of the Private Mortgage-
Backed Securities (the "PMBS Trustee"); (viii) certain
characteristics of credit support, if any, such as reserve
funds, insurance policies, letters of credit, financial
guaranty insurance policies or third party guarantees,
relating to the mortgage loans underlying the Private
Mortgage-Backed Securities, or to such Private Mortgage-
Backed Securities themselves; (ix) the terms on which
underlying mortgage loans for such Private Mortgage-Backed
Securities may, or are required to, be repurchased prior to
stated maturity; and (x) the terms on which substitute
mortgage loans may be delivered to replace those initially
deposited with the PMBS Trustee. See "The Trusts."
Pre-Funding
Account If provided in the related Prospectus Supplement, the
original principal amount of a Series of Certificates may
exceed the principal balance of the Mortgage Assets
initially being delivered to the Trustee. Cash in an
amount equal to such difference (such amount, the "Pre-
Funded Amount") will be deposited into a separate trust
account (the "Pre-Funding Account") maintained with
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the Trustee for the benefit of the Holders. During the
period set forth in the related Prospectus Supplement (the
"Funding Period"), the Pre-Funded Amount in the Pre-Funding
Account may be used to purchase additional Mortgage Assets
for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements.
For a Trust that elects to be characterized as either a
REMIC or a grantor trust under federal income tax laws, the
maximum length of the related Funding Period will not
exceed three calendar months or 90 days, respectively, from
the date of issuance of the Certificates and otherwise the
maximum length of the Funding Period will not exceed the
period set forth in the related Prospectus Supplement. The
amount of the initial Pre-Funded Amount is intended not to
exceed the aggregate principal balance of additional
Mortgage Assets that the Representative anticipates will be
acquired and conveyed to the Trust during the applicable
Funding Period.
Prior to the conveyance of any additional Mortgage
Assets to the Trust, the Representative will be required to
give notice of the additional Mortgage Assets to be
conveyed to the Trust to the Trustee(s) and any third-party
credit enhancement provider. Upon the satisfaction of the
conditions set forth in the Agreement, including the
receipt by the Trustee of an executed assignment, an
Officer's Certificate and a legal opinion, the Trustee will
release from the Pre-Funding Account the necessary funds to
purchase the additional Mortgage Assets to be conveyed to
the Trust on such date. If any Pre-Funded Amount remains
on deposit in the Pre-Funding Account at the end of the
Funding Period, such amount, in the amounts and in the
manner specified in the related Prospectus Supplement, will
be used to prepay some or all Classes of the related Series
of Certificates.
Description of the
Certificates Each Certificate will represent a fractional undivided
ownership interest in
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the Trust created pursuant to the related Agreement. The
primary assets of such Trust will be a Pool of Mortgage
Loans and certain other Mortgage Assets. The Certificates
of any Series may be issued in one or more Classes, as
specified in the related Prospectus Supplement. A Series of
Certificates may include one or more Classes of senior
Certificates (collectively, "Senior Certificates") which
receive certain preferential treatment specified in the
related Prospectus Supplement with respect to one or more
Classes of subordinate Certificates (collectively, the
"Subordinated Certificates"). Certain Series or Classes of
Certificates may be covered by a Certificate Guaranty
Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy, Bankruptcy Bond or other insurance
policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees,
supplemental interest payments or other forms of credit
enhancement or maturity protection, as described herein and
in the related Prospectus Supplement.
Each Class of Certificates within a Series will evidence
the interests specified in the related Prospectus
Supplement, which may (i) include the right to receive
distributions allocable only to principal, only to interest
or to any combination thereof; (ii) include the right to
receive distributions only of prepayments of principal
throughout the lives of the Certificates or during
specified periods; (iii) be subordinated in its right to
receive distributions of scheduled payments of principal,
prepayments of principal, interest or any combination
thereof to one or more other Classes of Certificates of
such Series throughout the lives of the Certificates or
during specified periods or may be subordinated with
respect to certain losses or delinquencies; (iv) include
the right to receive such distributions only after the
occurrence of events specified in the Prospectus
Supplement; (v) include the right to receive distributions
in accordance with a schedule or formula or on the basis of
collections from designated
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portions of the assets in the related Trust; (vi) include,
as to Certificates entitled to distributions allocable to
interest, the right to receive interest at a Fixed Rate or
an Adjustable Rate; and (vii) include, as to Certificates
entitled to distributions allocable to interest, the right
to distributions allocable to interest only after the
occurrence of events specified in the related Prospectus
Supplement, and in each case, may accrue interest until
such events occur, as specified in such Prospectus
Supplement. The timing and amounts of such distributions
may vary among Classes, over time, or otherwise as
specified in the related Prospectus Supplement.
The Certificates will be issuable in fully registered
form, in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof (or such other
amounts as may be set forth in a Prospectus Supplement),
except that one Certificate of each Class may be issued in
a different denomination. See "Description of
Certificates."
Credit
Enhancement The Mortgage Assets in a Trust or the Certificates of one
or more Classes in the related Series may have the benefit
of one or more types of credit enhancement, as described in
the related Prospectus Supplement. The protection against
losses afforded by any such credit support may be limited.
Such credit enhancement may include one or more of the
following types:
A. Subordination
and Reserve
Accounts The rights of the holders of Subordinated Certificates of a
Series to receive distributions with respect to the
Mortgage Assets and other assets in the related Trust will
be subordinated to the rights of the holders of the Senior
Certificates of the same Series to receive distributions to
the extent described in the related Prospectus Supplement.
This subordination is intended to enhance the likelihood of
regular receipt by holders of Senior Certificates of the
full amount of payments
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which such holders would be entitled to receive if there
had been no losses or delinquencies. The protection
afforded to the holders of Senior Certificates through
subordination may be accomplished by the preferential right
of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates,
the amounts of principal and interest due to them on each
Remittance Date out of the funds available for distribution
on such date in the related Certificate Account (as defined
herein) to the extent described in the related Prospectus
Supplement. The protection afforded to the holders of
Senior Certificates through subordination also may be
accomplished by allocating certain types of losses or
delinquencies to the related Subordinated Certificates to
the extent described in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement,
the same Class of Certificates may constitute Senior
Certificates with respect to certain types of payments or
certain losses or delinquencies and Subordinated
Certificates with respect to other types of payments or
losses or delinquencies. If so specified in the related
Prospectus Supplement, subordination may apply only in the
event of certain types of losses not covered by other forms
of credit support, such as hazard losses not covered by
Standard Hazard Insurance Policies or losses due to the
bankruptcy of a Mortgagor not covered by a Bankruptcy Bond.
If further specified in the related Prospectus Supplement,
one or more reserve accounts (each, a "Reserve Account")
may be established and maintained, in whole or in part, by
the deposit therein of distributions allocable to the
holders of Subordinated Certificates for a specified time
or until a specified level is reached. The related
Prospectus Supplement will set forth information concerning
the amount of subordination of a Class or Classes of
Subordinated Certificates in a Series, the circumstances in
which such subordination will be applicable, the manner, if
any, in which the amount of subordination will
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decrease over time, the manner of funding any Reserve
Account, and the conditions under which amounts in any such
Reserve Account will be used to make distributions to
Senior Certificateholders or released to Subordinated
Certificateholders from the related Trust.
B. Certificate
Guaranty
Insurance
Policy A certificate guaranty insurance policy or policies
("Certificate Guaranty Insurance Policy") may be obtained
and maintained for each Class or Series of Certificates.
Certificate Guaranty Insurance Policies generally
unconditionally and irrevocably guarantee that the full
amount of the distributions of principal and interest, as
well as any other amounts specified in the related
Prospectus Supplement, will be received by an agent of the
Trustee, for distribution by the Trustee to
Certificateholders. Certificate Guaranty Insurance
Policies may have certain limitations set forth in the
related Prospectus Supplement, including (but not limited
to) limitations on the insurer's obligation to guarantee
the Master Servicer's obligation to repurchase or
substitute for any Mortgage Loans, to guarantee any
specified rate of prepayments or to provide funds to redeem
Certificates on any specified date.
C. Spread
Amount If so specified in the related Prospectus Supplement,
certain Classes of Certificates may be entitled to receive
limited acceleration of principal relative to the
amortization of the related Mortgage Assets. The
accelerated amortization will be achieved by applying
certain excess interest collected on the Mortgage Assets to
the payment of principal on such Classes of Certificates.
This acceleration feature is intended to create an amount
(the "Spread Amount"), resulting from, and generally equal
to, the excess of the aggregate principal balances of the
applicable Mortgage Assets over the principal balances of
the applicable Classes of Certificates. Once the required
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Spread Amount is reached, and subject to the provisions
described in the next sentence and in the related
Prospectus Supplement, the acceleration feature will cease,
unless necessary to maintain the required level of the
Spread Amount. The applicable Agreement will provide that,
subject to certain floors, caps and triggers, the required
level of the Spread Amount may increase or decrease over
time. An increase would result in a temporary period of
accelerated amortization of the applicable Classes of
Certificates to increase the actual level of the Spread
Amount to its required level; a decrease would result in a
temporary period of decelerated amortization to reduce the
actual level of the Spread Amount to its required level.
An Agreement also may provide that after one or more
Classes of Certificates have been paid to the required
level of the Spread Amount, excess interest, together with
certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other
Classes of Certificates.
D. Mortgage Pool
Insurance
Policy A mortgage pool insurance policy or policies ("Mortgage
Pool Insurance Policy") may be obtained and maintained for
each Series pertaining to Mortgage Loans and Contracts,
limited in scope, covering defaults on the related Mortgage
Loans or Contracts in an initial amount equal to a
specified percentage of the aggregate principal balance of
all Mortgage Loans or Contracts included in the Pool as of
the Cut-off Date or such other date as is specified in the
related Prospectus Supplement.
E. Special Hazard
Insurance
Policy In the case of Mortgage Loans or Contracts, certain
physical risks that are not otherwise insured against by
Standard Hazard Insurance Policies may be covered by a
special hazard insurance policy or policies (a "Special
Hazard Insurance Policy"). The level of coverage of each
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Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement.
F. Bankruptcy
Bonds A mortgagor bankruptcy bond or bonds ("Bankruptcy Bond")
may be obtained to cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of
principal or interest on a Mortgage Loan or Contract or a
reduction by such court of the principal amount of a
Mortgage Loan or Contract, and will cover certain unpaid
interest on the amount of such a principal reduction. The
level of coverage of each Bankruptcy Bond will be specified
in the related Prospectus Supplement.
G. Cross
Support If so specified in the Prospectus Supplement, the ownership
interests of separate Trusts or separate groups of assets
may be evidenced by separate Classes of the related Series
of Certificates. In such case, credit support may be
provided by a cross-support feature which requires that
distributions be made with respect to certain Certificates
evidencing interests in one or more Trusts or asset groups
prior to distributions to other Certificates evidencing
interests in other asset groups or Trusts. If specified in
the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently
to two or more separate Trusts, without priority among such
Trusts, until the credit support is exhausted. If
applicable, the Prospectus Supplement will identify the
Trusts or asset groups to which such credit support relates
and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to
the identified Trusts or asset groups.
H. Supplemental
Interest
Payments If so specified in the Prospectus Supplement, one or more
Classes of Certificates may be entitled to receive
supplemental interest payments under
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specified circumstances. Supplemental interest payments
will be available to fund some or all of the difference, if
any, between the interest owed to a Class of Certificates
on a Remittance Date and the interest that would be
available to pay such interest assuming no defaults or
delinquencies on the Mortgage Assets. Such differences may
result if the interest rates on the applicable Classes of
Certificates are based upon an index that differs from the
index used in determining the interest rates on the
Mortgage Assets. Except as otherwise provided in a
Prospectus Supplement, supplemental interest payments will
not be available to fund shortfalls resulting from
delinquencies or defaults on the Mortgage Assets.
I. Maturity
Protection If so specified in the Prospectus Supplement, one or more
Classes of Certificates may be entitled to third-party
payments to help provide that the holders of such
Certificates receive their unpaid principal on or prior to
a specified date.
J. Other Credit
Enhancement Other credit enhancement arrangements, as described in the
related Prospectus Supplement, including (but not limited
to) one or more reserve funds, letters of credit, financial
guaranty insurance policies or third party guarantees, may
be used to provide coverage for certain risks of defaults
or losses. These arrangements may be in addition to or in
substitution for any forms of credit support described in
the Prospectus. Any such arrangement must be acceptable to
each nationally recognized rating agency that provides a
rating for the related Series of Certificates (the "Rating
Agency"). Additionally, to the extent a significant
portion of the Mortgage Loans underlying a given Series of
Certificates consists of FHA Loans, the related Prospectus
Supplement will describe the features of any related credit
support including, but not limited to, that provided by the
FHA, if any.
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Monthly Advances If so specified in the related Prospectus Supplement, the
Master Servicer will be required under each Agreement to
remit to the Trustee no later than the day of each month
which is at least three business days prior to the
Remittance Date and is in no case earlier than the seventh
business day of such month (the "Determination Date") the
amount (a "Monthly Advance"), if any, by which (a) the sum
of (x) 30 days' interest at the weighted average Adjusted
Mortgage Loan Remittance Rate (as defined herein under
"Description of the Certificates--Monthly Advances and
Compensating Interest") on the then outstanding principal
balance of the related Series of Certificates and (y) the
amount, if any, required to be deposited into the related
Reserve Account (as specified in the related Prospectus
Supplement) for the related Remittance Date exceeds (b) the
amount received by the Master Servicer in respect of
interest on the Mortgage Loans as of the related Record
Date. Such advances by the Master Servicer are
reimbursable in the first instance from late collections of
interest, including amounts received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation
Proceeds"), amounts paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan, Mortgaged
Property or REO Property ("Insurance Proceeds"), and
proceeds received by the Master Servicer in connection with
condemnation, eminent domain or a release of lien
("Released Mortgaged Property Proceeds") collected with
respect to the related Mortgage Loans as to which the
advances were made, and any other amount that would
otherwise be distributed on the Class R Certificates. See
"Description of the Certificates--Monthly Advances and
Compensating Interest."
Compensating
Interest If so specified in the related Prospectus Supplement, with
respect to each Mortgage Loan as to which the Master
Servicer receives a principal payment in full in advance of
the final scheduled due date (a "Principal Prepayment") or
receives a principal payment that exceeds the
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scheduled payment by a specified multiple, but which was
not intended by the Mortgagor to satisfy the Mortgage Loan
in full or to cure a delinquency (a "Curtailment"), the
Master Servicer will be required to remit to the Trustee,
from amounts otherwise payable to the Master Servicer as
servicing compensation, an amount ("Compensating Interest")
equal to any excess of (a) 30 days' interest on the
principal balance of each such Mortgage Loan as of the
beginning of the related Due Period at the applicable
weighted average Adjusted Mortgage Loan Remittance Rate
over (b) the amount of interest actually received on the
related Mortgage Loan during such Due Period.
Optional
Termination The Master Servicer, certain insurers, the holders of REMIC
Residual Certificates (as defined herein), or certain other
entities specified in the related Prospectus Supplement may
have the option to effect early retirement of a Series of
Certificates through the purchase of the related Mortgage
Assets and other assets in the related Trust under the
circumstances and in the manner described in "The
Agreement--Termination; Purchase of Mortgage Loans."
Mandatory
Termination The Trustee, the Master Servicer or certain other entities
specified in the related Prospectus Supplement may be
required to effect early retirement of a Series of
Certificates under the circumstances and in the manner
specified in the related Prospectus Supplement and herein
under "The Agreement--Termination; Purchase of Mortgage
Loans."
Trustee The trustee or trustees under any Agreement relating to a
Series of Certificates (each, a "Trustee") will be
specified in the related Prospectus Supplement.
Federal Income Tax
Consequences The federal income tax consequences of the purchase,
ownership and disposition of the Certificates of each
series will depend on whether an election is made to treat
the corresponding Trust (or certain assets of
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the Trust) as a "real estate mortgage investment conduit"
("REMIC") under the Internal Revenue Code of 1986, as
amended (the "Code").
REMIC. If an election is to be made to treat the Trust for
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a Series of Certificates as a REMIC for federal income tax
purposes, the related Prospectus Supplement will specify
which Class or Classes thereof will be designated as
regular interests in the REMIC ("REMIC Regular
Certificates") and which class of Certificates will be
designated as the residual interest in the REMIC ("REMIC
Residual Certificates"). To the extent provided herein and
in the related Prospectus Supplement, in the opinion of
Stroock & Stroock & Lavan, special Federal tax counsel
("Federal Tax Counsel"), Certificates representing an
interest in the REMIC generally will be considered
"qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" for
purposes of Section 856(c)(5)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code.
In the opinion of Federal Tax Counsel, for federal
income tax purposes, REMIC Regular Certificates generally
will be treated as debt obligations of the Trust with
payment terms equivalent to the terms of such Certificates.
Holders of REMIC Regular Certificates will be required to
report income with respect to such Certificates under an
accrual method, regardless of their normal tax accounting
method. Original issue discount, if any, on REMIC Regular
Certificates will be includible in the income of the
Holders thereof as it accrues, in advance of receipt of the
cash attributable thereto, which rate of accrual will be
determined based on a reasonable assumed prepayment rate.
The REMIC Residual Certificates generally will not be
treated as evidences of indebtedness for federal income tax
purposes, but instead, as representing rights to the
taxable income or net loss of the REMIC.
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Each holder of a REMIC Residual Certificate will be
required to take into account separately its pro rata
portion of the REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess inclusions")
generally may not be offset by such a holder's net
operating loss carryovers or other deductions, and in the
case of a tax-exempt holder of a REMIC Residual Certificate
will be treated as "unrelated business taxable income." In
certain situations, particularly in the early years of a
REMIC, holders of a REMIC Residual Certificate may have
taxable income, and possibly tax liabilities with respect
to such income, in excess of cash distributed to them.
"DISQUALIFIED ORGANIZATIONS," AS DEFINED IN "FEDERAL INCOME
TAX CONSEQUENCES--REMIC RESIDUAL CERTIFICATES--TAX ON
DISPOSITION OF REMIC RESIDUAL CERTIFICATES; RESTRICTION ON
TRANSFER; HOLDING BY PASS-THROUGH ENTITIES," ARE PROHIBITED
FROM ACQUIRING OR HOLDING ANY BENEFICIAL INTEREST IN THE
REMIC RESIDUAL CERTIFICATES.
Grantor Trust. If no election is to be made to treat
-------------
the Trust for a series of Certificates ("Non-REMIC
Certificates") as a REMIC, the Trust will be classified as
a grantor trust for federal income tax purposes and not as
an association taxable as a corporation. In the opinion of
Federal Tax Counsel, holders of Non-REMIC Certificates will
be treated for such purposes, subject to the possible
application of the stripped bond rules, as owners of
undivided interests in the related Mortgage Assets
generally will be required to report as income their pro
rata share of the entire gross income (including amounts
paid as reasonable servicing compensation) from the
Mortgage Assets and will be entitled, subject to certain
limitations, to deduct their pro rata share of expenses of
the Trust.
To the extent provided herein, Non-REMIC Certificates
generally will represent interests in "qualifying real
property loans" within the meaning of Section 593(d) of the
Code, "real estate assets" for purposes of Section
856(c)(5)(A) of the
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Code and "Loans . . . principally secured by an interest in
real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
Investors are advised to consult their tax advisors and
to review "Federal Income Tax Consequences" herein and, if
applicable, in the related Prospectus Supplement.
ERISA
Considerations Fiduciaries of employee benefit plans or other retirement
plans or arrangements, including individual retirement
accounts, certain Keogh plans, and collective investment
funds, separate accounts and insurance company general
accounts in which such plans, accounts or arrangements are
invested, that are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with their legal advisors
whether an investment in Certificates will cause the assets
of the related Trust to be considered plan assets under the
Department of Labor ("DOL") regulations set forth in 29
C.F.R. Section 2510.3-101 (the "Plan Asset Regulations"),
thereby subjecting the Trustee and the Master Servicer to
the fiduciary investment standards of ERISA, and whether
the purchase, holding or transfer of Certificates gives
rise to a transaction that is prohibited under ERISA or
subject to the excise tax provisions of Section 4975 of the
Code, unless a DOL administrative exemption applies. See
"ERISA Considerations."
Legal
Investment Each Prospectus Supplement will describe the extent, if
any, to which the Classes of Certificates offered thereby
will constitute "mortgage-related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") and whether they will be legal investments for
certain types of institutional investors under SMMEA. See
"Legal Investment" herein.
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Registration of
Certificates Certificates may be represented by global certificates
registered in the name of Cede & Co. ("Cede"), as nominee
of The Depository Trust Company ("DTC"), or another
nominee. In such case, Certificateholders will not be
entitled to receive definitive certificates representing
such Holders' interests, except in certain circumstances
described in the related Prospectus Supplement. See
"Description of the Certificates--Book-Entry Registration"
herein.
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<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates will
develop or, if a secondary market does develop, that it will provide Holders of
the Certificates with liquidity of investment or that it will continue for the
lives of the Certificates.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, Direct or Indirect Participants and certain banks,
the ability of a Certificateholder to pledge a Certificate to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Certificates, may be limited due to lack of a physical
certificate representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration."
