<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 28, 1998)
$895,000,000
[LOGO]
THE MONEY STORE TRUST 1998-C
$401,250,000 Class AF-1 Adjustable Rate Notes
$133,750,000 Class AF-2 Auction Rate Notes
$360,000,000 Class AV Adjustable Rate Notes
The Money Store Trust 1998-C (the "Trust") will be formed pursuant to a
Trust Agreement, dated as of August 31, 1998 (the "Trust Agreement"), among
certain subsidiaries of The Money Store Inc. (such subsidiaries, the
"Originators") and Chase Manhattan Bank Delaware, as owner trustee (the "Owner
Trustee"), and will issue notes (the "Notes") in the following three classes:
(i) Class AF-1 Notes and Class AF-2 Notes (collectively, the "Pool I Notes") and
(ii) Class AV Notes (the "Pool II Notes"). Each Class of Notes will be issued in
the initial principal amount set forth above and (i) in the case of the Class
AF-1 Notes and the Class AV Notes, will bear interest at an adjustable rate
based on one-month LIBOR, as described herein and (ii) in the case of the Class
AF-2 Notes, will bear interest based upon the Auction Procedures described in
Annex III to this Prospectus Supplement. The Notes will be issued pursuant to an
Indenture, dated as of August 31, 1998 (the "Indenture"), between the Trust and
The Bank of New York as trustee (the "Indenture Trustee"). The Trust also will
issue separate certificates and other interests representing the beneficial
ownership and voting interests in the Trust. Only the Notes are being offered
hereby.
(COVER CONTINUED ON NEXT PAGE)
-------------------
SEE "RISK FACTORS" ON PAGE S-21 HEREIN AND PAGE 23 OF THE PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE NOTES OFFERED HEREBY.
-----------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND EXCEPT FOR THE MBIA
POLICIES DESCRIBED HEREIN, DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF
THE MONEY STORE INC., FIRST UNION NATIONAL BANK, FIRST UNION CORPORATION,
MBIA INSURANCE CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES OR
SUBSIDIARIES. 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.
-------------------
The Notes will be purchased by the underwriters indicated below (the
"Underwriters") from the Representative, on behalf of the Originators and the
Trust, and will be offered by the Underwriters from time to time in negotiated
transactions or otherwise, at varying prices to be determined at the time of
sale. Aggregate proceeds to the Originators from the sale of the Notes are
expected to be approximately $892,986,250, before deducting expenses payable by
the Originators estimated to be approximately $660,000. See "Underwriting"
herein.
First Union Capital Markets, a division of Wheat First Securities, Inc.
("First Union Capital Markets"), expects to enter into market making
transactions in the Notes and may act as principal or agent in any such
transactions. Any such purchases or sales will be made at prices related to
prevailing market prices at the time of sale. This Prospectus Supplement and the
Prospectus may be used by First Union Capital Markets in connection with such
transactions.
The Notes 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 Notes 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 September 29, 1998 (the actual such
date being hereinafter referred to as the "Closing Date").
------------------------
Pool I Notes
FIRST UNION CAPITAL MARKETS
BARCLAYS CAPITAL
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
--------------
Pool II Notes
<PAGE>
FIRST UNION CAPITAL MARKETS
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
SEPTEMBER 28, 1998
S-2
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The primary assets of the Trust will consist of two separate cross-supported
pools ("Pool I" and "Pool II", respectively, and collectively, the "Pools") of
loans (the "Loans" or the "Home Equity Loans") having the characteristics
described herein. Pool I will consist of one- to four-family ("single family")
residential first and second mortgage loans having original terms to stated
maturity of up to 40 years with fixed rates. Pool II will consist of single
family residential first mortgage loans having original terms to stated maturity
of up to 30 years with adjustable rates. 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. 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.
Note guaranty insurance policies (the "MBIA Policies") with respect to the
Notes will be issued by:
[LOGO]
Full and complete payment to The Bank of New York, as Indenture Trustee for
the holders of the Notes, of Insured Payments (as defined herein), consisting
primarily of interest due to such holders in respect of the Notes on each
Remittance Date and principal at the times described herein, is unconditionally
and irrevocably guaranteed pursuant to the terms of the MBIA Policies. See "The
MBIA Policies and MBIA" herein for a more complete description of the MBIA
Policies.
The Pool I Notes generally will represent the right to receive payments
distributable on or with respect to the Loans in Pool I. The Pool II Notes
generally will represent the right to receive payments distributable on or with
respect to the Loans in Pool II. HOWEVER, DUE TO THE CROSS-SUPPORT PROVISIONS
DESCRIBED HEREIN, THE HOLDERS OF EACH CLASS OF NOTES MAY RECEIVE CASH AS CREDIT
SUPPORT FROM ANY LOAN IN EITHER POOL. See "Description of the
Notes--Cross-Support Provisions" herein. Additionally, the holders of the Pool I
Notes will be entitled to receive Supplemental Interest Payments as described
herein. See "Description of the Notes--Supplemental Interest Payments."
Distributions of principal and interest to the holders of each Class of
Notes 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 October 1998 (each
such day, a "Remittance Date") to the owners of each such Class of Notes as of
the preceding Record Date (as defined herein). Holders of any Class of Notes are
referred to herein as "Holders" or "Noteholders."
By purchasing a Class AF-2 Note, whether in an Auction or otherwise, each
prospective purchaser will be deemed to have agreed to participate in Auctions
on the terms described in Annex III hereto and in the attached Prospectus.
There is currently no secondary market for any Class of Notes. The
Underwriters intend to make a secondary market for the Notes, but have no
obligation to do so. There can be no assurance that a secondary market for any
Class of Notes will develop or, if one does develop, that it will offer
sufficient liquidity of investment or continue.
The Classes of Notes offered by this Prospectus Supplement each constitute a
separate class of one series of Notes being offered by the Representative and
the Originators, on behalf of the Trust, pursuant to the Prospectus dated
September 28, 1998 (the "Prospectus"), 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)
S-3
<PAGE>
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE NOTES, 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.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by or on
behalf of the Trust with the Securities and Exchange Commission (the
"Commission") pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), on or subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes made by this Prospectus Supplement. The Representative will provide
without charge to each person to whom this Prospectus Supplement and Prospectus
are delivered, on request of such person, a copy of any or all of the documents
incorporated herein by reference other than the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests should be directed to The Money Store Inc., 707 Third
Street, West Sacramento, California 95605 Attention: Finance Department,
Telephone: (916) 617-2001.
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.
<TABLE>
<S> <C>
Securities Offered................ The Money Store Asset Backed Notes, Series 1998-C, Class
AF-1, Class AF-2 and Class AV. Each Class of Notes will
be issued in the initial Class Principal Balance (as
defined herein), set forth for such Class on the cover
page hereof.
For the first Remittance Date, the Class AF-1 Notes will
bear interest at a per annum rate equal to LIBOR (as
defined herein) determined on September 25, 1998, plus
0.27%. For each Remittance Date thereafter, the Class
AF-1 Notes will bear interest at a per annum rate equal
to LIBOR plus (i) before the Optional Servicer
Termination Date (as defined herein), 0.27% and (ii)
after the Optional Servicer Termination Date if
termination has not occurred, 0.54%, subject in each
case to the applicable Net Funds Cap, but in no event
exceeding 14.0% per annum.
For the first Remittance Date, the Class AF-2 Notes will
bear interest at a per annum rate to be determined on
September 28, 1998. For each Remittance Date thereafter,
the Class AF-2 Notes will bear interest based upon the
Auction Procedures described in Annex III to this
Prospectus Supplement, subject to the applicable Net
Funds Cap, but in no event exceeding 14.0% per annum.
For the first Remittance Date, the Class AV Notes will
bear interest at a per annum rate equal to LIBOR
determined on September 25, 1998, plus 0.26%. For each
Remittance Date thereafter, the Class AV Notes will bear
interest at a per annum rate equal to LIBOR plus (i)
before the Optional Servicer Termination Date, 0.26% and
(ii) after the Optional Servicer Termination Date if
termination has not occurred, 0.52%, in each case
subject to the applicable Net Funds Cap, but in no event
exceeding 14.0% per annum.
The per annum rate at which a Class of Notes bears
interest is referred to herein as the "Remittance Rate"
for such Class.
The statistical information presented in this Prospectus
Supplement concerning the Loans is based on preliminary
Pools expected to be contributed to the Trust on the
Closing Date. The Representative expects that additional
Loans that were not contained in the preliminary Pools
will be added to constitute the final Pools of Loans
actually delivered on the Closing Date. 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
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
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 (as
defined herein) 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 Money Store Trust 1998-C (the "Trust"), is a
Delaware business trust to be formed pursuant to a Trust
Agreement, dated as of August 31, 1998 (the "Trust
Agreement"), among the Originators and Chase Manhattan
Bank Delaware, as owner trustee (the "Owner Trustee").
The Trust will issue the following Classes of Notes
pursuant to an Indenture, dated as of August 31, 1998
(the "Indenture") between the Trust and The Bank of New
York, as trustee (the "Indenture Trustee"):
POOL I NOTES.................... Class AF-1 and Class AF-2 Notes.
POOL II NOTES................... Class AV Notes.
OTHER SECURITIES................ The Trust also will issue separate certificates (the
"Certificates") and other interests (the "Voting
Interests") representing the beneficial ownership and
voting interests in the Trust. The Certificates will
have no principal balance and only will be entitled to
receive amounts in excess of amounts required to be
distributed on the Notes. The Certificates initially
will be owned by First Union National Bank ("FUNB"). The
Voting Interests initially will be owned by an
unaffiliated party. Neither the Certificates nor the
Voting Interests are being offered hereby, and any
information contained herein relating to the
Certificates and the Voting Interests is included only
to provide a better understanding of the Notes.
Issuer............................ The Money Store Trust 1998-C.
Cut-Off Date...................... August 31, 1998 (or the date of origination of the Loan,
if later) (the "Cut-Off Date").
Closing Date...................... September 29, 1998.
Representative and Servicer....... The Money Store Inc., a New Jersey corporation (in its
capacity as sponsor of the Trust, the "Representative"
and in its capacity as the servicer of the Loans, the
"Servicer"). The principal office of The Money Store
Inc. is located at 707 Third Street, West Sacramento,
California 95605 (telephone number (916) 617-1000). On
June 30, 1998 the Representative became a wholly-owned
subsidiary of FUNB, which is the principal banking
subsidiary of First Union Corporation. First Union
Corporation is also the ultimate parent of First Union
Capital Markets. See "The Representative and the
Originators" herein and in the Prospectus.
Owner Trustee..................... Chase Manhattan Bank Delaware, a Delaware banking
corporation, will be the owner trustee (the "Owner
Trustee").
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Indenture Trustee................. The Bank of New York, a New York banking corporation,
will be the trustee under the Indenture (the "Indenture
Trustee"). See "The Transfer and Servicing
Agreements--The Indenture Trustee" herein.
Trust Administrator............... FUNB will perform certain administrative functions on
behalf of the Trust (in such capacity, the "Trust
Administrator"). See "The Transfer and Servicing
Agreements--The Trust Administrator" herein.
Custodian......................... First Union National Bank, Trust Department will serve
as Custodian with respect to the Loans. In such
capacity, it will retain the files relating to the Loans
unless and until an Assignment Event (as defined herein)
occurs. Such files will be held by FUNB in a segregated
area maintained initially at the Representative's
offices in North Highlands, California. See "The
Transfer and Servicing Agreements--The Custodian"
herein. FUNB is the parent of the Representative and the
Originators. See "Risk Factors--Risk of Bankruptcy or
Insolvency of the Originators; the Custodian" and "The
Representative and The Originators" herein.
Remarketing Agent................. First Union Capital Markets will act as remarketing
agent (in such capacity, the "Remarketing Agent") with
respect to the Class AF-2 Notes. See "The Transfer and
Servicing Agreements--The Remarketing Agent" herein.
Originators of the Loans.......... Each Loan will have been originated and underwritten, or
purchased and re-underwritten, by the Originators, all
of which are wholly-owned subsidiaries of the
Representative.
Agreement......................... The Loans will be contributed to the Trust by the
Originators and serviced by the Servicer pursuant to a
Sale and Servicing Agreement, dated as of August 31,
1998 (the "Agreement") among the Trust, the
Representative and the Originators.
Description of the Notes
GENERAL......................... The Notes will represent obligations of the Trust, the
assets of which will consist primarily of two separate
cross-supported pools ("Pool I" and "Pool II,"
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 having original terms to
stated maturity of up to 40 and 30 years, respectively.
The aggregate principal balances as of the Cut-Off Date
of the Pool I and Pool II Loans were $490,803,685.08 and
$319,865,434.34, respectively. See "The Loan Pools"
herein.
As described herein, the Loans in Pool I (the "Pool I
Home Equity Loans" or the "Pool I Loans") will bear
interest at a fixed rate and the Loans in Pool II (the
"Pool II Home Equity Loans" or the "Pool II Loans") will
bear interest at an adjustable rate as described below.
See "The Loan Pools" herein.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
The Class AF-1 and Class AF-2 Notes generally will be
entitled to receive payments distributable on or with
respect to the Pool I Home Equity Loans. The Class AV
Notes generally will be entitled to receive payments
distributable on or with respect to the Pool II Home
Equity Loans. HOWEVER, DUE TO THE CROSS-SUPPORT
PROVISIONS DESCRIBED HEREIN, THE HOLDERS OF EACH CLASS
OF NOTES MAY RECEIVE CASH AS CREDIT SUPPORT FROM ANY
LOAN IN EITHER POOL. See "Description of the
Notes--Cross-Support Provisions" herein.
The holders of the Class AF-1 and Class AF-2 Notes are
also referred to herein as the "Pool I Noteholders." The
holders of the Class AV Notes are also referred to
herein as the "Pool II Noteholders." Each holder of a
Note is referred to herein as a "Noteholder."
The Final Maturity Date for each Class of Notes is as
set forth herein under "Maturity, Prepayment and Yield
Considerations." It is expected that the actual last
Remittance Date for each Class of Notes will occur
significantly earlier than its Final Maturity Date. See
"Maturity, Prepayment and Yield Considerations" herein.
The Notes are issuable in book-entry form in minimum
denominations of $25,000 original principal amount and
integral multiples of $1,000 in excess thereof.
The Notes are issued by, and payable solely from and
secured solely by the property of, the Trust. The
undivided percentage interest of the holder of any Note
in the distributions to be made to the related Class
(the "Percentage Interest") will be equal to the
percentage obtained by dividing the denomination
specified on such Note by the original principal balance
of such Class.
Remittance and Record Dates....... Distributions on the Notes will be made by or on behalf
of the Indenture Trustee on the 15th day of each month,
or if such day is not a Business Day, on the first
Business Day thereafter, commencing October 15, 1998
(each, a "Remittance Date"), to each person in whose
name a Note is registered on the last day of the
preceding calendar month (the "Record Date"), except
that the final distribution on each Class of Notes will
be made only upon presentation and surrender of such
Notes at the office or agency designated for that
purpose.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Distributions..................... As more fully described herein, distributions with
respect to each Class of Notes will be payable, after
payment of certain fees, generally from (i) receipts on
the Loans of the applicable Pool (subject to certain
adjustments as a result of the cross support provisions
described herein), (ii) Monthly Advances (as defined
under "--Monthly Advances") and payments of Compensating
Interest (as defined under "--Compensating Interest") by
the Servicer, (iii) Supplemental Interest Payments (as
defined under "--Supplemental Interest Payments") and
(iv) amounts transferred from the Spread Account and the
Rounding Account and payments under the related MBIA
Policy (with respect to each Pool, the "Pool Available
Amount").
The "Due Period" with respect to any Remittance Date is
the calendar month preceding the month of such
Remittance Date.
Current Interest.................. On each Remittance Date, to the extent of the applicable
Pool Available Amount, the holders of each Class of
Notes will receive interest based on the actual number
of days since the last Remittance Date (or, in the case
of the first Remittance Date, from September 29, 1998)
up to but not including the upcoming Remittance Date at
the related Remittance Rate on the respective Class
Principal Balance outstanding immediately prior to such
Remittance Date.
Interest with respect to the Notes will accrue on the
basis of a 360-day year consisting of the actual number
of days elapsed since interest was last paid or in the
case of the first Remittance Date, from September 29,
1998. See "Description of the Notes" herein.
The amount of interest each Class of Notes is entitled
to receive on each Remittance Date is referred to as the
"Current Interest Requirement" for such Class.
Interest will be allocated between the Class AF-1 and
Class AF-2 Notes pro rata in accordance with their
respective Current Interest Requirements.
If on a particular Remittance Date, the Pool Available
Amount for a Pool of Notes is less than the aggregate
Current Interest Requirement for each Class of Notes of
the related Pool, the amount of the shortfall for each
such Class of Notes, together with interest thereon at
the applicable Remittance Rates to the extent permitted
by law (each, a "Class Interest Shortfall Carryforward
Amount") will be carried forward and distributed as
described below. However, the Class Interest Shortfall
Carryforward Amount will be paid by MBIA under the MBIA
Policies and there should be no carry forward thereof.
As to any Remittance Date, the applicable "Net Funds
Cap" for a Class of Notes will be the per annum rate
determined on an actual/360 basis pursuant to the
following formula:
</TABLE>
<TABLE>
<S> <C> <C>
Net Funds Cap = (A X B) + C
A
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Where:
A= The Class Principal Balance for the applicable Class
of Notes immediately prior to such Remittance Date.
B= The difference between (x) the weighted average
Mortgage Interest Rate for the Loans of the related Pool
and (y) the sum of the percentages used in
determining (i) the Servicing Fee, (ii) the
Contingency Fee, (iii) the premium due MBIA for the
related Pool, (iv) the fees due the Owner Trustee,
the Indenture Trustee and the Trust Administrator for
the related Pool, (v) commencing with the Remittance
Date in May 1999, 0.50% and (vi) with respect to the
Class AF-2 Notes, the fee due the Remarketing Agent.
C= With respect to the Class AF-1 and Class AF-2 Notes,
the amount, if any, of Supplemental Interest Payments
allocated to such Class for such Remittance Date.
If on any Remittance Date the Remittance Rate for a
Class of Notes is based upon the applicable Net Funds
Cap, the excess of (i) the amount of interest such Class
of Notes 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 the applicable maximum
rate set forth above), over (ii) the amount of interest
such Class will receive on such Remittance Date at the
applicable Net Funds Cap, together with the unpaid
portion of any such excess from prior Remittance Dates
(and interest accrued thereon at the then applicable
Remittance Rate, without giving effect to the Net Funds
Cap, but in no event exceeding the applicable maximum
rate set forth above) is referred to herein as the
"Noteholders' Interest Carryover." Any Noteholders'
Interest Carryover will be paid on future Remittance
Dates, to the extent funds are available, as set forth
herein under "Description of the Notes--Cross-Support
Provisions." No Noteholders' Interest Carryover will be
paid to a Class of Notes after its Class Principal
Balance is reduced to zero. The ratings of the Notes do
not address the likelihood of the payment of the amount
of any Noteholders' Interest Carryover and the MBIA
Policies do not guaranty payment of any such amount.
PRINCIPAL DISTRIBUTION AMOUNTS.... Holders of the Pool I and Pool II Notes will be entitled
to receive on each Remittance Date as payments of
principal, in the order of priority set forth below, in
the aggregate, the lesser of (i) the remaining
applicable Pool Available Amount in the applicable Note
Distribution Account on such Remittance Date after
payment of the Current Interest Requirements on the
Notes in the applicable Pool and reimbursement to the
Rounding Account as described below and (ii) the
applicable Pool Principal Distribution Amount.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
For any Remittance Date, the "Pool Principal
Distribution Amount" for each Pool is equal to 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, (iv) that
portion of the purchase price for any Loan of the
related Pool repurchased which represents principal and
any Substitution Adjustments, in either case to the
extent received by the Indenture Trustee as of the
related Determination Date, (v) any proceeds
representing principal received by the Indenture Trustee
in connection with the liquidation of a Pool or
termination of the Trust, and (vi) the amount of any
Realized Loss related to a Pool I or Pool II Loan, as
the case may be, that became a Liquidated Loan during
the related Due Period.
POOL I............................ On each Remittance Date, the portion of the Pool
Principal Distribution Amount for Pool I available for
distribution will be distributed to the holders of the
Class AF-1 and Class AF-2 Notes pro rata based upon
their respective Class Principal Balance until the Class
Principal Balance of each such Class is reduced to zero
and the Noteholders of each such Class have received an
amount equal to the amount described in clause (iv) of
the definition of Distribution Amount (as defined
herein) that is recovered from such Noteholders.
On each Remittance Date, the holders of the Class AF-1
and Class AF-2 Notes also will receive amounts
transferred from an account (the "Rounding Account") to
be established with the Indenture Trustee as part of the
Trust. Principal payments distributed to the holders of
the Class AF-1 and Class AF-2 Notes are required to be
made in integral multiples of $1,000. If on any
Remittance Date the amount of principal to be
distributed to the holders of Class AF-1 or Class AF-2
Notes is not an even multiple of $1,000, such holders
will receive from the Rounding Account the amount of
such difference. The Rounding Account will be
reimbursed, to the extent funds are available, on the
next Remittance Date prior to principal being paid to
the holders of the Class AF-1 and Class AF-2 Notes.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
POOL II........................... On each Remittance Date, the Pool Principal Distribution
Amount for Pool II will be distributed to the holders of
the Class AV Notes until the Class Principal Balance
thereof is reduced to zero and the Class AV Noteholders
have received an amount equal to the amount described in
clause (iv) of the definition of Distribution Amount
that is recovered from such Noteholders.
Supplemental Interest
Payments........................ If for any Remittance Date LIBOR exceeds 6.0% per annum,
the holders of the Class AF-1 and Class AF-2 Notes will
be entitled to receive supplemental interest payments
("Supplemental Interest Payments") as described herein.
Supplemental Interest Payments are intended to increase
the likelihood of payment of the Current Interest
Requirements on the Class AF-1 and Class AF-2 Notes in
the event of an increase in LIBOR and, under limited
circumstances, are available to cover Realized Losses.