NATURE OF SECURITY
Certain of the Mortgage Loans will be loans secured by junior liens
subordinate to the rights of the mortgagee under each related senior mortgage.
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a junior
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee are satisfied in full, including any related foreclosure costs. In
addition, a mortgagee may not foreclose on the mortgaged property unless it
forecloses subject to any related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder. In
servicing mortgage loans in their portfolios, it has been the Originators'
practice to satisfy each such senior mortgage at or prior to the
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foreclosure sale only to the extent that they determine any amounts so paid will
be recoverable from future payments and collections on the mortgage loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the Mortgage Loans--Foreclosure/Repossession."
An overall decline in the market value of residential real estate, the
general condition of a Mortgaged Property, or other factors, could adversely
affect the values of the Mortgaged Properties such that the outstanding balances
of the Mortgage Loans which are junior mortgage loans, together with any senior
liens on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Such a decline could extinguish the interest of the related Trust
in the Mortgaged Property before having any effect on the interest of the
related senior mortgagee. Certain of the Mortgage Loans may be secured by
Mortgaged Properties located in California and Texas. Certain areas of the
country, including California and Texas, have experienced declines in real
estate values over the last few years. Economic conditions in California are
often volatile and from time to time have been adversely affected by natural
disasters, contractions in the defense industry and declining real estate
values. The President of the United States has endorsed a list of military
bases to be closed within the next two to six years, which list includes
significant bases in California. These closures, which have been approved by
Congress, along with the recent general decline in defense spending, could have
an adverse affect on economic conditions in California. The Representative will
not be able to quantify the impact of any property value declines on the
Mortgage Loans or predict whether, to what extent or how long such declines may
continue. In periods of such declines, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
historically experienced in the mortgage lending industry in general. See "The
Single Family Lending Program--Servicing and Collections."
Certain of the Mortgage Loans may constitute "Balloon Loans." Balloon
Loans are originated with a stated maturity of less than the period of time of
the corresponding amortization schedule. As a result, upon the maturity of a
Balloon Loan, the Mortgagor will be required to make a "balloon" payment which
will be significantly larger than such Mortgagor's previous monthly payments.
The ability of such a Mortgagor to repay a Balloon Loan at maturity frequently
will depend on such borrower's ability to refinance the Mortgage Loan. The
ability of a Mortgagor to refinance such a Mortgage Loan will be affected by a
number of factors, including the level of available mortgage rates at the time,
the value of the related Mortgaged Property, the Mortgagor's equity in the
related Mortgaged Property, the financial condition of the Mortgagor and the tax
laws and general economic conditions at the time.
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Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the
Representative, the Originators, the Master Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan.
General economic conditions have an impact on the ability of borrowers to
repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by borrowers. In
the event of bankruptcy of a Mortgagor, it is possible that a Trust could
experience a loss with respect to such Mortgagor's Mortgage Loan. In
conjunction with a Mortgagor's bankruptcy, a bankruptcy court may suspend or
reduce the payments of principal and interest to be paid with respect to such
Mortgage Loan or permanently reduce the principal balance of such Mortgage Loan,
thus either delaying or permanently limiting the amount received by the Trust
with respect to such Mortgage Loan. Moreover, in the event a bankruptcy court
prevents the transfer of the related Mortgaged Property to a Trust, any
remaining balance on such Mortgage Loan may not be recoverable.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
liquidated Mortgage Loan and not yet repaid, including payments to prior
lienholders, legal fees and costs of legal action, real estate taxes, and
maintenance and preservation expenses. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans and
insufficient funds are available from applicable Credit Enhancement,
Certificateholders could experience a loss on their investment.
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Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the smaller mortgage loan
than would be the case with a larger loan. Because the average outstanding
principal balances of the Mortgage Loans which are junior mortgage loans are
small relative to the size of the loans in a typical pool composed entirely of
first mortgages, realizations net of liquidation expenses on defaulted Mortgage
Loans which are junior mortgage loans may also be smaller as a percentage of the
principal amount of such junior mortgage loans than would be the case with a
typical pool of first mortgage loans.
Under environmental legislation and case law applicable in various states,
including California, a secured party that takes a deed in lieu of foreclosure,
acquires a mortgaged property at a foreclosure sale or which, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Considerations."
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Pool will not be secured by an interest in the related real estate
or otherwise, and the related Trust Fund, as the owner of such Unsecured Home
Improvement Loan, will be a general unsecured creditor as to such obligations.
As a consequence, in the event of a default under an Unsecured Home Improvement
Loan, the related Trust Fund will have recourse only against the borrower's
assets generally, along with all other general unsecured creditors of the
borrower. In a bankruptcy or insolvency proceeding relating to a borrower on an
Unsecured Home Improvement Loan, the obligations of the borrower under such
Unsecured Home Improvement Loan may be discharged in their entirety,
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<PAGE>
notwithstanding the fact that the portion of such borrower's assets made
available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Originators and the
Master Servicer. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Mortgage 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 Master 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 Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and (iv)
the NHA Act (as defined herein) with respect to FHA Loans.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act") which amended the Federal
Truth in Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages
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that may be recovered in an action under the Home Ownership Act from an assignee
is the remaining amount of indebtedness plus the total amount paid by the
borrower in connection with the mortgage loan. Any Trust for which the Mortgage
Assets include Mortgage Loans subject to the Home Ownership Act would be subject
to all of the claims and defenses which the borrower could assert against the
original lender. Any violation of the Home Ownership Act which would result in
such liability would be a breach of the applicable Originator's representations
and warranties, and the Representative would be obligated to cure, repurchase
or, if permitted by the related Agreement, substitute for the Mortgage Loan in
question.
PREPAYMENT CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social, and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
A number of factors suggest that the prepayment behavior of a pool
including junior mortgage loans may be significantly different from that of a
pool composed entirely of first mortgage loans with equivalent interest rates
and maturities. One such factor is the smaller average principal balance of a
pool of junior mortgage loans which may result in a higher prepayment rate than
that of a pool of first mortgage loans with a larger average balance, regardless
of the interest rate environment. A small principal balance, however, also may
make refinancing a junior mortgage loan at a lower interest rate less attractive
to the borrower relative to refinancing a larger balance first mortgage loan, as
the perceived impact to the borrower of lower interest rates on the size of the
monthly payment for a junior mortgage loan may be less than for a first mortgage
loan with a larger balance. Other factors that might be expected to affect the
prepayment rate of a pool of junior mortgage loans include the amounts of, and
interest rates on, the underlying senior mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and junior mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans which are junior mortgage loans
may experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity mortgage loans for federal income tax purposes
may
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further increase the rate of prepayments of such junior mortgage loans. See
"Maturity, Prepayment and Yield Considerations."
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies and, if so
specified in the related Prospectus Supplement, amounts on deposit in the Pre-
Funding Account at the end of the Funding Period being applied to the payment of
principal of the Certificates. In addition, repurchases or purchases from a
Trust of Mortgage Loans required to be made by the Representative under the
Agreement will have the same effect on the Certificateholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the secured Mortgage Loans contain "due-on-sale" provisions,
and the Master Servicer will be required to enforce such provisions unless (i)
such enforcement would materially increase the risk of default or delinquency
on, or materially decrease the security for, such Mortgage Loan or (ii) such
enforcement is not permitted by applicable law, in which case the Master
Servicer is authorized to permit the purchaser of the related Mortgaged Property
to assume the Mortgage Loan. See "The Agreement" in the related Prospectus
Supplement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Certain of the Mortgage Loans may be "simple interest" or "date-of-payment
loans." If a payment is received on such a Mortgage Loan later than scheduled,
a smaller portion of such payment will be applied to principal and a greater
portion will be applied to interest than would have been the case had the
payment been received on the scheduled due date, resulting in such Mortgage Loan
having a longer average life than would have been the case had the payment been
made as scheduled. Conversely, if a payment on such a Mortgage Loan is received
earlier than scheduled, more of such payment will be applied to principal and
less to interest than would have been the case had the payment been received on
its scheduled due date, resulting in such Mortgage Loan having a shorter average
life than would have been the case had the payment been made as scheduled.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF
BANKRUPTCY OF THE REPRESENTATIVE OR AN ORIGINATOR
In the event of the bankruptcy of the Representative or an Originator at a
time when it or any affiliate thereof holds a Class R Certificate, a trustee in
bankruptcy of the
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Representative or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Representative, the
Originator or such affiliate with the result, if such recharacterization is
upheld, that the Certificateholders would be deemed to be creditors of the
Representative, the Originator or such affiliate, secured by a pledge of the
Mortgage Loans. If such an attempt were successful, a trustee in bankruptcy
could elect to accelerate payment of the Certificates and liquidate the Mortgage
Loans, with the Certificateholders entitled to the then outstanding principal
amount thereof together with accrued interest. Thus, the Certificateholders
could lose the right to future payments of interest, and might suffer
reinvestment loss in a lower interest rate environment.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), or similar state legislation, a
Mortgagor who enters military service after the origination of the related
Mortgage Loan (including a Mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such Mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could have an effect, for an indeterminate period
of time, on the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage Loans. In addition, the Relief Act imposes
limitations which would impair the ability of the Master Servicer to foreclose
on an affected Mortgage Loan during the Mortgagor's period of active duty
status. Thus, in the event that such a Mortgage Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
RECENT DEVELOPMENTS
On March 21, 1994, the United States Court of Appeals for the Eleventh
Circuit issued an opinion in a case involving a borrower in Florida who sought
rescission of a home equity loan approximately one year after origination. The
borrower alleged three violations of the Federal Truth-in-Lending Act ("TILA")
and Regulation Z promulgated thereunder including the lender's inclusion of the
Florida intangible tax as part of the amount financed rather than as part of the
finance charge. The court found that this practice had violated TILA and,
therefore, the court reversed the lower court's granting of the defendant's
motion for summary judgment. A violation of TILA allows the borrower to rescind
the transaction within three years from the date the loan was made. The
Originators have followed the
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general practice of Florida lenders to treat the Florida intangible tax as part
of the amount financed.
Effective September 30, 1995, Federal legislation was enacted to amend TILA
to address the 1994 Court of Appeals decision. This 1995 amendatory
legislation clarified certain provisions of TILA, including treating the Florida
intangible tax as part of the amount financed. In addition, and with respect to
transactions consummated prior to the date of enactment, the 1995 legislation
--------
further provides (with certain exceptions noted below) that a lender will have
no civil, administrative or criminal liability under TILA for, and a borrower
shall have no extended recision rights under TILA with respect to, a situation
where a lender included the Florida intangible tax as part of the amount
financed rather than as a part of the finance charge. The only exceptions to
this retroactive liability bar relate to situations where a borrower had filed
an action alleging a violation of TILA before June 1, 1995.
In each Agreement, the Originators will represent, among other things, that
no Mortgage Loan will be subject to any right of rescission and that each
Mortgage Loan at the time it was made complied with applicable state and federal
laws and regulations. Upon the discovery of a breach of any such representation
which materially and adversely affects the interests of the holders of the
Certificates or any surety provider in a Mortgage Loan, the Representative will
be obligated to cure, substitute for or repurchase the affected Mortgage Loan
pursuant to the terms of the applicable Agreement. Any such repurchase will
have the effect of a principal prepayment.
CERTIFICATE RATING
The rating of the Certificates will depend primarily on the
creditworthiness of any third party provider of credit enhancement, if any, as
set forth in the related Prospectus Supplement. Any reduction in the rating
assigned to the claims-paying ability of such provider below the rating
initially given to a Series of Certificates would likely result in a reduction
in the rating of such Series of Certificates. See "Rating."
OTHER
To the extent a significant portion of the Mortgage Loans underlying a
given series of Certificates consists of FHA Loans and/or Secured Conventional
Home Improvement Loans, the related Prospectus Supplement will describe any
additional Risk Factors related to such Mortgage Loans.
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THE TRUSTS
A Trust for any Series of Certificates will include the Mortgage Assets
consisting of (A) a Pool/*/ comprised of (i) Single Family Loans, (ii)
Cooperative Loans, (iii) Multifamily Loans, (iv) Contracts, (v) FHA Loans, (vi)
Secured Conventional Home Improvement Loans, (vii) Unsecured Home Improvement
Loans, or (B) Agency Securities or Private Mortgage-Backed Securities, in each
case, as specified in the related Prospectus Supplement, together with payments
in respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
The Certificates will be entitled to payment only from the assets of the
related Trust and, to the extent specified in a Prospectus Supplement, payments
in respect of the assets of other trusts established by the Representative, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Certificates will evidence the entire fractional undivided
ownership interest in a Trust which will contain a beneficial ownership interest
in another Trust which will contain all or some of the Mortgage Assets.
Certain of the Mortgage Assets may have been originated by the Originators.
Other Mortgage Assets may have been acquired by the Representative, an
Originator or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative. See "Mortgage Loan Program--Underwriting Criteria."
The following is a brief description of the Mortgage Assets expected to be
included in the Trusts. If specific information respecting the Mortgage Assets
is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the
/*/Whenever the terms "Pool" and "Certificates" are used in this Prospectus,
such terms will be deemed to apply, unless the context indicates otherwise, to
one specific Pool and the Certificates representing certain undivided fractional
interests, as described below, in a single Trust consisting primarily of the
Mortgage Loans in such Pool. Similarly, the term "Pass-Through Rate" will refer
to the Pass-Through Rate borne by the Certificates of one specific Series and
the term "Trust" will refer to one specific Trust.
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Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of
the Mortgage Assets relating to such Series (the "Mortgage Asset Schedule") will
be attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
THE MORTGAGE LOANS--GENERAL
The real property and Manufactured Homes, as the case may be, which secure
repayment of the Mortgage Loans and Contracts (the "Mortgaged Properties") may
be located in any one of the fifty states or the District of Columbia. It is
expected that the Mortgage Loans or Contracts will be Conventional Loans (i.e.,
loans that are not insured or guaranteed by any governmental agency). However,
if specified in the related Prospectus Supplement, certain of the Single Family
Loans may be insured by the FHA or partially guaranteed by the VA. Mortgage
Loans with Combined Loan-to-Value Ratios and/or certain principal balances may
be covered wholly or partially by Primary Mortgage Insurance Policies. The
Mortgage Loans may be covered by Standard Hazard Insurance Policies.
All of the Mortgage Loans in a Pool will provide for payments to be made
monthly ("monthly pay"), bi-weekly or on such other terms as may be described in
a Prospectus Supplement. The payment terms of the Mortgage Loans to be included
in a Trust will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for a period of time or under certain circumstances
and is followed by an adjustable rate, a rate that otherwise varies from
time to time, or a rate that is convertible from an adjustable rate to a
fixed rate). The specified rate of interest on a Mortgage Loan is its
Mortgage Interest Rate. Changes to an Adjustable Rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal
of a Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may provide
for the payment of interest at a rate lower than the Mortgage Interest Rate
for a period of time or for the life of the Mortgage Loan, and the amount
of any difference may be contributed from funds supplied by the seller of
the Mortgaged Property securing the related Mortgage Loan or another source
or may be treated as
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accrued interest added to the principal of the Mortgage Loan.
(b) Principal may be payable on a level basis to fully amortize the
Mortgage Loan over its term, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the Mortgage
Interest Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity ("balloon" payments). Principal may include
interest that has been deferred and added to the principal balance of the
Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
("graduated payments") or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments. Mortgage Loans having graduated payment provisions may require
the monthly payments of principal and interest to increase for a specified
period, provide for deferred payment of a portion of the interest due
monthly during such period, and recoup the deferred interest through
negative amortization whereby the difference between the scheduled payment
of interest and the amount of interest actually accrued is added monthly to
the outstanding principal balance. Other Mortgage Loans sometimes referred
to as "growing equity" mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The Mortgage Loans may include due-on-sale clauses which permit
the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or certain transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Originator.
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To the extent a significant portion of the Mortgage Loans underlying a
given Series of Certificates consist of FHA Loans and/or Secured Conventional
Home Improvement Loans, the related Prospectus Supplement will describe the
material provisions of such Mortgage Loans and the programs under which they
were originated. The Prospectus Supplement for each Series of Certificates will
contain information with respect to all the Mortgage Loans expected to be
included in the related Pools as of the related closing date, including (i) the
expected aggregate outstanding principal balance and the expected average
outstanding principal balance of the Mortgage Loans as of the date set forth in
the Prospectus Supplement, (ii) the largest expected principal balance and the
smallest expected, principal balance of any of the Mortgage Loans, (iii) the
types of Mortgaged Properties and/or other assets securing the Mortgage Loans
(e.g., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property) and the percentage, if
any, of Unsecured Home Improvement Loans expected to be included in the related
Pool, (iv) the original terms to maturity of the Mortgage Loans, (v) the
expected weighted average term to maturity of the Mortgage Loans as of the date
set forth in the Prospectus Supplement and the expected range of the terms to
maturity, (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the expected aggregate principal balance of Mortgage
Loans having Combined Loan-to-Value Ratios at origination exceeding 80%, (viii)
the expected Mortgage Interest Rate or APR and ranges of Mortgage Interest Rates
or APRs borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the expected weighted average of the Adjustable Rates, if any,
(x) the expected aggregate outstanding principal balance, if any, of Buy-Down
Loans and Mortgage Loans having graduated payment provisions as of the date set
forth in the Prospectus Supplement, (xi) the amount of any Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to such Pool, (xii) to the extent different from the
amounts described herein, the amount of any Standard Hazard Insurance Policy
required to be maintained with respect to each Mortgage Loan; (xiii) the amount,
if any, and terms of any other credit enhancement to be provided with respect to
all or a material portion of the Mortgage Loans or the Pool and (xiv) the
expected geographic location of the Mortgaged Properties. If specific
information respecting the Mortgage Loans is not known to the Representative at
the time the related Certificates are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement and specific information will be set forth in the Detailed
Description.
The Combined "Loan-to-Value Ratio" of a Single Family Loan at any given
time is the ratio, expressed as a percentage, determined by dividing (x) the sum
of the original principal balance of the Single Family Loan (less the amount, if
any, of
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the premium for credit life insurance) plus the then-current principal
balance of the related first lien, if any, by (y) the value of the related
Mortgaged Property, based upon the appraisal or valuation made at the time of
origination of the Single Family Loan. To the extent a significant portion of
the Mortgage Loans underlying a given Series of Certificates consists of FHA
loans and/or Secured Conventional Home Improvement Loans, the related Prospectus
Supplement may describe the method for calculating the Combined Loan-to-Value
Ratio, if deemed relevant by the Representative. In the case of Refinance
Loans, the value of the related Mortgaged Property generally will be based on an
appraisal or valuation obtained at the time of refinancing. For purposes of
calculating the Combined Loan-to-Value Ratio of a Contract relating to a new
Manufactured Home, the value of such Manufactured Home generally will be no
greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site) including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. The value of a used Manufactured
Home generally will be the least of the sales price, appraised value, and
National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a Manufactured Home will be
based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Mortgaged Properties), in a particular Pool become equal to or greater than the
value of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. An overall decline in the market value of real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the Mortgage Loans, together with any additional liens
on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Under such circumstances, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
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Certain of the residential mortgage loans to be included in a Trust are
expected to be residential mortgage loans secured by second, third or fourth
liens ("Home Equity Loans") subordinate to the rights of the mortgagee under
each related senior mortgage. The proceeds from any liquidation, insurance or
condemnation of Mortgaged Properties relating to Home Equity Loans in a Pool
will be available to satisfy the principal balance of such Home Equity Loans
only to the extent that the claims, if any, of the related senior mortgagee,
including any related foreclosure costs, are satisfied in full. In addition,
the Master Servicer may not foreclose on a Mortgaged Property relating to a Home
Equity Loan unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. Generally, in servicing Home Equity Loans in their loan
portfolios, it has been the Originators' practice to satisfy each senior
mortgage at or prior to a foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the Home Equity Loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the Mortgage Loans--
Foreclosure/Repossession."
In addition, general economic conditions and other factors (which may or
may not effect real property values) have an impact on the ability of mortgagors
to repay mortgage loans. Loss of earnings, illness and other similar factors
may lead to an increase in delinquencies and bankruptcy filings by mortgagors.
In the event of bankruptcy of a mortgagor, it is possible that a Trust could
experience a loss with respect to the related Mortgage Loan. In conjunction with
a mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments
of principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by such Trust with respect
thereto. Moreover, in the event a bankruptcy court prevents the transfer of the
related Mortgaged Property to the Trust, any remaining balance on such Mortgage
Loan may not be recoverable.
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by
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credit enhancements, such losses will be borne, at least in part, by the
Certificateholders of the related Series.
The Representative will cause the Mortgage Loans comprising each Pool to be
assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Agreement." With respect to Mortgage Loans serviced through a Sub-
Servicer, the Master Servicer will remain liable for its servicing obligations
under the related Agreement as if the Master Servicer alone were servicing such
Mortgage Loans.
The only obligations of the Representative or the Originators with respect
to a Series of Certificates will be to provide (or, where the Representative or
an Originator acquired a Mortgage Loan from another originator, obtain from such
originator) certain representations and warranties concerning the Mortgage Loans
and to assign to the Trustee for such Series of Certificates the
Representative's or Originator's rights with respect to such representations and
warranties. See "The Agreements--Sale of Mortgage Loans." The obligations of
the Master Servicer with respect to the Mortgage Loans will consist principally
of its contractual servicing obligations under the related Agreement and its
obligation to make certain cash advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Certificates--Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
If provided in the related Prospectus Supplement, the original principal
amount of a Series of Certificates may exceed the principal balance of the
Mortgage Assets initially being delivered to the Trustee. Cash in an amount
equal to such difference (the "Pre-Funded Amount") will be deposited into a
separate trust account (the "Pre-Funding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement (the "Funding
Period"), amounts on deposit in the Pre-Funding Account may be used to purchase
additional Mortgage Assets for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related Series of Certificates at the time and
in the manner set forth in the related Prospectus Supplement.
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SINGLE FAMILY AND COOPERATIVE LOANS
Single Family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on one- to four-family residential properties. If so
specified in a Prospectus Supplement, the Single Family Loans may include loans
or participations therein secured by mortgages or deeds of trust on condominium
units in low-rise condominium buildings together with such condominium units'
appurtenant interests in the common elements of the condominium buildings.
Cooperative Loans generally will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' buildings.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in low-rise
condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties. A portion of a
dwelling unit may contain a commercial enterprise.
MULTIFAMILY LOANS
"Multifamily Loans" will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on rental apartment buildings, mixed-use properties or
projects containing five or more residential units.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. In such cases, the Cooperative
owns all the apartment units in the building and all common areas. The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the tenant-
stockholder must make on any loans to the tenant-stockholder secured by its
shares in the Cooperative. The Cooperative will be directly responsible for
building
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management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases
have to be paid by special assessments on the tenant-stockholders.
Substantially all of the Multifamily Loans will be secured by mixed-use
properties, with no less than approximately 90% of such properties, measured by
square footage, number of units and projected rent, being allocated to
residential units.
CONTRACTS
Contracts will consist of manufactured housing conditional sales contracts
and installment sales or loan agreements each secured by a Manufactured Home.
Contracts may be conventional, insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans Administration ("VA"), as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Contract will be fully amortizing and
will bear interest at its APR.
The "Manufactured Homes" securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which, in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract loan-to-value ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related
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Trust; and the original maturities of the Contracts and the last maturity date
of any Contract.
FHA LOANS
The FHA Loans will consist of home improvement loans originated under Title
I (the "Title I Loan Program") of the National Housing Act of 1934 (the "NHA
Act"). Under the NHA Act, the Federal Housing Administration (the "FHA"), an
agency of the United States Department of Housing and Urban Development ("HUD"),
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. Several types of loans may be made under the Title I
Loan Program, including (1) property improvement loans; (2) manufactured home
purchase loans; (3) manufactured home lot loans; and (4) combination loans (to
purchase a manufactured home and a lot). Property improvement loans (the "Title
I Property Improvement Loans") may be made by approved lenders to finance
alterations, repair or improvement of existing single family, multifamily,
manufactured housing and nonresidential structures.
Title I Property Improvement Loans, in addition to improvements to protect
the livability or utility of single family, multifamily or manufactured housing
or nonresidential property, also include loans for the renovation or
preservation of historic residential structures and loans to finance the
installation of fire safety equipment in existing health care facilities. Loan
processing and credit determinations are done by an approved financial
institution. Each lender is required to use prudent lending standards in
underwriting individual loans.
Under the Title I Loan Program, the FHA does not review individual loans at
the time of approval (as is typically the case with some other federal loan
programs), except when the amount of a Title I Property Improvement Loan would
result in any borrower having a total unpaid principal obligation on such loans
in excess of certain specified amounts, in which case HUD approval must be
obtained.
The Title I Loan Program is a coinsurance program. The lender initially is
at risk for 10% of the principal balance of each loan. The FHA will insure the
remaining 90% of the principal balance of each loan, subject to the limits of
the reserve amount discussed below. Such FHA insurance is accorded the full
faith and credit of the United States of America. Thus, a lender under the
program risks the loss of up to 10% of the principal balance on every loan
submitted to the FHA for an insurance claim (or a greater amount if the lender's
reserve amount is diminished or exhausted), plus a portion of the interest on
such loans.
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At the time the FHA receives a new loan origination or transfer of note
report from an approved lender, the FHA adds to the balance in the reserve
amount established by the FHA for the lender originating or purchasing such loan
an amount equal to 10% of the amount disbursed, advanced or expended by the
lender in originating or purchasing the loan. The balance in the reserve amount
limits the amount of claims the FHA is required to pay.
The reserve amount established by the FHA for each lender will be reduced
by the amount of all insurance claims approved for payment in conjunction with
losses on such loans. The lender's reserve amount will be increased based upon
additions made pursuant to the origination or purchase of eligible loans
registered for insurance.
The FHA charges a fee of 0.50% per annum of the original balance for each
loan it insures, on a non-declining basis. The FHA bills the lender annually
(on the anniversary date of origination) for the insurance premium, unless the
loan has a maturity of 25 months or less, in which case the insurance charge is
payable in one lump sum. If a loan is prepaid during the year, the FHA will not
rebate the insurance premium nor reduce the balance in the lender's insurance
coverage reserve account. The unused insurance charge will, however, be rebated
when a Title I loan is refinanced.
SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
The Secured Conventional Home Improvement Loans will consist of secured
conventional loans, the proceeds of which generally will be used for purposes
similar to those described under the heading "--FHA Loans." To the extent set
forth in the related Prospectus Supplement, the Secured Conventional Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans will consist of conventional unsecured
home improvement loans and FHA insured home improvement loans. To the extent
set forth in the related Prospectus Supplement, the Unsecured Home Improvement
Loans will be fully amortizing and will bear interest at a fixed or variable
annual percentage rate.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the United Stated Department of
Housing and Urban Development HUD. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
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GNMA to, among other things, guarantee the timely payment of the principal of
and interest on certificates which represent an interest in a pool of mortgage
loans insured by FHA under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may
be a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates held in a Trust Fund will
consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by a
one- to four-family residential property or a manufactured home. GNMA will
approve the issuance of each such GNMA Certificate in accordance with a guaranty
agreement (a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant
to its Guaranty Agreement, a GNMA Issuer will be required to advance its own
funds in order to make timely payments of all amounts due on each such GNMA
Certificate, even if the payments received by the GNMA Issuer on the FHA Loans
or VA Loans underlying each such GNMA Certificate are less than the amounts due
on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will provide for
the payment by or on behalf of the GNMA Issuer to the registered holder of such
GNMA Certificate of scheduled monthly payments of principal and interest equal
to the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loans or VA Loans
and the pass-through rate on the GNMA Certificate. In addition,
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each payment will include proportionate pass-through payments of any prepayments
of principal on the FHA Loans or VA Loans underlying such GNMA Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by
a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder
of the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments
on any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund
or any other early recovery of principal on such loan will be passed through to
the Trustee as the registered holder of such GNMA Certificate.
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GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a
GNMA Issuer will be the same irrespective of whether the GNMA Certificates are
backed by graduated payment mortgage loans or "buydown" mortgage loans. No
statistics comparable to the FHA's prepayment experience on level payment, non-
buydown loans are available in respect of graduated payment or buydown
mortgages. GNMA Certificates related to a Series of Certificates may be held in
book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("FNMA Project
Issuers") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the Housing Act ("GNMA
Project Certificates"). The Prospectus Supplement for a Series of Certificates
that includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating
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nationwide, FNMA helps to redistribute mortgage funds from capital-surplus to
capital-short areas.
FNMA Certificates. FNMA Certificates are either Guaranteed Mortgage Pass-
Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities ("FNMA
SMBS"). The following discussion of FNMA Certificates applies equally to both
FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA Certificate
included in the Trust for a Series will represent a fractional undivided
interest in a pool of mortgage loans formed by FNMA. Each such pool will
consist of mortgage loans of one of the following types: (i) fixed-rate level
installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA; (iii)
adjustable rate conventional mortgage loans; or (iv) adjustable rate mortgage
loans that are insured by the FHA or partially guaranteed by the VA. Each
mortgage loan must meet the applicable standards set forth under the FNMA
purchase program. Each such mortgage loan will be secured by a first lien on a
one-family or two- to four-family residential property. Each such FNMA
Certificate will be issued pursuant to a trust indenture. Original maturities
of substantially all of the conventional, level payment mortgage loans
underlying a FNMA Certificate are expected to be between either 8 to 15 years or
20 to 40 years. The original maturities of substantially all of the fixed rate
level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate if a FNMA MBS, or the series pass-
through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute on a timely basis amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through
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rate provided for by such FNMA Certificate on the underlying mortgage loans,
whether or not received, and such holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
FNMA under its guarantees are obligations solely of FNMA and are not backed by,
nor entitled to, the full faith and credit of the United States. If FNMA were
unable to satisfy its obligations, distributions to holders of FNMA Certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FNMA Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of
each class in principal and interest distributions are not identical, but the
classes in the aggregate represent 100% of the principal distributions and
interest distributions (adjusted to the series pass-through rate) on the
respective pool. Because of such difference between the fractional interests in
principal and interest of each class, the effective rate of interest on the
principal of each class of FNMA SMBS may be significantly higher or lower than
the series pass-through rate and/or the weighted average interest rate of the
underlying mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing interests
in pools of mortgages formed on or after May 1, 1985 will be available in book-
entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development
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of secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate Group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate Group. Under the Guarantor Program, any
such FHLMC Certificate Group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate ultimate receipt by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the Prospectus Supplement for a Series of Certificates, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i)
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30 days following foreclosure sale, (ii) 30 days following payment of the claim
by any mortgage insurer, or (iii) 30 days following the expiration of any right
of redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June 1,
1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their
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unpaid principal balances, adjusted for accrued or prepaid interest, which when
applied to the interest rate of the mortgage loans and participations purchased,
results in the yield (expressed as a percentage) required by FHLMC. The required
yield, which includes a minimum servicing fee retained by the servicer, is
calculated using the outstanding principal balance. The range of interest rates
on the mortgage loans and participations in a FHLMC Certificate group under the
Cash Program will vary since mortgage loans and participations are purchased and
assigned to a FHLMC Certificate group based upon their yield to FHLMC rather
than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). The Prospectus Supplement for a Series of
Securities issued by a Trust that included FHLMC Project Certificates will set
forth additional information regarding multi-family residential mortgage loans
that qualify for purchase by FHLMC.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
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the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government- sponsored agency, each as trustee,
or by another trustee named in the related Prospectus Supplement. FHLMC, FNMA,
GNMA or another government agency or government-sponsored agency will guarantee
each stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage pass-
through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of mortgage
loans, or (b) collateralized mortgage obligations ("CMO's") secured by mortgage
loans. Private Mortgage-Backed Securities will have been issued pursuant to a
PMBS agreement (the "PMBS Agreement"). The seller/servicer of the underlying
mortgage loans will have entered into the PMBS Agreement with the PMBS Trustee
under the PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will
possess the mortgage loans underlying such Private Mortgage-Backed Security.
Mortgage loans underlying a Private Mortgage-Backed Security will be serviced by
the PMBS Servicer directly or by one or more sub-servicers who may be subject to
the supervision of the PMBS Servicer. The PMBS Servicer will be approved as a
servicer by FNMA or FHLMC and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by the Department of Housing and Urban Development ("HUD")
as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus
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Supplement, the PMBS Issuer may be an affiliate of the Representative. The
obligations of the PMBS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PMBS Issuer will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Mortgage-Backed Securities issued under the
PMBS Agreement. Additionally, although the mortgage loans underlying the Private
Mortgage-Backed Securities may be guaranteed by an agency or instrumentality of
the United States, the Private Mortgage-Backed Securities themselves will not be
so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed 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 Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the
PMBS Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The mortgage loans underlying the Private Mortgage-
Backed Securities may consist of fixed rate, level payment, fully amortizing
loans or graduated payment mortgage loans, buydown loans, adjustable rate
mortgage loans, or loans having balloon or other special payment features. Such
mortgage loans may be Single Family Loans, Multifamily Loans, Cooperative Loans
or Contracts secured by Manufactured Homes. As specified in the related
Prospectus Supplement, (i) no mortgage loan underlying the Private Mortgage-
Backed Securities will have had a Combined Loan-to-Value Ratio at origination in
excess of the percentage set forth in the related Prospectus Supplement, (ii)
each underlying mortgage loan will have had an original term to stated maturity
of not less than 5 years and not more than 40 years, (iii) each underlying
mortgage loan (other than Cooperative Loans) will be required to be covered by a
standard hazard insurance policy (which may be a blanket policy), and (iv) each
mortgage loan (other than Cooperative Loans or Contracts secured by a
Manufactured Home) will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying the
Private Mortgage-Backed Securities or with respect to the Private Mortgage-
Backed Securities themselves.
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Additional Information. The Prospectus Supplement for a Series for which
the related Trust includes Private Mortgage-Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Mortgage-
Backed Securities to be included in the Trust Fund, (ii) certain characteristics
of the mortgage loans underlying the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance, if known, of underlying mortgage loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the underlying mortgage loans, and (D) the minimum and
maximum stated maturities of the underlying mortgage loans at origination, (iii)
the maximum original term-to-stated maturity of the Private Mortgage-Backed
Securities, (iv) the weighted average term-to-stated maturity of the Private
Mortgage-Backed Securities, (v) the pass-through or certificate rate of the
Private Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the mortgage loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying mortgage loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which other mortgage loans may be substituted
for those originally underlying the Private Mortgage-Backed Securities.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Certificates of each Series for general corporate
purposes, including repayment of debt and the origination and acquisition of
residential mortgage loans and other loans. The Representative expects
Certificates to be sold in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The Mortgage Loans will have been originated or acquired by the
Originators. The Money Store will act as the Master Servicer of the Mortgage
Loans and other Mortgage Assets. Except for certain representations and
warranties relating to the
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Mortgage Loans and other Mortgage Assets and certain other matters, the
obligations of The Money Store with respect to the Mortgage Loans and other
Mortgage Assets will be limited to its contractual servicing obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and
its subsidiaries have consisted primarily of mortgage loans, loans partially
guaranteed by the United States Small Business Administration, student loans,
and automobile loans.
Since 1967, The Money Store and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States.
THE SINGLE FAMILY LOAN LENDING PROGRAM
OVERVIEW
The Money Store's and the Originators' mortgage lending activities consist
primarily of originating, purchasing, selling and servicing mortgage loans that
are primarily secured by one- to four-family residential properties, including
low-rise condominiums, single-family detached homes, single-family attached
homes, planned unit developments and mixed use properties (collectively, "Single
Family Loans"). It has been the Originators' policy generally not to make
mortgage loans secured by high-rise condominiums, cooperative residences or
other categories of properties that management believes have demonstrated
relatively high levels of risk. The majority of Single Family Loans are to
borrowers owning a single-family detached home. Single Family Loans are made to
borrowers for, among other purposes, education, home improvements and debt
consolidation. The Money Store and its subsidiaries also originate, with the
intention of selling and servicing, Multifamily Loans, FHA Loans, Secured
Conventional Home Improvement Loans, Unsecured Home Improvement Loans and loans
partially guaranteed by the United States Small Business Administration. In
addition, The Money Store and its subsidiaries from time to time purchase
packages of loans from other lenders or government agencies.
Historically, the majority of all loans originated and purchased by the
Originators were Single Family Loans with original terms of 15 years. Starting
in 1992, the Originators began originating and purchasing Single Family Loans
with original terms of up to 30 years. The Money Store believes that the longer
term, and correspondingly lower monthly payments, of
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these Single Family Loans is attractive to customers who might otherwise
refinance an existing loan or obtain a new loan from a bank or other traditional
long term lender. The Money Store believes that its rapid turnaround time from
application to funding also makes it an attractive alternative to more
traditional lenders. The following is a description of the origination,
underwriting, servicing and other procedures used by The Money Store and the
Originators in connection with their Single Family Loan program. If a
significant portion of the Mortgage Loans underlying a given Series of
Certificates consists of FHA Loans, Secured Conventional Home Improvement Loans
and/or Unsecured Home Improvement Loans, the related Prospectus Supplement will
contain a similar description of the program relating to such Mortgage Loans.
SINGLE FAMILY LOAN ORIGINATION
The Originators' Single Family Loan origination offices are generally
located in small and medium-sized suburban communities. All Single Family Loan
origination offices have a manager who reports to senior management. Each
regional office supervises the operations of a group of states. The supervision
of all of the Originator's underwriting and administrative functions is
conducted from the Sacramento, California headquarters.
The entire application and approval process for Single Family Loans is
generally conducted by telephone. The Originators attempt to grant approvals of
loans quickly to borrowers meeting their underwriting criteria. A loan officer
is responsible for completing, evaluating and processing the loan application of
a prospective borrower based on information obtained from the borrower and
verified with third parties. Depending on the size of the loan applied for,
loan applications must be approved by an underwriter located in the Sacramento,
California headquarters. Loan officers are trained to structure loans that meet
the applicant's needs, while satisfying the Originators' lending criteria. If
an applicant does not meet the lending criteria, the loan officer may offer to
make a smaller loan, if a smaller loan would meet the lending criteria, or
suggest a debt consolidation package that better suits the applicant's needs.
The Originators also acquire Single Family Loans through an indirect
lending program, from independent brokers. Such Single Family Loans are
underwritten by the Originators using the same criteria applied to loans
originated by such Originator. Brokers participating in this program must
satisfy certain requirements established by the Originators pertaining to
experience, size of business and various licenses and approvals. The
Originators also acquire, from time to time, portfolios of Single Family Loans
from various third parties. The Originators will not sell such acquired loans
to a Trust unless the
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Originators determine that such loans, when originated, were underwritten using
the same criteria applied to loans originated by the Originators.
Starting in October 1995, the Originators began originating Single Family
Loans under a program that will result in lower interest rates for borrowers
that make timely payments during the early years of the related loan. Under
this program, if a borrower remits all scheduled payments during the first year
of the loan on a timely basis, the interest rate on the loan will be reduced
0.50% per annum. If the borrower remits all scheduled payments during the
second year of the loan on a timely basis, the interest rate will be reduced an
additional 0.50% per annum and, if all payments are made during the third year
of the loan on a timely basis, the interest rate will be reduced a final 0.50%
per annum. Once the interest rate on a loan is reduced, it will not be
increased, regardless of the borrowers future payment record.
UNDERWRITING CRITERIA
The following is a brief description of certain of the underwriting
standards used by the Originators to underwrite Single Family Loans. The
underwriting process is intended to assess both the prospective borrower's
ability to repay and the adequacy of the real property security as collateral
for the loan granted. To the extent that the relevant underwriting criteria
differ from those described herein, the related Prospectus Supplement for such
Series will specifically describe such criteria.
In certain cases deemed appropriate by an Originator's underwriters, loans
may be made outside of the Originator's guidelines with the prior approval of
pre-designated senior officials. No information is available with respect to
the portion of the Mortgage Loans which was originated outside of these
guidelines.
The Originators' objective in originating Single Family Loans is to provide
loans to borrowers with satisfactory income and credit histories deemed
sufficient to demonstrate the ability to repay their loan. The primary and
initial origination policy is to analyze the applicant's creditworthiness (i.e.,
a determination of the applicant's ability to repay the loan). Creditworthiness
is assessed by examination of a number of factors, including calculating a debt-
to-income ratio obtained by dividing a borrower's fixed monthly debt by the
borrower's gross monthly income. Fixed monthly debt generally includes (i) the
monthly payment under the related prior mortgages (which generally includes an
escrow for real estate taxes) based, in the case of an adjustable-rate first
mortgage, on the assumption that the then-current rate is the rate at which
interest will accrue on such loan, (ii) the
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monthly payment on the loan applied for and (iii) other installment debt,
including, for revolving debt, the required monthly payment thereon or if no
such payment is specified, 5% of the balance as of the date of calculation.
Fixed monthly debt does not include any debt (other than revolving credit debt)
described above that matures within less than 10 months of the date of
calculation. Except as otherwise set forth in the related Prospectus Supplement,
the debt-to-income ratio of any borrower will not have exceeded 50% as of
origination of the related loan. Creditworthiness is also assessed by examining
the applicant's credit history through standard credit reporting bureaus, and by
checking the applicant's payment history with respect to the first mortgage, if
any, on the property.
The second origination policy for Single Family Loans is a determination of
the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio guidelines are
established depending on the type of loan. For each Single Family Loan, the
Originator confirms the value of the property to be mortgaged by appraisals
(which in certain cases may be drive-by appraisals) performed by independent
appraisers. Drive-by appraisals involve a visual observation of the exterior of
the characteristics and condition of the property and the neighborhood. Because
the interior dimensions, improvements and conditions are not inspected, a drive-
by appraisal produces only a general approximation of value for the particular
property. If the Originator has previously originated a loan to the same
borrower secured by the same property within one year, the Originator may rely
on the prior appraisal in conjunction with a new drive-by appraisal. If an
appraisal is not required to be obtained for a Single Family Loan, the value of
the related mortgaged property, as represented by the borrower, may be evaluated
through other methods such as a drive-by appraisal, a review of comparable sales
or tax assessments or reliance upon a recent sales price for such mortgaged
property. Such methods do not constitute an appraisal of the related mortgaged
property. All Combined Loan-to-Value Ratios are determined prior to approval of
the loans.