See "Description of the Notes--Supplemental Interest
Payments" herein.
Credit Enhancement................ The credit enhancement provided for the benefit of the
Pool I and Pool II Notes consists of (i) the Spread
Account (as defined below) and cross-support features,
which utilize the internal cash flows of both Pools as
described herein and (ii) the MBIA Policies.
SPREAD ACCOUNT.................... FUNB, as initial holder of the Certificates, will
establish a reserve account (the "Spread Account") with
FUNB in the name of the Indenture Trustee (in such
capacity, FUNB is referred to as the "Spread Account
Depositor"). The Spread Account will not be part of the
Trust but will be pledged to the Indenture Trustee as
security for the obligations of the Spread Account
Depositor under the Agreement pursuant to an agreement
(the "Spread Account Agreement") between the Spread
Account Depositor and the Indenture Trustee. On each
Remittance Date, certain amounts otherwise payable to
the holders of the Certificates will instead be
deposited into the Spread Account until the amount on
deposit therein equals the amount required pursuant to
the terms of the Insurance Agreement.
The aggregate amount required to be on deposit at any
time in the Spread Account and the maximum amount ever
required to be on deposit in the Spread Account will be
determined in accordance with the terms of the Insurance
Agreement (such amount, the "Specified Spread Account
Requirement"). Amounts, if any, on deposit in the Spread
Account up to the Subordinated Amount (as defined below)
will be available to fund any Insured Payments (as
defined below) otherwise required to be made on a
Remittance Date with respect to the Pool I and Pool II
Notes, without distinction as to the Pool.
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
The Insurance Agreement provides that, if aggregate
withdrawals from the Spread Account, other than
investment earnings, to fund shortfalls on the Pool I
and Pool II Notes exceed the amount specified therein
(such amount, the "Subordinated Amount"), no further
withdrawals with respect to such shortfalls may be made
from the Spread Account, and the Specified Spread
Account Requirement will thereafter be zero.
The Insurance Agreement, including the provisions
thereof relating to the required level of funding of the
Spread Account, may be amended in any respect without
the consent of, or notice to, the Noteholders. Such
amendment could reduce the funding requirements of the
Spread Account. Also, as amounts in the Spread Account
will be available for the Pool I and Pool II Notes, a
disproportionate amount of funds may be used to benefit
one Class of Pool I or Pool II Notes, thereby reducing
the funds available for the other Classes of Pool I and
Pool II Notes. Notwithstanding any reduction in the
funding requirements of the Spread Account, or depletion
of the Subordinated Amount or the Spread Account, in
accordance with the terms of the related MBIA Policy,
MBIA will be obligated on each Remittance Date to fund
the full amount of the Distribution Amounts for the Pool
I and Pool II Notes on such Remittance Date.
REALIZED LOSSES................... If a Loan becomes a Liquidated Loan during a Due Period,
the Net Liquidation Proceeds relating thereto and
allocated to principal may be less than the then
outstanding balance of such Loan. The amount of such
insufficiency is a "Realized Loss."
To the extent that Realized Losses in a Pool are
experienced, such Realized Losses will reduce the
aggregate outstanding balance of the related Loans
(i.e., a reduction in the collateral balance will
occur). With respect to Pool I and Pool II, for each
Distribution Date the related Pool Principal
Distribution Amount includes, and Noteholders of the
applicable Pool are entitled to receive, the amount of
any Realized Loss relating to a Pool I or Pool II Loan,
as the case may be, experienced during the related Due
Period.
CROSS SUPPORT FEATURES............ After distribution of amounts otherwise provided herein
from funds available for a Pool of Notes from the Excess
Spread applicable to that Pool, any remaining Excess
Spread with respect to Pool I and Pool II will be
allocated to the other such Pool to the extent necessary
to pay the Distribution Amount for such Pool. See
"Description of the Notes--Cross-Support Provisions."
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
MBIA POLICIES..................... MBIA Insurance Corporation, a New York stock insurance
corporation ("MBIA"), will provide separate insurance
policies (collectively, the "MBIA Policies") relating to
the Pool I and Pool II Notes. 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 Indenture 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 Indenture 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 and (ii) any Preference Amount
(each, as defined under "The MBIA Policies and MBIA").
As stated above, amounts 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
Noteholders' Interest Carryover, (iii) guarantee any
specified rate of prepayments, or (iv) provide funds to
redeem the Notes on any specified date.
Subject to the terms of the Transfer and Servicing
Agreements, MBIA will be subrogated to the rights of the
Holders of the Pool I and Pool II Notes to the extent of
any Insured Payments made under the applicable MBIA
Policy and not otherwise reimbursed, but its right to
reimbursement will be subject to the prior rights of the
holders of the Pool I and Pool II Notes to amounts to
which such holders are entitled under the Transfer and
Servicing Agreements.
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 preliminary Pool of Loans described herein at
the close of business on the Cut-Off Date (which, for a
Loan originated after the Cut-Off Date, is deemed to be
the date such Loan was originated), and all dollar
amounts are based on the principal balances of such
Loans at the close of business on the Cut-Off Date.
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
POOL I AND POOL II................ The Pool I and Pool II 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 ("PUDs")
and units in condominium developments (the "Home Equity
Mortgaged Properties" or "Mortgaged Properties").
As of the Cut-Off Date, 7.26%, 6.47%, 5.80%, 5.51% and
5.08% of the Pool I Home Equity Loans were secured by
Home Equity Mortgaged Properties located in North
Carolina, New York, California, Ohio and Florida,
respectively, and 10.39%, 6.16%, 6.02%, 5.52% and 5.39%
of the Pool II Home Equity Loans were secured by Home
Equity Mortgaged Properties located in Illinois,
Florida, Michigan, North Carolina and California,
respectively. Based on representations made by the
obligor on a Home Equity Mortgage Note (the "Home Equity
Mortgagor" or the "Mortgagor"), as of the Cut-Off Date,
84.74% of the Home Equity Loans in Pool I and 83.95% of
the Home Equity Loans in Pool II were secured by
detached single family residences, 2.77% and 3.06% of
the Pool I and Pool II Home Equity Loans, respectively,
were secured by vacation homes, secondary residences or
investment properties, and 4.05% and 6.28% of the Pool I
and Pool II Home Equity Loans, respectively, were
secured by two-, three- or four-family houses. As of the
Cut-Off Date, 6.35% and 2.99% of the Pool I and Pool II
Home Equity Loans, respectively, were secured by a
mobile home or a cooperative residence.
As of the Cut-Off Date, 80.18% of the Pool I Home Equity
Loans and 100.00% of the Pool II Home Equity Loans
constituted first mortgage liens on the related Home
Equity Mortgaged Property and the remainder of the Pool
I Home Equity Loans constituted 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, as of the Cut-Off Date, 55.18% and 52.64%
of the Pool I and Pool II Home Equity Loans,
respectively, had a Combined Loan-to-Value Ratio
exceeding 80%. No Pool I or Pool II Home Equity Loan had
a Combined Loan-to-Value Ratio exceeding 100%. As of the
Cut-Off Date, the weighted average Combined
Loan-to-Value Ratio of the Pool I and Pool II Home
Equity
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
Loans, based upon appraisals or valuations made at the
times of origination of the Pool I and Pool II Home
Equity Loans, were 79.963% and 79.752%, 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, provide for a schedule of
payments which will be, if timely paid, sufficient to
amortize fully the principal balance of the Home Equity
Loan on or before its maturity date. The Home Equity
Loans are 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.
Each of the Pool I Home Equity Loans bears interest at a
fixed rate (each, a "Pool I Mortgage Interest Rate")
which, as of the Cut-Off Date, ranged from 7.400% to
17.990% per annum.
Each of the Pool II Home Equity Loans bears interest at
an adjustable rate (each, a "Pool II Mortgage Interest
Rate") which, as of the Cut-Off Date, ranged from 7.500%
to 14.890% per annum, and which will adjust on the date
set forth in the related Mortgage Note. For each Pool II
Home Equity Loan, the related Pool II Mortgage Interest
Rate will change initially after the period set forth in
the related Mortgage Note and periodically thereafter.
Each date on which a Pool II Mortgage Interest Rate
changes is referred to as the "Change Date" for the
related Pool II Home Equity Loan. 53.22% of the Pool II
Home Equity Loans will have their first Change Date
occurring approximately 24 months after origination,
0.83% of the Pool II Home Equity Loans will have their
first Change Date occurring approximately 36 months
after origination, 42.92% of the Pool II Home Equity
Loans will have their first Change Date occurring
approximately 48 months after origination and 0.08% of
the Pool II Home Equity Loans will have their first
Change Date occuring approximately 60 months after
origination. The remainder of the Pool II Home Equity
Loans will have their first Change Date occurring no
later than 12 months after origination.
The Pool II Mortgage Interest Rate relating to 99.28% of
the Pool II Home Equity Loans will adjust on each
applicable Change Date to equal the sum of (i) the
applicable London Interbank Offered Rate for U.S. dollar
deposits (the "LIBOR Index") 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 the remainder of the
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Pool II Home Equity Loans will adjust on each Change
Date to equal the sum of (i) the applicable One-Year
Constant Maturity Treasury Index ("CMT" or the "Treasury
Index") as published by the Federal Reserve Board in the
applicable Federal Reserve Board Statistical Release No.
H.15, 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 "Lifetime Cap" is the maximum rate of
interest on any adjustable rate loan. The "Lifetime
Floor" is the minimum rate of interest on any adjustable
rate loan.
As of the Cut-Off Date, the Gross Margins for the Pool
II Home Equity Loans ranged from 3.000% to 10.750%. As
of the Cut-Off Date, the weighted average Gross Margin
of the Pool II Home Equity Loans was 6.251%. 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 the Periodic Rate Cap as set
forth in the related Mortgage Note. The Lifetime Caps of
the Pool II Home Equity Loans range from 13.375% to
20.890%. As of the Cut-Off Date, the weighted average
Lifetime Cap of the Pool II Home Equity Loans was
16.262%. The Lifetime Floors of the Pool II Home Equity
Loans range from 4.500% to 14.890%. As of the Cut-Off
Date, the weighted average Lifetime Floor of the Pool II
Home Equity Loans was 9.649%.
As of the Cut-Off Date, the weighted average Pool I
Mortgage Interest Rate of the Pool I Home Equity Loans
was 10.651%, and the weighted average current Pool II
Mortgage Interest Rate of the Pool II Home Equity Loans
was 10.055%. The lowest principal balance of any Pool I
and Pool II Home Equity Loan as of the Cut-Off Date was
$3,003 and $1,343, respectively, and the highest was
$470,000 and $500,000, respectively. As of the Cut-Off
Date, the average principal balances of the Pool I and
Pool II Home Equity Loans was $51,061 and $85,342,
respectively. 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 Pool I
and Pool II Home Equity Loans were 280 months and 359
months, respectively. The weighted average terms to
stated maturity of the Pool I and Pool II Home Equity
Loans at origination were 282 months and 360 months,
respectively.
As of the Cut-Off Date 2.72% and 0.13% of the Pool I and
Pool II Home Equity Loans, respectively, provided 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
Mortgagor will be required to make a final payment which
will be substantially larger than such
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
Mortgagor's previous monthly payments. See "Risk
Factors-- Nature of the Security" in the Prospectus.
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 Indenture
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) interest on the actual number of days
since the last Remittance Date (or, in the case of the
first Remittance Date, from September 29, 1998) 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 Notes in such Pool
immediately prior to the related Remittance Date and (y)
the Excess Spread (as defined herein under "Description
of the Notes--Cross-Support Provisions"), 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. 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") 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 Notes.
Notwithstanding the foregoing, the Servicer will not be
required to make an advance if it determines, in its
good faith judgment, that such advance will not be
recoverable from the foregoing sources. The "Adjusted
Mortgage Loan Remittance Rate" for a Class of Notes will
equal the sum of the Remittance Rate for such Class and
a rate used to determine certain expenses of the Trust.
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
Indenture Trustee
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
from amounts otherwise payable to the Servicer as
servicing compensation (including the Contingency Fee),
an amount ("Compensating Interest") equal to any excess
of (a) interest on the actual number of days since the
last Remittance Date (or, in the case of the first
Remittance Date, from September 29, 1998) 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 Rate 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.
Optional Repurchase............... The Servicer has the right, but not the obligation, to
repurchase any Defaulted Loan for the purchase price and
in the manner described under "The Transfer and
Servicing Agreements-- Representations and Warranties."
In no event, however, may the aggregate principal
balance of Defaulted Loans purchased pursuant to this
provision exceed 5% of the aggregate Original Pool
Principal Balances. A "Defaulted Mortgage Loan" is any
Loan as to which the related Obligor has failed to pay
in full three or more consecutive monthly payments.
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 amounts
collected.
Rating............................ It is a condition to the issuance of the Notes that each
Class be rated "AAA" by Standard & Poor's, 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 Notes 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 Notes. In general,
the ratings address credit risk and do not address the
likelihood or rate of principal prepayments. The ratings
of the Notes by S&P and Moody's do not reflect the
likelihood of payment of Noteholders' Interest
Carryover. See "Rating of the Notes" 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 5% of the sum of the aggregate
principal balances of the Pool I and Pool II Loans as of
the Cut-Off Date (with respect to each Pool, the
"Original Pool Principal Balance") (such date,
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
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 (y) interest thereon for the actual
number of days from the last Remittance Date to but not
including the upcoming Remittance Date) at the then
applicable weighted average Remittance Rates of the
Notes plus an amount equal to the interest portion of
any unreimbursed Insured Payments made by MBIA with
respect to the Loans. See "The Agreement" herein and in
the Prospectus.
Optional Termination by MBIA...... On and after the date on which the Subordinated Amounts
for Pool I and Pool II are zero, on any Remittance Date
on which Pool I and/or Pool II Loans with aggregate
principal balances as of the Cut-Off Date equal to or
exceeding 25% or more of the Original Pool Principal
Balance with respect to Pool I and Pool II 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 both
Pools and the outstanding and unpaid fees and expenses
of the Trust. See "The Agreement" herein and in the
Prospectus.
Tax Status........................ In the opinion of Stroock & Stroock & Lavan LLP, special
Federal tax counsel, for Federal income tax purposes,
the Notes will be characterized as debt, and the Trust
will not be characterized as an association (or a
publicly traded partnership) taxable as a corporation or
as a taxable mortgage pool. Each Noteholder, by the
acceptance of a Note, will agree to treat the Notes as
debt. See "Federal Income Tax Considerations" herein and
"Federal Income Tax Consequences" in the Prospectus.
ERISA Considerations.............. Subject to the conditions and considerations discussed
under "ERISA Considerations" herein, the Notes are
eligible for purchase 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 certain types of Keogh
plans which are not subject to ERISA but are subject to
Section 4975 of the Code ("Plans"). See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment Considerations... Only the Class AV Notes will constitute "mortgage
related securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Each investor should
consult its own legal advisers in determining whether
and the extent to which a Class of Notes constitutes a
legal investment for such investor. See "Legal
Investment Considerations" herein.
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
Registration of the Notes......... The Notes will be represented by global notes 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 Euroclear System ("Euroclear") in Europe. No
Noteholder will be entitled to receive definitive notes
("Definitive Notes") representing such person's
interest, except in the event that Definitive Notes are
issued under the limited circumstances described herein.
All references herein to "Noteholders" or "Holders" will
reflect the rights of the beneficial owners of Notes, 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 Notes--Book-Entry
Notes" herein.
</TABLE>
S-20
<PAGE>
RISK FACTORS
Prospective Noteholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE.
The Servicer, Originators, Indenture Trustee and Trust Administrator
(collectively, the "Relevant Parties") utilize a significant number of computer
software programs and operating systems and are highly dependent on computer
systems operated by third parties which include, but are not limited to, their
suppliers, customers, brokers and agents and the telephone, electric and utility
companies. To the extent that any computer system relied upon by the Relevant
Parties or any third party, has software applications and contains source codes
that are unable to appropriately interpret the upcoming calendar year 2000, some
level of modification or replacement of such applications or hardware may be
necessary. The year 2000 issue is the result of prior computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any computer programs of a Relevant Party that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. Any such occurrence could result in a major computer system failure or
miscalculations. Several federal regulatory agencies, including the Commission,
require the entities that they regulate to take steps to address problems which
may arise in relation to the year 2000.
The Relevant Parties currently are assessing the impact of modifications or
replacements required to adjust for the year 2000. The Relevant Parties are
utilizing both internal and external resources to identify, correct or
reprogram, and test their systems for year 2000 compliance. It is anticipated
that all reprogramming efforts and necessary testing will be completed prior to
the year 2000. The Relevant Parties have initiated formal communications with
those third parties on whom they will rely to determine the extent to which the
Relevant Parties are vulnerable to the failure of these third parties to
remediate their own year 2000 issue. However, there can be no assurance that the
systems of third parties on which the systems of the Relevant Parties rely will
be converted in a timely fashion, or that a failure to convert by a third party,
or a conversion that is incompatible with the systems of the Relevant Parties,
would not have an adverse effect on the business, financial condition or results
of operations of the Relevant Parties. The total year 2000 project cost and
estimates for the Relevant Parties include the estimated costs and time
associated with the impact of a third party's year 2000 issue, and are based on
presently available information. The costs allocated to the year 2000 project
are significant. The costs of the project and the dates on which the Relevant
Parties plan to complete their year 2000 modifications are based on their best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
such estimates. Specific factors that might cause such material differences
include, but are not limited to: (i) the availability and cost of personnel
trained in this area, (ii) the ability to locate and correct all relevant
computer codes and (iii) similar uncertainties.
No assurance can be given that any or all of the systems discussed above,
including the systems of the Relevant Parties, are or will be year 2000
compliant or that the costs required to address year 2000 issues will not
adversely affect the business, financial condition or results of operations of
the respective party or the performance of their obligations under the Transfer
and Servicing Agreements. As a result of this potential affect on performance
under the Transfer and Servicing Agreements, the timely receipt of payment by
the Noteholders may also be adversely affected.
NET FUNDS CAP AND NOTEHOLDERS' INTEREST CARRYOVER
The Remittance Rate for the Class AF-1 and Class AV Notes is based generally
on the London interbank offered rate ("LIBOR") for one-month U.S. Dollar
deposits and the Remittance Rate for the
S-21
<PAGE>
Class AF-2 Notes will be determined pursuant to the Auction Procedures described
herein and in the attached Prospectus. Although the Mortgage Interest Rates on
the Pool II Loans (which rates will be used in determining the Net Funds Cap for
such Pool) are also subject to adjustment, the Mortgage Interest Rates with
respect to most of the Pool II Loans adjust less frequently than the Remittance
Rate on the Class AV Notes and adjust by reference to either six-month LIBOR,
which will be calculated differently for the Pool II Loans and the Class AV
Notes, or the Treasury Index, which may not necessarily correspond to changes in
one-month LIBOR. Also, the Pool I Loans bear fixed rates of interest. However,
Supplemental Interest Payments are intended to reduce the likelihood that
holders of the Class AF-1 and Class AF-2 Notes experience Noteholders' Interest
Carryover. See "Description of the Notes--Supplemental Interest Payments"
herein.
If in respect of any Remittance Date there does not exist a positive spread
between (a) the Net Funds Cap applicable to a Class of Notes and (b) the
interest accrued on such Class at LIBOR plus the applicable margin, or the
Auction Rate, as the case may be, but in no event exceeding 14% per annum, the
Remittance Rate for such Class on such Remittance Date will be based upon the
applicable Net Funds Cap. Any Noteholders' Interest Carryover arising as a
result of the applicable Remittance Rate being based upon the Net Funds Cap,
together with interest thereon at the then applicable Remittance Rate (without
giving effect to the Net Funds Cap but in no event exceeding 14% 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 Noteholders of record of such Class for such
Remittance Date, regardless of whether they owned Notes when the related
Noteholders' Interest Carryover was created. See "Description of the
Notes--Distributions on the Notes." The ratings of the Notes do not address the
likelihood of the payment of any Noteholders' Interest Carryover, and the MBIA
Policies do not guaranty payment of any such amount.
RISK OF BANKRUPTCY OR INSOLVENCY OF THE ORIGINATORS; THE CUSTODIAN
The Originators believe that the transfer of the Loans to the Trust
constitutes a sale by the Originators to the Trust and, accordingly, that such
Loans will not be part of the assets of the Originators in the event of the
bankruptcy of an Originator and will not be available to the creditors of the
Originators. The terms of the Agreement provide that, with respect to the Home
Equity Loans, the Originators will deliver all of the Mortgages, the Notes and
the other documents in the Trustee's Loan File to FUNB, as Custodian, which
shall maintain possession of such Trustee's Loan Files, and no assignment of any
Mortgage is required to be recorded, in either case unless an Assignment Event
as defined in the Agreement (an "Assignment Event") has occurred (e.g., the
long-term unsecured debt rating of FUNB is reduced below "A" by S&P or below
"A2" by Moody's). Within 30 days following any such downgrade or occurrence of
another Assignment Event, FUNB, as Custodian, is required to deliver the
Mortgages, Notes and the other documents in the Trustee's Loan Files in its
possession to the Indenture Trustee, or such Indenture Trustee's bailee and
either to cause proper assignments of each Mortgage relating to a Pool I or Pool
II Loan to be recorded in the relevant real property recording office for each
such Mortgage or to deliver assignments of the Mortgages, in recordable form, to
the Indenture Trustee, together with an opinion of counsel addressed to and
acceptable to MBIA to the effect that recordation of such assignments is not
necessary in order to perfect the interest of the Indenture Trustee in such
Mortgages.
For so long as (i) the Servicer remains an affiliate of FUNB, (ii) no Event
of Default under the Transfer and Servicing Agreements shall have occurred and
be continuing and (iii) FUNB maintains a short-term rating of at least "A-1" by
S&P and "P-1" by Moody's and for five Business Days following any reduction,
suspension, termination or withdrawal of either such rating, and certain other
events as described in the Spread Account Agreement, the Principal and Interest
Account and Spread Account may be held with FUNB and its affiliates and FUNB may
commingle such cash with its other funds for certain
S-22
<PAGE>
periods. In any insolvency proceedings or receivership or conservatorship of
FUNB or of an Originator, the Trust may not have a perfected interest in such
commingled collections.