The Originators have several procedures which they use to verify
information obtained from an applicant. The applicant's outstanding balance and
payment history on any senior mortgage may be verified by calling the senior
mortgage lender. If the senior mortgage lender cannot be reached by telephone
to verify this information, the Originator may rely upon information provided by
the applicant, such as a recent statement from the senior lender and
verification of payment, such as canceled checks, or upon information provided
by national credit bureaus.
In order to verify an applicant's employment status, the Originators may
obtain from the applicant recent tax returns or other tax forms (e.g., W-2
forms) or current pay stubs or may telephone the applicant's employer or obtain
written verification from the employer. As in the case of the senior
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mortgage lender verification procedures, if the employer will not verify
employment history over the telephone, the Originator may rely solely on the
other information provided by the applicant.
The Originators will not close a Single Family Loan prior to receiving
evidence that the property securing the loan is insured. In addition, at the
closing, the borrower is required to sign a letter addressed to his insurance
carrier naming the Originator as a loss payee under the insurance policy, which
the Originator will thereafter mail to the insurer. Accordingly, the Originator
normally will not be named as a loss payee with respect to the property securing
the Single Family Loan at the time the loan is closed.
A title search is ordered to verify the vesting of title to the Mortgaged
Property, along with the existence of any mortgages, tax or other liens that
have been levied on the property, to assure that the lien priority will be as
represented by the borrower.
Most Single Family Loans originated or purchased by the Originators
generally are scheduled to amortize over their terms and provide for equal
monthly payments over their terms. The Originators also offer a "balloon"
mortgage on a limited basis. The Originators collect nonrefundable points, late
charges and various fees in certain states in connection with their mortgage
loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees.
Although the Originators have no maximum dollar amount for Single Family
Loans, the actual maximum amount that they will lend is determined by an
evaluation of the applicant's ability to repay the loan, the value of the
borrower's equity in the real estate and the ratio of such equity to the real
estate's appraised value.
QUALITY CONTROL
Quality control is exercised in two areas: lending and documentation
standards. In the case of Single Family Loans, a centralized quality control
staff checks to confirm that lending and documentation standards are met. Every
month, at least one office is audited and every loan type originated during the
prior month by such office is reviewed for compliance with lending and
documentation standards. Five percent of all Single Family Loans originated by
the Originators are audited at random on a monthly basis for compliance with
lending and documentation standards. Additional offices receive audits on a
random, monthly basis. In order to confirm the validity of appraisals obtained
at the time loans are made, reappraisals are obtained
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for the property securing the loans in approximately two percent to five percent
of the transactions.
REFINANCING POLICY
Where the Originators believe that borrowers having existing loans with
them are likely to refinance such loans due to interest rate changes or other
reasons, the Originators actively attempt to retain such borrowers through
solicitations of such borrowers to refinance with the Originators. Such
refinancings generate fee and servicing income for the Originators. Since the
solicited borrowers may refinance their existing loans in any case, the
Representative believes that this practice will be unlikely to affect the
prepayment experience of the Single Family Loans in a material respect. The
Originators also have solicited their borrowers who are in good standing to
apply for additional loans, consistent with their origination standards, where
deemed appropriate.
SERVICING AND COLLECTIONS
The Money Store, as Master Servicer, will be required under the related
Agreement to master service the Mortgage Loans and other Mortgage Assets
underlying a particular Series of Certificates with the same degree of skill and
care that it exercises with respect to all comparable loans and assets that it
master services for its own account. Servicing includes, but is not limited to,
post-origination loan processing, customer service, remittance handling,
collections and liquidations.
Borrowers are sent payment coupon books that specify the fixed payment due
and the late payment amount, if any. Due dates for payments occur throughout
the calendar month. If payment is not received within fifteen working days of
the due date, an initial collection effort is made by telephone in an attempt to
bring the delinquent account current. The various stages of delinquency are
monitored and evaluated on a monthly basis.
Means of contacting delinquent accounts include, but are not limited to,
telephone calls and collection letters. When an account is 30 days past due,
the collection supervisor analyzes the account to determine the appropriate
course of action. If a borrower is experiencing difficulty in making payments
on time, the Servicer may modify the payment schedule (as permitted by the
Agreement) but will not remove the loan from a delinquency status.
The course of action taken by the Servicer is dependent upon a number of
factors including the borrower's payment history, the amount of equity in the
related Mortgaged Property and the reason for the current inability to make
timely payments.
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When a loan is 90 days past due, the related Mortgaged Property is required
to be reappraised and the results evaluated by the Company to determine a course
of action. Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received or (iii) the servicer discovers circumstances indicating
potential loss exposure. During the foreclosure process, any expenses incurred
by the Servicer may be added to the amount owed by the borrower, as permitted by
applicable law. Upon completion of the foreclosure, the property is sold to an
outside bidder, or passes to the mortgagee, in which case the Servicer proceeds
to liquidate the asset.
The Servicer may not foreclose on the property securing a junior mortgage
loan unless it forecloses subject to the related senior mortgages. In such
cases, the Servicer generally will pay the amount due on the senior mortgages to
the senior mortgagees, if the Servicer considers it to be in the best interest
of the related Certificateholders to do so. In the event that foreclosure
proceedings have been instituted on a senior mortgage prior to the initiation of
the Servicer's foreclosure action, the Servicer will either satisfy such
mortgage at the time of the foreclosure sale or take other appropriate action.
The Servicer retains "in-house" counsel in part to help assist with problem
accounts. Such counsel may be utilized by all levels of management to help
avoid legal problems, including those associated with consumer lending.
Servicing and charge-off policies and collection practices may change over
time in accordance with the servicer's business judgment, changes in its real-
estate loan portfolio and applicable laws and regulations, as well as other
items.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from state
to state. Only if a delinquency cannot otherwise be cured will the servicer
decide that liquidation is the appropriate course of action. If, after
determining that purchasing a property securing a mortgage loan will minimize
the loss associated with such defaulted loan, the servicer may bid at the
foreclosure sale for such property or accept a deed in lieu of foreclosure.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the date set forth in the related Prospectus Supplement (each such date, a
"Cut-off Date"), among The Money Store, the applicable Originators and the
Trustee for the benefit of the Certificateholders of such Series. The
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provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust. A
form of an Agreement has been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. The following summaries describe certain
material provisions which may appear in each Agreement. The Prospectus
Supplement for a Series of Certificates will describe any provision of the
Agreement relating to such Series that materially differs from the description
thereof contained in this Prospectus. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement for each Series of Certificates and
the applicable Prospectus Supplement. The Representative will provide a copy of
the Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of a Certificate of such Series addressed to The
Money Store, 2840 Morris Avenue, Union, New Jersey 07083, Attention: Corporate
Counsel.
GENERAL
The Certificates of each Series will represent fractional undivided
ownership interests in a Trust created pursuant to the related Agreement and/or
such other assets as may be described in the related Prospectus Supplement. The
Certificates will be issued in fully registered form, in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof (or such other
amounts do may be set forth in a Prospectus Supplement), except that one
Certificate of each Class may be issued in a different denomination.
Definitive Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee or, at the election of the Trustee,
at the office of a Certificate Registrar appointed by the Trustee. No service
charge will be made for any registration of exchange or transfer, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. If provided in the related Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
The Certificates will not represent obligations of the Representative, the
Originators or any affiliate thereof. The assets of each Trust will consist of
one or more of the following, as set forth in the related Prospectus Supplement,
(a) the Mortgage Loans that from time to time are subject to the related
Agreement and which are held in the related Pool; (b) the assets for the Trust
that from time to time are required by the Agreement to be deposited in certain
reserve accounts, including the Certificate Account, the Principal and Interest
Account, the Expense Account, the Letter of Credit Fee Account and the Insurance
Account (each, as defined herein), or to be
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invested in Permitted Investments (as defined herein); (c) property and any
proceeds thereof acquired by foreclosure of the Mortgage Loans in such Pool,
deed in lieu of foreclosure or a comparable conversion; (d) any Primary Mortgage
Insurance Policies; (e) any Mortgage Pool Insurance Policies; (f) any Special
Hazard Insurance Policies; (g) any Bankruptcy Bonds; and (h) all rights under
any other insurance policies, guarantees, supplemental interest payments, surety
bonds, letters of credit or other credit enhancement or maturity protection
covering any Certificates, any Mortgage Loan in the related Pool or any related
Mortgaged Property which is required to be maintained pursuant to the related
Agreement.
Each Series of Certificates will be issued in one or more Classes. Each
Class of Certificates of a Series will evidence beneficial ownership of the
interest in assets of the related Trust specified in the related Prospectus
Supplement. A Class of Certificates may be divided into two or more Sub-
Classes, as specified in the related Prospectus Supplement.
A Series of Certificates may include one or more Classes of Senior
Certificates that receive certain preferential treatment with respect to one or
more Subordinated Classes of Certificates of such Series. Certain Series or
Classes of Certificates may he covered by a Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond or other insurance policies,
cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, supplemental interest payments or other forms of credit
enhancement or maturity protection, in each case as described herein and in the
related Prospectus Supplement. Distributions on one or more Classes of a Series
of Certificates may be made prior to one or more other Classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust or on a different basis, in each case, as specified in the related
Prospectus Supplement. The timing and amounts of such distributions may vary
among classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Remittance Date, in the amounts specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Certificates are registered at the close of business on the record dates
specified in the Prospectus Supplement Unless Definitive Certificates have been
issued, the registered holder of all Certificates will be Cede. Distributions
will be made by check mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (the
"Certificate Register") or, to the extent
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described in the related Prospectus Supplement, by wire transfer or by such
other means as are described therein, except that the final distribution in
retirement of the Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency of the Trustee or other person
specified in the final distribution notice to Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
Each Class of Certificates within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Certificates or during
specified periods; (iii) be subordinated in its right to receive distributions
of scheduled payments of principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of Certificates of such Series
throughout the lives of the Certificates or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust; (vi)
include, as to Certificates entitled to distributions allocable to interest, the
right to receive interest at a Fixed Rate or an Adjustable Rate; and (vii)
include, as to Certificates entitled to distributions allocable to interest, the
right to distributions allocable to interest only after the occurrence of events
specified in the related Prospectus Supplement, and in each case, may accrue
interest until such events occur, as specified in such Prospectus Supplement.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds available in the
related Certificate Account and other accounts to the extent described in the
related Prospectus Supplement. To the extent described in the related
Prospectus Supplement, on each Remittance Date, the Master Servicer will
withdraw from the applicable Certificate Account and such other accounts as may
be described in the related Prospectus Supplement and distribute to the
Certificateholders of each Class (other than a Series having a Class of
Subordinated Certificates, as described below), either the specified interest of
such Class in the Pool times the aggregate of all amounts on deposit in the
Certificate
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Account as of the Determination Date, or, in the case of Classes which have been
assigned an aggregate principal balance and Pass-Through Rate, payments of
interest and payments in reduction of such aggregate principal balance from all
amounts on deposit in the Certificate Account on the Determination Date, in the
priority and calculated in the manner set forth in the related Prospectus
Supplement, except, in each case, for (i) all payments on the Mortgage Loans
that were due on or before the Cut-off Date; (ii) all Principal Prepayments,
Liquidation Proceeds and Insurance Proceeds received after the period specified
in the related Prospectus Supplement (the "Principal Prepayment Period"); (iii)
all scheduled payments of principal and interest due on a date or dates
subsequent to the Determination Date; (iv) amounts representing reimbursement
for Advances, as specified in the related Prospectus Supplement; (v) amounts
representing reimbursement for any unpaid Servicing Fee or Contingency Fee and
expenses from Liquidation Proceeds, condemnation proceeds and proceeds of
insurance policies with respect to the related Mortgage Loans; (vi) all income
from any Permitted Investments held in the Certificate Account for the benefit
of the Master Servicer; and (vii) any Advances deposited in the Certificate
Account prior to the applicable Remittance Date.
The timing and amounts of distributions allocable to interest and principal
and, if applicable, Principal Prepayments and scheduled payments of principal,
to be made on any Remittance Date may vary among Classes, over time or otherwise
as specified in the Prospectus Supplement. Differing allocations of principal
and interest to different Classes of Certificateholders will have the effect of
accelerating the amortization of Senior Certificates while increasing the
interests evidenced by the Subordinated Certificates in the related Trust.
Distributions to any Class of Certificates will be made pro rata to all
Certificateholders of that Class, or as otherwise described in a Prospectus
Supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Certificateholders (rather than to guarantee or insure against losses) if
provided in the related Prospectus Supplement, the Master Servicer will be
required to advance to the Trustee, on or before each Remittance Date (from its
own funds), the amount, if any, by which (a) the sum of (x) 30 days' interest at
the applicable weighted average Adjusted Mortgage Loan Remittance Rate (as
defined below) on the then outstanding principal balance of the related Series
of Certificates and (y) the amount, if any, required to be deposited into the
related Reserve Account (as specified in the Prospectus Supplement) for the
related Remittance Date exceeds (b) the amount received by the Master Servicer
and any Sub-Servicers in respect of interest on the Mortgage Loans as of the
related Record Date (such excess, the "Monthly Advance"). For each Class of
Certificates, the "Adjusted Mortgage Loan Remittance Rate" will equal the sum of
the related Pass-Through Rate and the rate used in determining certain expenses
payable by the related Trust, as
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more specifically set forth in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each Mortgage Loan
for which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Certificate Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such Mortgage Loan as of the beginning of the
related Due Period at the applicable weighted average Adjusted Mortgage Loan
Remittance Rate, over (b) the amount of interest actually received on the
related Mortgage Loan for such Due Period (such difference, "Compensating
Interest").
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
initially will be registered in the name of Cede, the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code ("UCC") and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Certificateholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Certificates registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Certificateholders will receive all distributions of principal of and interest
on the Certificates and reports relating to the Certificates from the Trustee
through DTC and its Participants. Under a book-entry format, Certificateholders
will receive payments and reports relating to the Certificates after the related
Remittance Date because, while payments and such reports are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such
payments and reports to
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its Participants which thereafter will be required to forward them to Indirect
Participants or Certificateholders. Unless and until Definitive Certificates are
issued, it is anticipated that the only Certificateholder will be Cede, as
nominee of DTC, and that the beneficial holders of Certificates will not be
recognized by the Trustee as Certificateholders under the Agreement. The
beneficial holders of such Certificates will only be permitted to exercise the
rights of Certificateholders under the Agreement indirectly through DTC and its
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit reports and payments of principal of and interest on the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such reports and
payments on behalf of their respective Certificateholders. Accordingly,
although Certificateholders will not possess certificates, the rules provide a
mechanism by which Certificateholders will receive distributions and reports and
will be able to transfer their interests.
Unless and until Definitive Certificates are issued, Certificateholders who
are not Participants may transfer ownership of Certificates only through
Participants by instructing such Participants to transfer Certificates, by book-
entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with
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respect to specified percentages of the Certificateholders only at the direction
of and on behalf of Participants whose holdings include current principal
amounts of outstanding Certificates that satisfy such specified percentages. DTC
may take conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Certificateholders
or their nominees ("Definitive Certificates"), rather than to DTC or its nominee
only under the events specified in the related Agreement and described in the
related Prospectus Supplement. Upon the occurrence of any of the events
specified in the related Agreement and Prospectus Supplement, DTC will be
required to notify all Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificates representing
the Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Remittance Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Certificates of such Series, (ii) the use of a Certificate
Guarantee Insurance Policy, Spread Amount, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts, Supplemental
Interest Payments, a letter of credit, a limited financial guaranty insurance
policy, other third party guarantees or maturity protection, another method of
credit enhancement described in the related Prospectus Supplement, or the use of
a cross-support feature, or (iii) any combination of the foregoing. Credit
enhancement will not provide protection against all risks of loss and will not
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guarantee repayment of the entire principal balance of the Certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, holders of one
or more Classes of Certificates will bear their allocable share of deficiencies.
If a form of credit enhancement applies to several Classes of Certificates, and
if principal payments equal to the aggregate principal balances of certain
Classes will be distributed prior to such distributions to other Classes, the
Classes which receive such distributions at a later time are more likely to bear
any losses which exceed the amount covered by credit enhancement. Coverage
under any credit enhancement may be canceled or reduced by the Master Servicer
or the Representative if such cancellation or reduction would not adversely
affect the rating or ratings of the related Certificates. The Trustee of the
related Trust will have the right to sue providers of credit enhancement if a
default is made on a required payment.
SUBORDINATION
To enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which they would be entitled to
receive in the absence of any losses or delinquencies, if so specified in the
related Prospectus Supplement, distributions of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series will
instead be payable to holders of one or more Classes of Senior Certificates,
under the circumstances and to the extent specified in the Prospectus
Supplement. If specified in the related Prospectus Supplement, the holders of
Senior Certificates will receive the amounts of principal and/or interest due to
them on each Remittance Date, out of the funds available for distribution on
such date in the related Certificate Account, prior to any such distribution
being made to holders of the related Subordinated Certificates, in each case
under the circumstances and subject to the limitations specified in the
Prospectus Supplement. The protection afforded to the holders of Senior
Certificates through subordination also may be accomplished by first allocating
certain types of losses or delinquencies to the related Subordinated
Certificates, to the extent described in the related Prospectus Supplement. If
aggregate losses and delinquencies in respect of such Mortgage Loans were to
exceed the total amounts payable and available for distribution to holders of
Subordinated Certificates or, if applicable, were to exceed the specified
maximum amount, holders of Senior Certificates would experience losses on the
Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated
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Certificates on any Remittance Date may instead be deposited into one or more
Reserve Accounts established and maintained with the Trustee. If so specified in
the Prospectus Supplement, such deposits may be made on each Remittance Date, on
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the Prospectus Supplement. If so specified in the
related Prospectus Supplement, amounts on deposit in the Reserve Account may be
released to the holders of the Class of Certificates specified in the Prospectus
Supplement at the times and under the circumstances specified in the Prospectus
Supplement. See "--Reserve Accounts" below.
If so specified in the related Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the related Prospectus Supplement, various
Classes of Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other Classes of
Senior and Subordinated Certificates, respectively, through a cross support
mechanism or otherwise. As between Classes of Senior Certificates and as
between Classes of Subordinated Certificates, distributions may be allocated
among such Classes (i) in the order of their scheduled final distribution dates,
(ii) in accordance with a schedule or formula, (iii) in relation to the
occurrence of events, or (iv) otherwise, in each case as specified in the
Prospectus Supplement. The related Prospectus Supplement will set forth
information concerning the amount of subordination of a Class or Classes of
Subordinated Certificates in a Series, the circumstances in which such
subordination will be applicable, the manner, if any, in which the amount of
subordination will decrease over time, the manner of funding any Reserve
Account, and the conditions under which amounts in any such Reserve Account will
be used to make distributions to Senior Certificateholders or released to
Subordinated Certificateholders from the related Trust.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy may be obtained and maintained for any Class or Series
of Certificates. The issuer of any Certificate Guaranty Insurance Policy (a
"Certificate Guaranty Insurer") will be described in the related Prospectus
Supplement. A copy of any such Certificate Guaranty Insurance Policy will be
attached as an exhibit to the related Prospectus Supplement.
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If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy will unconditionally and irrevocably guarantee to
Certificateholders that an amount equal to each full and complete Insured
Payment will be received by an agent of the Trustee (an "Insurance Paying
Agent") on behalf of Certificateholders, for distribution by the Trustee to each
Certificateholder. The "Insured Payment" will equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement.
The specific terms of any Certificate Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Certificate Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the Master Servicer's obligation to repurchase
or substitute for any Mortgage Loans, to guarantee any specified rate of
prepayments or to provide funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Certificate Guaranty
Insurer may be subrogated to the rights of each Certificateholder to receive
payments under the Certificates to the extent of any payments by such
Certificate Guaranty Insurer under the related Certificate Guaranty Insurance
Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Certificates may be entitled to receive limited acceleration of principal
relative to the amortization of the related Mortgage Assets. The accelerated
amortization will be achieved by applying certain excess interest collected on
the Mortgage Assets to the payment of principal on such Classes of Certificates.
This acceleration feature is intended to create an amount (the "Spread Amount"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Mortgage Assets over the principal balances of the
applicable Classes of Certificates. Once the required Spread Amount is reached,
and subject to the provisions described in the next sentence and in the related
Prospectus Supplement, the acceleration feature will cease, unless necessary to
maintain the required level of the Spread Amount. The applicable Agreement will
provide that, subject to certain floors, caps and triggers, the required level
of the Spread Amount may increase or decrease over time. An increase would
result in a temporary period of accelerated amortization of the applicable
Classes of Certificates to increase the actual level of the Spread Amount to its
required level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of the Spread Amount to its required
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level. An Agreement also may provide that after one or more Classes of
Certificates have been paid to the required level of the Spread Amount, excess
interest, together with certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other Classes of Certificates.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of Mortgage
Loans, a Mortgage Pool Insurance Policy issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement will be obtained and maintained
for each Series pertaining to Mortgage Loans. Each Mortgage Pool Insurance
Policy will, subject to the limitations described below or in the related
Prospectus Supplement, cover loss by reason of default in payment on the related
Mortgage Loans in the Pool in an amount initially equal to a specified
percentage of the aggregate principal balance of all Mortgage Loans included in
the Pool as of the Cut-off Date or such other date as is specified in such
Prospectus Supplement. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. The Mortgage Pool Insurance
Policies generally will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
Primary Mortgage Insurance Policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to the Mortgage Pool Insurance Policy, a bond or other credit
support may cover fraud in connection with the origination of Mortgage Loans.
If so specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted Mortgage Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted
Mortgage Loan occurring when the servicer of such Mortgage Loan, at the time of
default or thereafter, was not approved by the applicable insurer.
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The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will include certain expenses incurred by the Master Servicer as
well as accrued interest on delinquent Mortgage Loans to the date of payment of
the claim. Accordingly, if aggregate net claims paid under any Mortgage Pool
Insurance Policy reach the original policy limit, coverage under that Mortgage
Pool Insurance Policy will be exhausted and any further losses will be borne by
the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Pool and will be issued by the
insurer (the "Special Hazard Insurer") named in such Prospectus Supplement.
Each Special Hazard Insurance Policy will, subject to limitations described
below, protect holders of the related Certificates from (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not insured
against under the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties are located or under a flood insurance
policy if the Mortgaged Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreement--Hazard
Insurance." No Special Hazard Insurance Policy will cover losses occasioned by
war, civil insurrection, certain governmental action, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), chemical contamination and certain other risks. The amount of coverage
under any Special Hazard Insurance Policy will be specified in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
property securing the Mortgage Loan has been kept in force and other protection
and preservation expenses have been paid.
Since each Special Hazard Insurance Policy will be designed to permit full
recovery under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Agreement will provide that, if the related
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Mortgage Pool Insurance Policy shall have been terminated or been exhausted
through payment of claims, the Master Servicer will be under no further
obligation to maintain such Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a combination
thereof in the aggregate amount specified in the Prospectus Supplement may be
deposited by the Master Servicer or Representative on the date specified in the
Prospectus Supplement in one or more Reserve Accounts established with the
Trustee. In addition to or in lieu of the foregoing, if so specified in such
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into such Reserve Accounts. Such deposits may be made on the date
specified in the Prospectus Supplement, which may include each Remittance Date,
each Remittance Date for specified periods or until the
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balance in the Reserve Account has reached a specified amount. See "--
Subordination" above.
The cash and other assets in the Reserve Accounts will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement.
Any cash in a Reserve Account and the proceeds upon maturity or liquidation of
any other asset or instrument therein will be invested, to the extent acceptable
to the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Any asset or instrument deposited in
the Reserve Account generally will name the Trustee, in its capacity as trustee
for the Certificateholders, as beneficiary and will be issued by an entity
acceptable to the applicable Rating Agency. Additional information with respect
to such instruments deposited in the Reserve Accounts will be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments deposited
in a Reserve Account will be available for withdrawal from such Reserve Account
for distribution to Certificateholders for the purposes, in the manner and at
the times specified in the Prospectus Supplement.
SUPPLEMENTAL INTEREST PAYMENTS
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to receive supplemental interest payments under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Certificates on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Mortgage Assets.
Such differences may result if the interest rates on the applicable Classes of
Certificates are based upon an index that differs from the index used in
determining the interest rates on the Mortgage Assets. Except as otherwise
provided in a Prospectus Supplement, supplemental interest payments will not be
available to fund shortfalls resulting from delinquencies or defaults on the
Mortgage Assets.
MATURITY PROTECTION
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If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to third-party payments to help provide that the
holders of such Certificates receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto letters of credit,
financial guaranty insurance policies, third party guarantees, limited
guarantees or insurance from agencies or instrumentalities of the United States,
and other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any Class of Certificates has
a floating interest rate, or if any of the Mortgage Assets has a floating
interest rate, the Trust may include an interest rate swap contract, an interest
rate cap agreement or similar contract providing limited protection against
interest rate risks.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust may be evidenced by separate
Classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trusts, the
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allocation of available funds to various Classes of Certificates, the Pass-
Through Rate for various Classes of Certificates and the purchase price paid for
the Certificates.
The original terms to maturity of the Mortgage Loans in a given Pool will
vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Pool. Single Family Loans,
Cooperative Loans and Contracts generally may be prepaid without penalty in full
or in part at any time, although a prepayment fee or penalty may be imposed in
connection therewith. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment fee or penalty upon prepayment in full or in
part.
In general, prepayment of Mortgage Loans is likely to increase when the
level of prevailing interest rates declines significantly, although the
prepayment rate is influenced by a number of other factors, some of which are
described below. Similarly, when the level of prevailing interest rates rises,
prepayment rates may decrease. No prediction can be made as to the prepayment
rate that the Mortgage Loans will actually experience.
Generally, junior mortgage loans have smaller average principal balances
than senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than Mortgage Loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on Mortgage Loans for Federal income tax purposes may result
in a higher rate of prepayment of the Mortgage Loans. The obligation of the
Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. The prepayment experience of the
Pools may be affected by a wide variety of factors, including general and local
economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Representative is unaware of
any reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of The Money Store's and its affiliates'
portfolios of Mortgage Loans.
The secured conventional Mortgage Loans and Contracts generally will
contain due-on-sale provisions permitting the mortgagee or holder of the
Contract to accelerate the maturity of the Mortgage Loan or Contract upon sale
or certain transfers by the borrower of the underlying Mortgaged Property. The
Master Servicer generally will enforce any due-on-sale or due-
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on-encumbrance clause, to the extent it has knowledge of the conveyance or
further encumbrance or the proposed conveyance or proposed further encumbrance
of the Mortgaged Property and reasonably believes that it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "The Agreement--Collection Procedures"
and "Certain Legal Aspects of the Mortgage Loans" for a description of certain
provisions of each Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
Greater than anticipated prepayments of principal will increase the yield
on Certificates purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments 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 applicable Class of Certificates may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Mortgage Loans and foreclosed Mortgaged Properties result in principal
payments on the Mortgage Loans faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Mortgage Loan, the
Mortgagor will be charged interest on the principal amount of the Mortgage Loan
so prepaid only for the number of days in the month actually elapsed up to the
date of the prepayment rather than for a full month. Interest shortfalls also
could result from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), as described under "Certain Legal
Aspects of the Mortgage Loans-- Soldiers' and Sailors' Civil Relief Act" herein.
If so specified in the related Prospectus Supplement, in the event that less
than 30 days' interest is collected on a Mortgage Loan during a Due Period,
whether due to prepayment in full or a Curtailment, the Master Servicer will be
obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of
Compensating Interest that the Master Servicer is obligated to pay, and are not
otherwise covered by
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Insured Payments, the yield on the Certificates could be adversely affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Certificates. See "The Agreement--Termination; Purchase of
Mortgage Loans."
If so specified in the related Prospectus Supplement, the effective yield
to certain Certificateholders may be slightly lower than the yield otherwise
produced by the applicable Remittance Rate and purchase price, because while
interest generally will accrue on such Certificates from the first day of each
month, the distribution of such interest will not be made earlier than a
specified date in the month following the month of accrual.
In addition, if so specified in the related Prospectus Supplement,
prepayments may result from amounts on deposit, if any, in the Pre-Funding
Account at the end of the Funding Period being applied to the payment of
principal of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Certificates. Factors other than those identified herein and in the
related Prospectus Supplement could significantly affect principal prepayments
at any time and over the lives of the Certificates.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
SALE OF MORTGAGE LOANS
Pursuant to each Agreement, at the time of issuance of Certificates of a
Series the Originators and/or The Money Store will sell to the related Trust,
without recourse, all interest of the Originators and/or The Money Store in each
of the Mortgage Assets comprising the assets of such Trust and all
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interest in all actual payments collected after the Cut-off Date with respect to
such Mortgage Assets.
In addition, to the extent specified in the related Prospectus Supplement,
the net proceeds received from the sale of the Certificates of a given Series
will be applied to the deposit of the Pre-Funded Amount into the Pre-Funding
Account.
The aggregate principal balance of additional Mortgage Assets to be purchased
for the related Trust generally will be equal to the Pre-Funded Amount on the
date of the issuance of the related Series. On each applicable purchase date,
the Originators and/or The Money Store will sell to the related Trust, without
recourse, the entire interest of the Originators and/or The Money Store in the
additional Mortgage Assets identified in a schedule attached to a supplemental
conveyance relating to such additional Mortgage Assets executed on such date by
the Originators and/or The Money Store. In connection with each purchase of
additional Mortgage Assets, the related Trust will be required to pay to the
Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Mortgage Asset as of its
related Cut-off Date. The purchase price will be withdrawn from the Pre-Funding
Account and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in "--Representations and Warranties"
below apply to each additional Mortgage Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied.
The Originators and/or The Money Store will convey the additional Mortgage
Assets to the related Trust on the applicable purchase date pursuant to the
Agreement.
Any conveyance of additional Mortgage Assets will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Mortgage Asset must satisfy the
eligibility criteria specified in the preceding paragraph as of its applicable
Cut-off Date and such additional criteria as may be specified in the related
Prospectus Supplement; (ii) if and to the extent specified in the related
Prospectus Supplement, the third-party credit enhancement provider, if any,
shall have approved the transfer of such additional Mortgage Assets to the
related Trust; (iii) neither the Originator nor The Money Store will have
selected such additional Mortgage Assets in a manner that either believes is
adverse to the interests of Certificateholders; and (iv) the Originator and The
Money Store will deliver certain opinions of counsel to the Trustee(s) and the
Rating Agencies with respect to the validity of the conveyance of such
additional Mortgage Assets.
In connection with such sales of the Mortgage Loans, the Representative
will be required to deliver to the Trustee certain specified items (collectively
with respect to each Mortgage Loan, the "Trustee's Mortgage File") with respect
to
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each Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, each Trustee's Mortgage File will be required to include the
following, together with certain other specified items: (a) The original
Mortgage Note; (b) either: (i) the original Mortgage, with evidence of
recording thereon or (ii) a certified copy of the Mortgage where the original
has been transmitted for recording or has been lost; and (c) an assignment of
the Mortgage Loan from the applicable Originator to either the related Trustee
or Initial Co-Trustee under the Agreement with evidence of recording thereon.
The Trustee will be required to review each such Trustee's Mortgage File to
ascertain that all required documents have been executed and received. If the
Certificate Guaranty Insurer, if any, or the Trustee finds any document
constituting a part of a Trustee's Mortgage File which is not properly executed,
has not been received, is unrelated to the Mortgage Loans of the related Trust
or does not conform in a material respect to the description thereof provided on
behalf of the Representative, the Certificate Guaranty Insurer, if any, or the
Trustee is required promptly to notify the Master Servicer, The Money Store, and
the Trustee or the Certificate Guaranty Insurer, if any, respectively. The
Money Store is required to use reasonable efforts to remedy a material defect in
a document constituting part of a Trustee's Mortgage File of which it is so
notified. If, however, within 60 days after the Trustee's notice to it
respecting such defect The Money Store has not remedied the defect and the
defect materially and adversely affects the interest of the Trust in the related
Mortgage Loan or the interests of the Certificate Guaranty Insurer, if any, The
Money Store is required to (i) substitute in lieu of such Mortgage Loan a
substitute Mortgage Loan which qualifies for substitution under the Agreement (a
"Qualified Substitute Mortgage Loan") and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution, deposit in
the related Principal and Interest Account (as defined herein under "--Payments
on the Mortgage Loans") the amount of such shortfall in principal balance
arising from such substitution (the "Substitution Adjustment") or (ii) purchase
such Mortgage Loan at a price equal to the principal balance of such Mortgage
Loan as of the date of purchase, plus 30 days' interest on such principal
balance, computed at the Adjusted Mortgage Loan Remittance Rate (as defined in
the related Prospectus Supplement) as of the next succeeding Determination Date,
plus any accrued unpaid Servicing Fees and Contingency Fees (each as defined
herein under "--Servicing and Other Compensation and Payment of Expenses") and
certain other amounts advanced by and reimbursable to the Master Servicer, plus
the interest portion of any unreimbursed Insured Payments made by the
Certificate Guaranty Insurer, if any, related to such Mortgage Loan, which
purchase price will be deposited in the Principal and Interest Account and
delivered to
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the Trustee on the next succeeding Determination Date, except for
the amount described above relating to unreimbursed Insured Payments, if any,
which shall be paid directly to the Certificate Guaranty Insurer; provided,
however, that, if a REMIC election has been made for the related Trust, The
Money Store may not take any such action unless it has theretofore caused to be
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters (an "Opinion of Counsel") which states that such a purchase or
substitution would not constitute a "prohibited transaction," as defined in
Section 860F of the Code (a "Prohibited Transaction").
REPRESENTATIONS AND WARRANTIES
The Representative will represent, among other things, that as of the
related Cut-off Date as to each Mortgage Loan sold to the related Trust, the
information provided with respect to such Mortgage Loan was true and correct;
all of the original or certified documentation constituting the Trustee's
Mortgage Files (including all material documents related thereto) has been or
will be delivered to the Trustee or a custodian on its behalf (the "Custodian");
each Mortgage was a valid and subsisting lien of record on the Mortgaged
Property; immediately prior to such transfer and assignment, the Originators
were the sole owners of each Mortgage Loan conveyed by them; and as of the
related Cut-off Date, no Mortgage Loan will be 59 days or more delinquent in
payment, no Mortgage Loan originated within 12 months of the related Cut-off
Date will be delinquent 59 days or more as measured at the end of any month
during the 12 months immediately preceding such Cut-off Date, and with respect
to Mortgage Loans originated more than 12 months before such Cut-off Date, no
more than the percentage of Mortgage Loans specified in the related Prospectus
Supplement (measured by outstanding principal balance as of such Cut-off Date)
will have been on up to two occasions 60 days delinquent as measured at the end
of any month since the inception of each such Mortgage Loan.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Servicer, any Subservicer, the Custodian, the Certificate Guaranty Insurer, if
any, or the Trustee that any of the representations and warranties contained in
the Agreement have been breached in any material respect as of the related Cut-
off Date, with the result that the interests of the related Trust in the related
Mortgage Loan or the interests of the Certificate Guaranty Insurer, if any, were
materially and adversely affected, notwithstanding that such representation and
warranty was made to The Money Store's best knowledge, the party discovering
such breach is required to give prompt written notice to the other parties.
Within 60 days of the earlier to occur of The Money Store's discovery or its
receipt of notice of any such breach, The Money Store will be required to cure
promptly such breach in all material respects, or (i) remove
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such Mortgage Loan and substitute one or more Qualified Substitute Mortgage
Loans or (ii) purchase such Mortgage Loan, in each case on the same terms and on
the same conditions as described above under "Sale of Mortgage Loans." The
obligation of The Money Store to so substitute or purchase any Mortgage Loan
will constitute the sole remedy respecting a material breach of any such
representation or warranty available to the Certificateholders or the Trustee.
PAYMENTS ON THE MORTGAGE LOANS
The Agreement will require the Master Servicer to establish and maintain
one or more principal and interest accounts (each a "Principal and Interest
Account") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer will be required to deposit or cause to be deposited in
the related Principal and Interest Account (within 24 hours of receipt) all
payments received after the related Cut-off Date on account of principal and
interest on the related Mortgage Loans (but net of the Servicing Fee and the
Contingency Fee with respect to each Mortgage Loan and other servicing
compensation payable to the Master Servicer as permitted by the Agreement).
Not later than the day of each month which is the later of (i) the third
Business Day prior to the 15th day of such month and (ii) the seventh Business
Day of such month (each such day a "Determination Date"), the Master Servicer
will be required to wire transfer to the Trustee the Available Remittance Amount
for deposit in the segregated trust accounts to be maintained with the Trustee
for such purpose (each a "Certificate Account").
Unless otherwise specified in the related Prospectus Supplement, the
"Available Remittance Amount" will be defined in the Agreement to include, with
respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Master Servicer or any Sub-
Servicer on the Mortgage Loans (including amounts paid by the Master
Servicer and the Representative and excluding amounts required to be
deposited into any related Reserve Account, amounts paid as reimbursement
to the Master Servicer of advances and
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amounts recovered as voidable preferences) during the immediately preceding
calendar month (the "Due Period"), plus
(ii) the amount of any Monthly Advance and Compensating Interest
payments with respect to the Mortgage Loans remitted by the Master Servicer
for such Remittance Date.
The term Available Remittance Amounts will not include Insured Payments, if
any.
GENERAL SERVICING STANDARDS
The Master Servicer will agree to master service the Mortgage Loans in
accordance with the related Agreement and, where applicable, prudent mortgage
servicing standards. "Prudent mortgage servicing standards" generally will
require the Master Servicer to exercise collection and foreclosure procedures
with respect to the Mortgage Loans with the same degree of care and skill that
it would use in master servicing mortgage loans for its own account. Pursuant
to each Agreement, the Master Servicer will be required to make reasonable
efforts to collect all payments called for under the terms of the related
Mortgage Loan. Nonetheless, the Master Servicer, in determining the type of
action that is reasonable to pursue may consider, among other things, the unpaid
principal balance of a Mortgage Loan against the estimated cost of collection or
foreclosure action, the unpaid balance of the related prior mortgage, if any,
the condition and estimated market value ("as is" and "if repaired"), the
estimated marketability of the related Mortgaged Property and the borrower's
ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "Servicing
Fee") and a contingency fee (the "Contingency Fee") equal to the percentage per
annum specified in the related Prospectus Supplement of the principal balance of
each Mortgage Loan. The Contingency Fee is meant to provide additional
servicing compensation to a successor servicer if The Money Store is replaced as
Master Servicer under the related Agreement. However, as long as The Money
Store acts as Master Servicer, it will be entitled to receive the Contingency
Fee, although such amount is not deemed servicing compensation. Unless
otherwise specified in the related Prospectus Supplement, the Servicing Fee and
Contingency Fee will each be calculated and payable monthly from the interest
portion of scheduled monthly payments, liquidation proceeds and certain other
collected proceeds. In addition, the Master Servicer will be entitled under the
Agreement to retain additional servicing compensation in the form of assumption
and other administrative fees, prepayment penalties and premiums, late payment
charges,
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interest paid on funds in the Principal and Interest Account, interest
paid on earnings realized on Permitted Instruments, and certain other excess
amounts.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of the Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage Loan. Such expenditures may include costs of collection
efforts, reappraisals when a loan is 90 days past due, forced placement of
hazard insurance if a borrower allows his hazard policy to lapse, legal fees in
connection with foreclosure actions, advancing payments on the related senior
mortgage, if any, advances of delinquent property taxes, upkeep and maintenance
of the property if it is acquired through foreclosure and similar types of
expenses. Each such expenditure constitutes a "Servicing Advance." The Master
Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Master Servicer will be entitled
to recover Servicing Advances to the extent permitted by the Mortgage Loans or,
if not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan.
Servicing Advances will be reimbursable to the Servicer from the sources
described above out of the funds on deposit in the Principal and Interest
Account.
HAZARD INSURANCE
The Master Servicer will be required to cause to be maintained fire and
hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located, in an amount which is at least equal to the least
of (i) the outstanding principal balance owing on the Mortgage Loan and the
related senior mortgage, if any, (ii) the full insurable value of the premises
securing the Mortgage Loan, and (iii) the minimum amount required to compensate
for damage or loss on a replacement cost basis. If the Mortgaged Property is in
an area identified in the Federal Register by the Flood Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), the Master Servicer will be required to cause to be purchased a
flood insurance policy with a generally acceptable insurance carrier, in an
amount representing coverage not less than the least of (a) the outstanding
principal balance of the Mortgage Loan and the senior lien, if any, (b) the full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance
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available under the National Flood Insurance Act of 1968, as amended.
The Master Servicer will also be required to maintain, to the extent such
insurance is available, on REO Property, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, flood insurance in an amount equal to that required above. Any amounts
collected by the Master Servicer or any Sub-Servicer under any such policies
(other than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary first
or second mortgage servicing procedures) are required to be deposited in the
Principal and Interest Account.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire and hazards of extended coverage on all of the
Mortgage Loans, then, to the extent such policy names the Trustee as loss payee
and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without individual fire and hazard insurance, and
otherwise complies with the requirements of the preceding paragraph, the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
ENFORCEMENT OF DUE ON SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer, on behalf of the Trustee, will, to the extent it
has knowledge of such conveyance or prospective conveyance, be required to
enforce the rights of the Trustee as the mortgagee of record to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Master
Servicer will not be required to exercise any such right if the "due-on-sale"
clause, in the reasonable belief of the Master Servicer, is not enforceable
under applicable law or if such enforcement would materially increase the risk
of default or delinquency on, or materially decrease the security for, such
Mortgage Loan. In such event, the Master Servicer will attempt to enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, unless prohibited by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Certificate Guaranty Insurer, if
any, to enter into a substitution of liability agreement with such person,
pursuant to which the original Mortgagor is released from liability and such
person is substituted as Mortgagor and becomes liable under the Mortgage Note.