90-DAY DEFERRED PROGRAM
With respect to Home Equity Loans, a borrower is offered the opportunity to
defer two scheduled payments of principal and interest on his loan. The interest
that accrues for that period is accounted for separately and is collected either
from monthly payments made which are in excess of the borrower's scheduled
monthly payment or when the loan is paid in full. Payment of principal during
the period is similarly deferred. No principal reduction occurs until the first
payment is made. The term to maturity and other loan terms are no different than
those for loan products without this feature and are not changed due to the
deferral.
S-23
<PAGE>
THE TRUST
The Money Trust 1998-C is a business trust formed under the laws of the
State of Delaware pursuant to the Trust Agreement for the transactions described
in this Prospectus Supplement. After its formation, the Trust will not engage in
any activity other than (i) acquiring, holding and managing the Loans and the
other assets of the Trust and proceeds therefrom, (ii) issuing the Notes, the
Certificates and the Voting Interests, (iii) making payments on the Notes and
the Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
in connection therewith.
The Certificates will have no principal balance and will represent the
residual interest in the assets of the Trust. The Voting Interests will entitle
the holders thereof to exercise sole authority to approve or disapprove actions
requiring the approval or disapproval of Certificateholders. The Trust Agreement
will provide that the holder of the Voting Interests will act in accordance with
written directions received from the holders of a majority of the aggregate
Class Principal Balance of the Notes then outstanding; provided, however, that
no action may be taken that would increase or reduce in any manner the amount
of, or accelerate or delay the timing of, collections of payments on Loans or
distributions required to be made for the benefit of the Certificateholders, or
would adversely affect the Federal or state tax consequences to the
Certificateholders, without the consent of the holders of all Certificates
affected thereby. The Certificates initially will be owned by FUNB. The Voting
Interests initially will be owned by an unaffiliated party.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Chase Manhattan Bank Delaware, as Owner Trustee, at 1201 Market Street,
Wilmington, Delaware 19801.
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. The Money Store Inc. is headquartered in West Sacramento,
California and Union, New Jersey. On June 30, 1998, The Money Store Inc. became
a wholly-owned subsidiary of First Union National Bank, the principal banking
subsidiary of First Union Corporation. First Union Corporation is also the
ultimate parent of First Union Capital Markets. See "Risk Factors--Risk of
Bankruptcy or Insolvency of the Originators; the Custodian."
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").
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. 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 15 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 and, in 1995,
entered the private student loan origination market.
S-24
<PAGE>
For the years ended December 31, 1996 and December 31, 1997 and the
six-month period ended June 30, 1998, The Money Store Inc. and its subsidiaries
originated or purchased approximately $5.7 billion, $7.8 billion and $3.8
billion of loans, respectively. Of those loans, approximately 73%, 76% and 82%,
respectively, by principal amount were home equity loans, approximately 11%, 9%
and 9%, respectively, by principal amount were SBA Loans, approximately 8%, 8%
and 8%, respectively, by principal amount were Student Loans and approximately
8%, 7% and 1%, respectively, by principal amount were auto loans. On January 29,
1998, The Money Store Inc. announced that it had ceased originating loans in its
non-prime auto finance division as part of an overall corporate strategy to
focus on more profitable areas of lending. The Money Store Inc. will continue to
service its existing auto loan portfolio. 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 June 30, 1998, The Money Store Inc. and its subsidiaries operated out of
191 locations and were doing business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the United Kingdom.
First Union Corporation is a North Carolina-based, multi-bank holding
company registered under the Bank Holding Company Act of 1956, as amended, and
the rules and regulations promulgated thereunder. Through its full-service
banking offices, First Union Corporation provides a wide range of commercial and
retail banking services and trust services in Connecticut, Delaware, Florida,
Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia and Washington, DC. Such offices are operated by
First Union National Bank, headquartered in Charlotte, North Carolina, except
the Delaware offices, which are operated by First Union Bank of Delaware. First
Union Corporation also provides various other financial services, including
mortgage banking, home equity lending, credit cards, leasing, investment
banking, insurance and securities brokerage services, through other
subsidiaries. As of and for the three months ended March 31, 1998, First Union
Corporation had on a restated basis taking into consideration the acquistion by
First Union Corporation of CoreStates Financial Corp. on April 28, 1998, assets
of $220 billion. First Union Corporation is the sixth largest bank holding
company in the United States, based on assets at June 30, 1998.
First Union National Bank, a national banking association with its
headquarters in Charlotte, North Carolina, provides a wide range of commercial
and retail banking services and trust services in all of the states listed
above, except Delaware. On February 28, 1998, First Union National Bank merged
with an affiliated national bank. As of and for the six months ended June 30,
1998, First Union Corporation reported assets of $229 billion.
S-25
<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,
---------------------------------------------------------------------------
1995 1996
--------------------- ---------------------
ORIGINATIONS ORIGINATIONS
--------------------- SERVICED --------------------- SERVICED
NUMBER OF LOAN NUMBER OF 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 $4,150,992 104,519 $ 8,230,776
% of Total.............................. 75.5% 66.7% 72.9% 67.5%
SBA Loans............................... 440,728 1,461 1,907,050 635,498 1,769 2,282,384
% of Total.............................. 11.5% 22.1% 11.2% 18.7%
Student Loans........................... 369,129 139,946 845,501 458,459 168,837 1,203,739
% of Total.............................. 9.7% 9.8% 8.0% 9.9%
Auto Loans.............................. 128,070 13,141 117,239 448,105 45,124 475,533
% of Total.............................. 3.3% 1.4% 7.9% 3.9%
---------- --------- ------------ ---------- --------- ------------
Total............................... $3,822,971 222,376 $8,621,467 $5,693,054 320,249 $12,192,432
---------- --------- ------------ ---------- --------- ------------
---------- --------- ------------ ---------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------------
1997 1998
--------------------- ---------------------
ORIGINATIONS ORIGINATIONS
--------------------- --------------------- SERVICED
NUMBER OF SERVICED LOAN NUMBER OF LOAN
AMOUNT LOANS PORTFOLIO AMOUNT LOANS PORTFOLIO
---------- --------- ------------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Home Equity Loans....................... $5,926,252 152,554 $11,430,392 $3,129,170 76,650 $12,476,565
% of Total.............................. 76.0% 69.3% 82.4% 70.5%
SBA Loans............................... 728,961 1,650 2,694,640 325,533 639 2,784,311
% of Total.............................. 9.3% 16.3% 8.6% 15.7%
Student Loans........................... 582,294 163,350 1,590,791 314,164 68,333 1,819,638
% of Total.............................. 7.5% 9.7% 8.3% 10.3%
Auto Loans.............................. 563,507 54,383 778,121 28,830 2,315 627,168
% of Total.............................. 7.2% 4.7% 0.8% 3.5%
---------- --------- ------------- ---------- --------- ------------
Total............................... $7,801,014 371,937 $16,493,944 $3,797,697 147,937 $17,707,682
---------- --------- ------------- ---------- --------- ------------
---------- --------- ------------- ---------- --------- ------------
</TABLE>
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 1995, 1996, 1997, and the six month period ended
June 30, 1998, the average loan size was approximately $43,000, $40,000, $38,000
and $40,000, respectively.
S-26
<PAGE>
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 SIX-MONTH
AS OF AND FOR THE YEARS PERIOD ENDED
ENDED DECEMBER 31, JUNE 30,
------------------------- -------------
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
30-59 days past due.......................... 1.76% 1.31% 1.53% 1.56%
60-89 days past due.......................... 0.68% 0.81% 0.81% 0.89%
90+ days past due............................ 2.42% 3.83% 4.38% 4.53%
Loans charged-off, net....................... $24,205 $37,039 $58,739 $65,251
Loans charged-off, net, as a percentage of
the home equity serviced loan
portfolio(1)(2)............................ 0.42% 0.45% 0.51% 1.05%
</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.
(2) Figures for June 30, 1998 are presented on an annualized basis.
While the above delinquency and charge-off experience represents the The
Money Store Inc.'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 Notes--Distributions on the Notes" herein for a discussion
of the effect to Noteholders of delinquencies in payments on The Home Equity
Loans.
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
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. References in this
Prospectus Supplement to the
S-27
<PAGE>
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.
The statistical information presented in this Prospectus Supplement
concerning the Loans is based on preliminary Pools expected to be contributed to
the Trust on the Closing Date. The Representative expects that additional loans
that were not contained in the preliminary Pools will be added to constitute the
final Pools of Loans actually delivered on the Closing Date. 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.
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 (and, in the case of Pool I, certain five or more unit
residential or mixed-use residential and commercial properties), units in
planned unit developments ("PUDs") and units in condominium developments (the
"Home Equity Mortgaged Properties" or "Mortgaged Properties"). The aggregate
principal balance of the Pool I Home Equity Loans as of the Cut-Off Date was
$490,803,685.08, and the aggregate principal balance of the Pool II Home Equity
Loans as of the Cut-Off Date was $319,865,434.34. 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 3.73% of the Pool I
Home Equity Loans, based upon their original principal balances, the Originators
may not have independently verified the income of the related Obligors. Certain
of the Pool I and Pool II Home Equity Loans contain provisions requiring the
related Mortgagor to pay a penalty in connection with certain prepayments.
Unless otherwise noted, all percentages in this general discussion are measured
by the expected principal balance of the 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 will bear interest at an adjustable rate
(each, a "Pool II Mortgage Interest Rate") which will adjust on the date set
forth in the related Mortgage Note. For each Pool II Home Equity Loan, the
related Pool II Mortgage Interest Rate will change initially after the period
set forth in the related Mortgage Note and periodically thereafter. Each date on
which a Pool II Mortgage Interest Rate changes is referred to as the "Change
Date" for the related Pool II Home Equity Loan. As of the Cut-Off Date, 53.22%
of the Pool II Home Equity Loans will have their first Change Date occurring
approximately 24 months after origination, 0.83% of the Pool II Home Equity
Loans will have their first Change Date occurring approximately 36 months after
origination, 42.92% of the Pool II Home Equity Loans will have their first
Change Date occurring approximately 48 months after origination and 0.08% of the
Pool II Home Equity Loans will have their first Change Date occurring
approximately 60 months after origination. The remainder of the Pool II Home
Equity Loans will have their first Change Date occurring no later than 12 months
after origination. As of the Cut-Off Date, the Pool II Mortgage Interest Rate
relating to 99.28% of the Pool II Home Equity Loans will adjust on each
applicable Change Date to equal the sum of (i) the applicable London Interbank
Offered Rate for U.S. dollar deposits (the "LIBOR Index") 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 the remainder of the Pool II Home Equity Loans will adjust on
each Change Date to equal the sum of (i) the applicable One-Year Constant
Maturity Treasury Index ("CMT" or the "Treasury Index") as published by the
Federal Reserve Board in the applicable Federal Reserve Board Statistical
Release No. H.15, and (ii) the related Gross
S-28
<PAGE>
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 Home
Equity Loans do not provide for negative amortization.
Based upon the original principal balances of the Home Equity Loans, as of
the Cut-Off Date, 55.18% and 52.64% of the Pool I and Pool II Home Equity Loans,
respectively, had a Combined Loan-to-Value Ratio exceeding 80%. As of the
Cut-Off Date, no Pool I or Pool II Home Equity Loan had 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, as of the Cut-Off Date, were 79.963% and
79.752%, respectively. The Home Equity Loans are not be insured or guaranteed by
any governmental entity.
The Pool I Home Equity Loans bear interest at fixed rates which, as of the
Cut-Off Date, ranged from 7.400% to 17.990% per annum. The Pool II Home Equity
Loans bear interest at adjustable rates which, as of the Cut-Off Date, ranged
from 7.500% to 14.890% per annum. The weighted average Pool I Mortgage Interest
Rate on the Pool I Home Equity Loans, as of the Cut-Off Date, was 10.651% per
annum. As of the Cut-Off Date, the weighted average current Pool II Mortgage
Interest Rate on the Pool II Home Equity Loans was 10.055% per annum. As of the
Cut-Off Date, the lowest principal balances of any Pool I and Pool II Home
Equity Loans were $3,003 and $1,343, respectively, and the highest were $470,000
and $500,000, respectively. As of the Cut-Off Date, the average principal
balances of the Pool I and Pool II Home Equity Loans were $51,061 and $85,342,
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 Pool I and Pool II Home Equity Loans will be no more than
approximately 280 months and 359 months, respectively. The weighted average
terms to stated maturity of the Pool I and Pool II Home Equity Loans at
origination were, as of the Cut-Off Date, 282 months and 360 months,
respectively. As of the Cut-Off Date, 2.72% of the Pool I Home Equity Loans and
0.13% of the Pool II Home Equity Loans were Balloon Loans.
S-29
<PAGE>
Set forth below is a description of certain characteristics of a preliminary
pool of the Pool I Loans as of the Cut-Off Date. Certain of the percentage
columns may not sum to 100.00% due to rounding.
POOL I
CUT-OFF DATE LOAN BALANCES
<TABLE>
<CAPTION>
CUT-OFF % OF
NUMBER OF DATE LOAN CUT-OFF DATE AGGREGATE
CUT-OFF DATE LOAN BALANCES LOANS BALANCES LOAN BALANCE
- --------------------------------------------- --------- --------------- ----------------------
<S> <C> <C> <C>
$20,000.00 and below......................... 1,837 $ 26,421,418.94 5.38%
20,000.01 - 30,000.00........................ 1,607 40,550,552.43 8.26
30,000.01 - 40,000.00........................ 1,413 49,825,949.86 10.15
40,000.01 - 50,000.00........................ 1,096 49,571,320.90 10.10
50,000.01 - 60,000.00........................ 888 48,925,495.21 9.97
60,000.01 - 70,000.00........................ 717 46,557,998.01 9.49
70,000.01 - 80,000.00........................ 509 38,235,853.47 7.79
80,000.01 - 90,000.00........................ 338 28,614,686.97 5.83
90,000.01 - 100,000.00....................... 274 26,113,876.09 5.32
100,000.01 - 120,000.00...................... 353 38,722,477.29 7.89
120,000.01 - 130,000.00...................... 136 16,983,632.23 3.46
130,000.01 - 140,000.00...................... 96 12,985,039.19 2.65
140,000.01 - 150,000.00...................... 71 10,335,113.66 2.11
150,000.01 - 160,000.00...................... 54 8,361,864.00 1.70
160,000.01 - 170,000.00...................... 36 5,970,093.28 1.22
170,000.01 - 180,000.00...................... 26 4,529,664.68 0.92
180,000.01 - 190,000.00...................... 26 4,808,666.49 0.98
190,000.01 - 200,000.00...................... 14 2,742,716.78 0.56
200,000.01 - 250,000.00...................... 76 16,851,753.42 3.43
250,000.01 - 300,000.00...................... 27 7,325,335.18 1.49
300,000.01 - 350,000.00...................... 10 3,196,591.07 0.65
350,000.01 - 400,000.00...................... 5 1,841,585.93 0.38
400,000.01 and above......................... 3 1,332,000.00 0.27
--------- --------------- ------
Total:..................................... 9,612 $490,803,685.08 100.00%
--------- --------------- ------
--------- --------------- ------
</TABLE>
S-30
<PAGE>
POOL I
ORIGINAL LOAN BALANCES
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE AGGREGATE
ORIGINAL LOAN BALANCES LOANS LOAN BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
$20,000.00 and below.................. 1,821 $ 26,143,691.57 5.33%
20,000.01 - 30,000.00................. 1,599 40,190,841.80 8.19
30,000.01 - 40,000.00................. 1,422 49,978,049.18 10.18
40,000.01 - 50,000.00................. 1,098 49,512,203.76 10.09
50,000.01 - 60,000.00................. 889 48,815,422.80 9.95
60,000.01 - 70,000.00................. 720 46,642,077.53 9.50
70,000.01 - 80,000.00................. 513 38,447,378.52 7.83
80,000.01 - 90,000.00................. 335 28,339,777.15 5.77
90,000.01 - 100,000.00................ 277 26,338,893.35 5.37
100,000.01 - 120,000.00............... 356 38,931,659.57 7.93
120,000.01 - 130,000.00............... 134 16,667,218.86 3.40
130,000.01 - 140,000.00............... 99 13,374,188.89 2.72
140,000.01 - 150,000.00............... 72 10,462,011.27 2.13
150,000.01 - 160,000.00............... 52 8,043,525.21 1.64
160,000.01 - 170,000.00............... 36 5,948,830.79 1.21
170,000.01 - 180,000.00............... 27 4,689,658.62 0.96
180,000.01 - 190,000.00............... 27 4,988,273.83 1.02
190,000.01 - 200,000.00............... 14 2,742,716.78 0.56
200,000.01 - 250,000.00............... 76 16,851,753.42 3.43
250,000.01 - 300,000.00............... 27 7,325,335.18 1.49
300,000.01 - 350,000.00............... 10 3,196,591.07 0.65
350,000.01 - 400,000.00............... 5 1,841,585.93 0.38
400,000.01 and above.................. 3 1,332,000.00 0.27
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-31
<PAGE>
POOL I
LOAN RATES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
LOAN RATES LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
7.251 - 7.500%........................ 12 $ 1,151,191.83 0.23%
7.501 - 7.750......................... 15 1,501,752.16 0.31
7.751 - 8.000......................... 96 9,039,058.34 1.84
8.001 - 8.250......................... 32 3,019,523.17 0.62
8.251 - 8.500......................... 193 18,984,534.96 3.87
8.501 - 8.750......................... 141 13,173,237.80 2.68
8.751 - 9.000......................... 389 34,248,591.37 6.98
9.001 - 9.250......................... 175 14,048,133.61 2.86
9.251 - 9.500......................... 303 24,630,072.78 5.02
9.501 - 9.750......................... 344 25,729,288.20 5.24
9.751 - 10.000........................ 952 64,819,514.90 13.21
10.001 - 10.250....................... 294 17,329,626.40 3.53
10.251 - 10.500....................... 551 31,846,438.65 6.49
10.501 - 10.750....................... 498 24,509,341.89 4.99
10.751 - 11.000....................... 591 30,002,427.16 6.11
11.001 - 11.250....................... 427 17,026,087.32 3.47
11.251 - 11.500....................... 633 25,843,612.41 5.27
11.501 - 11.750....................... 427 17,995,280.29 3.67
11.751 - 12.000....................... 753 28,360,003.86 5.78
12.001 - 12.250....................... 438 13,448,230.56 2.74
12.251 - 12.500....................... 566 18,067,373.49 3.68
12.501 - 12.750....................... 373 12,679,417.49 2.58
12.751 - 13.000....................... 503 15,858,386.41 3.23
13.001 - 13.250....................... 162 5,304,959.63 1.08
13.251 - 13.500....................... 211 6,505,115.39 1.33
13.501 - 13.750....................... 121 3,653,431.51 0.74
13.751 - 14.000....................... 203 5,710,268.94 1.16
14.001 - 14.250....................... 62 1,859,594.06 0.38
14.251 - 14.500....................... 67 1,966,166.98 0.40
14.501 - 14.750....................... 34 1,105,005.10 0.23
14.751 - 15.000....................... 30 939,281.25 0.19
15.001 - 15.250....................... 6 153,527.59 0.03
15.251 - 15.500....................... 5 193,623.14 0.04
15.751 - 16.000....................... 1 12,868.04 *
16.751 - 17.000....................... 2 57,819.57 0.01
17.751 - 18.000....................... 2 30,898.83 0.01
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
- ------------------------
* Less than 0.01%
S-32
<PAGE>
POOL I
STATED PURPOSE OF LOAN
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
STATED PURPOSE OF LOAN LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Debt Consolidation.................... 2,355 $ 69,886,537.96 14.24%
Tuition............................... 1 51,789.19 0.01
Co-owner Buyout....................... 1 133,025.76 0.03
Cashout............................... 1,754 47,396,034.45 9.66
Purchase Money........................ 286 22,667,376.90 4.62
Rate/Term Refinance................... 5,210 350,457,938.41 71.40
Home Improvement...................... 5 210,982.41 0.04
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL I
COMBINED LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
COMBINED LOAN-TO-VALUE RATIO LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
30.00% or below....................... 205 $ 4,651,124.56 0.95%
30.01 - 40.00......................... 191 6,245,262.53 1.27
40.01 - 50.00......................... 261 9,726,846.60 1.98
50.01 - 60.00......................... 459 19,890,622.97 4.05
60.01 - 65.00......................... 376 17,056,008.45 3.48
65.01 - 70.00......................... 581 25,664,353.69 5.23
70.01 - 75.00......................... 725 37,092,142.21 7.56
75.01 - 80.00......................... 1,816 99,646,785.60 20.30
80.01 - 85.00......................... 1,516 84,516,776.93 17.22
85.01 - 90.00......................... 2,354 145,780,511.45 29.70
90.01 - 95.00......................... 510 21,080,689.28 4.30
95.01 - 100.00........................ 618 19,452,560.81 3.96
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
- ------------------------
(1) The combined loan-to-value ratios (the "Combined Loan-to-Value Ratios")
shown above are equal, with respect to each Loan, to (i) the sum of (a) the
original principal balance of such Loan at the date of origination plus (b)
the remaining balance of the senior lien(s), if any, at the date of
origination of such Loan divided by (ii) the lesser of (a) the value of the
related Mortgaged Property, based upon the appraisal made at the time of
origination of such Loan or (b) the purchase price of such Mortgaged
Property if the Loan proceeds from such Loan are used to purchase such
Mortgaged Property.