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REALIZATION UPON DEFAULTED MORTGAGE
The Master Servicer generally will foreclose upon or otherwise comparably
convert the ownership in the name of the Trustee of Mortgaged Properties
relating to defaulted Mortgage Loans as to which no satisfactory arrangements
can be made for collection of delinquent payments. However, the Master Servicer
will be required to take into account the existence of any hazardous substances,
hazardous wastes or solid wastes on a Mortgaged Property in determining whether
to foreclose upon or otherwise comparably convert the ownership of such
Mortgaged Property.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable efforts
to collect all payments called for under the terms and provisions of the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any late payment charge, prepayment charge, assumption fee or
any penalty interest in connection with the prepayment of a Mortgage Loan or any
other fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Mortgage
Loan or consent to the postponement of strict compliance with any such term or
in any matter grant indulgence to any Mortgagor, subject to the limitations set
forth in the Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will nonetheless make payment of any required Monthly Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to enter
into sub-servicing arrangements with sub-servicers meeting the requirements of
the related Agreement (each, a "Sub-Servicer"). Such sub-servicing arrangements
will not relieve the Master Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
REMOVAL AND RESIGNATION OF MASTER SERVICER
With respect to each Series of Certificates, the Certificate Guaranty
Insurer, if any, or the Holders of not less than 50 percent of each Class of
Certificates of the related Series, other than the Class R Certificates (the
"Majority Certificateholders"), by notice in writing to the Master Servicer and
with the prior written consent of the Certificate Guaranty Insurer, if any,
which consent may not be unreasonably withheld, may, pursuant to the related
Agreement, remove the
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Master Servicer upon the occurrence of any of the following events:
(i) (A) an Event of Nonpayment (as defined below); (B) the failure by
the Master Servicer to make any required Servicing Advance to the extent
such failure materially or adversely affects the interests of the
Certificate Guaranty Insurer, if any, or the Certificateholders; (C) the
failure by the Master Servicer to make any required Monthly Advance; (D)
the failure by the Master Servicer to remit any Compensating Interest; or
(E) any failure by the Master Servicer to remit to the Trustee any payment
required to be made under the terms of the related Agreement, which in each
case continues unremedied (in the case of the events described in clauses
(i)(A), (i)(B), (i)(D) and (i)(E) for 30 days) after the date upon which
written notice of such failure, requiring the same to be remedied, shall
have been given to the Master Servicer by the Trustee or to the Master
Servicer and the Trustee by any Certificateholder or the Certificate
Guaranty Insurer, if any; or
(ii) failure by the Master Servicer or The Money Store (so long as The
Money Store is the Master Servicer) duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Master Servicer or the Representative, as set forth in the related
Agreement, which failure continues unremedied for a period of 60 days after
the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Master Servicer or The Money Store,
as the case may be, by the Trustee or to the Master Servicer or The Money
Store, as the case may be, and the Trustee by any Certificateholder or the
Certificate Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Master
Servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings of or
relating to the Master Servicer or of or relating to all or substantially
all of the Master Servicer's property; or
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(v) the Master Servicer shall admit in writing its inability to pay
its debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its
obligations.
An "Event of Nonpayment" will generally be defined in the Agreements as a
shortfall on any Remittance Date in moneys (excluding any amounts representing
Insured Payments) available to fund the full amount of the Distribution Amounts
due on such Remittance Date.
The Master Servicer may not assign its obligations under the Agreement nor
resign from the obligations and duties thereby imposed on it except by mutual
consent of the Master Servicer, the Certificate Guaranty Insurer, if any, the
Trustee and the Majority Certificateholders, or upon the determination that the
Master Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Master Servicer. No such
resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the Majority
Certificateholders or the Certificate Guaranty Insurer, if any, so request, the
Trustee may appoint, or petition a court of competent jurisdiction to appoint,
any established mortgage loan servicing institution acceptable to the
Certificate Guaranty Insurer, if any, having a net worth of not less than
$15,000,000 and which is approved as a servicer by FNMA and FHLMC as the
Successor Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee, the
Contingency Fee and such other compensation as is described under "--Servicing
and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust established under each Agreement will terminate upon notice to
the Trustee following the earlier to occur of (i) the final payment or other
liquidation of such last Mortgage Loan remaining in the related Trust or the
disposition of all
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REO Property, (ii) the optional purchase of the assets of the Trust by the
Servicer or the Certificate Guaranty Insurer, if any, as described below, (iii)
mutual consent of the Master Servicer, the Certificate Guaranty Insurer, if any,
and all Certificateholders in writing, or (iv) if a REMIC election has been made
for the related Trust, the occurrence of a "qualified liquidation" of the Trust,
as permitted by the REMIC provisions of the Code as described below; provided,
however, that in no event will any Trust terminate later than twenty-one years
after the death of the last survivor of the person named in the related
Agreement.
Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Mortgage Loans are less than 10% of the Original Pool Principal Balance (or
such other percentage as may be specified in the related Prospectus Supplement),
the Master Servicer may, at its option, and in the absence of the exercise
thereof by the Master Servicer, the Certificate Guaranty Insurer, if any, may,
at its option, purchase, on the next succeeding Remittance Date, all of the
Mortgage Loans and any related REO Properties at a price equal to the
Termination Price.
On any Remittance Date on or after the Cross-Over Date on which Mortgage
Loans with an aggregate principal balance as of the Cut-off Date that equals or
exceeds 25% of the Original Pool Principal Balance (or such other percentage as
may be specified in the related Prospectus Supplement) have become liquidated
Mortgage Loans, the Certificate Guaranty Insurer, if any, may determine to
purchase and may cause the purchase from the Trust of all Mortgage Loans and REO
Properties in the Pool at a price equal to the sum of the Termination Price and
the outstanding and unpaid fees and expenses of the Trustee and the Master
Servicer.
If a REMIC election is made for a Series of Certificates, following a final
determination by the Internal Revenue Service (the "IRS") or by a court of
competent jurisdiction, in either case from which no appeal is taken within the
permitted time for such appeal, or if any appeal is taken, following a final
determination of such appeal from which no further appeal can be taken, to the
effect that the REMIC does not and will no longer qualify as a REMIC pursuant to
Section 860D of the Code (the "Final Determination"), at any time on or after
the date which is 30 calendar days following such Final Determination (i) the
Majority Certificateholders may direct the Trustee on behalf of such Trust to
adopt a "plan of complete liquidation" (within the meaning of Section
860F(a)(4)(B)(i) of the Code) with respect to such REMIC and (ii) the
Certificate Guaranty Insurer, if any, may notify the Trustee of the Certificate
Guaranty Insurer's determination to purchase from the Trust all Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu
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of foreclosure, or otherwise in respect of any Mortgage Loan, then remaining in
such REMIC at a price (the "Termination Price") equal to the sum of (x) 100% of
the aggregate principal balances of such Mortgage Loans as of the day of
purchase minus amounts remitted from the Principal and Interest Account to the
Certificate Account representing collections of principal on such Mortgage Loans
during the current Due Period, (y) 30 days' interest on such amount computed at
the applicable weighted average of the Adjusted Mortgage Loan Remittance Rates,
and (z) the interest portion of any unreimbursed insured payment made by the
Certificate Guaranty Insurer, if any. Upon receipt of such direction by the
Majority Certificateholders or of such notice from the Certificate Guaranty
Insurer, the Trustee will notify the holders of the Class R Certificates of such
election to liquidate or such determination to purchase, as the case may be (the
"Termination Notice"). The Holders of a majority of the percentage interest of
the Class R Certificates then outstanding may, within 60 days from the date of
receipt of the Termination Notice (the "Purchase Option Period"), at their
option, purchase from the related Trust all Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the REMIC at a purchase price
equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Certificateholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
Mortgage Loans and such other property in the REMIC and distribute the proceeds
of the liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Certificateholders shall permit
or direct in writing, after the expiration of the Purchase Option Period and
(ii) in the event that the Certificate Guaranty Insurer has given the Trustee
notice of the Certificate Guaranty Insurer's determination to purchase the
assets described in clause (ii) preceding, the Certificate Guaranty Insurer
shall so purchase such assets within 60 days after the expiration of the
Purchase Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and the Certificate Guaranty Insurer, if
any, of an opinion of nationally recognized tax counsel selected by the Holders
of such Class R Certificates, which opinion shall be reasonably satisfactory in
form and substance to the Majority
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Certificateholders and the Certificate Guaranty Insurer, if any, that the effect
of the Final Determination is to increase substantially the probability that the
gross income of the REMIC will be subject to federal taxation, purchase from the
Trust all Mortgage Loans and all property theretofore acquired by foreclosure,
deed in lieu of foreclosure, or otherwise in respect of any Mortgage Loan then
remaining in the applicable REMIC at a purchase price equal to the Termination
Price. The foregoing opinion shall be deemed satisfactory unless the Majority
Certificateholders give the holders of a majority of percentage interests in the
Class R Certificates notice that such opinion is not satisfactory within thirty
days after receipt of such opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Certificate-holders may
exercise any trust or power conferred on the Trustee with respect to the
Certificates or the Trusts, upon satisfac-tion of certain conditions set forth
in the Agreements; provided, however, that with respect to any action or event
affecting only one or more Classes of Certificates, only Holders of such Class
or Classes may exercise such trust or power.
AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer and
the Trustee by written agreement, upon the prior written consent of the
Certificate Guaranty Insurer, if any, without the notice to, or consent of, the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions of such Agreement, or any
agreement for the retention of each Trustee's Mortgage File; provided, however,
that such action shall not, as evidenced by an Opinion of Counsel delivered to
the Trustee, adversely affect the interest of any Certificateholder or any other
party and further provided that no such amendment shall reduce in any manner the
amount of, or delay the timing of, any amounts which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party thereto
without the consent of such party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer and the Trustee with the consent of the Certificate Guaranty
Insurer, if any, and the Holders of the majority of the percentage interest in
each Class of Certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner
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any provisions thereof; provided, however, that if a REMIC election is made for
the applicable Trust, no such amendment shall be made unless the Trustee
receives an Opinion of Counsel, at the expense of the party requesting the
change, that such change will not adversely affect the status of the Trust as a
REMIC or cause a tax to be imposed on the REMIC, and provided further, that no
such amendment shall reduce in any manner the amount of, or delay the timing of,
any amounts which are required to be distributed on any Certificates without the
consent of the Holders of 100% of each Class of Certificates affected thereby.
Each Agreement may be amended from time to time by the Master Servicer, The
Money Store and the Trustee by written agreement, upon the prior written consent
of the Certificate Guaranty Insurer, if any, without the notice to or consent of
the Certificateholders, in connection with the substitution of cash, a letter of
credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative may also remove the Trustee if the Trustee ceases
to be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. 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.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Laws and practices
relating to the legal effects and enforcement of mortgages and deeds of trust
vary somewhat from state to state. In general, however, the most significant
applicable legal principles are similar in all states. The following discussion
addresses the more significant legal principles applicable to mortgages and
deeds of trust in all states. It should be noted that some of the Mortgage
Loans may relate to Mortgaged Properties located in California, which has
enacted various laws, not common to most other states, which
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impose special limitations on the remedies available to the holders of mortgages
and deeds of trust. These laws, called "anti-deficiency laws," are discussed
below.
NATURE OF THE MORTGAGE ASSETS
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. The Single Family Loans, FHA Loans, Secured Conventional
Home Improvement Loans and Multifamily Loans generally will be secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property subject to the
loan is located. A mortgage creates a lien upon the real property encumbered by
the mortgage, which lien is generally not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of recording with a state or county office. There are
two parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. The mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a security
deed or deed to secure debt are governed by law and, with respect to some deeds
of trust, the directions of the beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is
a form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The
condominium unit owners appoint or elect the condominium association to govern
the affairs of the condominium.
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Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage on the Cooperative
and/or underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the Cooperative in connection with
the construction or purchase of the Cooperative's apartment building. The
interest of the occupants under proprietary leases or occupancy agreements to
which the Cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the Cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
Cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
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perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the UCC in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Unless otherwise specified
in the Prospectus Supplement, under the Agreement, the Representative will
transfer or cause the transfer of physical possession of the Contracts to the
Trustee or its custodian. In addition, the Representative will make or cause to
be made an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a
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motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home
under real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Representative.
The Representative will assign or cause to be assigned a security interest
in the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Representative, the Master Servicer nor the Trustee will amend the certificates
of title to identify the Trustee, on behalf of the Certificateholders, as the
new secured party and, accordingly, the Representative or the Seller will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the
Representative's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest might not be held effective against
creditors of the Representative or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the
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notation of the lien of the Trustee on the certificate of title or delivery of
the required documents and fees should be sufficient to protect the Trustee
against the rights of subsequent purchasers of a Manufactured Home or subsequent
lenders who take a security interest in the Manufactured Home. If there are any
Manufactured Homes as to which the security interest assigned to the
Representative and the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee, on behalf of the Certificateholders as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the Trustee could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Representative will represent that it has no knowledge of any such liens with
respect to any
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Manufactured Home securing a Contract. However, such liens could arise at any
time during the term of a Contract. No notice will be given to the Trustee or
Certificateholders in the event such a lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the borrower-
trustor, to any person who has recorded a request for a copy of any notice of
default and notice of sale, to any successor in interest to the borrower-
trustor, to the beneficiary of any junior deed of trust and to certain other
persons. Before such non-judicial sales take place, typically a notice of sale
must be posted in a public place and published during a specific period of time
in one or more newspapers, posted on the property, and sent to parties having an
interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having
a junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
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Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make
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payments or defaults in the performance of covenants required thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
which establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder on its obligations under the proprietary lease
or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the
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tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give
the debtor a number of days' notice, generally varying from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit so that
the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the borrower and foreclosed junior lienors are
given a statutory period in which to redeem the property from 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
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sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the Mortgage Assets (by
principal balance) will be secured by properties located in California.
Foreclosure of a deed of trust in California may be effected by a judicial or
nonjudicial foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgement against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. However, in the case of certain
purchase money mortgage loans, a lender may be prohibited by statute from
obtaining a deficiency judgment. California law also requires the deed of trust
beneficiary to exhaust all real property security in a single action (i.e. in a
judicial foreclosure) before a deficiency judgement may be sought against the
borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary
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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 would be a personal judgment against the former borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property sold at the foreclosure sale. As a
result of these prohibitions, it is anticipated that in many instances the
Master Servicer will not seek deficiency judgments against defaulting
mortgagors. Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment for any deficiency following possession and resale
of a Manufactured Home. However, some states impose prohibitions or limitations
on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws (including California law) affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon collateral and/or enforce a deficiency judgment. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the court determines
that the value of the Mortgaged Property is less than the principal balance of
the mortgage loan, for the reduction of the secured indebtedness to the value of
the Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments. Some states also have homestead exemption
laws which would protect a principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state
laws impose specific statutory liabilities upon lenders who fail to
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comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the seller of such Contract had or should have had knowledge of
such claim or defense, the Master Servicer will have the right to require the
seller to repurchase the Contract because of a breach of such seller's
representation and warranty that no claims or defenses exist which would affect
the obligor's obligation to make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgager
or secured party. The Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of due-on-
sale clauses. As to loans secured by an owner-occupied residence (which would
include a Manufactured Home), the Garn-St Germain Act sets forth nine specific
instances in which a mortgagee covered by the Act may not exercise its rights
under a due-on-sale clause, notwithstanding the fact that a transfer of the
property may
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have occurred. The inability to enforce a due-on-sale clause may result in
transfer of the related Mortgaged Property to an uncreditworthy person, which
could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of mortgage loans with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the Mortgage Loans. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Mortgage Loans having higher Mortgage
Rates or APR's, may increase the likelihood of refinancing or other early
retirement of such loans or contracts. Legal restrictions, if any, on
prepayment of Multifamily Loans will be described in the related Prospectus
Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. 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. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V.
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In any state in which application of Title V was expressly rejected or a
provision limiting discount points or other charges has been adopted, no
Contract which imposes finance charges or provides for discount points or
charges in excess of permitted levels will be included in any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief
Act imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted alleging
personal injury or property damage from the existence of certain chemical
substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a
consequence, lawsuits may arise from time to time asserting claims against
manufacturers or builders of the housing, suppliers of component parts, and
related persons in the distribution process. Plaintiffs have won such judgments
in certain such lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by a
Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the
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related Contract and may be unable to collect amounts still due under the
Contract. Unless otherwise described in the related Prospectus Supplement, the
successful assertion of such claim constitutes a breach of a representation or
warranty of the Seller, and the Certificateholders would suffer a loss only to
the extent that (i) the Seller breached its obligation to repurchase the
Contract in the event an obligor is successful in asserting such a claim, and
(ii) the Seller, the Representative or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde and certain other chemicals in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against a
Trust.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Certificateholders if a Mortgaged Property securing a
Mortgage Loan became the property of such Trust in certain circumstances and if
such Cleanup Costs were incurred. Moreover, certain states by statute impose a
lien for any Cleanup Costs incurred by such state on the property that is the
subject of such Cleanup Costs (a "Superlien"). All subsequent liens on such
property are subordinated to such Superlien and, in some states, even prior
recorded liens are subordinated to such Superliens. In the latter states, the
security interest of
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the Trustee in a property that is subject to such a Superlien could be adversely
affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan, special Federal tax counsel,
("Federal Tax Counsel"), the following are the material federal income tax
consequences of the purchase, ownership and disposition of the Certificates
offered hereby. The discussion, and the opinions referred to below, are based
on laws, regulations, rulings and decisions now in effect (or, in the case of
certain regulations, proposed), all of which are subject to change or possibly
differing interpretations. Because tax consequences may vary based on the
status or tax attributes of the owner of a Certificate, prospective investors
should consult their own tax advisors in determining the federal, state, local
and other tax consequences to them of the purchase, ownership and disposition of
a Certificate. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), the terms
"Certificateholder" and "holder" mean the beneficial owner of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election will be made
with respect to the related Trust. To the extent provided in the Prospectus
Supplement for a series, Certificateholders may also have the benefit of a
Reserve Fund and of certain agreements (each, a "Yield Supplement Agreement")
under which payment will be made from the Reserve Fund in the event that
interest accrued on the Mortgage Loans at their Mortgage Interest Rates is
insufficient to pay interest on the Certificates of such Series (a "Basis Risk
Shortfall"). If a REMIC election is to be made, the Prospectus Supplement will
designate the Certificates of such series as "regular interests" ("REMIC Regular
Certificates") in the REMIC (within the meaning of Section 860G(a)(1) of the
Code) or as the "residual interest" ("REMIC Residual Certificates") in the REMIC
(within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates of
a series with respect to which a REMIC election will, or will not, be made. The
discussion below is divided into two parts, the first part applying only to
REMIC Certificates and the second part applying only to Non-REMIC Certificates.
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REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust or certain assets of such
Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
related Trust or certain assets of such Trust will be a REMIC and the REMIC
Certificates will be considered to evidence ownership of "regular interests" or
"residual interests" within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Fund in
the event of a Basis Risk Shortfall will be required to allocate their purchase
price between their beneficial ownership interests in the related REMIC regular
interests and Yield Supplement Agreements, and will be required to report their
income realized with respect to each, calculated taking into account such
allocation. In general, such allocation would be based on the respective fair
market values of the REMIC regular interests and the related Yield Supplement
Agreements on the date of purchase of the related Certificate. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. REMIC Regular
Certificateholders are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable classes of REMIC Regular Certificates will agree that, for federal
income tax purposes, they will be treated as owners of the respective class of
regular interests and of the corresponding Yield Supplement Agreement.
Status of REMIC Certificates as Real Property Loans. The REMIC
Certificates will be "qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code (assets qualifying under one or more of those sections, applying each
section separately, "qualifying assets") to the extent that the REMIC's assets
are
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qualifying assets, but not to the extent that the REMIC's assets consist of
Yield Supplement Agreements. However, if at least 95 percent of the REMIC's
assets are qualifying assets, then 100 percent of the REMIC Certificates will be
qualifying assets. Similarly, income on the REMIC Certificates will be treated
as "interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the limitations of the
preceding two sentences. In addition to Mortgage Assets, the REMIC's assets
will include payments on Mortgage Assets held pending distribution to holders of
REMIC Certificates, amounts in reserve accounts (if any), other credit
enhancements (if any) and possibly buydown funds ("Buydown Funds"). The
Mortgage Assets generally will be qualifying assets under all three of the
foregoing sections of the Code. However, Mortgage Assets that are not secured
by residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(C)(v) of the
Code, and Mortgage Assets that are not secured by improved real property or real
property which is to be improved using loan proceeds will not constitute
qualifying assets under Section 593(d) of the Code. In addition, to the extent
that the principal amount of a Mortgage Asset exceeds the value of the property
securing the Mortgage Asset, it is unclear and Federal Tax Counsel is unable to
opine whether the loans will be qualifying assets. The regulations under
Sections 860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Mortgage Assets and held pending distribution to holders of
Certificates ("cash flow investments") will be treated as qualifying assets. It
is unclear whether reserve funds or Buydown Funds would also constitute
qualifying assets under any of those provisions. The Prospectus Supplement for
each series will indicate (if applicable) that it has Buydown Funds.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify as a REMIC
and the REMIC Certificates issued by the Tiered REMICs, respectively, will be
considered to evidence ownership of "regular interests" or "residual interests"
in the related REMIC within the meaning of the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under
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Section 593(d) of the Code, "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code, and "loans secured by an interest in real property"
under Section 7701(a)(19)(C) of the Code, and whether the income on such
Certificates is interest described in Section 856(c)(3)(B) of the Code, the
Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount---Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above
for purposes of the REMIC Regulations (a "REMIC qualified floating rate"),
qualifies as a variable rate for purposes of the REMIC Regulations if such REMIC
qualified floating rate is set at a "current rate" as defined in the OID
Regulations. In addition, a rate equal to
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the highest, lowest or an average of two or more REMIC qualified floating rates
qualifies as a variable rate for REMIC purposes. A REMIC Regular Certificate
also may have a variable rate based on a weighted average of the interest rates
on some or all of the qualified mortgages held by the REMIC where each qualified
mortgage taken into account has a fixed rate or a variable rate that is
permissible under the REMIC Regulations. Further, a REMIC Regular Certificate
may have a rate that is the product of a REMIC qualified floating rate or a
weighted average rate and a fixed multiplier, is a constant number of basis
points more or less than a REMIC qualified floating rate or a weighted average
rate, or is the product, plus or minus a constant number of basis points, of a
REMIC qualified floating rate or a weighted average rate and a fixed multiplier.