S-33
<PAGE>
POOL I
OCCUPANCY STATUS OF MORTGAGED PROPERTY
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
OCCUPANCY STATUS LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Primary............................... 9,314 $ 477,186,186.37 97.23%
Second Home........................... 33 1,188,478.11 0.24
Investment............................ 265 12,429,020.60 2.53
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL I
FICO SCORE
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
FICO SCORE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Not Available......................... 253 $ 10,309,717.25 2.10%
600 or below.......................... 3,591 169,414,070.60 34.52
601 - 610............................. 480 25,740,274.51 5.24
611 - 620............................. 523 25,690,056.06 5.23
621 - 630............................. 504 25,886,266.23 5.27
631 - 640............................. 497 27,635,035.59 5.63
641 - 650............................. 591 30,037,826.66 6.12
651 - 660............................. 543 29,372,911.15 5.98
661 - 670............................. 528 29,870,749.25 6.09
671 - 680............................. 449 27,050,579.98 5.51
681 - 690............................. 394 23,419,217.25 4.77
691 - 700............................. 268 14,223,013.61 2.90
701 - 720............................. 436 23,614,966.04 4.81
721 - 740............................. 262 14,197,505.49 2.89
741 - 760............................. 159 7,918,197.02 1.61
761 - 780............................. 94 4,697,689.61 0.96
781 - 800............................. 32 1,335,319.28 0.27
801 - 820............................. 7 292,725.85 0.06
821 and above......................... 1 97,563.65 0.02
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL I
LIEN POSITION
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
LIEN POSITION LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
First................................. 6,111 $ 393,505,210.12 80.18%
Second................................ 3,501 97,298,474.96 19.82
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-34
<PAGE>
POOL I
DELINQUENCIES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
DELINQUENCIES LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Current............................... 9,516 $ 485,708,838.97 98.96%
30 - 59 days.......................... 96 5,094,846.11 1.04
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL I
AGE OF LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
AGE OF LOANS (MONTHS) LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Less than 1........................... 5,422 $ 266,090,477.40 54.22%
1-5................................... 3,839 202,360,568.66 41.23
6-10.................................. 253 17,400,330.89 3.55
11-15................................. 52 2,887,904.06 0.59
16-20................................. 4 179,171.91 0.04
21-25................................. 8 378,815.32 0.08
26-30................................. 3 253,682.00 0.05
31-35................................. 1 29,125.33 0.01
46-50................................. 1 35,215.66 0.01
86-90................................. 7 217,766.44 0.04
91-95................................. 1 26,413.87 0.01
100 and above......................... 21 944,213.54 0.19
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-35
<PAGE>
POOL I
REMAINING TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
REMAINING TERM NUMBER OF DATE LOAN AGGREGATE
TO STATED MATURITY (MONTHS) LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
13 - 24............................... 2 $ 7,753.64 *%
25 - 36............................... 1 12,000.00 *
37 - 48............................... 1 24,296.33 *
49 - 60............................... 227 3,135,043.44 0.64
61 - 72............................... 20 519,972.26 0.11
73 - 84............................... 79 2,162,572.40 0.44
85 - 96............................... 22 561,356.10 0.11
97 - 108.............................. 5 169,370.91 0.03
109 - 120............................. 1,046 23,741,426.09 4.84
121 - 132............................. 3 93,100.00 0.02
133 - 144............................. 22 861,863.08 0.18
145 - 156............................. 8 401,592.54 0.08
157 - 168............................. 26 1,370,553.84 0.28
169 - 180............................. 3,218 125,207,684.20 25.51
181 - 192............................. 2 196,114.65 0.04
193 - 204............................. 4 176,584.85 0.04
205 - 216............................. 1 43,899.02 0.01
217 - 228............................. 8 393,165.61 0.08
229 - 240............................. 1,222 57,686,044.39 11.75
253 - 264............................. 2 227,100.00 0.05
289 - 300............................. 591 26,530,461.52 5.41
313 - 324............................. 1 105,000.00 0.02
325 - 336............................. 2 131,196.19 0.03
337 - 348............................. 8 436,076.73 0.09
349 - 360............................. 3,032 240,085,540.72 48.92
469 - 480............................. 59 6,523,916.57 1.33
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
- ------------------------
* Less than 0.01%
S-36
<PAGE>
POOL I
ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
ORIGINAL TERM (MONTHS) LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
13 - 24............................... 1 $ 4,750.00 *%
25 - 36............................... 1 12,000.00 *
49 - 60............................... 227 3,129,998.49 0.64
61 - 72............................... 10 137,532.26 0.03
73 - 84............................... 72 1,763,651.09 0.36
85 - 96............................... 13 288,050.46 0.06
97 - 108.............................. 1 25,000.00 0.01
109 - 120............................. 1,052 23,917,925.97 4.87
121 - 132............................. 3 93,100.00 0.02
133 - 144............................. 21 826,647.42 0.17
145 - 156............................. 4 94,570.15 0.02
157 - 168............................. 2 23,670.05 *
169 - 180............................. 3,273 127,951,688.94 26.07
181 - 192............................. 2 196,114.65 0.04
193 - 204............................. 4 176,584.85 0.04
229 - 240............................. 1,229 57,992,601.71 11.82
253 - 264............................. 2 227,100.00 0.05
289 - 300............................. 591 26,530,461.52 5.41
313 - 324............................. 1 105,000.00 0.02
325 - 336............................. 1 108,472.86 0.02
349 - 360............................. 3,043 240,674,848.09 49.04
469 - 480............................. 59 6,523,916.57 1.33
----------- ----------------- ------
Total:.............................. 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
- ------------------------
* Less than 0.01%
S-37
<PAGE>
POOL I
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
PROPERTY TYPE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Detached single family................ 8,195 $ 415,914,928.43 84.74%
Detached PUD.......................... 197 11,834,759.11 2.41
Manufactured single wide.............. 280 10,647,844.78 2.17
Attached PUD.......................... 24 1,460,137.48 0.30
Attached townhouse.................... 37 2,133,864.34 0.43
Attached condo........................ 164 7,301,257.73 1.49
Mixed Use............................. 7 372,274.53 0.08
2-4 Family............................ 297 19,866,024.23 4.05
Manufactured double wide.............. 396 19,738,596.13 4.02
Manufactured triple wide.............. 10 765,050.00 0.16
Multi-Family (SFU).................... 5 768,948.32 0.16
----------- ----------------- ------
Total:............................ 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL I
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES (1)
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
STATE LOANS BALANCES LOAN BALANCES
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Alaska................................ 14 $ 626,650.45 0.13%
Arizona............................... 164 6,793,028.79 1.38
Arkansas.............................. 70 3,480,871.85 0.71
California............................ 444 28,451,735.20 5.80
Colorado.............................. 168 9,683,727.45 1.97
Connecticut........................... 66 4,286,722.69 0.87
Delaware.............................. 24 1,240,031.39 0.25
District of Columbia.................. 29 2,053,846.60 0.42
Florida............................... 489 24,931,141.21 5.08
Georgia............................... 313 17,103,488.29 3.48
Hawaii................................ 1 28,457.96 0.01
Idaho................................. 38 1,724,499.24 0.35
Illinois.............................. 468 22,139,366.38 4.51
Indiana............................... 365 18,418,896.67 3.75
Iowa.................................. 44 1,820,807.89 0.37
Kansas................................ 133 5,058,380.75 1.03
Kentucky.............................. 187 8,613,375.50 1.75
Louisiana............................. 147 6,795,262.02 1.38
Maine................................. 118 5,149,350.92 1.05
Maryland.............................. 209 10,904,727.75 2.22
Massachusetts......................... 148 10,165,193.40 2.07
Michigan.............................. 430 19,348,297.67 3.94
Minnesota............................. 105 4,077,337.52 0.83
Mississippi........................... 202 8,183,936.31 1.67
Missouri.............................. 312 12,874,812.25 2.62
Montana............................... 15 714,291.35 0.15
</TABLE>
S-38
<PAGE>
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
STATE LOANS BALANCES LOAN BALANCES
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Nebraska.............................. 76 $ 2,979,109.22 0.61%
Nevada................................ 79 4,565,274.75 0.93
New Hampshire......................... 62 3,269,526.42 0.67
New Jersey............................ 239 15,287,240.91 3.11
New Mexico............................ 112 6,292,147.84 1.28
New York.............................. 509 31,744,812.00 6.47
North Carolina........................ 624 35,639,459.15 7.26
North Dakota.......................... 8 290,645.82 0.06
Ohio.................................. 537 27,036,106.85 5.51
Oklahoma.............................. 113 3,805,877.39 0.78
Oregon................................ 84 4,303,823.58 0.88
Pennsylvania.......................... 482 23,742,276.40 4.84
Rhode Island.......................... 42 2,183,151.55 0.44
South Carolina........................ 464 23,535,742.92 4.80
South Dakota.......................... 25 1,121,121.33 0.23
Tennessee............................. 228 11,910,357.67 2.43
Texas................................. 402 14,062,737.70 2.87
Utah.................................. 91 5,439,796.00 1.11
Vermont............................... 36 1,905,598.77 0.39
Virginia.............................. 142 7,337,209.12 1.49
Washington............................ 297 17,599,195.29 3.59
West Virginia......................... 126 5,868,779.87 1.20
Wisconsin............................. 111 5,097,307.07 1.04
Wyoming............................... 20 1,118,149.96 0.23
----------- ----------------- ------
Total:............................ 9,612 $ 490,803,685.08 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
- ------------------------
(1) Determined by property address designated as such in the related Mortgage.
S-39
<PAGE>
Set forth below is a description of certain characteristics of a preliminary
pool of the Pool II Loans as of the Cut-Off Date. Certain of the percentage
columns may not sum to 100.00% due to rounding.
POOL II
CUT-OFF DATE LOAN BALANCES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
CUT-OFF DATE LOAN BALANCES LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
$20,000.00 and below.................. 14 $ 220,016.86 0.07%
20,000.01 - 30,000.00................. 136 3,582,113.31 1.12
30,000.01 - 40,000.00................. 320 11,437,569.76 3.58
40,000.01 - 50,000.00................. 384 17,439,088.15 5.45
50,000.01 - 60,000.00................. 470 25,948,429.82 8.11
60,000.01 - 70,000.00................. 427 27,888,212.33 8.72
70,000.01 - 80,000.00................. 405 30,373,003.02 9.50
80,000.01 - 90,000.00................. 309 26,330,631.77 8.23
90,000.01 - 100,000.00................ 251 23,989,847.08 7.50
100,000.01 - 120,000.00............... 368 40,457,714.13 12.65
120,000.01 - 130,000.00............... 123 15,405,470.20 4.82
130,000.01 - 140,000.00............... 103 13,940,585.77 4.36
140,000.01 - 150,000.00............... 93 13,491,547.36 4.22
150,000.01 - 160,000.00............... 68 10,520,745.00 3.29
160,000.01 - 170,000.00............... 47 7,749,154.61 2.42
170,000.01 - 180,000.00............... 31 5,426,385.22 1.70
180,000.01 - 190,000.00............... 27 5,015,867.21 1.57
190,000.01 - 200,000.00............... 28 5,464,569.58 1.71
200,000.01 - 250,000.00............... 104 23,035,956.46 7.20
250,000.01 - 300,000.00............... 24 6,606,696.86 2.07
300,000.01 - 350,000.00............... 13 4,161,829.84 1.30
350,000.01 - 400,000.00............... 1 400,000.00 0.13
400,000.01 and above.................. 2 980,000.00 0.31
----------- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-40
<PAGE>
POOL II
ORIGINAL LOAN BALANCES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
ORIGINAL LOAN BALANCES LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
$20,000.00 and below.................. 12 $ 199,793.45 0.06%
20,000.01 - 30,000.00................. 137 3,600,992.93 1.13
30,000.01 - 40,000.00................. 316 11,282,568.02 3.53
40,000.01 - 50,000.00................. 387 17,495,504.07 5.47
50,000.01 - 60,000.00................. 470 25,931,612.97 8.11
60,000.01 - 70,000.00................. 426 27,796,409.46 8.69
70,000.01 - 80,000.00................. 405 30,349,021.33 9.49
80,000.01 - 90,000.00................. 312 26,563,162.79 8.30
90,000.01 - 100,000.00................ 249 23,791,029.72 7.44
100,000.01 - 120,000.00............... 368 40,421,725.34 12.64
120,000.01 - 130,000.00............... 125 15,640,276.35 4.89
130,000.01 - 140,000.00............... 102 13,800,641.34 4.31
140,000.01 - 150,000.00............... 94 13,631,491.79 4.26
150,000.01 - 160,000.00............... 68 10,520,745.00 3.29
160,000.01 - 170,000.00............... 47 7,749,154.61 2.42
170,000.01 - 180,000.00............... 31 5,426,385.22 1.70
180,000.01 - 190,000.00............... 27 5,015,867.21 1.57
190,000.01 - 200,000.00............... 27 5,269,922.60 1.65
200,000.01 - 250,000.00............... 105 23,230,603.44 7.26
250,000.01 - 300,000.00............... 24 6,606,696.86 2.07
300,000.01 - 350,000.00............... 13 4,161,829.84 1.30
350,000.01 - 400,000.00............... 1 400,000.00 0.13
400,000.01 and above.................. 2 980,000.00 0.31
----------- ----------------- ------
Total:.............................. 3,748 $ 319,865,434.34 100.0%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-41
<PAGE>
POOL II
LOAN RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
LOAN RATES AS OF THE CUT-OFF DATE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
7.251 - 7.500%........................ 1 $ 215,110.94 0.07%
7.501 - 7.750......................... 4 582,371.29 0.18
7.751 - 8.000......................... 9 823,701.22 0.26
8.001 - 8.250......................... 10 1,322,292.35 0.41
8.251 - 8.500......................... 28 3,414,206.76 1.07
8.501 - 8.750......................... 53 6,087,698.38 1.90
8.751 - 9.000......................... 141 18,541,945.99 5.80
9.001 - 9.250......................... 118 12,748,692.02 3.99
9.251 - 9.500......................... 325 32,977,648.55 10.31
9.501 - 9.750......................... 582 51,095,526.06 15.97
9.751 - 10.000........................ 694 58,101,383.88 18.16
10.001 - 10.250....................... 341 26,562,297.50 8.30
10.251 - 10.500....................... 490 36,229,650.94 11.33
10.501 - 10.750....................... 241 19,678,372.69 6.15
10.751 - 11.000....................... 306 22,140,648.24 6.92
11.001 - 11.250....................... 121 9,727,882.78 3.04
11.251 - 11.500....................... 136 9,505,140.87 2.97
11.501 - 11.750....................... 38 2,704,989.22 0.85
11.751 - 12.000....................... 46 3,099,612.43 0.97
12.001 - 12.250....................... 17 1,158,678.66 0.36
12.251 - 12.500....................... 19 1,229,303.94 0.38
12.501 - 12.750....................... 7 453,934.56 0.14
12.751 - 13.000....................... 5 326,380.17 0.10
13.001 - 13.250....................... 4 148,119.03 0.05
13.251 - 13.500....................... 4 253,714.35 0.08
13.501 - 13.750....................... 2 167,768.58 0.05
13.751 - 14.000....................... 4 281,111.06 0.09
14.251 - 14.500....................... 1 92,400.00 0.03
14.751 - 15.000....................... 1 194,851.88 0.06
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
POOL II
INDICIES FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
INDICIES FOR POOL II MORTGAGE LOANS LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
1 Year Treasury....................... 22 $ 2,315,990.73 0.72%
6 Month LIBOR......................... 48 7,124,459.75 2.23
2-28 - 6 Month LIBOR.................. 1,771 170,231,714.43 53.22
3-27 - 6 Month LIBOR.................. 32 2,651,514.11 0.83
4-26 - 6 Month LIBOR.................. 1,873 137,276,311.63 42.92
5-25 - 6 Month LIBOR.................. 2 265,443.69 0.08
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-42
<PAGE>
POOL II
GROSS MARGIN
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
GROSS MARGIN LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
2.751 - 3.000%........................ 1 $ 64,733.02 0.02%
3.751 - 4.000......................... 1 50,000.00 0.02
4.001 - 4.250......................... 1 76,860.53 0.02
4.251 - 4.500......................... 3 270,132.22 0.08
4.501 - 4.750......................... 13 1,402,024.13 0.44
4.751 - 5.000......................... 196 19,241,745.48 6.02
5.001 - 5.250......................... 185 17,148,243.57 5.36
5.251 - 5.500......................... 213 20,220,321.86 6.32
5.501 - 5.750......................... 89 8,748,729.18 2.74
5.751 - 6.000......................... 537 45,885,217.68 14.35
6.001 - 6.250......................... 823 65,238,238.24 20.40
6.251 - 6.500......................... 688 53,627,271.41 16.77
6.501 - 6.750......................... 402 31,605,556.06 9.88
6.751 - 7.000......................... 227 22,214,098.08 6.94
7.001 - 7.250......................... 102 9,218,839.10 2.88
7.251 - 7.500......................... 83 8,581,644.57 2.68
7.501 - 7.750......................... 54 4,487,007.92 1.40
7.751 - 8.000......................... 48 4,382,354.34 1.37
8.001 - 8.250......................... 26 2,247,259.04 0.70
8.251 - 8.500......................... 15 1,680,296.95 0.53
8.501 - 8.750......................... 10 752,352.17 0.24
8.751 - 9.000......................... 14 1,265,407.18 0.40
9.001 - 9.250......................... 6 549,585.96 0.17
9.501 - 9.750......................... 3 286,568.89 0.09
10.001 - 10.250....................... 2 121,647.66 0.04
10.251 - 10.500....................... 2 222,880.73 0.07
10.501 - 10.750....................... 4 276,418.37 0.09
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-43
<PAGE>
POOL II
LIFETIME CAP
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
LIFETIME CAP LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
13.001 - 13.500%...................... 1 $ 85,500.00 0.03%
13.501 - 14.000....................... 7 634,498.56 0.20
14.001 - 14.500....................... 25 3,368,135.37 1.05
14.501 - 15.000....................... 150 19,259,265.39 6.02
15.001 - 15.500....................... 373 38,540,256.90 12.05
15.501 - 16.000....................... 1,177 99,230,340.46 31.02
16.001 - 16.500....................... 793 59,679,264.68 18.66
16.501 - 17.000....................... 578 46,757,941.64 14.62
17.001 - 17.500....................... 304 25,305,475.24 7.91
17.501 - 18.000....................... 185 15,137,925.19 4.73
18.001 - 18.500....................... 80 6,384,766.25 2.00
18.501 - 19.000....................... 40 2,850,178.61 0.89
19.001 - 19.500....................... 21 1,502,879.91 0.47
19.501 - 20.000....................... 10 705,644.91 0.22
20.001 - 20.500....................... 3 228,509.35 0.07
20.501 - 21.000....................... 1 194,851.88 0.06
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
POOL II
PERIODIC RATE CAP
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
PERIODIC RATE CAP LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
0.001 - 1.000%........................ 3,430 $ 288,093,474.09 90.07%
1.001 - 2.000......................... 313 31,330,625.06 9.79
2.001 - 3.000......................... 5 441,335.19 0.14
----------- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-44
<PAGE>
POOL II
LIFETIME FLOOR
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
LIFETIME FLOOR LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
4.001 - 4.500%........................ 1 $ 102,290.18 0.03%
4.501 - 5.000......................... 26 2,594,958.94 0.81
5.001 - 5.500......................... 45 4,646,390.05 1.45
5.501 - 6.000......................... 50 5,084,839.44 1.59
6.001 - 6.500......................... 90 9,066,397.16 2.83
6.501 - 7.000......................... 98 9,836,507.23 3.08
7.001 - 7.500......................... 34 3,580,429.14 1.12
7.501 - 8.000......................... 27 2,943,960.02 0.92
8.001 - 8.500......................... 35 4,188,496.29 1.31
8.501 - 9.000......................... 147 19,264,269.91 6.02
9.001 - 9.500......................... 374 39,326,055.14 12.29
9.501 - 10.000........................ 1,195 100,555,713.48 31.44
10.001 - 10.500....................... 768 56,338,200.32 17.61
10.501 - 11.000....................... 487 35,959,182.56 11.24
11.001 - 11.500....................... 240 17,485,910.81 5.47
11.501 - 12.000....................... 72 4,874,726.73 1.52
12.001 - 12.500....................... 32 2,147,814.98 0.67
12.501 - 13.000....................... 11 731,327.06 0.23
13.001 - 13.500....................... 8 401,833.38 0.13
13.501 - 14.000....................... 6 448,879.64 0.14
14.001 - 14.500....................... 1 92,400.00 0.03
14.501 - 15.000....................... 1 194,851.88 0.06
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-45
<PAGE>
POOL II
NEXT INTEREST ADJUSTMENT DATE
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
NEXT INTEREST ADJUSTMENT DATE LOANS BALANCES LOAN BALANCE
- ------------------------------------------ ------------- ---------------- ---------------------
<S> <C> <C> <C>
November 1998............................. 4 $ 637,150.47 0.20%
December 1998............................. 10 1,385,662.63 0.43
January 1999.............................. 17 2,281,774.61 0.71
February 1999............................. 12 1,768,708.77 0.55
March 1999................................ 2 306,436.03 0.10
April 1999................................ 2 243,440.13 0.08
May 1999.................................. 4 527,101.56 0.16
June 1999................................. 3 365,599.47 0.11
July 1999................................. 4 691,727.06 0.22
August 1999............................... 1 53,821.17 0.02
September 1999............................ 2 278,129.69 0.09
October 1999.............................. 6 750,495.60 0.23
November 1999............................. 8 661,554.64 0.21
December 1999............................. 27 2,433,426.19 0.76
January 2000.............................. 42 4,476,662.42 1.40
February 2000............................. 12 1,130,510.18 0.35
March 2000................................ 36 3,150,341.92 0.98
April 2000................................ 65 6,109,422.19 1.91
May 2000.................................. 78 7,423,848.89 2.32
June 2000................................. 193 18,130,493.31 5.67
July 2000................................. 448 44,546,425.61 13.93
August 2000............................... 579 57,415,264.88 17.95
September 2000............................ 251 21,800,005.52 6.82
October 2000.............................. 28 2,311,750.00 0.72
November 2000............................. 1 146,213.97 0.05
December 2000............................. 1 55,092.25 0.02
January 2001.............................. 1 63,507.03 0.02
February 2001............................. 2 173,234.65 0.05
March 2001................................ 7 768,389.54 0.24
April 2001................................ 1 114,543.93 0.04
May 2001.................................. 4 358,296.04 0.11
June 2001................................. 4 375,945.48 0.12
July 2001................................. 2 126,542.33 0.04
August 2001............................... 8 669,817.66 0.21
September 2001............................ 6 407,400.00 0.13
March 2002................................ 1 37,538.75 0.01
April 2002................................ 4 225,646.86 0.07
May 2002.................................. 32 2,814,415.86 0.88
June 2002................................. 60 4,346,677.30 1.36
July 2002................................. 118 8,846,895.35 2.77
August 2002............................... 838 63,346,912.96 19.80
September 2002............................ 752 53,059,014.55 16.59
October 2002.............................. 69 4,685,289.90 1.46
January 2003.............................. 1 139,506.33 0.04
June 2003................................. 1 98,863.30 0.03
July 2003................................. 1 125,937.36 0.04
----- ---------------- -------
Total:................................ 3,748 $ 319,865,434.34 100.00%
----- ---------------- -------
----- ---------------- -------
</TABLE>
S-46
<PAGE>
POOL II
STATED PURPOSE OF LOAN
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
STATED PURPOSE OF LOAN LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Debt Consolidation.................... 164 $ 8,381,162.54 2.62%
Cashout............................... 223 11,584,672.47 3.62
Purchase Money........................ 471 50,067,201.84 15.65
Rate/Term Refinance................... 2,890 249,832,397.49 78.11
----- ----------------- ------
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
POOL II
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
COMBINED LOAN-TO-VALUE RATIO LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
30.00% and below...................... 35 $ 1,776,023.74 0.56%
30.01 - 40.00......................... 58 2,958,786.89 0.93
40.01 - 50.00......................... 90 4,878,907.74 1.53
50.01 - 60.00......................... 156 10,186,432.47 3.18
60.01 - 65.00......................... 171 11,168,268.51 3.49
65.01 - 70.00......................... 263 20,042,654.66 6.27
70.01 - 75.00......................... 307 23,725,406.42 7.42
75.01 - 80.00......................... 875 76,746,241.26 23.99
80.01 - 85.00......................... 802 71,230,191.34 22.27
85.01 - 90.00......................... 894 88,883,509.94 27.79
90.01 - 95.00......................... 88 7,401,495.55 2.31
95.01 - 100.00........................ 9 867,515.82 0.27
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
- ------------------------
(1) The combined loan-to-value ratios (the "Combined Loan-to-Value Ratios")
shown above are equal with respect to each Loan, to (i) the sum of (a) the
original principal balance of such Loan at the date of origination plus (b)
the remaining balance of the senior lien(s), if any, at the date of
origination of such Loan divided by (ii) the lesser of (a) the value of the
related Mortgaged Property, based upon the appraisal made at the time of
origination of such Loan or (b) the purchase price of such Mortgaged
Property if the Loan proceeds from such Loan are used to purchase such
Mortgaged Property.