An otherwise permissible variable rate for a REMIC Regular Certificate,
described above, will not lose its character as such because it is subject to a
floor or a cap, including a "funds available cap" as that term is defined in the
REMIC Regulations. Lastly, a REMIC Regular Certificate will be considered as
having a permissible variable rate if it has a fixed or otherwise permissible
variable rate during one or more payment or accrual periods and different fixed
or otherwise permissible variable rates during other payment or accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Service and to certain categories of holders of such REMIC
Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations. The OID Regulations
are effective April 4, 1994. Proposed OID Regulations concerning contingent
payments have not been finalized.
These rules provide that, in the case of a debt instrument such as a REMIC
Regular Certificate, (i) the amount and rate of accrual of original issue
discount will be calculated based on a reasonable assumed prepayment rate (the
"Prepayment Assumption"), and (ii) adjustments will be made in the amount and
rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued.
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The applicable legislative history indicates, however, that such regulations
will provide that the assumed prepayment rate for securities such as the REMIC
Regular Certificates will be the rate used in pricing the initial offering of
the securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period,
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begins on the Closing Date) and ends on the next succeeding Distribution Date.
The original issue discount accruing during each accrual period is then
allocated ratably to each day during such period to determine the daily portion
of original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day
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on which it holds such REMIC Regular Certificate, the daily portions of original
issue discount with respect to the REMIC Regular Certificate, calculated as
described above. However, if (i) the excess of the remaining stated redemption
price at maturity over such cost is less than (ii) the aggregate amount of such
daily portions for all days after the date of purchase until final retirement of
such REMIC Regular Certificate, then such daily portions will be reduced
proportionately in determining the income of such holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includible in the stated redemption price at maturity of
the REMIC Regular Certificate. Interest payments will not qualify as qualified
stated interest unless the interest payments are "unconditionally payable." The
OID Regulations state that interest is unconditionally payable if late payment
of interest (other than late payment that occurs within a reasonable grace
period) or nonpayment of interest is expected to be penalized or reasonable
remedies exist to compel payment. The meaning of "penalized" under the OID
regulations is unclear. The Internal Revenue Service has taken the position
that a penalty must inure directly to the benefit of the debt instrument holder
and must be large enough to ensure that, at the time the debt instruments are
issued, it is reasonably certain that, absent insolvency, the issuer will make
interest payments when due. In its determination, the accrual of interest on
past-due interest payments at a penalty rate that is two percentage points above
the stated yield of a debt instrument is not a sufficient penalty, but the
accrual of interest on past-due interest payments at a penalty rate that is
twelve percentage points above the stated yield of the debt instrument might be
a sufficient penalty, depending on the facts and circumstances.
Accordingly, Federal Tax Counsel is unable to opine whether interest payments on
REMIC Regular Certificates that otherwise would not be treated as having
original issue discount would be considered to have original issue discount
because there are not reasonable remedies to compel timely payment of interest
or adequate penalties for the nonpayment of interest.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account
in determining the life of the REMIC Regular Certificate for this purpose.
Except as provided in regulations, amortizable premium will be treated as an
offset to interest income on the REMIC Regular Certificate.
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Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "Variable Rate REMIC
Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount and (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than zero but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than zero but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with
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values within 25 basis points of each other as determined on the Variable Rate
REMIC Regular Certificate's issue date will be conclusively presumed to be a
Presumed Single Qualified Floating Rate. Notwithstanding the foregoing, a
variable rate that would otherwise constitute a qualified floating rate but
which is subject to one or more restrictions such as a cap or floor, will not be
a qualified floating rate for purposes of the OID Regulations unless the
restriction is fixed throughout the term of the Variable Rate REMIC Regular
Certificate or the restriction will not significantly affect the yield of the
Variable Rate REMIC Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon (i)
one or more qualified floating rates, (ii) one or more rates where each rate
would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate REMIC Regular
Certificate is denominated, (iii) either the yield or changes in the price of
one or more items of actively traded personal property or (iv) a combination of
rates described in (i),(ii) and (iii). The OID Regulations also provide that
other variable rates may be treated as objective rates if so designated by the
Internal Revenue Service in the future. Despite the foregoing, a variable rate
of interest on a Variable Rate REMIC Regular Certificate will not constitute an
objective rate if it is reasonably expected that the average value of such rate
during the first half of the Variable Rate REMIC Regular Certificate'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 REMIC Regular
Certificate's term. An objective rate will qualify as a "qualified inverse
floating rate" if such rate is equal to a fixed rate minus a qualified floating
rate and variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the cost of newly borrowed funds. The OID
Regulations also provide that if a Variable Rate REMIC Regular Certificate
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 REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "Presumed
Single Variable Rate"). If the value of the variable rate and the initial fixed
rate are within 25 basis points of each other as determined on the Variable Rate
REMIC Regular Certificate's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations
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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 (a "Single Variable Rate REMIC Regular
Certificate"), original issue discount is computed as described in "REMIC
Regular Certificates-Current Income on REMIC Regular Certificates--Original
Issue Discount" based on the following: (i) stated interest on the Single
Variable Rate REMIC Regular Certificate which is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest and (ii) by assuming that the variable rate
on the Single Variable Rate REMIC Certificate is a fixed rate equal to: (a) in
the case of a Single Variable Rate REMIC Regular Certificate with a qualified
floating rate or a qualified inverse floating rate, the value of, as of the
issue date, of the qualified floating rate or the qualified inverse floating
rate or (b) in the case of a Single Variable Rate REMIC Regular Certificate with
an objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Certificate.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") 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 REMIC Regular Certificate. The
OID Regulations generally require that such a Multiple Variable Rate REMIC
Regular Certificate 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 REMIC Regular
Certificate 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 REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate 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 REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the
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Multiple Variable Rate REMIC Regular Certificate as of the Multiple Variable
Rate REMIC Regular Certificate'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 REMIC Regular Certificate is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate 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 in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A Holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the Holder held the "equivalent"
fixed rate debt instrument. Each accrual period appropriate adjustments will be
made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
The OID Regulations do not clearly address the treatment of a Variable Rate
REMIC Regular Certificate that is based on a weighted average of the interest
rates on underlying Mortgage Assets and, consequently, Federal Tax Counsel is
unable to opine whether REMIC Regular Certificates that otherwise would not be
treated as having original issue discount would be considered to have original
issue discount because they bear interest based on a wighted average. Under the
OID Regulations, interest payments on such a Variable Rate REMIC Regular
Certificate may be characterized as qualified stated interest which is
includible in income in a manner similar to that described in the previous
paragraph. However, it is also possible that interest payments on such a
Variable Rate REMIC Regular Certificate would be treated as contingent interest
(possibly includible in income when the payments become fixed) or in some other
manner. If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the
Variable Rate REMIC Regular Certificate would be treated as a contingent payment
debt obligation. Federal Tax Counsel is unable to opine how a Variable Rate
REMIC Regular Certificate would be taxed if such REMIC Regular
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Certificate were treated as a contingent payment debt obligation.
Interest-Only REMIC Regular Certificates. The Trust intends to
report income from interest-only classes of REMIC Regular Certificates to the
Internal Revenue Service and to holders of interest-only REMIC Regular
Certificates based on the assumption that the stated redemption price at
maturity is equal to the sum of all payments determined under the Prepayment
Assumption. As a result, such interest-only REMIC Regular Certificates will be
treated as having original issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to payments of interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion of the
holder's interest expense on any debt incurred or continued to purchase or carry
a REMIC Regular Certificate purchased with market discount. The deferred portion
of any interest deduction would not exceed the portion of the market discount on
the REMIC Regular Certificate that accrues during the taxable year in which such
interest would otherwise be deductible and, in general, would be deductible when
such market discount is included in income upon receipt of a principal
distribution on, or upon the sale of, the REMIC Regular Certificate. The Code
requires that information necessary to compute accruals of market discount be
reported periodically to the Internal Revenue Service and to certain categories
of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on
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REMIC Regular Certificates-Original Issue Discount"), taking into account
distributions (including prepayments) prior to the date of acquisition of such
REMIC Regular Certificate by the subsequent purchaser. If market discount on a
REMIC Regular Certificate is treated as zero under this rule, the actual amount
of such discount must be allocated to the remaining principal distributions on
the REMIC Regular Certificate, and when each such distribution is made, gain
equal to the discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that all Holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is sold,
the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110k of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
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REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate shortly following the REMIC's receipt of
the final payment in respect of the Mortgage Assets. The last distribution on a
REMIC Regular Certificate should be treated as a payment in full retirement of
a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts taken
into account by holders of REMIC Residual Certificates, is determined in the
same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Requlations determine the fair market value
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of the contributed property by deeming it equal to the aggregate issue prices of
all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Assets or as principal on the Mortgage Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original issue
discount, if any, on a REMIC Regular Certificate is uncertain. As a result, the
timing of recognition of the REMIC taxable income related to a REMIC Residual
Certificate is also uncertain. Although Federal Tax Counsel is unable to opine
as to this matter, the related REMIC taxable income may be recognized when the
adjusted issue price of such REMIC Regular Certificate would exceed the maximum
amount of future payments with respect to such REMIC Regular Certificate. It is
unclear whether the Prepayment Assumption is taken into account for this
purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess
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losses may be carried forward indefinitely to future quarters subject to the
same limitation.
There is no REMIC counterpart to the partnership election under Code Section
754 to increase or decrease the partnership's basis in its assets by reference
to the adjusted basis to subsequent partners of their partnership interest. The
REMIC Regulations do not provide for a similar election or other adjustment.
Consequently, a subsequent purchaser of a REMIC Residual Certificate at a
premium will not be able to use the premium to reduce his share of the REMIC's
taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and discount income (or deductions for amortization of
premium) with respect to Mortgage Assets, on the one hand, and the timing of
deductions for interest (including original issue discount) on the REMIC Regular
Certificates, on the other. In the case of multiple classes of REMIC Regular
Certificates issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Assets may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Assets (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will be
subject to certain special rules. The excess inclusions with respect to a REMIC
Residual Certificate are equal to the excess, if any, of its share of REMIC
taxable income for the quarterly period over the sum of the daily accruals for
such quarterly period. The daily accrual for any day on which the REMIC Residual
Certificate is held is determined by allocating to each day in a quarter its
allocable share of the product of (A) 120% of the long-term applicable Federal
rate (for quarterly compounding) that would have applied to the REMIC Residual
Certificates (if they were debt
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instruments) on the closing date under Code Section 1274(d)(1) and (B) the
adjusted issue price of such REMIC Residual Certificates at the beginning of a
quarterly period. For this purpose, the adjusted issue price of such REMIC
Residual Certificate at the beginning of a quarterly period is the issue price
of such Certificates plus the amount of the daily accruals of REMIC taxable
income for all prior quarters, decreased by any distributions made with respect
to such Certificates prior to the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return. An exception exists for organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, the Code grants the Treasury
Department authority to issue regulations providing that this exception will not
apply to the extent necessary or appropriate to prevent avoidance of tax. The
REMIC Regulations provide that the exception for thrifts applies only if a REMIC
Residual Certificate has "significant value." For this purpose, a REMIC
Residual Certificate has significant value if (i) the aggregate issue price of
the residual interest in the REMIC equals at least two percent of the total
issue prices of all interests in the REMIC, and (ii) the REMIC Residual
Certificate has an anticipated weighted average life at least equal to 20
percent of the anticipated weighted average life of the REMIC. The anticipated
weighted average life of the REMIC is the weighted average of the anticipated
weighted average lives of all classes of interests in the REMIC. This weighted
average is determined under a formula provided in the REMIC Regulations, applied
by treating all payments taken into account in computing the anticipated
weighted average lives of the regular and residual interests in the REMIC as
principal payments on a single regular interest.
Legislation has been introduced with respect to the relationship between
excess inclusions and the alternative minimum tax. This legislation provides
that (i) the alternative minimum taxable income of a taxpayer is based on the
taxpayer's regular taxable income computed without regard to the rule that
taxable income cannot be less than the amount of excess inclusions, (ii) the
alternative minimum taxable income of a taxpayer for a taxable year cannot be
less than the amount of excess inclusions for that year, and (iii) the amount of
any alternative minimum tax net operating loss is computed without regard to any
excess inclusions. No prediction can be made whether such legislation or similar
legislation will be enacted.
The rule permitting thrift institutions to offset excess inclusions with their
net operating losses generally applies only when the thrift institution itself
(rather than an affiliate of the thrift) holds the residual interest. However,
excess inclusions of a "qualified subsidiary" of a thrift
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institution (defined generally as a subsidiary organized and operated
exclusively in connection with the organization and operation of one or more
REMICs) may be offset by net operating losses of its parent thrift as if the
parent thrift held the residual interest directly.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations providing
that if the aggregate value of the REMIC Residual Certificates is not considered
to be "significant," then the entire share of REMIC taxable income of a holder
of a REMIC Residual Certificate (including a holder which is a thrift
institution) may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derived from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a Mortgage Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Mortgage Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would be subject to such tax. This provision will not affect the REMIC's ability
to accept substitute Mortgage Loans or to sell defective Mortgage Loans in
accordance with the Agreement.
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A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on the
Trust initially would be borne by the holders of the REMIC Residual Certificates
in the related REMIC rather than by the REMIC Regular Certificateholders, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark-to-Market REMIC Residual Certificates. Temporary
regulations provide that "negative-value" REMIC Residual Certificates are not
securities and cannot be marked-to-market pursuant to Section 475 of the Code
(relating to the requirement that dealers in securities mark them to market). A
REMIC Residual Certificate is a negative-value REMIC Residual Certificate if on
the date the dealer acquires the REMIC Residual Certificate the present value of
the anticipated tax liabilities associated with holding the REMIC Residual
Certificate (net of the present value of the tax savings resulting from losses
associated with holding the REMIC Residual Certificate) exceeds the present
value of the expected future distributions on the REMIC Residual Certificate.
Pursuant to the temporary regulations, the Commissioner has the authority to
treat REMIC Residual Certificates which have the same economic effect as a
negative-value REMIC Residual Certificate as not being a security for purposes
of Section 475 of the Code. Proposed regulations would provide that all REMIC
Residual Certificates acquired on or after January 4, 1995, and similar
interests or arrangements acquired on or after January 4, 1995 that are
determined by the Commissioner to have substantially the same economic effect as
a REMIC Residual Certificate, are not securities and cannot be marked to market
pursuant to Section 475 of the Code.
The anticipated and expected tax consequences and distributions are determined
by taking into account events that have occurred through the date of
acquisition, the Prepayment Assumption and reinvestment assumption adopted when
the residual was created, and by taking account of required liquidations and
required or permitted clean up calls.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss
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generally will be capital gain or loss. However, under Code Section 582(c), the
sale of a REMIC Residual Certificate by certain banks and other financial
institutions will be considered a sale of property other than a capital asset,
resulting in ordinary income or loss. Although Federal Tax Counsel is unable to
opine with respect to the tax treatment of a REMIC Residual Certificate that has
unrecovered basis after all funds of the Trust have been distributed, the holder
may be entitled to claim a loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which have
not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a disqualified
organization is equal to the present value of the total anticipated excess
inclusions with respect to the interest transferred for periods after such
transfer multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a REMIC
Residual Certificate. The federal income
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tax consequences of any consideration paid to a transferee on a transfer of an
interest in a REMIC Residual Certificate are unclear and Federal Tax Counsel is
unable to opine with respect to this issue. The preamble to the REMIC
Regulations indicates that the Internal Revenue Service is considering the tax
treatment of these types of residual interests. A transferee of such an interest
should consult its own tax advisors.
Restrictions on Transfer; Holding by Pass - Through Entities. An
entity cannot qualify as a REMIC absent reasonable arrangements designed to
ensure that (1) residual interests in such entity are not held by disqualified
organizations and (2) information necessary to calculate the tax due on
transfers to disqualified organizations (i.e., a computation of the present
value of the excess inclusions) is made available by the REMIC. The governing
instruments of a Trust will contain provisions designed to ensure the foregoing,
and any transferee of a REMIC Residual Certificate must execute and deliver an
affidavit stating that neither the transferee nor any person for whose account
such transferee is acquiring the REMIC Residual Certificate is a disqualified
organization. In addition, as to the requirement that reasonable arrangements be
made to ensure that disqualified organizations do not hold a residual interest
in the REMIC, the REMIC Regulations require that notice of the prohibition be
provided either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below, on pass-through
entities, interests in which are held by disqualified organizations), the REMIC
Regulations further require that such information also be provided to the
Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests where a
disqualified organization is a record holder of an interest in the pass-through
entity. "Pass-through entity" is defined for this purpose to include RICs,
REITs, common trust funds, partnerships, trusts, estates, and subchapter T
cooperatives. Except as provided in regulations, nominees holding interests in a
"pass-through entity" for another person will also be treated as "pass-through
entities" for this purpose. The tax is equal to the amount of excess inclusions
allocable to the disqualified organization for the taxable year multiplied by
the highest corporate rate of tax, and is deductible by the "pass-through
entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or record
interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to
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the Trustee an affidavit that such transferee is not a disqualified
organization.
Legislation has been introduced which would provide that partners of certain
partnerships having a large number of partners will be treated as disqualified
organizations for purposes of the tax imposed on pass-through entities if such
partnerships hold residual interests in a REMIC. When applicable, the
legislation would disallow 70 percent of a large partnership's miscellaneous
itemized deductions, including deductions for servicing and guaranty fees and
any expenses of the REMIC, although the remaining deductions would not be
subject to the 2 percent floor applicable to individual partners. See
"Deductibility of Trust Expenses" below. No prediction can be made regarding
whether such legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "Foreign Investors"
below.
DEDUCTIBILITY OF TRUST EXPENSES
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A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trusts with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to
holders of REMIC Residual Certificates in an amount equal to their allocable
share of such deductions, and individuals, estates, or trusts holding an
interest in such REMIC Residual Certificates may have taxable income in excess
of the cash received. In the case of a "single-class REMIC," the expenses will
be allocated, under Treasury regulations, among the holders of the REMIC Regular
Certificates and the REMIC Residual Certificates on a daily basis in proportion
to the relative amounts of income accruing to each Certificateholder on that
day. In the case of a holder of a REMIC Regular Certificate who is an
individual or a "pass-through interest holder" (including certain pass-through
entities, but not including real estate investment trusts), the deductibility of
such expenses will be subject to the limitations described above. The reduction
or disallowance of these deductions may have a significant impact on the yield
of REMIC Regular Certificates to such a holder. In general terms, a single-
class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and which is structured
with the principal purpose of avoiding the single- class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain
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identification requirements, including timely delivery of a statement, signed by
the holder of the REMIC Regular Certificate under penalties of perjury,
certifying that the holder of the REMIC Regular Certificate is not a United
States person and providing the name and address of the holder, (ii) the holder
is not a "10-percent shareholder" within the meaning of Code Section
871(h)(3)(B), which could be interpreted to apply to a holder of a REMIC Regular
Certificate who holds a direct or indirect 10 percent interest in the REMIC
Residual Certificates, (iii) the holder is not a "controlled foreign
corporation" (as defined in the Code) related to the REMIC or related to a 10
percent holder of a residual interest in the REMIC, and (iv) the holder is not
engaged in a United States trade or business, or otherwise subject to federal
income tax as a result of any direct or indirect connection to the United States
other than through its ownership of a REMIC Regular Certificate. For these
purposes, the term "United States person" means (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, or (iii) an estate or trust whose income is includible in gross income
for United States federal income taxation regardless of its source.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act
of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by
a Trust will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC
Residual Certificate will not be entitled to the portfolio interest exception
from the 30% withholding tax (or to any treaty exemption or rate reduction) for
that portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax
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avoidance potential." A transfer to a foreign transferee will be considered to
have tax avoidance potential unless at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the REMIC Residual
Certificate will equal at least 30 percent of the anticipated excess inclusions
and (2) such amounts will be distributed at or after the time at which the
excess inclusion accrues, but not later than the close of the calendar year
following the calendar year of accrual. A safe harbor in the REMIC Regulations
provides that the reasonable expectation requirement will be satisfied if the
above test would be met at all assumed prepayment rates for the Mortgage Assets
from 50 percent of the Prepayment Assumption to 200 percent of the Prepayment
Assumption. A transfer by a foreign transferor to a domestic transferee will
likewise be disregarded under the REMIC Regulations if the transfer would have
the effect of allowing the foreign transferor to avoid the tax on accrued excess
inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder"s federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust"s information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings
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involving the Internal Revenue Service. Under the Code and Regulations, a REMIC
generally is required to designate a tax matters person. Generally, subject to
various limitations, the tax matters person has authority to act on behalf of
the REMIC and the holders of the REMIC Residual Certificates in connection with
administrative determinations and judicial review respecting returns of taxable
income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Representative or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder"s fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made.