POOL II
OCCUPANCY STATUS OF MORTGAGED PROPERTY
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
OCCUPANCY STATUS LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Primary............................... 3,607 $ 310,080,467.63 96.94%
Second Home........................... 22 1,665,742.06 0.52
Investment............................ 119 8,119,224.65 2.54
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-47
<PAGE>
POOL II
FICO SCORE
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
FICO SCORE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Not Available......................... 122 $ 8,599,358.93 2.69%
600 and below......................... 1,903 154,581,710.48 48.33
601 - 610............................. 214 18,701,844.46 5.85
611 - 620............................. 236 20,748,499.13 6.49
621 - 630............................. 224 19,361,875.11 6.05
631 - 640............................. 209 17,526,257.28 5.48
641 - 650............................. 192 17,896,772.53 5.60
651 - 660............................. 162 15,395,131.92 4.81
661 - 670............................. 132 12,444,013.58 3.89
671 - 680............................. 96 9,153,420.89 2.86
681 - 690............................. 74 6,916,544.38 2.16
691 - 700............................. 41 4,535,039.02 1.42
701 - 720............................. 59 5,576,119.86 1.74
721 - 740............................. 40 3,952,265.08 1.24
741 - 760............................. 24 2,410,698.33 0.75
761 - 780............................. 10 1,289,616.88 0.40
781 - 800............................. 10 776,266.48 0.24
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
POOL II
LIEN POSITION
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
LIEN POSITION LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
First................................. 3,748 $ 319,865,434.34 100.00%
----------- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL II
DELINQUENCIES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
DELINQUENCIES LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Current............................... 3,690 $ 313,620,552.04 98.05%
30-59 days............................ 58 6,244,882.30 1.95
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-48
<PAGE>
POOL II
AGE OF LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
AGE OF LOANS (MONTHS) LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Less than 1........................... 2,538 $ 204,871,588.30 64.05%
1 - 5................................. 1,095 103,393,469.44 32.32
6 - 10................................ 108 10,718,983.36 3.35
11 - 15............................... 6 848,125.62 0.27
16 - 20............................... 1 33,267.62 0.01
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
POOL II
REMAINING TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
REMAINING TERM TO NUMBER OF DATE LOAN AGGREGATE
STATED MATURITY (MONTHS) LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
109 - 120............................. 2 $ 238,449.55 0.07%
169 - 180............................. 2 224,325.04 0.07
229 - 240............................. 2 76,879.61 0.02
337 - 348............................. 4 517,160.27 0.16
349 - 360............................. 3,738 318,808,619.87 99.67
----- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
POOL II
ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
ORIGINAL TERM (MONTHS) LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
109 - 120............................. 2 $ 238,449.55 0.07%
169 - 180............................. 2 224,325.04 0.07
229 - 240............................. 2 76,879.61 0.02
349 - 360............................. 3,742 319,325,780.14 99.83
----------- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
S-49
<PAGE>
POOL II
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
PROPERTY TYPE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Detached single family................ 3,188 $ 268,537,682.02 83.95%
Detached PUD.......................... 95 12,347,035.10 3.86
Manufactured single wide.............. 29 1,653,517.46 0.52
Attached PUD.......................... 15 1,188,140.10 0.37
Attached townhouse.................... 24 1,734,388.09 0.54
Attached condo........................ 73 6,129,334.74 1.92
Mixed Use............................. 1 102,100.00 0.03
2-4 Family............................ 200 20,079,793.79 6.28
Manufactured double wide.............. 121 7,846,343.04 2.45
Manufactured triple wide.............. 1 74,800.00 0.02
Multi-Family (SFU).................... 1 172,300.00 0.05
----------- ----------------- ------
Total:............................ 3,748 $ 319,865,434.34 100.00%
----------- ----------------- ------
----------- ----------------- ------
</TABLE>
POOL II
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES (1)
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
Alaska................................ 3 $ 264,344.12 0.08%
Arizona............................... 65 5,710,445.03 1.79
Arkansas.............................. 15 1,062,242.24 0.33
California............................ 142 17,230,923.24 5.39
Colorado.............................. 70 7,404,236.29 2.31
Connecticut........................... 26 2,391,067.80 0.75
Delaware.............................. 12 988,690.62 0.31
District of Columbia.................. 7 605,178.87 0.19
Florida............................... 251 19,702,237.41 6.16
Georgia............................... 150 12,684,711.06 3.97
Idaho................................. 36 2,702,523.03 0.84
Illinois.............................. 343 33,221,431.65 10.39
Indiana............................... 153 10,122,271.61 3.16
Iowa.................................. 13 1,100,793.91 0.34
Kansas................................ 41 2,430,644.96 0.76
Kentucky.............................. 36 2,875,689.44 0.90
Louisiana............................. 36 2,944,382.23 0.92
Maine................................. 35 2,298,943.70 0.72
Maryland.............................. 80 8,597,146.83 2.69
Massachusetts......................... 130 15,389,895.90 4.81
Michigan.............................. 265 19,242,307.94 6.02
Minnesota............................. 74 5,487,382.09 1.72
Mississippi........................... 29 2,351,209.84 0.74
Missouri.............................. 117 7,582,271.45 2.37
Montana............................... 8 577,200.00 0.18
Nebraska.............................. 17 1,029,656.34 0.32
Nevada................................ 25 2,132,912.84 0.67
New Hampshire......................... 40 3,619,211.61 1.13
New Jersey............................ 102 11,524,658.39 3.60
New Mexico............................ 25 1,999,930.55 0.63
New York.............................. 128 12,068,028.22 3.77
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF DATE
NUMBER OF DATE LOAN AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- -------------------------------------- ----------- ----------------- ---------------------
<S> <C> <C> <C>
North Carolina........................ 212 $ 17,649,999.99 5.52%
North Dakota.......................... 1 47,400.00 0.01
Ohio.................................. 191 14,150,706.55 4.42
Oklahoma.............................. 37 1,676,936.92 0.52
Oregon................................ 53 5,377,267.53 1.68
Pennsylvania.......................... 123 8,061,614.63 2.52
Rhode Island.......................... 16 1,601,539.81 0.50
South Carolina........................ 85 6,941,186.89 2.17
South Dakota.......................... 12 741,400.00 0.23
Tennessee............................. 97 7,998,242.74 2.50
Texas................................. 98 6,253,673.17 1.96
Utah.................................. 38 4,350,482.08 1.36
Vermont............................... 19 1,237,499.54 0.39
Virginia.............................. 47 5,304,164.12 1.66
Washington............................ 117 11,512,031.40 3.60
West Virginia......................... 14 735,636.11 0.23
Wisconsin............................. 113 8,796,833.65 2.75
Wyoming............................... 1 86,250.00 0.03
----- ----------------- ------
Total:.............................. 3,748 $ 319,865,434.34 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
- ------------------------
(1) Determined by property address designated as such in the related Mortgage.
S-51
<PAGE>
PAYMENTS ON THE LOANS
The 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 Loan on or before its maturity date. Interest
with respect to the 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. 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 Noteholders 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 Noteholders are entitled to
receive interest calculated on the actual number of days from the last
Remittance Date (or, in the case of the first Remittance Date, from September
29, 1998) to but not including the upcoming Remittance Date at the applicable
Remittance Rate on the outstanding principal balances of the applicable Class of
Notes immediately prior to such Remittance Date. The Servicer is required to
remit to the Indenture Trustee the excess, if any, of the amount of interest the
Noteholders 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 Notes. See "The Transfer and Servicing Agreements-- 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 Transfer
and Servicing Agreements--Servicing and Other Compensation and Payment of
Expenses" herein.
S-52
<PAGE>
With respect to simple interest loans, 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 Notes 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 Notes than if such payment was received on its due date. This
will not affect the total amount of principal to be received by the Noteholders
over the life of the transaction, but it may affect the weighted average lives
of the Notes.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Because the Pool I 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 II Loans may differ from that on the Pool I Loans 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 Class AV Notes may differ from that on the other
Classes of Notes.
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 portfolios of home
equity and home improvement loans.
Unscheduled payments, delinquencies, repurchases of defective Loans and
Defaulted Loans and defaults on the Loans 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 Pool I and Pool II Loans that
have been liquidated (each, a "Liquidated Loan") is equal to or exceeds 25% of
the sum of the Original Pool I and Pool II Principal Balances. The Cross-Over
Date is defined in the Agreement as the date on which the Subordinated Amounts
for each of the Pools are reduced to zero. See "The MBIA Policies and MBIA"
herein.
S-53
<PAGE>
If prepayments of principal are received on the Loans at a rate greater than
that assumed by an investor (including receipt of amounts from the Loans in
other Pool as a result of the cross support features described herein), the
yield will be increased on Notes purchased by such investor at a price less than
par (i.e., the principal balance of a Note 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 Notes
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 Notes may not be offset by a
subsequent like reduction (or increase) in the rate of principal payments. The
weighted average lives of the Notes 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. Delinquencies will generally slow the rate of
payment of principal to the Noteholders since neither the Servicer nor MBIA in
the case of Pool I and Pool II is obligated to advance for delinquent payments
of principal. 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.
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 one month's 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 Excess Spread (as defined herein under "Description of the
Notes--Cross-Support Provisions"), Supplemental Interest Payments or Insured
Payments, the yield on the Notes 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 Remittance Rate on the Class AF-1 and Class AV Notes will be adjusted by
reference to changes in the level of one-month LIBOR, 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 Remittance Rate on the
Class AV Notes and adjust by reference to either six-month LIBOR, which will be
calculated differently for the Pool II Loans and the Class AV Notes, or the
Treasury Index, which will not necessarily correspond to changes in one-month
LIBOR. 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 Class AV Notes.
Certain of the Pool II Loans were originated with 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 Remittance Rates on the Class AV
Notes are limited by the applicable Net Funds Cap, on each Remittance Date
limits on changes in the Pool II Mortgage Interest Rates may limit changes in
the Remittance Rate on the Class AV Notes.
S-54
<PAGE>
The Net Funds Cap for a Pool on a Remittance Date will depend, in part, on
the weighted average of the then-current Mortgage Interest Rates of the Loans in
the related Pool. If the Loans in a Pool bearing higher Mortgage Interest Rates
were to prepay, the weighted average Mortgage Interest Rate of the Loans in the
applicable Pool, and consequently the applicable Net Funds Cap, would be lower
than otherwise would be the case.
The "Final Maturity Date" for each Class of Notes is as follows:
<TABLE>
<CAPTION>
CLASS FINAL MATURITY DATE
- --------- --------------------------------------------------------------------------------------
<S> <C>
AF-1 October 15, 2038
AF-2 October 15, 2038
AV November 15, 2028
</TABLE>
The Final Maturity Date for the (i) Class AF-1 and Class AF-2 Notes with
respect to Pool I, and (ii) Class AV Notes with respect to Pool II, is the
Remittance Date following the latest date upon which a Loan in the related Pool
matures. The weighted average lives of the Notes 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 Notes could occur significantly earlier than the Final Maturity Dates because
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 Notes.
"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
Notes 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 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:
POOL I
<TABLE>
<CAPTION>
INITIAL
ASSUMED CUT-OFF MORTGAGE ORIGINAL TERM REMAINING TERM REMAINING TERM
DATE PRINCIPAL INTEREST OF AMORTIZATION OF AMORTIZATION TO MATURITY (IN AMORTIZATION
BALANCE RATE (%) (IN MONTHS) (IN MONTHS) MONTHS) METHOD
- ----------------- ----------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$ 14,182,696.47 10.951 359 354 172 Balloon
$ 579,965.64 12.041 60 59 59 Level*
$ 5,864,519.92 11.684 119 118 118 Level*
$ 27,279,615.63 10.956 179 178 178 Level*
$ 13,700,453.34 10.787 240 239 239 Level*
$ 6,839,491.28 11.593 299 298 298 Level*
$ 56,566,282.96 9.930 360 359 359 Level*
$ 1,151,295.14 9.157 480 479 479 Level*
$ 2,705,832.85 11.757 59 58 58 Level
$ 21,894,960.83 11.488 117 116 116 Level
$ 98,150,125.12 11.028 180 178 178 Level
$ 50,718,992.05 10.951 239 238 238 Level
$ 22,420,988.90 11.521 300 299 299 Level
$ 206,721,558.44 10.300 360 358 358 Level
$ 6,223,221.43 9.869 480 479 479 Level
</TABLE>
- ------------------------
* Denotes 90-Day Deferred Loans.
S-55
<PAGE>
POOL II
<TABLE>
<CAPTION>
INITIAL ORIGINAL REMAINING SUBSEQUENT
ASSUMED MORTGAGE TERM OF TERM TO GROSS INITIAL PERIODIC LIFETIME MONTHS
CUT-OFF DATE INTEREST AMORTIZATION MATURITY MARGIN PERIODIC RATE CAP LIFETIME FLOOR TO RESET
PRINCIPAL BALANCE RATE (%) (IN MONTHS) (IN MONTHS) (%) CAP (%) (%) CAP (%) (%) DATE
- ----------------- -------- ------------ ----------- ------ -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6-MONTH LIBOR
$ 13,497,838.15 9.714 360 360 5.300 3.000 1.000 15.714 9.714 24
$ 73,141,514.19 10.058 360 360 6.199 3.000 1.000 16.058 10.058 48
$ 9,147,349.67 10.051 354 346 6.609 2.703 1.040 16.583 9.575 16
$ 1,130,510.18 10.143 360 354 6.526 2.959 1.075 16.394 8.192 18
$ 3,529,001.27 10.248 360 355 6.877 2.710 1.217 16.710 9.387 19
$ 7,214,761.61 10.023 360 356 6.346 2.775 1.032 16.291 9.229 20
$ 9,889,297.94 10.004 360 357 6.296 2.763 1.079 16.307 9.415 21
$ 22,130,946.23 10.250 360 358 6.831 2.746 1.079 16.734 9.826 22
$ 45,460,407.13 10.135 360 359 6.490 2.717 1.172 16.630 9.192 23
$ 83,576,120.65 10.081 360 360 6.080 2.843 1.041 16.317 9.417 24
$ 3,093,131.13 10.067 360 357 6.693 2.910 1.056 16.638 9.570 33
$ 5,431,157.99 9.760 360 357 6.135 3.000 1.000 15.760 9.760 45
$ 690,967.55 10.186 360 359 6.233 3.000 1.000 16.186 10.188 47
$ 69,720,829.45 10.123 360 360 6.220 3.000 1.000 16.126 10.108 48
$ 78,908.36 10.000 360 356 3.000 1.000 1.000 16.000 3.000 2
$ 637,150.47 9.208 360 356 5.829 1.000 1.000 15.208 8.394 3
$ 2,055,006.81 9.759 343 341 6.113 1.062 1.062 16.303 9.225 4
$ 5,417,879.64 9.767 360 358 6.632 1.458 1.289 16.223 8.949 6
1-YEAR CMT
$ 4,157,221.58 9.773 360 357 6.153 2.096 1.911 16.315 8.790 11
<CAPTION>
ASSUMED
CUT-OFF DATE RESET AMORTIZATION
PRINCIPAL BALANCE FREQUENCY METHOD
- ----------------- --------- ------------
<S> <C> <C>
6-MONTH LIBOR
$ 13,497,838.15 6 Full*
$ 73,141,514.19 6 Full*
$ 9,147,349.67 6 Full
$ 1,130,510.18 6 Full
$ 3,529,001.27 6 Full
$ 7,214,761.61 6 Full
$ 9,889,297.94 6 Full
$ 22,130,946.23 6 Full
$ 45,460,407.13 6 Full
$ 83,576,120.65 6 Full
$ 3,093,131.13 6 Full
$ 5,431,157.99 6 Full
$ 690,967.55 6 Full
$ 69,720,829.45 6 Full
$ 78,908.36 6 Full
$ 637,150.47 6 Full
$ 2,055,006.81 6 Full
$ 5,417,879.64 6 Full
1-YEAR CMT
$ 4,157,221.58 12 Full
</TABLE>
- ------------------------
* Denotes 90-Day Deferred Loans.
S-56
<PAGE>
The following tables also have been prepared assuming (i) all distributions
with respect to the Notes will be made at the scheduled times as described below
under "Description of the Notes--Distributions on the Notes," (ii) distributions
on the Notes are received in cash on the 15th day of each month, commencing in
October 1998, (iii) prepayments represent payment in full of individual Loans
and are received on the last day of each month (commencing in September 1998)
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 and that all other
fees will be as set forth in the Agreement, (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 Notes are purchased on September 29, 1998, (viii) with respect to the Loans,
six-month LIBOR and one-year CMT remain constant at 5.34375% and 4.58%,
respectively and (ix) with respect to the Notes, one-month LIBOR remains
constant at 5.52734%.
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
Notes 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, the "100% Prepayment Assumption" assumes a CPR of 2.60% of the then
outstanding principal balance of the respective Pool I Loans in the first month
of the life of such Loans and an additional 2.60% per annum, respectively, in
each month thereafter until the tenth month. Beginning in the tenth month and in
each month thereafter during the life of the respective Loans, the "100%
Prepayment Assumption" with respect to Pool I assumes a CPR of 26% per annum
each month. With respect to Pool II, the "100% Prepayment Assumption" assumes a
CPR of 30% per annum of the then outstanding principal balance of the adjustable
rate Pool II Home Equity Loans each month. 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 prepayment rates equal to 100% of the related Prepayment Assumption,
125% Prepayment Assumption assumes 125% of 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.
S-57
<PAGE>
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.
CLASS AF-1 NOTES
<TABLE>
<CAPTION>
PERCENTAGE OF WEIGHTED
PREPAYMENT AVERAGE LIFE EARLIEST RETIREMENT
ASSUMPTION (YEARS)(4) EXPECTED MATURITY DATE(1)
- ------------- --------------- ---------------------- ----------------------
<C> <C> <S> <C>
0% 16.47 August 15, 2038 February 15, 2028
75% 4.35 August 15, 2038 August 15, 2010
100%(2) 3.34 August 15, 2038 September 15, 2007
125% 2.68 August 15, 2038 October 15, 2005
150% 2.22 August 15, 2038 June 15, 2004
</TABLE>
CLASS AF-2 NOTES (3)
<TABLE>
<CAPTION>
PERCENTAGE OF WEIGHTED
PREPAYMENT AVERAGE LIFE EARLIEST RETIREMENT
ASSUMPTION (YEARS)(4) EXPECTED MATURITY DATE(1)
- ------------- ------------- ---------------------- ----------------------
<C> <C> <S> <C>
0% 16.47 August 15, 2038 February 15, 2028
75% 4.35 August 15, 2038 August 15, 2010
100%(2) 3.34 August 15, 2038 September 15, 2007
125% 2.68 August 15, 2038 October 15, 2005
150% 2.22 August 15, 2038 June 15, 2004
</TABLE>
CLASS AV NOTES
<TABLE>
<CAPTION>
PERCENTAGE OF WEIGHTED
PREPAYMENT AVERAGE LIFE EARLIEST RETIREMENT
ASSUMPTION (YEARS)(4) EXPECTED MATURITY DATE(1)
- ------------- --------------- ---------------------- ----------------------
<C> <C> <S> <C>
0% 22.17 September 15, 2028 February 15, 2028
75% 3.85 September 15, 2028 August 15, 2010
100%(2) 2.80 September 15, 2028 September 15, 2007
125% 2.14 September 15, 2028 October 15, 2005
150% 1.70 September 15, 2028 June 15, 2004
</TABLE>
- ------------------------
(1) Assuming early termination of the Trust when the aggregate principal balance
of the Loans declines to a level equal to 5% of the aggregate Original Pool
Principal Balances.
(2) Pricing Assumption.
(3) Reflects experience of the Class AF-2 Notes in the aggregate, without taking
into account random distributions of principal by lot or distributions of
principal in integral multiples of $1,000. Therefore, it is unlikely that
any individual holder of a Class AF-2 Note will realize the Weighted Average
Life and Expected Maturity set forth for the Percentage of Prepayment
Assumptions listed above.
(4) To Maturity.
S-58
<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture, 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 Notes, 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 Notes, the Indenture and the Agreement. Terms used herein and not otherwise
defined will have the meanings set forth in the Agreement. See "The Transfer and
Servicing Agreements" herein.
GENERAL
The Pool I Notes generally will receive payments distributable on or with
respect to the Home Equity Loans in Pool I. The Pool II Notes generally will
receive payments distributable on or with respect to the Home Equity Loans in
Pool II. However, as a result of the cross-support provisions described herein,
the holders of each Class of Notes may receive cash as credit support from any
Loan in any Pool. See "--Cross Support Provisions."
The Notes are obligations of the Trust only and will not represent
obligations of the Representative, the Originators or any of their respective
affiliates. The Notes will be issued in book-entry form in minimum denominations
of $25,000 original principal amount and integral multiples of $1,000 in excess
thereof.
Definitive Notes, if issued, will be transferable and exchangeable at the
corporate trust office of the Indenture Trustee or, at the election of the
Indenture Trustee, at the office of a Note Registrar appointed by the Indenture
Trustee. No service charge will be made for any registration of exchange or
transfer, but the Indenture 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 that are
subject to the Agreement; (b) amounts that from time to time are required by the
Agreement to be deposited in the Note Distribution Account, the Principal and
Interest Account, the Expense Account, the Rounding Account and the Insurance
Account, or to be invested in Permitted Instruments; (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; (e) the Rate Agreement and (f) the MBIA
Policies and any proceeds thereof. Additionally, the Holders of the Pool I and
Pool II Notes will have the benefit of the Spread Account.
DISTRIBUTIONS ON THE NOTES
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 October 1998 (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 Notes
has been reduced to zero, the Indenture Trustee or Paying Agent will be required
to distribute to the persons in whose name a Note is registered at the close of
business on the last day of the month immediately preceding the month of the
related Remittance Date (the "Record Date"), such Holder's Percentage Interest
multiplied by the amount available to be paid to the respective Class of Notes
for such Remittance Date. For so long as the Notes are in book-entry form with
DTC, the only "Holder" of the Notes will be Cede. See "--Book-Entry Notes."
Notwithstanding the foregoing, with respect to the Class AF-2 Notes, on each
Remittance Date, the Indenture Trustee or Paying Agent will be required to
distribute to the persons in whose name a Class AF-2 Note 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
Class AF-2 Notes for such Remittance Date. The remainder of the amount being
distributed to the Class AF-2 Notes on such Remittance Date will be allocated as
principal to the specific Notes of such Class selected no later than 5 Business
Days prior to the related Remittance Date by lot or such other manner as
S-59
<PAGE>
may be determined, which allocations will be made only in amounts equal to
$1,000 and integral multiples of $1,000 in excess thereof.
The "Class Principal Balance" of a Class of Notes as of any date of
determination is the original principal balance of such Class of Notes, less (i)
the sum of all amounts (including the principal portion of any related Insured
Payments) previously distributed by the Indenture Trustee as principal on the
applicable Class of Notes, and (ii) any actual loss of principal suffered by the
related Noteholders due to the failure of MBIA to perform its obligations under
the related MBIA Policy.
A Noteholder's "Percentage Interest" is that fraction, expressed as a
percentage, the numerator of which is the original denomination of such
Noteholder's Note and the denominator of which is the original aggregate Class
Principal Balance of the respective Class of Notes.
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 California, Minnesota, New
York or North Carolina are authorized or obligated by law or executive order to
be closed.
As more fully described herein, distributions with respect to each Class of
Notes will be payable, after payment of certain fees, generally from (i)
receipts on the Loans of the applicable Pool, (subject to certain adjustments
described herein as a result of the cross support provisions), (ii) Monthly
advances and payments of Compensating Interest by the Servicer, (iii)
Supplemental Interest Payments and (iv) amounts transferred from the Spread
Account and payments under the related MBIA Policy (with respect to each Pool,
the "Pool Available Amount").
The "Due Period" with respect to any Remittance Date is the calendar month
preceding the month of such Remittance Date.
CURRENT INTEREST
On each Remittance Date, to the extent of the applicable Pool Available
Amount, the Holders of each Class of Notes will receive interest based on the
actual number of days since the last Remittance Date (or, in the case of the
first Remittance Date, from September 29, 1998) up to but not including the
upcoming Remittance Date at the related Remittance Rate on the respective Class
Principal Balance outstanding immediately prior to such Remittance Date.
Interest with respect to the Notes will accrue on the basis of a 360-day
year consisting of the actual number of days elapsed since interest was last
paid or in the case of the first Remittance Date, from September 29, 1998.
The amount of interest each Class of Notes is entitled to receive on each
Remittance Date at the related Remittance Rate is referred to as the "Current
Interest Requirement" for such Class.
Interest will be allocated between the Class AF-1 and Class AF-2 Notes, pro
rata in accordance with their respective Current Interest Requirements.
If on a particular Remittance Date, the Pool Available Amount for each Class
of Notes of the related Pool is less than the aggregate Current Interest
Requirement for each Class of Notes of the related Pool, the amount of the
shortfall for each such Class of Notes, together with interest thereon at the
applicable Remittance Rates to the extent permitted by law (each, a "Class
Interest Shortfall Carryforward Amount") will be carried forward and distributed
as described below. However, the Class Interest Shortfall Carryforward Amount
will be paid by MBIA under the MBIA Policies and there should be no carry
forward thereof. Class Interest Shortfall Carryforward Amounts do not include
any Noteholders' Interest Carryover.
LIBOR for each Interest Period after the first Interest Period will be
determined on the second LIBOR Determination Date preceding the start of each
such Interest Period. See "The Transfer and Servicing Agreements--Calculation of
LIBOR."
If on any Remittance Date the Remittance Rate for a Class of Notes is based
upon the applicable Net Funds Cap, the excess of (i) the amount of interest such
Class of Notes would be entitled to receive on
S-60
<PAGE>
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 14.0% per annum), over (ii) the amount of interest such Class will
receive on such Remittance Date at the applicable Net Funds Cap, together with
the unpaid portion of any such excess from prior Remittance Dates (and interest
accrued thereon at the then applicable Remittance Rate, without giving effect to
the Net Funds Cap, but in no event exceeding the applicable maximum rate set
forth above) is referred to herein as the "Noteholders' Interest Carryover." Any
Noteholders' Interest Carryover will be paid on future Remittance Dates as set
forth herein under "--Cross-Support Provisions." No Noteholders' Interest
Carryover will be paid to a Class of Notes after its Class Principal Balance is
reduced to zero. The ratings of the Notes do not address the likelihood of the
payment of the amount of any Noteholders' Interest Carryover, and the MBIA
Policies do not insure payment of the Noteholders' Interest Carryover.
PRINCIPAL DISTRIBUTION AMOUNTS
Holders of the Pool I and Pool II Notes will be entitled to receive on each
Remittance Date as payments of principal, in the order of priority set forth
below, in the aggregate, the lesser of (i) the remaining applicable Pool
Available Amount in the applicable Note Distribution Account on such Remittance
Date after payment of the Current Interest Requirements on the Notes in the
applicable Pool, reimbursement to the Rounding Account as described below and
payment to the Certificateholders of certain excess amounts received with
respect to Supplemental Interest Payments and (ii) the applicable Pool Principal
Distribution Amount.
For any Remittance Date, the "Pool Principal Distribution Amount" for each
Pool is equal to 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,
(iv) that portion of the purchase price for any Loan of the related Pool
repurchased by The Money Store Inc. which represents principal and any
Substitution Adjustments, in either case to the extent received by the
Indenture Trustee as of the related Determination Date,
(v) any proceeds representing principal received by the Indenture
Trustee in connection with the liquidation of a Pool or termination of the
Trust, and
(vi) the amount of any Realized Loss related to a Pool I or Pool II
Loan, as the case may be, that became a Liquidated Loan during the related
Due Period.
POOL I
On each Remittance Date, the portion of the Pool Principal Distribution
Amount for Pool I available for distribution will be distributed to the Holders
of the Class AF-1 and Class AF-2 Notes, pro rata based upon their respective
Class Principal Balance, until the Class Principal Balance of each such Class is
reduced to zero and the Noteholders of each such Class have received an amount
equal to the amount described in clause (iv) of the definition of Distribution
Amount (as defined herein) that is recovered from such Noteholders.
On each Remittance Date, the Holders of the Class AF-1 and Class AF-2 Notes
also will receive amounts transferred from an account (the "Rounding Account")
to be established by the Holder of the GP Interest with the Indenture Trustee as
part of the Trust. Principal payments distributed to the Holders of the Class
AF-1 and Class AF-2 Notes are required to be made in integral multiples of
$1,000. If on any
S-61
<PAGE>
Remittance Date the amount of principal to be distributed to the Holders of the
Class AF-1 or Class AF-2 Notes is not an even multiple of $1,000, such holders
will receive from the Rounding Account the amount of such difference. The
Rounding Account will be reimbursed, to the extent funds are available, on the
next Remittance Date prior to principal being paid to the holders of the Class
AF-1 and Class AF-2 Notes.
POOL II
On each Remittance Date, the portion of the Pool Principal Distribution
Amount for Pool II available for distribution will be distributed to the Holders
of the Class AV Notes until the Class Principal Balance thereof is reduced to
zero and the Noteholders of the Class AV Notes have received an amount equal to
the amount described in clause (iv) of the definition of Distribution Amount
that is recovered from such Noteholders.
MBIA RELATED PROVISIONS
On any Remittance Date, the "Distribution Amount" for the Pool I or Pool II
Notes will equal the sum of (i) the Current Interest Requirement for such Pool,
(ii) the Principal Distribution Amount for such Pool, (iii) the Carryforward
Amount for such Pool, and (iv) any amount received by the Indenture 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 "Carryforward Amount" for Pool I or Pool II 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
Notes 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 Remittance Rate for the
related Class of Notes.
The Carryforward 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 the Pool I and Pool II Noteholders to receive
payments under the Pool I and Pool II Notes 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
Pool I and Pool II Noteholders to receive the entire Distribution Amount on each
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 Pool I or Pool II Noteholder
directly unless such Noteholder has returned principal or interest paid on a
related Note to such trustee in bankruptcy, in which case such payment will be
disbursed to such Noteholder.
Except for clause (vi) of the definition of Pool Principal Distribution
Amount, the definitions of the Principal Distribution Amount for Pool I and Pool
II 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."
The Agreement provides that the Indenture Trustee or Paying Agent will (i)
receive as attorney-in-fact of each Holder of the Pool I and Pool II Notes 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 (as by paying through the Indenture
Trustee), to the Holders of the Notes, 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 Pool I or Pool II
Notes and
S-62
<PAGE>
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 Pool I or Pool II Note is required by the Agreement to
notify the Indenture Trustee promptly upon the receipt of a court order to the
effect that amounts previously received by such Pool I or Pool II Noteholder 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 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 Noteholders 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.
The Indenture Trustee will have the right, on behalf of Pool I and Pool II
Noteholders, to sue MBIA in the event any required Insured Payment is not made
in accordance with the terms of the applicable MBIA Policy.
CROSS-SUPPORT PROVISIONS
As a result of the cross-support provisions described below, on each
Remittance Date the portion of the "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 Notes in the related Pool has been allocated its interest for such
Remittance Date and certain expenses of the Trust have been paid) remaining
after payment of interest on the Notes as described under "Distributions on the
Notes--Current Interest" will be available to offset Realized Losses with
respect to the related Pool and fund certain payments. Any remaining Excess
Spread, net of certain amounts used to reimburse MBIA, will be applied in the
following order of priority on such Remittance Date:
(i) first, to reduce the related Carryforward Amounts;
(ii) second, for deposit in the Spread Account until the amount on
deposit therein equals the Specified Spread Account Requirement;
(iii) third, to reimburse the Servicer and/or The Money Store Inc. for
certain amounts owing to it with respect to the applicable Pool;
(iv) fourth, to provide funds to the Notes of the other Pool to cover
current Realized Losses;
(v) fifth, to pay the Noteholders any Noteholders' Interest Carryover
owing for such Remittance Date and all prior Remittance Dates (but only with
respect to collections relating to the applicable Pool of Loans);
(vi) sixth, to pay any remainder to the Certificates as specified in the
Agreement.
SPREAD ACCOUNT
FUNB, as initial holder of the Certificates, will establish a reserve
account (the "Spread Account") with FUNB in the name of the Indenture Trustee
(in such capacity, FUNB is referred to as the "Spread Account Depositor"). The
Spread Account will not be part of the Trust Fund but will be pledged to the
Indenture Trustee as security for the obligations of the Spread Account
Depositor under the Agreement pursuant to an agreement (the "Spread Account
Agreement") between the Spread Account Depositor and the Indenture Trustee. On
each Remittance Date, certain amounts otherwise payable to the Holders of the
Certificates, will instead be deposited into the Spread Account until the amount
on deposit therein equals the amount required pursuant to the terms of the
Insurance Agreement.
The aggregate amount required to be on deposit at any time in the Spread
Account and the maximum amount ever required to be on deposit in the Spread
Account will be determined in accordance with the terms of the Insurance
Agreement (such amount, the "Specified Spread Account Requirement").
S-63
<PAGE>
Amounts, if any, on deposit in the Spread Account up to the Subordinated Amount
(as defined below) plus all reinvestment earnings on the funds on deposit in the
Spread Account will be available to fund any Insured Payments (as defined below)
otherwise required to be made on a Remittance Date with respect to the Pool I
and Pool II Notes, without distinction as to the Pool.
The Insurance Agreement provides that, if aggregate withdrawals from the
Spread Account with respect to shortfalls on the Pool I and Pool II Notes exceed
the amount specified therein (such amount, the "Subordinated Amount"), no
further withdrawals with respect to such shortfalls may be made from the Spread
Account, and the Specified Spread Account Requirement will thereafter be zero.
The Insurance Agreement, including the provisions thereof relating to the
required level of funding of the Spread Account, may be amended in any respect
without the consent of, or notice to, the Noteholders. Such amendment could
reduce the funding requirements of the Spread Account. Also, as amounts in the
Spread Account will be available for the Pool I and Pool II Notes, a
disproportionate amount of funds may be used to benefit one Class of Pool I or
Pool II Notes, thereby reducing the funds available for the other Classes of
Pool I and Pool II Notes. Notwithstanding any reduction in the funding
requirements of the Spread Account, or depletion of the Subordinated Amount or
the Spread Account, in accordance with the terms of the related MBIA Policy,
MBIA will be obligated on each Remittance Date to fund the full amount of the
Distribution Amounts for the Pool I and Pool II Notes on such Remittance Date.
The Spread Account may be modified without the consent of the Holders of the
Notes.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT AND CERTAIN OTHER RISKS
In general, the protection afforded by the Spread Account and by the MBIA
Policies is protection for credit risk and not for prepayment risk and does not
apply to the Noteholders' Interest Carryover. The Spread Account 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.
SUPPLEMENTAL INTEREST PAYMENTS
The Trust will be entitled to receive supplemental payments of interest (the
"Supplemental Interest Payments") pursuant to an interest rate agreement (the
"Rate Agreement") between Merrill Lynch Derivative Products AG ("MLDP") and the
Trust. If for any Remittance Date, LIBOR (as calculated in accordance with the
Rate Agreement) exceeds the Strike Price (as defined below) for such Remittance
Date, the Supplemental Interest Payments due under the Rate Agreement for such
Remittance Date will be equal to the product of (i) the difference between LIBOR
and the applicable Strike Price, (ii) the applicable Notional Amount and (iii) a
factor related to the number of days elapsed since the last Remittance Date (or
the Closing Date in the case of the October 1998 Remittance Date). For each
applicable Remittance Date, the "Strike Price" will equal 6.0% per annum and the
"Notional Amount" will equal the dollar amount set forth for the month in which
such Remittance Date occurs as set forth on the schedule attached hereto as
Annex II.
Supplemental Interest Payments are intended to provide the holders of the
Class AF-1 and Class AF-2 Notes with an additional payment equal to the
difference, if any, between (i) the amount of interest accrued on the Class AF-1
and Class AF-2 Notes for an Interest Period at the applicable Remittance Rate
(without giving effect to the applicable Net Funds Cap) but in no event
exceeding 14.0% per annum and (ii) the amount of interest so accrued on such
Classes of Notes based upon the applicable Net Funds Cap without giving effect
to Supplemental Interest Payments (such difference, the "Supplemental Interest
Amount"). However, in certain circumstances the Supplemental Interest Payments
received in respect of a Remittance Date may be less than the related
Supplemental Interest Amount. In such event, such excess will be treated as
Noteholders' Interest Carryover and paid, to the extent funds are available for
such purpose, on future Remittance Dates as set forth under "--Cross-Support
Provisions."
If the Pool I Loans prepay at a rate slower than the rate used in deriving
the Notional Amounts set forth in Annex II, for any Remittance Date the actual
balance of the Pool I Loans (and, therefore, the aggregate Class Principal
Balance of the Pool I Notes) may exceed the Notional Amount. If this were to
S-64
<PAGE>
occur during periods when LIBOR is increasing, Supplemental Interest Payments
may not equal the Supplemental Interest Amount for the related Remittance Date.
Conversely, if the Pool I Loans prepay at a faster rate than that assumed in
deriving the Notional Amounts, for any Remittance Date the Notional Amount may
exceed the actual balance of the Pool I Loans (and, therefore, the aggregate
Class Principal Balance of the Pool I Notes). If a Supplemental Interest Payment
is made for any Remittance Date on which the Notional Amount exceeds the
aggregate Class Principal Balance of the Pool I Notes, a portion of the
Supplemental Interest Payment allocable to such excess and not needed to pay the
Current Interest Requirements will be paid to the Certificateholders.
MLDP is a Swiss share company originally established as a Delaware
corporation in November, 1991. MLDP's principal place of business is at
Stauffacherstrasse 5, CH-8004 Zurich, Switzerland.
REPORTS TO NOTEHOLDERS
On each Remittance Date, the Indenture Trustee will be required to forward
to each Noteholder of the related Pool (which will be Cede, as registered Holder
of each Class of Notes and the nominee of DTC, unless and until Definitive Notes
are issued), a statement prepared by the Trust Administrator (based in part on
information provided by the Servicer), which generally will set forth, among
other things:
(a) the Distribution Amounts for each such Pool on such Remittance Date,
in the aggregate and by component and listed separately for the portions
relating to each related Class of Pool I or Pool II Notes;
(b) the Principal Distribution Amounts for each such Pool for such
Remittance Date, in the aggregate and listed separately for the portion
relating to each related Class of Pool I or Pool II Notes;
(c) the Current Interest Requirements for each related Class of Pool I
or Pool II Notes for such Remittance Date;
(d) the applicable rate of LIBOR and the Auction Rate for such
Remittance Date;
(e) the Remittance Rate for each Class of Notes for such Remittance Date
and if such Remittance Rate was based on the applicable Net Funds Cap, what
it would be if based on LIBOR plus the applicable margin or the Auction
Rate, as the case may be;
(f) the Net Funds Cap for each Class of Notes for such Remittance Date;
(g) if the Remittance Rate for a Class of Notes for such Remittance Date
is based on the applicable Net Funds Cap and such Class is entitled to
receive Noteholders' Interest Carryover, the amount of any Noteholders'
Interest Carryover allocated to such Class of Notes for such Remittance
Date;
(h) the amount of the distribution, if any, allocable to Noteholders'
Interest Carryover and the amount of any unpaid Noteholders' Interest
Carryover for all prior Remittance Dates after giving effect to such
distribution;
(i) the total amount of any Insured Payments included in the
Distribution Amount for each such Pool on such Remittance Date, listed
separately for each related Class of Pool I or Pool II Notes;
(j) the amount of Supplemental Interest Payments, if any, and the
portion thereof being distributed to the Certificateholders;
(k) the Specified Spread Account Amount for such Remittance Date and the
portion of the amounts on deposit in Spread Account that constitute
investment earnings and the Specified Spread Account Requirement for such
Remittance Date;
(l) the Class Principal Balances for each Class of Notes and the
Principal Factors (as defined below) after giving effect to the
distributions of principal on each related Class of Pool I or Pool II Notes
on such Remittance Date;
S-65
<PAGE>
(m) 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;
(n) 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; and
(o) the number and aggregate Principal Balances of Defaulted Loans
repurchased at the option of the Servicer.
As to any Remittance Date, the "Principal Factor" for a Class of Notes 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
principal 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 Note with a $25,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture Trustee
will be required to mail to each person who at any time was a Holder of Notes of
the related Pool during such year, a statement prepared by the Trust
Administrator containing the information set forth in clauses (a) through (c)
above aggregated for such calendar year, or, in the case of each person who was
a Holder of a Note for a portion of such calendar year, setting forth such
information for each month thereof.
All reports prepared by the Trust Administrator and forwarded to the
Indenture Trustee will be based upon statements supplied to the Trust
Administrator by the Servicer.
BOOK-ENTRY NOTES
The Notes will be book-entry Notes (the "Book-Entry Notes"). Persons
acquiring beneficial ownership interests in the Notes ("Note Owners") will hold
their Notes 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 Notes will
be issued in one or more Notes which equal the aggregate principal balance of
the Notes 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 Notes in minimum denominations
representing original principal balances of $1,000 and integral multiples of
$1,000 in excess thereof. Except as described below, no person acquiring a
Book-Entry Note (each, a "beneficial owner") will be entitled to receive a
physical Note representing such Note (a "Definitive Note"). Unless and until
Definitive Notes are issued, it is anticipated that the only "Noteholder" of the
Notes will be Cede & Co., as nominee of DTC. Note Owners will not be Noteholders
as that term is used in the Indenture or the Agreement. Note Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
S-66
<PAGE>
The beneficial owner's ownership of a Book-Entry Note 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 Note 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).