Tax Status of the Trust. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel, will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Mortgage Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Mortgage Assets that is allocable to such Non-
REMIC Certificate and may deduct the portion of the expenses incurred by the
Trust that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Assets and received
directly its share of the payments on the Mortgage Assets and incurred directly
its share of expenses incurred by the Trust when those amounts are received or
incurred by the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder"s other miscellaneous itemized deductions exceeds
two percent of such holder"s adjusted gross income. Moreover, a holder of a
Non-REMIC Certificate that is not a corporation cannot deduct such expenses for
purposes of the alternative minimum tax (if applicable). Such deductions will
include
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servicing, guarantee and administrative fees paid to the servicer of the
Mortgage Loans. As a result, the Trust will report additional taxable income to
holders of Non-REMIC Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding Non-REMIC
Certificates may have taxable income in excess of the cash received.
Status of the Non-REMIC Certificates as Real Property Loans. The Non-REMIC
Certificates will be "qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code (assets
qualifying under one or more of those sections, applying each section
separately, "qualifying assets") to the extent that the Trust"s assets are
qualifying assets. The Non-REMIC Certificates may not be qualifying assets
under any of the foregoing sections of the Code to the extent that the Trust"s
assets include Buydown Funds, reserve funds, or payments on mortgages held
pending distribution to Certificateholders. Further, the Non-Remic Certificates
may not be "qualifying real property loans" to the extent loans held by the
Trust are not secured by improved real property or real property which is to be
improved using the loan proceeds, may not be "real estate assets" to the extent
loans held by the trust are not secured by real property, and may not be "loans
. . . secured by an interest in real property" to the extent loans held by the
trust are not secured by residential real property or real property used
primarily for church purposes. In addition, to the extent that the principal
amount of a loan exceeds the value of the property securing the loan, it is
unclear and Federal Tax Counsel is unable to opine whether the loan will be a
qualifying asset.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer"s servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm"s length consideration for servicing the Mortgage Loans and
should be characterized for federal income tax purposes as an ownership interest
in the Mortgage Loans. The Internal Revenue Service has taken the position in
Revenue Ruling 91-46 that retained interest in excess of reasonable compensation
for servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
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If interest retained for the Servicer"s servicing fee or other interest is
treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the Non-REMIC Certificate
was treated as zero under the original issue discount de minimis rule when the
Non-REMIC Certificate was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Mortgage Loans. If neither of the above exceptions
applies, the original issue discount rules will apply to the Non-REMIC
Certificates.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Asset underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate (assuming
monthly compounding) that, if used in discounting the holder"s share of the
payments on the Mortgage Assets, would cause the present value of those payments
to equal the price at which the holder purchased the Non-REMIC Certificate.
With respect to certain categories of debt instruments, Section 1272(a)(6) of
the Code requires that original issue discount be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. It is
unclear whether such regulations would apply this rule to the Non-REMIC
Certificates, whether Section 1272(a)(6) might apply to the Non-REMIC
Certificates in the absence of such regulations, or whether the Internal Revenue
Service could require use of a reasonable prepayment assumption based on other
tax law principles and Federal Tax Counsel is unable to opine with respect to
these issues. If required to report interest income on the Non-REMIC
Certificates to the Internal Revenue Service under the stripped bond rules, it
is anticipated that the Trustee will calculate the yield of the Non-REMIC
Certificates based on a representative initial offering price of the Non-REMIC
Certificates and a reasonable assumed rate of prepayment of the Mortgage Assets
(although such yield may differ from the yield to any particular holder that
would be used in calculating the interest income of such holder). The
Prospectus Supplement for each series of Non-REMIC Certificates will describe
the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Assets will prepay at that rate or at
any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Assets allocable
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to the Non-REMIC Certificate, 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 Non-REMIC Certificate acquired at
a discount or premium (that is, at a price less than or greater than such
principal amount, respectively), the use of a reasonable prepayment assumption
would increase or decrease such yield, and thus accelerate or decelerate the
reporting of interest income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate 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 Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "Sales of Non-REMIC Certificates" below) that is allocable to the Mortgage
Loan. The method of allocating such basis among the Mortgage Loans may differ
depending on whether a reasonable prepayment assumption is used in calculating
the yield of the Non-REMIC Certificates for purposes of accruing original issue
discount. 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.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Assets held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-REMIC
Certificate that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Non-REMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Assets in accordance with its tax accounting method. In addition, if
the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below. The treatment of any discount will depend on whether the
discount is original issue discount as defined in the Code and, in the case of
discount other than original issue discount, whether such other discount exceeds
a de minimis amount. In the case of original issue discount, the holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
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accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of original issue discount to be accrued
in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Assets. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates."
If discount other than original issue discount exceeds a de minimis amount
(described below), the holder will also generally be required to include in
income in each month the amount of such discount accrued through such month and
not previously included in income, but limited, with respect to the portion of
such discount allocable to any Mortgage Asset, to the amount of principal on
such Mortgage Asset received by the Trust in that month. Because the Mortgage
Assets will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues (and therefore at a rate not
significantly slower than the rate at which such discount would be included in
income if it were original issue discount). The holder may elect to accrue such
discount under a constant yield method based on the yield of the Non-REMIC
Certificate to such holder. In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method.
Under the de minimis rule, market discount with respect to a Non-REMIC
Certificate will be considered to be zero if it is less than the product of (i)
0.25% of the principal amount of the Mortgage Assets allocable to the Non-REMIC
Certificate and (ii) the weighted average life (in complete years) of the
Mortgage Assets remaining at the time of purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Mortgage Loan under a constant yield method based on the yield
of the Mortgage Loan to such holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage 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 Mortgage Loans or taking
account of a reasonable
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prepayment assumption, and Federal Tax Counsel is unable to opine on this issue.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate 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 Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of Non-
REMIC Certificates" below) that is allocable to the Mortgage Loan. The method
of allocating such basis among the Mortgage Loans may differ depending on
whether a reasonable prepayment assumption is used in calculating the yield of
the Non-REMIC Certificates for purposes of accruing original issue discount.
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.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder"s cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a de
minimis amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-REMIC Certificate to the extent attributable to
Mortgage Loans that were originated after July 18, 1984, provided that the
holder complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and
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providing the name and address of such holder). Interest or original issue
discount on a Non-REMIC Certificate attributable to Mortgage Loans that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). For
these purposes, the term "United States person" means a citizen or a resident of
the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any political
subdivision thereof, or an estate or trust the income of which is subject to
United States federal income taxation regardless of its source.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "taxable
mortgage pool" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC, (ii) substantially all of the
assets of the entity are debt obligations, and more than 50 percent of such debt
obligations consist of real estate mortgages (or interests therein), (iii) the
entity is the obligor under debt obligations with two or more maturities, and
(iv) payments on the debt obligations on which the entity is the obligor bear a
relationship to the payments on the debt obligations which the entity holds as
assets. With respect to requirement (iii), the Code authorizes the Internal
Revenue Service to provide by regulations that equity interests may be treated
as debt for purposes of determining whether there are two or more maturities.
If a Series of Non-REMIC Certificates were treated as obligations of a taxable
mortgage pool, the Trust would be ineligible to file consolidated returns with
any other corporation and could be liable for corporate tax. Treasury
regulations do not provide for the recharacterization of equity as debt for
purposes of determining whether an entity has issued debt with two maturities,
except in the case of transactions structured to avoid the taxable mortgage pool
rules.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds, separate accounts and insurance company general accounts in
which such plans or arrangements are invested to which it applies and on those
persons who are fiduciaries with respect to such benefit plans. Certain
employee benefit plans, such as governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA), are
not subject to ERISA. In accordance with ERISA"s general fiduciary standards,
before investing in a Certificate a benefit plan fiduciary should determine
whether such an investment is permitted under the governing benefit plan
instruments and is appropriate for the
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benefit plan in view of its overall investment policy and the composition and
diversification of its portfolio and is prudent.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons").
Such transactions are treated as "prohibited transactions" under Sections 406
and 407 of ERISA and excise taxes are imposed upon such persons by Section 4975
of the Code. The Representative, the Originators, the Certificate Guaranty
Insurer, the Underwriter and the Trustee and certain of their affiliates might
be considered "parties in interest" or "disqualified persons" with respect to a
Plan. If so, the acquisition or holding or transfer of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an exemption is
available. In addition, the Department of Labor ("DOL") has issued a regulation
(29 C.F.R. Section 2510.3-101) concerning the definition of what constitutes the
assets of a Plan (the "Plan Asset Regulations"), which provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed for purposes of ERISA to be assets of the
investing Plan unless certain exceptions apply. If an investing Plan"s assets
were deemed to include an interest in the Mortgage Loans and any other assets of
the Trust and not merely an interest in the Certificates, the assets of the
Trust would become subject to the fiduciary investment standards of ERISA, and
transactions occurring between the Representative, the Trustee, the Servicer,
the Certificate Guaranty Insurer or any of their affiliates might constitute
prohibited transactions, unless an administrative exemption applies. Certain
such exemptions which may be applicable to the acquisition and holding of the
Certificates or to the servicing of the Mortgage Loans are noted below.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which
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represents a beneficial undivided interest in a mortgage pool which entitles the
holder to pass-through payments of principal and interest from the mortgage
loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Representative
and the Trustee maintain a system of insurance or other protection for the
Mortgage Loans and the property securing such Mortgage Loans, and for
indemnifying holders of Class A Certificates against reductions in pass-through
payments due to defaults in loan payments or property damage in an amount at
least equal to the greater of 1% of the aggregate principal balance of the
Mortgage Loans, or 1% of the principal balance of the largest covered pooled
Mortgage Loan~ (ii) the Trustee may not be an affiliate of the Representative~
and (iii) the payments made to and retained by the Representative in connection
with the Trust, together with all funds inuring to its benefit for administering
the Trust, represent no more than "adequate consideration" for selling the
Mortgage Loans, plus reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Representative, the Certificate Guaranty Insurer, the
Servicer, or the Trustee is a party in interest if the Plan does not pay more
than fair market value for such Certificates and the rights and interests
evidenced by such Certificates are not subordinated to the rights and interests
evidenced by other Certificates of the same pool. PTCE 83-1 also exempts from
the prohibited transaction rules and transactions in connection with the
servicing and operation of the Pool, provided that any payments made to the
Servicer in connection with the servicing of the Trust are made in accordance
with a binding agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Representative, the
Servicer, the Certificate Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to the other requirements: (i) the initial
sale, exchange or transfer of Certificates is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Certificates~ (ii) the Plan pays no more for the Certificates
than would be paid in an arm"s length transaction~ (iii) no investment
management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Representative with regard to the sale, exchange or
transfer of Certificates to the Plan~ (iv) the total value of the Certificates
purchased by such Plan does not exceed 25% of the amount issued~ and (v) at
least 50% of the aggregate amount of Certificates is acquired by persons
independent of the Representative, the Trustee, the Servicer, and the
Certificate Guaranty Insurer.
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Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Certificates constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction exemptions.
The Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including but not limited to:
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds and PTCE
95-60, regarding investments by insurance company general accounts. However,
even if the conditions specified in the Exemption or one or more of these other
exemptions are met, the scope of the relief provided might or might not cover
all acts which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Certificate should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan"s investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
Each Prospectus Supplement will describe the extent, if any, to which the
Classes of Certificates offered thereby will constitute "mortgage related
securities" for purposes of SMMEA.
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No representation is made herein as to whether the Certificates will constitute
legal investments for any entity under any applicable statute, law, rule,
regulation or order. Prospective purchasers are urged to consult with their
counsel concerning the status of the Certificates as legal investments for such
purchasers prior to investing in any Class of Certificates.
PLAN OF DISTRIBUTION
The Certificates offered hereby will be offered in Series, either directly
by the Representative or through one or more underwriters or underwriting
syndicates ("Underwriters"). The Prospectus Supplement for each Series will set
forth the terms of the offering of such Series and of each Class within such
Series, including the name or names of the Underwriters, the proceeds to and
their use by the Representative and the Originators, and either the initial
public offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Certificates will be
determined.
The Certificates in a Series may be acquired by Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
Underwriters will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all of a Series of
Certificates described in the related Prospectus Supplement, if they are
purchased. If Certificates of a Series are offered other than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Certificates of such Series.
The place and time of delivery for the Certificates of a Series in respect
of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Certificates of each Series will be passed upon for the Representative by Eric
R. Elwin, Esq., Corporate Counsel of the Representative and certain legal
matters relating to the validity of the issuance of the Certificates of each
Series will be passed upon for the Underwriter of the Certificates of each
Series by Stroock & Stroock & Lavan, New York, New York. Stroock & Stroock &
Lavan has performed legal services for the
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Representative and it is expected that it will continue to perform such services
in the future.
FINANCIAL INFORMATION
The Representative has determined that its financial statements are not
material to the offering made hereby.
A new Trust will be formed to own the Mortgage Assets and to issue each
Series of Certificates. Each such Trust will have no assets or obligations
prior to the issuance of the Certificates and will not engage in any activities
other than those described herein. Accordingly, no financial statements with
respect to such Trusts are included in this Prospectus.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage pass-
through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in extreme cases might fail to recoup their
underlying investments.
A security 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. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
<TABLE>
<CAPTION>
<S> <C>
Adjustable Rate.............................. 10
Adjusted Mortgage Loan Remittance Rate....... 72
Agency Securities............................ 9
Agreement.................................... 8
APR.......................................... 14
ARM.......................................... 146
Available Remittance Amount.................. 90
Balloon Loans................................ 32
Bankruptcy Bond.............................. 23
Basis Risk Shortfall......................... 116
Buydown Funds................................ 118
Cede......................................... 30
Certificate Account.......................... 90
Certificate Guaranty Insurance Policy........ 21
Certificate Guaranty Insurer................. 77
Certificate Register......................... 70
Certificateholders........................... 3
Certificates................................. 1
Class........................................ 3
Cleanup Costs................................ 115
CMO.......................................... 15
Code......................................... 27
Commission................................... 5
Compensating Interest........................ 26
Contingency Fee.............................. 91
Contracts.................................... 9
Conventional Loans........................... 9
Cooperative Loans............................ 9
Cooperatives................................. 9
Curtailment.................................. 26
Custodian.................................... 89
Cut-off Date................................. 68
Definitive Certificates...................... 75
Designated Depository Institution............ 90
Detailed Description......................... 40
Determination Date........................... 25
DTC.......................................... 30
Due Period................................... 91
ERISA........................................ 29
Event of Nonpayment.......................... 96
Federal Tax Counsel.......................... 27
FHA.......................................... 9
FHA Loans.................................... 10
FHLMC........................................ 9
Final Determination.......................... 97
Fixed Rate................................... 10
FNMA......................................... 9
FTC Rule..................................... 112
</TABLE>
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<PAGE>
Funding Period............................... 17
Garn-St. Germain Act......................... 112
GNMA......................................... 9
Home Equity Loans............................ 45
HUD.......................................... 12
Index........................................ 154
Indirect Participant......................... 73
Insurance Proceeds........................... 25
Insurance Paying Agent....................... 78
Insured Payment.............................. 78
IRS.......................................... 97
Liquidation Proceeds......................... 25
Loan-to-Value Ratio.......................... 43
Lockout Periods.............................. 11
Lower Tier REMIC............................. 132
Majority Certificateholders.................. 94
Manufactured Homes........................... 48
Manufacturer"s Invoice Price................. 44
Master Servicer.............................. 2
Monthly Advance.............................. 25
Mortgage Asset Schedule...................... 41
Mortgage Assets.............................. 1
Mortgage Interest Rate....................... 10
Mortgage Loans............................... 10
Mortgage Pool Insurance Policy............... 22
Mortgaged Properties......................... 11
Multifamily Loans............................ 9
NHA Act...................................... 49
1933 Act..................................... 5
Non-REMIC Certificates....................... 28
Opinion of Counsel........................... 89
Originators.................................. 1
Participants................................. 73
Pass-Through Rate............................ 3
Permitted Instruments........................ 90
Permitted Investments........................ 82
Plan......................................... 149
PMBS......................................... 9
PMBS Agreement............................... 59
PMBS Issuer.................................. 16
PMBS Servicer................................ 16
PMBS Trustee................................. 16
Pool......................................... 1
Pool Insurer................................. 79
Pre-Funding Account.......................... 16
Prepayment Assumption........................ 120
Principal and Interest Account............... 90
Principal Prepayment Period.................. 72
Principal Prepayment......................... 25
Private Mortgage-Backed Securities........... 9
Qualified Substitute Mortgage Loan........... 88
Rating Agency................................ 24
REIT......................................... 134
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<PAGE>
Relief Act................................... 38
REMIC........................................ 4
REMIC Certificates........................... 116
REMIC Regular Certificates................... 27
REMIC Residual Certificates.................. 27
REMIC Regulations............................ 118
Remittance Date.............................. 3
Representative............................... 1
Reserve Account.............................. 20
Secured Conventional Home Improvement Loans.. 9
Senior Certificates.......................... 18
Servicing Advance............................ 92
Servicing Fee................................ 91
Single Family Loans.......................... 9
SMMEA........................................ 29
Special Hazard Insurance Policy.............. 22
Special Hazard Insurer....................... 80
Spread Amount................................ 21
Standard Hazard Insurance Policies........... 12
Subordinated Certificates.................... 18
Sub-Servicer................................. 94
Substitution Adjustment...................... 88
Successor Servicer........................... 96
Superlien.................................... 115
Supplemental Interest Payments............... 23
Termination Notice........................... 98
Termination Price............................ 98
Tiered REMICs................................ 118
Title I Loan Program......................... 12
Title I Property Improvement Loans........... 49
Title V...................................... 113
Trust........................................ 1
Trustee...................................... 26
Trustee"s Mortgage File...................... 87
UCC.......................................... 73
Underwriters................................. 152
United States person......................... 140
Unsecured Home Improvement Loans............. 10
VA........................................... 9
Variable Rate Non-REMIC Certificates......... 145
Variable Rate REMIC Regular Certificate...... 124
Yield Supplement Agreement................... 116
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<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE REPRESENTATIVE OR THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A CERTIFICATES
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Terms.......................................................... S-4
Risk Factors.............................................................. S-40
Lending Programs.......................................................... S-43
The Representative and the Originators.................................... S-48
The Loan Pools............................................................ S-51
Maturity, Prepayment and Yield Considerations............................. S-56
Description of the Certificates........................................... S-70
The MBIA Policies and MBIA................................................ S-81
The Agreement............................................................. S-83
Federal Income Tax Considerations......................................... S-92
ERISA Considerations...................................................... S-94
Legal Investment Considerations........................................... S-96
Underwriting.............................................................. S-96
Experts................................................................... S-98
Legal Matters............................................................. S-98
Rating of the Class A Certificates........................................ S-98
Financial Information..................................................... S-98
Index of Principal Terms.................................................. S-99
Annex I--Auction Procedures............................................... I-1
Annex II--Settlement Procedures........................................... II-1
Annex III--Global Clearance, Settlement and Tax
Documentation Procedures................................................. III-1
Exhibit A--Audited Financial Statements of MBIA........................... A-1
Exhibit B--Unaudited Financial Statements of MBIA......................... B-1
PROSPECTUS
Prospectus Supplement..................................................... 5
Available Information..................................................... 5
Reports to Certificateholders............................................. 6
Incorporation of Certain Documents by Reference........................... 6
Summary of Terms.......................................................... 8
Risk Factors.............................................................. 31
The Trusts................................................................ 40
Use of Proceeds........................................................... 61
The Representative and the Originators.................................... 61
The Single Family Loan Lending Program.................................... 62
Description of the Certificates........................................... 68
Credit Enhancement........................................................ 75
Maturity, Prepayment and Yield Considerations............................. 83
The Agreements............................................................ 86
Certain Legal Aspects of the Mortgage Loans............................... 100
Federal Income Tax Consequences........................................... 116
ERISA Considerations...................................................... 148
Legal Investment Considerations........................................... 151
Plan of Distribution...................................................... 152
Legal Matters............................................................. 152
Financial Information..................................................... 153
Rating.................................................................... 153
Index of Principal Terms.................................................. 154
</TABLE>
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$1,250,000,000
THE MONEY STORE (R)
THE MONEY STORE TRUST 1996-B
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PROSPECTUS SUPPLEMENT
----------------
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
BEAR, STEARNS & CO. INC.
CS FIRST BOSTON
June 21, 1996
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