Note Owners will receive all distributions of principal of, and interest on,
the Notes from the Indenture Trustee through DTC and DTC participants. While the
Notes 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 Notes and is required
to receive and transmit distributions of principal of, and interest on, the
Notes. Participants and indirect participants with whom Note Owners have
accounts with respect to Notes are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Note Owners. Accordingly, although Note Owners will not possess
Notes, the Rules provide a mechanism by which Note Owners will receive
distributions and will be able to transfer their interest.
Note Owners will not receive or be entitled to receive Notes representing
their respective interests in the Notes, except under the limited circumstances
described below. Unless and until Definitive Notes are issued, Note Owners who
are not Participants may transfer ownership of Notes only through Participants
and indirect participants by instructing such Participants and indirect
participants to transfer Notes, by book-entry transfer, through DTC for the
account of the purchasers of such Notes, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Notes 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 Note 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 Notes, see "GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I 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 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,
S-67
<PAGE>
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 Notes, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Notes 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 Notes. Transactions may be settled in Cedel
Bank in numerous 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 Notes 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 Notes to specific securities clearance accounts. The
Euroclear
S-68
<PAGE>
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions on the Book-Entry Notes will be made on each Distribution Date
by the Indenture 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 Notes 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 Notes that it
represents.
Under a book-entry format, beneficial owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede. Distributions with respect to Notes
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 Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical Notes for such Book-Entry
Notes. In addition, issuance of the Book-Entry Notes in book-entry form may
reduce the liquidity of such Notes in the secondary market since certain
potential investors may be unwilling to purchase Notes for which they cannot
obtain physical Notes.
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 Notes of such beneficial owners are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes, Cedel Bank or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Noteholder under the Indenture or 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
Notes which conflict with actions taken with respect to other Notes.
Definitive Notes will be issued to beneficial owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Servicer
advises the Indenture 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 Notes and the Servicer or the
Indenture Trustee is unable to locate a qualified successor, (b) the Servicer,
at its sole option, with the consent of the Indenture Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default (as defined herein), beneficial owners having Percentage
Interests aggregating not less than 51% of the aggregate Current Principal
Balance of the Book-Entry Notes advise the Indenture 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 Indenture Trustee will be required to notify all
beneficial owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global note or notes
representing the Book-Entry Notes and instructions for re-registration, the
Indenture Trustee will issue
S-69
<PAGE>
Definitive Notes, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Notes and Noteholders under the Indenture and the
Agreement.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes 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 Indenture Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes held by Cede &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
THE MBIA POLICIES AND MBIA
The following information has been furnished by MBIA for use herein.
MBIA, in consideration of the payment of the premium and subject to the
terms of the MBIA Policies, unconditionally and irrevocably guarantees to any
Owner (as described below) that an amount equal to each full and complete
Insured Payment will be received by the Indenture Trustee, or its successor, on
behalf of the Owners, for distribution by the Indenture 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 Indenture Trustee, whether or not such funds are properly
applied by the Indenture 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 Pool I or Pool II Notes, unless such
acceleration is at the sole option of MBIA.
Notwithstanding the foregoing paragraph, the MBIA Policies do not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability). Further, the MBIA Policies do not guaranty
payment of any Noteholders' 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 the order requiring
the return of a preference payment, (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 Pool I or Pool II Notes 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 Pool I or Pool II Note 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
S-70
<PAGE>
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 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 Indenture Trustee and
the Indenture 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 Indenture 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 Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
Subject to the terms of the Agreement, MBIA shall be subrogated to the
rights of each Owner to receive the payments under the Notes to the extent of
any payment by MBIA under the related MBIA Policy.
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:
"Agreement" means the Sale and Servicing Agreement, dated as of August 31,
1998, among The Money Store Trust 1998-C, the Originators and The Money Store
Inc., without regard to any amendment or supplement thereto, unless such
amendment or supplement has been approved in writing by MBIA.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which MBIA and banking institutions in New York City or in the city in which the
corporate trust office of the Indenture Trustee is located are authorized or
obligated by law or executive order to close.
"Deficiency Amount" means with respect to any Remittance Date and with
respect to the Pool I or Pool II Notes, (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 fees of the Remarketing Agent), the Excess Spread
applicable to such Pool for such Remittance Date, the Supplemental Interest
Payments, if any, for such Remittance Date and the amount on deposit in the
Spread Account, plus (ii) the excess, if any, of (a) the Class Principal Balance
of the Notes 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 by MBIA under the applicable MBIA Policy) exceeds (b) the aggregate
principal balances of the related Pool of Loans as of the close of business on
the last day of the related Due Period plus the amount, if any, in the Spread
Account on such date and allocated to such Pool of Loans (after application of
clause (i) above).
"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 Indenture Trustee specifying the Insured
Payment which shall be due and owing on the applicable Remittance Date.
"Owner" means each holder (other than the Trust) of a Pool I or Pool II Note
who, on the applicable Remittance Date, is entitled under the terms of the
applicable Class of Pool I or Pool II Notes to payment thereunder.
S-71
<PAGE>
"Preference Amount" means any amount previously distributed to an Owner of
the Notes 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, unless such amendment or supplement
has been approved in writing by MBIA.
Any notice under the MBIA Policies or service of process on the Fiscal Agent
may be made at the address listed below for the Fiscal Agent or such other
address as MBIA shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New York,
New York 10006, Attention: Municipal Registrar and Paying Agency, or such other
address as the Fiscal Agent shall specify to the Indenture Trustee in writing.
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.
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 Pool I or Pool II Notes.
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 domiciled in the State of New York and licensed to
do business in and is subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. MBIA has two European branches, one in the Republic of France
and the other in the Kingdom of Spain. New York has laws prescribing minimum
capital requirements, limiting classes and concentrations of investments and
requiring the approval of policy rates and forms. State laws also regulate the
amount of both the aggregate and individual risks that may be insured, the
payment of dividends by MBIA, changes in control and transactions among
affiliates. Additionally, MBIA is required to maintain contingency reserves on
its liabilities in certain amounts and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding stock
of Capital Markets Assurance Corporation ("CMAC"), through a merger with its
parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has ceded
all of its net insured risks (including any amounts due but unpaid from third
party reinsurers), as well as its unearned premiums and contingency reserves to
MBIA. MBIA Inc. is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
MBIA Inc., and its subsidiaries as of December 31, 1997 and December 31, 1996
and for each of the three years in the period ended December 31, 1997, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1997 and
the consolidated financial statements of MBIA and its subsidiaries as of June
30, 1998 and for the six month periods ended June 30, 1998 and June 30, 1997
included in the Quarterly Report on Form 10-Q of MBIA Inc. for the period ending
June 30, 1998, are incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent
S-72
<PAGE>
that a statement contained herein or in any other subsequently filed document
which is also incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of MBIA and its subsidiaries included in documents
filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be a part hereof from the respective dates of filing such documents.
The tables below present 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
--------------------------
DECEMBER 31, JUNE 30,
1997 1998
------------- -----------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................................................... $ 5,256 $ 6,048
Liabilities....................................................... 3,496 3,962
Capital and Surplus............................................... 1,760 2,086
</TABLE>
<TABLE>
<CAPTION>
GAAP
--------------------------
DECEMBER 31, JUNE 30,
1997 1998
------------- -----------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets............................................................ $ 5,988 $ 6,794
Liabilities....................................................... 2,624 2,977
Shareholder's Equity.............................................. 3,364 3,817
</TABLE>
Copies of the financial statements of MBIA incorporated by reference herein
and copies of MBIA's 1997 year-end audited financial statements prepared in
accordance with statutory accounting practices are available, without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545.
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. Additionally,
MBIA makes no representation regarding the Pool I or Pool II Notes or the
advisability of investing in the Pool I or Pool II Notes.
Moody's rates the claims paying ability of MBIA "Aaa." S&P rates the claims
paying ability of MBIA "AAA." Fitch rates the claims paying ability of MBIA
"AAA." Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Pool I or
Pool II Notes, and such ratings may be subject to revisions or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Pool I or
Pool II Notes. MBIA does not guaranty the market price of the Pool I or Pool II
Notes nor does it guaranty that the ratings on the Pool I or Pool II Notes will
not be revised or withdrawn.
S-73
<PAGE>
THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, the Sale and
Servicing Agreement and the Trust Agreement (collectively, the "Transfer and
Servicing Agreements"). Forms of the Transfer and Servicing Agreements have been
filed as exhibits to the Registration Statement. Copies of the Transfer and
Servicing Agreements will be filed with the Commission following the issuance of
the Notes. This summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Transfer
and Servicing Agreements. The following summary supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Transfer and Servicing Agreements set forth under the heading
"The Agreements" in the Prospectus.
CONTRIBUTION AND ASSIGNMENT OF THE LOANS
On the Closing Date, the Originators will contribute the Loans and the Rate
Agreement to the Trust. The Trust will, concurrently with such contribution,
pledge and assign the Loans and the Rate Agreement to the Indenture Trustee as
collateral for the Notes issued pursuant to the Indenture.
Under the terms of the Agreement, with respect to each Loan, the Originators
will deliver to FUNB, as Custodian, the Mortgages, the Mortgage Notes and the
other documents in the related Trustee's Loan File; provided, that so long as
FUNB's long-term unsecured debt is rated at least "A2" by Moody's and "A" by S&P
and no other Assignment Event (as defined in the Agreement) shall have occurred
and be continuing, FUNB shall be entitled to maintain possession of such
Trustee's Loan File as Custodian. In the event that the long-term unsecured debt
rating of FUNB does not satisfy the above-described standards or another
Assignment Event has occurred and is continuing, FUNB shall no longer be the
Custodian for the Pool I and Pool II Loans and will cause, within 30 days after
the occurrence of an Assignment Event, each of the Trustee's Loan Files in its
possession pertaining to the Home Equity Loans to be delivered to The Bank of
New York, as Indenture Trustee or such Indenture Trustee's bailee. See "Risk
Factors--Risk of Bankruptcy or Insolvency of the Originators; the Custodian."
FUNB will review the Trustee's Loan Files in its possession relating to the
Loans within the period specified in the Agreement and notify the Indenture
Trustee, of any material defect discovered in such review. Notwithstanding the
foregoing, FUNB shall perform the review required by the Agreement as to each
Loan within 60 days from the Closing Date. If any document required to be
included in any Trustee's Loan File does not bear manual signatures, has not
been received or is unrelated to the applicable Loan, and such defect is not
cured as provided in the Agreement following receipt of notification thereof by
the Representative from the Indenture Trustee, the Representative will be
required either to repurchase or to replace the affected Loan in the manner set
forth in the Prospectus under the caption "The Agreements-- Representations and
Warranties."
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. For so long as (i) the Servicer remains an affiliate of FUNB,
(ii) no Event of Default under the Agreement shall have occurred and be
continuing and (iii) FUNB maintains a short-term rating of at least "A-1" by S&P
and "P-1" by Moody's, and for five Business Days following any reduction,
suspension, termination or withdrawal of either such rating, the Principal and
Interest Account may be held with FUNB and its affiliates, and FUNB may
commingle such cash with its other funds for certain periods. See "Risk
Factors--Risk of Bankruptcy or Insolvency of the Originators; the Custodian."
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
S-74
<PAGE>
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 Indenture Trustee the Available Remittance
Amounts for the related Pools for deposit in the segregated trust accounts
maintained with the Indenture Trustee for such purpose (each a "Note
Distribution 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 included in such amounts,
(b) amounts paid as reimbursement to the Servicer of advances, (c) amounts
retained by the Servicer with respect to the Servicing Fee and the
Contingency Fee, (d) amounts deposited into the Servicing Accounts and (e)
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.
The term Available Remittance Amount does not include Supplemental Interest
Payments or 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.
MONTHLY ADVANCES AND COMPENSATING INTEREST
Not later than the close of business on each Determination Date, the
Servicer is required to remit to the Indenture Trustee for deposit in the
applicable Note Distribution Account an amount equal to the amount, if any, by
which, for each Pool (a) the sum of (x) interest on the actual number of days
from the last Remittance Date (or, in the case of the first Remittance Date,
from September 29, 1998) 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 Notes in such
S-75
<PAGE>
Pool immediately prior to the related Remittance Date and (y) the 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. Such excess is
defined as the "Monthly Advance." Monthly Advances will not cover any
Noteholders' 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
Indenture Trustee for deposit in the applicable Note Distribution Account from
amounts otherwise payable to it as servicing compensation, an amount equal to
the excess of (a) interest on the actual number of days since the last
Remittance Date (or, in the case of the first Remittance Date, from September
29, 1998) 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
From that portion of the Available Remittance Amount for the applicable
Pool, the Agreement requires the Servicer to pay the MBIA Premium and the
Remarketing Agent fees and then 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 for the related Remittance Date, along with any amounts
transferred from the Spread Account and the Rounding Account, to the Indenture
Trustee for deposit in the applicable Note Distribution Account. Upon receipt on
each Determination Date of such amounts, the Indenture Trustee is required to
deposit such amounts into the applicable Note Distribution Account.
The Agreement provides that on each Remittance Date the Indenture Trustee is
required to withdraw from the Note Distribution Accounts the Pool Available
Amount, pay into an expense account ("the Expense Account"), an amount equal to
one-twelfth of the estimated annual fees and expenses of the Indenture Trustee,
the Owner Trustee, the Trust Administrator, and the Trust and make distributions
of the remainder in the order of priority provided under "Description of the
Notes--Distributions on the Notes" and "--Cross-Support Provisions."
CALCULATION OF LIBOR
The Trust Administrator 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 Trust
Administrator 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 Trust Administrator, 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.
S-76
<PAGE>
"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.
"Business Day" means any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of California, Minnesota, New
York, or North Carolina 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 Notes, (i) initially, the
period commencing on September 29, 1998 and ending on the day immediately
preceding the Remittance Date in October 1998 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 Trust Administrator
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 Trust Administrator and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
The establishment of LIBOR on each Libor Determination Date by the Trust
Administrator and the Trust Administrator's calculation of the rate of interest
applicable to the Notes 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 Trust Administrator at (704) 383-6068.
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.
OPTIONAL REPURCHASE
The Servicer has the right, but not the obligation, to repurchase any
Defaulted Loan for the purchase price and in the manner described under "The
Agreements--Sale of Mortgage Loans" in the attached Prospectus. In no event,
however, may the aggregate principal balance of Defaulted Mortgage Loans
purchased pursuant to this provision exceed 5% of the aggregate Original Pool
Principal Balances.
TERMINATION; PURCHASE OF LOANS
The Trust will terminate upon distribution to the Noteholders and
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 or, (ii) the optional purchase of the assets
of the Trust
S-77
<PAGE>
by the Servicer or MBIA, 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 Pool I or Pool II
Notes, unless such acceleration is at the sole option of MBIA. This will not
affect the Pool I or Pool II Noteholders since, as described below, as a
condition to any optional termination of the Trust the Noteholders will receive
an amount equal to the outstanding Class Principal Balance of the related Class,
plus accrued interest.
On any date on which the aggregate principal balances of the Loans are less
than 5% of the aggregate Original Pool Principal Balances 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 and after the date on which the Pool Maximum Subordinated Amounts for
Pool I and Pool II is zero, on any Remittance Date on which the Pool I and/or
Pool II Loans with aggregate principal balances as of the Cut-Off Date that
equal or exceed 25% of the sum of the aggregate Original Pool Principal Balances
of the Pool I and Pool II Loans 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 Indenture
Trustee, the Owner Trustee, the Remarketing Agent, the Trust Administrator, and
the Servicer.
THE INDENTURE
MODIFICATION OF THE INDENTURE. With the consent of the holders of a
majority of the aggregate Current Principal Balance of Notes then outstanding
and MBIA, and notice to the Rating Agencies, the Indenture Trustee and the Trust
may execute a supplemental indenture to add provisions to, or change in any
manner or eliminate any provisions of, the Indenture, or to modify (except as
provided below) in any manner the rights of the Noteholders. Without the consent
of the holder of each outstanding Note affected thereby, however, no
supplemental indenture will (i) change the date of payment of any installment of
principal of or interest on any Note or reduce the principal amount thereof, the
interest rate thereon or the redemption price with respect thereto, change the
provisions of the Indenture relating to the application of collections on, or
the proceeds of the sale of, the assets of the Trust to payment of principal of
or interest on the Notes, or change any place of payment where, or the coin or
currency in which, any Note or any interest thereon is payable, (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment, (iii) reduce the percentage of the aggregate amount
of the outstanding Notes the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or certain
defaults thereunder and their consequences as provided for in the Indenture,
(iv) modify or alter certain provisions of the Indenture regarding the
determination of Notes that are considered "outstanding" for consent, waivers
and other matters, (v) reduce the percentage of the aggregate outstanding amount
of the Notes the consent of the holders of which is required to direct the
Issuer to sell or liquidate the Loans, (vi) decrease the percentage of the
aggregate principal amount of the Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements, (vii) modify any of the provisions of the Indenture in such manner
as to affect the calculation of the amount of any payment of interest or
principal due on any Note or (viii) permit the creation of any lien ranking
prior to or on a parity with the lien of the Indenture with respect to any of
the collateral for the Notes or, except as otherwise permitted or contemplated
in the Indenture, terminate the lien of the Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the lien of the
Indenture.
S-78
<PAGE>
The Trust and the Indenture Trustee may also enter into supplemental
indentures, with notice to the Rating Agencies but without obtaining the consent
of Noteholders, but with the consent of MBIA, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of Noteholders so long as
such action will not, in the opinion of counsel satisfactory to the Indenture
Trustee and MBIA, adversely affect in any material respect the interest of any
Noteholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. An "Event of Default" with
respect to the Notes is defined in the Indenture as consisting of the following
(except as described in the remaining sentences of this paragraph): (i) a
default for five days or more in the payment of any interest on any Note (other
than any Noteholders' Interest Carryover) after the same becomes due and payable
(provided that for the purposes of this clause, payment by the Indenture Trustee
from the proceeds of the related MBIA Policy or Policies shall not be considered
payment by the Trust with respect to the Notes); or (ii) a default in the
payment of principal of any Note when the same becomes due and payable (provided
that for the purposes of this clause, payment by the Indenture Trustee from the
proceeds of the related MBIA Policy or Policies shall not be considered payment
by the Trust with respect to the Notes); or (iii) a default in the observance or
performance of any covenant or agreement of the Trust made in the Indenture and
the continuation of any such default for a period of 30 days (or, for certain
defaults, 90 days) after notice thereof is given to the Trust and MBIA by the
Indenture Trustee or to the Trust, MBIA and the Indenture Trustee by the holders
of at least 25% in aggregate Current Principal Balance of the Notes then
outstanding; (iv) any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within 30 days (or, for certain breaches, 90
days) after notice thereof is given to the Trust and MBIA by the Indenture
Trustee or to the Trust, MBIA and the Indenture Trustee by the holders of at
least 25% in aggregate Current Principal Balance of the Notes then outstanding;
or (v) certain events of bankruptcy, insolvency, receivership or liquidation of
the Trust.
The amount of principal required to be distributed to Noteholders on any
Remittance Date is limited to the portion of the Pool Available Amount on
deposit in the Note Distribution Account and allocated to such purposes.
If an Event of Default should occur and be continuing, MBIA or, with the
consent of MBIA, the Indenture Trustee or holders of a majority in aggregate
Current Principal Balance of the Notes then outstanding may declare all
outstanding Notes to be immediately due and payable, by notice to the Trust or
notice to the Indenture Trustee if given by the Noteholders. Such declaration
may be rescinded by the holders of a majority in aggregate current Principal
Balance of the Notes then outstanding if (i) the Trust has paid to the Indenture
Trustee a sum equal to all amounts then due with respect to the Notes (without
giving effect to such acceleration) and due to the Indenture Trustee and (ii)
all Events of Default (other than nonpayment of amounts due solely as a result
of such acceleration) have been cured or waived.
If the Notes have been declared to be due and payable following an Event of
Default with respect thereto, the Indenture Trustee shall, at the direction of
MBIA, and may, with the consent of MBIA, sell the Loans or elect to maintain
possession of the Loans. In addition, the Indenture Trustee is prohibited from
selling the Loans following an Event of Default, other than a default for five
days or more in the payment of any interest or a default in the payment of any
principal on any Note, unless (i) MBIA or, with the consent of MBIA, the holders
of 100% of the aggregate Current Principal Balance of the Notes outstanding
consent to such sale, (ii) the Trustee determines that the proceeds of such sale
are sufficient to pay in full the principal of and the accrued interest on the
Notes outstanding and MBIA consents, in writing, to the sale or (iii) the
Indenture Trustee determines that the collections on the Loans and other assets
of the Trust would not be sufficient on an ongoing basis to make all payments on
the Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Indenture Trustee obtains the consent of MBIA
or, in the event an MBIA Default exists and is continuing, the holders of
66 2/3% of the aggregate Current Principal Balance of the Notes then
outstanding.
S-79
<PAGE>
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of MBIA or any of the holders of Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to such provisions for indemnification and certain limitations
contained in the Indenture, MBIA or, in the event an MBIA Default exists and is
continuing, the holders of a majority in aggregate Current Principal Balance of
the outstanding Notes will have the right to direct the time, method and place
of conducting any proceeding or any remedy available to the Indenture Trustee.
No holder of any Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in Current Principal Balance of the outstanding
Notes have requested in writing that the Indenture Trustee institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days after notice failed to institute such proceeding, (v) no
direction inconsistent with such written request has been given to the Indenture
Trustee during such 60-day period by the holders of a majority in Current
Principal Balance of the outstanding Notes and (vi) unless an MBIA Default
exists and is continuing, MBIA has provided its written consent to the
institution of the proceeding.
In addition, the Indenture Trustee and the Noteholders will covenant that
they will not, prior to the date which is one year and a day after the
termination of the Indenture, institute against the Trust or the Holder of the
GP Interest any bankruptcy, reorganization or other proceeding under any Federal
or state bankruptcy or similar law in connection with any obligations relating
to the Notes, the Indenture or the Basic Documents (as defined below).
An "MBIA Default" is (i) the failure of MBIA to make a payment under an MBIA
Policy in accordance with its terms or (ii) certain bankruptcy and insolvency
actions by or against MBIA.
CERTAIN COVENANTS. The Trust may not consolidate with or merge into any
other entity, unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, or any state, and such
entity expressly assumes the Trust's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement and
covenant of the Trust under the Indenture, (ii) no Event of Default has occurred
and is continuing immediately after such merger or consolidation, (iii) such
consolidation or merger will not result in any of the Rating Agencies lowering
its ratings then assigned to the Notes (without giving effect to the MBIA
Policies), (iv) the Trust and MBIA have received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse federal
or Delaware tax consequence to the Trust or to any Certificateholder or
Noteholder, (v) any action as is necessary to maintain the lien and security
interest created by the Indenture shall have been taken, (vi) MBIA shall have
consented to such consolidation or merger and (vii) the Trust shall have
delivered to the Indenture Trustee and MBIA an officer's certificate of the
Trust and an opinion of counsel each stating that such consolidation or merger
and any supplemental indenture relating thereto comply with the terms of the
Indenture and that all conditions precedent provided for in the Indenture to
such transaction have been complied with (including any Exchange Act filings) in
all material respects.
Except as otherwise permitted by the Indenture, the Transfer and Servicing
Agreements and related documents (the "Basic Documents"), the Trust may not
convey or transfer all or substantially all its properties or assets, including
the assets securing the Notes, unless for the most part the conditions specified
in (i) through (vii) above with respect to a permitted merger or consolidation
are met, plus the acquiror must agree (a) that all right, title and interest in
the property and assets so conveyed or transferred are subordinate to the rights
of the Noteholders, (b) to indemnify the Trust (unless otherwise
S-80
<PAGE>
provided in the supplemental indenture) and (c) to make all filings with the
Commission required by the Exchange Act in connection with the Notes.
The Trust will not, among other things, (i) except as expressly permitted by
the Basic Documents, sell, transfer, exchange or otherwise dispose of any of the
assets of the Trust, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of any Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Trust (iii) permit the validity or effectiveness of the
Indenture to be impaired, or permit the lien of the Indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any person to be
released from any covenants or obligations with respect to any Notes under the
Indenture except as may be expressly permitted thereby, (iv) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance (other
than the lien of the Indenture) to be created on or extend to or otherwise arise
upon or burden the assets of the Trust or any part thereof, or any interest
therein or the proceeds thereof (other than certain tax and other liens arising
by operation of law, except as expressly permitted by the Basic Documents) or
(v) permit the lien of the Indenture not to constitute a valid first priority
(other than with respect to such tax or other lien) security interest in the
assets securing the Notes.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling, servicing and managing the Loans and activities incidental
thereto.
The Trust will not issue, incur, assume or guarantee or otherwise become
liable for any indebtedness other than the Notes or otherwise in accordance with
the Basic Documents.
ANNUAL COMPLIANCE STATEMENT AND OTHER NOTICES. The Trust will be required
to deliver to the Indenture Trustee and MBIA annually, commencing in 1999, a
written statement as to the fulfillment of its obligations under the Indenture.
The Trust is required to give the Indenture Trustee and MBIA written notice of
each Event of Default among other notices. The Indenture Trustee will notify
Noteholders of known defaults under the Indenture within 90 days after their
occurrence.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture will be discharged
with respect to the collateral securing the Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Servicer, the Owner
Trustee and the Indenture Trustee acting jointly (or in some instances, the
Owner Trustee or the Indenture Trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the Trust. In the
event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Sale and Servicing Agreement
and the Trust Agreement and upon the Indenture Trustee by the Indenture will be
conferred or imposed upon the Owner Trustee and the Indenture Trustee,
respectively, and in each such case such separate trustee or co-trustee,
jointly, or, in any jurisdiction in which the Owner Trustee or Indenture Trustee
will be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee, which will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Owner Trustee or
the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in which
event the Servicer will be obligated to appoint a successor thereto. The
Servicer may also, subject to the prior written consent of MBIA, remove the
Owner Trustee or the Indenture Trustee if either ceases to be eligible to
continue as such under the Trust Agreement or the Indenture, as the case may be,
becomes legally unable to act or
S-81
<PAGE>
becomes insolvent. In such circumstances, the Servicer, with the consent of
MBIA, will be obligated to appoint a successor Owner Trustee or a successor
Indenture Trustee, as applicable. Any resignation or removal of the Owner
Trustee or Indenture Trustee and appointment of a successor thereto will not
become effective until acceptance of the appointment by such successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
Chase Manhattan Bank Delaware, a Delaware banking corporation, will be the
Owner Trustee under the Trust Agreement. The Owner Trustee will make no
representations as to the validity or sufficiency of the Trust Agreement, the
Certificates, the Notes (other than the execution thereof) or any Loans or
related documents, and will not be accountable for the use or application by the
Originators of any funds paid to the Originators in respect of the Notes or the
Loans, or the investment of any monies by the Servicer before such monies are
deposited into the Note Distribution Account or the Certificate Distribution
Account. The Owner Trustee will be required to perform only those duties
specifically required of it under the Trust Agreement. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Owner Trustee under the Trust
Agreement in which case it will only be required to examine them to determine
whether they conform to the requirements of the Trust Agreement. The Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Trust Agreement, or Sale and Servicing Agreement,
which failure constitutes an Event of Default, unless the Owner Trustee obtains
actual knowledge of such failure.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Owner Trustee security or indemnity against the costs, expenses
and liabilities that may be incurred therein or thereby. The Owner Trustee will
be paid a fee for its services as set forth in the Trust Agreement.
The Bank of New York will be the Indenture Trustee under the Indenture. The
Indenture Trustee will make no representations as to the validity or sufficiency
of the Indenture, the Notes (other than the execution and authentication
thereof) or any Loans or related documents, and will not be accountable for the
use or application by the Originators or the Owner Trustee of any funds paid to
the Originators or the Owner Trustee in respect of the Notes or the Loans, or
the investment of any monies by the Servicer before such monies are deposited
into the Note Distribution Account. So long as no Event of Default under the
Indenture or the Sale and Servicing Agreement has occurred or is continuing, the
Indenture Trustee will be required to perform only those duties specifically
required of it under the Transfer and Servicing Agreements. Generally, those
duties will be limited to the receipt of the various certificates, reports on
other instruments required to be furnished to the Indenture Trustee under the
Indenture, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Indenture. The Indenture Trustee
will not be charged with knowledge of a failure by the Servicer to perform its
duties under the Trust Agreement or Sale and Servicing Agreement, which failure
constitutes an Event of Default under the Indenture or the Sale and Servicing
Agreement, unless the Indenture Trustee obtains actual knowledge of such
failure. The Indenture Trustee will be paid a fee for its services as set forth
in the Indenture.
THE TRUST ADMINISTRATOR
First Union National Bank, a national banking association headquartered in
Charlotte, North Carolina, will perform certain administrative functions on
behalf of the Trust (in such capacity, the "Trust Administrator"), as set forth
in the Agreement. The Trust Administrator will be paid a fee for its services as
set forth in the Agreement.
S-82
<PAGE>
THE CUSTODIAN
First Union National Bank, Trust Department ("FUNB"), will be the Custodian
of the Loans. In such capacity, it will retain the files relating to the Loans
unless and until an Assignment Event occurs. FUNB will hold such files in a
segregated area maintained initally at the Representative's offices located in
North Highlands, California. The Custodian will be paid a fee for its services
as set forth in the Agreement. See "Risk Factors--Risk of Bankruptcy or
Insolvency of the Originators; the Custodian."
THE REMARKETING AGENT
First Union Capital Markets will act as remarketing agent with respect to
the Class AF-2 Notes.
S-83
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
PROSPECTIVE NOTEHOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISORS WITH
REGARD TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, OR
DISPOSITION OF INTERESTS IN THE NOTES, AS WELL AS THE TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY OR OTHER TAXING JURISDICTION.
Stroock & Stroock & Lavan LLP ("Counsel"), special tax counsel to the Trust,
is of the opinion that for federal income tax purposes the Notes will be
characterized as debt, and the Trust will, therefore, not be characterized as a
publicly traded partnership taxable as a corporation. Furthermore, because the
Pool I Notes and Pool II Notes are cross-collateralized only with respect to
credit support (and the two classes of Pool I Notes pay principal pro-rata),
Counsel is of the opinion that the Trust will not be characterized as a taxable
mortgage pool. Opinions of counsel are not binding on the Internal Revenue
Service (the "IRS") and there can be no assurance that the IRS could not
successfully challenge these conclusions. Moreover, no ruling will be sought
from the IRS with respect to the transaction described herein.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibits a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "articles in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other penalties and liabilities under ERISA and the Code for such persons. Title
I of ERISA also requires that fiduciaries of a Benefit Plan subject to ERISA
make investments that are prudent, diversified (except if prudent not to do so)
and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. The Representative believes that the Notes should be treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation. However, without regard to whether the Notes are treated as an
Equity Interest for such purposes, the acquisition or holding of Notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Owner Trustee or the Indenture Trustee, the owner
of collateral, or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1,
S-84
<PAGE>
regarding investments by insurance company pooled separate accounts; PTCE 95-60,
regarding investments by insurance company general accounts; PTCE 91-38,
regarding investments by bank collective investment funds; PTCE 96-23, regarding
transactions affected by in-house asset managers; and PTCE 84-14, regarding
transactions effected by "qualified professional asset managers."
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT CONSIDERATIONS
Only the Class AV Notes will 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 other Classes of Notes. No
representation is made herein as to whether and the extent to which a Class of
the Notes constitutes legal investments for any entity under any applicable
statute, law, rule, regulation or order. Each prospective purchaser is urged to
consult with its counsel concerning the status of the Notes as legal investments
for such purchaser prior to investing therein.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
dated September 23, 1998, (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 Notes set forth below it name.
<TABLE>
<CAPTION>
FIRST UNION
CAPITAL
MARKETS, A
DIVISION OF
WHEAT FIRST PRUDENTIAL LEHMAN SALOMON BEAR,
SECURITIES, BARCLAYS SECURITIES BROTHERS SMITH BARNEY STEARNS &
INC. CAPITAL INC. INCORPORATED INC. INC. CO. INC.
-------------- ----------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Pool I Notes
Class AF-1 $ 87,250,000 $ 50,000,000 $ 88,000,000 $88,000,000 $88,000,000 $ --
Class AF-2 $133,750,000 $ -- $ -- $ -- $ -- $ --
Pool II Notes
Class AV $180,000,000 $ -- $ -- $ -- $ -- $90,000,000
Total $401,000,000 $ 50,000,000 $ 88,000,000 $88,000,000 $88,000,000 $90,000,000
-------------- ------------ ------------ ------------ ------------ ------------
-------------- ------------ ------------ ------------ ------------ ------------
<CAPTION>
MORGAN
STANLEY &
CO.
INCORPORATED TOTAL
------------ ---------------
<S> <C> <C>
Pool I Notes
Class AF-1 $ -- $ 401,250,000
Class AF-2 $ -- $ 133,750,000
Pool II Notes
Class AV $90,000,000 $ 360,000,000
Total $90,000,000 $ 895,000,000
------------ ---------------
------------ ---------------
</TABLE>
The Representative has been advised by the Underwriters that the
Underwriters propose initially to offer the Notes to the public from time to
time in negotiated transactions or otherwise, at varying prices to be determined
at the time of sale. This Prospectus Supplement and the Prospectus may be used
by First Union Capital Markets in connection with offers and sales related to
market-making transactions. First Union Capital Markets may act as principal or
agents in such transactions.
The Representative has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Each of the Underwriters may provide investment banking and other services
for the Representative for which it will receive additional compensation.
The Representative, the Originators and FUNB are affiliates of First Union
Capital Markets. The Underwriters or agents and their associates may be
customers of (including borrowers from), engage in transactions with, and/or
perform services for the Representative, its affiliates, the Owner Trustee and
the Indenture Trustee in the ordinary course of business.
S-85
<PAGE>
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 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, 1997, incorporated by reference
in this Prospectus Supplement, have been incorporated herein in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the Notes
will be passed upon for the Representative by Stroock & Stroock & Lavan LLP, New
York, New York. Certain legal matters relating to the validity of the issuance
of the Notes will be passed upon for the Underwriters by Kilpatrick Stockton
LLP, Charlotte, North Carolina. Certain legal matters will be passed upon for
MBIA by Kutak Rock, Omaha, Nebraska.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each Class be rated
"AAA" by S&P and "Aaa" by Moody's.
The ratings given to the Notes 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 Notes. 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 Notes. In general, the ratings address credit risk and do not address
the likelihood or rate of principal prepayments. The ratings of the Notes by S&P
and Moody's do not reflect the likelihood of payment of the Noteholders'
Interest Carryover.
FINANCIAL INFORMATION
The Trust has been formed to own the Loans and to issue the Notes. The Trust
had no assets or obligations prior to the issuance of the Notes 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-86
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
1934 Act............................................................................................... S-3
Adjusted Mortgage Loan Remittance Rate................................................................. S-17
Agreement.............................................................................................. S-6
Assignment Event....................................................................................... S-22
Available Remittance Amount............................................................................ S-75
Balloon Loans.......................................................................................... S-16
Basic Documents........................................................................................ S-80
beneficial owner....................................................................................... S-66
Benefit Plan........................................................................................... S-84
Book-Entry Notes....................................................................................... S-66
Business Day........................................................................................... S-60
Carryforward Amount.................................................................................... S-62
Cede................................................................................................... S-19
Cedel Bank............................................................................................. S-1
Cedel Bank Participants................................................................................ S-68
Certificates........................................................................................... S-5
Change Date............................................................................................ S-15
Class Interest Shortfall Carryforward Amount........................................................... S-8
Class Principal Balance................................................................................ S-60
Closing Date........................................................................................... S-1
CMAC................................................................................................... S-72
CMT.................................................................................................... S-16
Combined Loan-to-Value Ratio........................................................................... S-14
Commission............................................................................................. S-3
Compensating Interest.................................................................................. S-17
Contingency Fee........................................................................................ S-18
Cooperative............................................................................................ S-68
Counsel................................................................................................ S-84
CPR.................................................................................................... S-57
Current Interest Requirement........................................................................... S-8
Curtailment............................................................................................ S-17
Cut-Off Date........................................................................................... S-5
Defaulted Mortage Loan................................................................................. S-18
Deficiency Amount...................................................................................... S-71
Definitive Note........................................................................................ S-66
Definitive Notes....................................................................................... S-20
Determination Date..................................................................................... S-17
Distribution Amount.................................................................................... S-62
DTC.................................................................................................... S-20
Due Period............................................................................................. S-8
Expense Account........................................................................................ S-76
ERISA.................................................................................................. S-19
Euroclear.............................................................................................. S-1
Euroclear Operator..................................................................................... S-68
Euroclear Participants................................................................................. S-68
European Depositaries.................................................................................. S-66
Event of Default....................................................................................... S-79
Excess Spread.......................................................................................... S-63
</TABLE>
S-87
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Final Maturity Date.................................................................................... S-55
Financial Intermediary................................................................................. S-67
First Union Capital Markets............................................................................ S-1
Fiscal Agent........................................................................................... S-70
FUNB................................................................................................... S-83
GAAP................................................................................................... S-73
Gross Margin........................................................................................... S-15
HEP.................................................................................................... S-57
Holders................................................................................................ S-2
Home Equity Loans...................................................................................... S-2
Home Equity Mortgaged Properties....................................................................... S-14
Home Equity Mortgage Notes............................................................................. S-14
Home Equity Mortgages.................................................................................. S-14
Home Equity Mortgagor.................................................................................. S-14
Indenture.............................................................................................. S-1
Indenture Trustee...................................................................................... S-1
Insurance Paying Agent................................................................................. S-13
Insurance Proceeds..................................................................................... S-17
Insured Payment........................................................................................ S-13
Interest Period........................................................................................ S-77
IRS.................................................................................................... S-84
LIBOR.................................................................................................. S-21
LIBOR Determination Date............................................................................... S-77
LIBOR Index............................................................................................ S-15
Lifetime Cap........................................................................................... S-16
Lifetime Floor......................................................................................... S-16
Liquidated Loan........................................................................................ S-53
Liquidation Proceeds................................................................................... S-17
Loans.................................................................................................. S-2
London Banking Day..................................................................................... S-77
MBIA................................................................................................... S-13
MBIA Default........................................................................................... S-80
MBIA Policies.......................................................................................... S-2
MLDP................................................................................................... S-64
Monthly Advance........................................................................................ S-17
Moody's................................................................................................ S-18
Mortgaged Properties................................................................................... S-14
Mortgages.............................................................................................. S-14
Mortgagor.............................................................................................. S-14
Net Funds Cap.......................................................................................... S-8
Note Distribution Account.............................................................................. S-75
Noteholder............................................................................................. S-7
Noteholders............................................................................................ S-2
Noteholders' Interest Carryover........................................................................ S-9
Note Owners............................................................................................ S-66
Notes.................................................................................................. S-1
Notice................................................................................................. S-71
Notional Amount........................................................................................ S-64
One-Month Index Maturity............................................................................... S-76
Optional Servicer Termination Date..................................................................... S-18
</TABLE>
S-88
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Original Pool Principal Balance........................................................................ S-18
Originators............................................................................................ S-1
Owner.................................................................................................. S-71
Owner Trustee.......................................................................................... S-1
Percentage Interest.................................................................................... S-7
Periodic Rate Cap...................................................................................... S-16
Plan Asset Regulations................................................................................. S-84
Plans.................................................................................................. S-19
Pool Available Amount.................................................................................. S-8
Pool Principal Distribution Amount..................................................................... S-10
Pool I................................................................................................. S-2
Pool I Home Equity Loans............................................................................... S-6
Pool I Loans........................................................................................... S-6
Pool I Mortgage Interest Rate.......................................................................... S-15
Pool I Noteholders..................................................................................... S-7
Pool I Notes........................................................................................... S-1
Pool II................................................................................................ S-2
Pool II Home Equity Loans.............................................................................. S-6
Pool II Loans.......................................................................................... S-6
Pool II Mortgage Interest Rate......................................................................... S-15
Pool II Noteholders.................................................................................... S-7
Pool II Notes.......................................................................................... S-1
Pools.................................................................................................. S-2
Preference Amount...................................................................................... S-72
Prepayment Assumption.................................................................................. S-57
Principal and Interest Account......................................................................... S-74
Principal Factor....................................................................................... S-66
Principal Prepayment................................................................................... S-17
Prospectus............................................................................................. S-2
PTCE................................................................................................... S-84
PUDs................................................................................................... S-14
Rate Agreement......................................................................................... S-64
Realized Loss.......................................................................................... S-12
Record Date............................................................................................ S-7
Reference Banks........................................................................................ S-77
Released Mortgaged Property Proceeds................................................................... S-17
Relevant Depositary.................................................................................... S-66
Relevant Parties....................................................................................... S-21
Remarketing Agent...................................................................................... S-6
Remittance Date........................................................................................ S-2
Remittance Rate........................................................................................ S-4
REO Property........................................................................................... S-19
Representative......................................................................................... S-2
Rounding Account....................................................................................... S-10
Rules.................................................................................................. S-67
S&P.................................................................................................... S-18
SAP.................................................................................................... S-73
SBA.................................................................................................... S-24
SBA Loans.............................................................................................. S-24
Servicer............................................................................................... S-2
</TABLE>
S-89
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Servicing Account...................................................................................... S-75
Servicing Fee.......................................................................................... S-18
single family.......................................................................................... S-2
SMMEA.................................................................................................. S-19
Specified Spread Account Requirement................................................................... S-11
Spread Account......................................................................................... S-11
Spread Account Agreement............................................................................... S-11
Spread Account Depositor............................................................................... S-11
Strike Price........................................................................................... S-64
Student Loans.......................................................................................... S-24
Subordinated Amount.................................................................................... S-12
Supplement Interest Amount............................................................................. S-65
Supplemental Interest Payments......................................................................... S-11
Telerate Page 3750..................................................................................... S-77
Termination Price...................................................................................... S-19
Terms and Conditions................................................................................... S-68
Transfer and Servicing Agreements...................................................................... S-74
Treasury Index......................................................................................... S-16
Trust.................................................................................................. S-1
Trust Administrator.................................................................................... S-6
Trust Agreement........................................................................................ S-1
Underwriters........................................................................................... S-1
Underwriting Agreement................................................................................. S-85
Voting Interests....................................................................................... S-5
Weighted average life.................................................................................. S-55
</TABLE>
S-90
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes (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 Notes 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 Securities issues in same-day funds.
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.
I-1
<PAGE>
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, or a 360-day year of twelve 30-day months, as applicable. 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, or a 360-day year of twelve 30-day months, as
applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following
I-2
<PAGE>
month. The payment will then be reflected in the 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.
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES.
(FORM 1001). Non-U.S. Persons that are Note Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will
I-3
<PAGE>
be imposed at that rate unless the filer alternatively files Form W-8. Form 1001
may be filed by the Note Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Note Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership, or other entity taxable as such, organized in
or under the laws of the United States or any political subdivision thereof,
(iii) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source or (iv) a trust other than a
"Foreign Trust," as defined in Section 7701(a)(31) of the Code. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities as well as the application of
recently issued Treasury regulations relating to tax documentation requirements
that are generally effective with respect to payments made after December 31,
1998.
I-4
<PAGE>
ANNEX II
NOTIONAL AMOUNTS
<TABLE>
<CAPTION>
REMITTANCE DATE NOTIONAL AMOUNTS
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Initial Balance................................................................................ $ 535,000,000.00
October 15, 1998............................................................................... 532,262,678.17
November 15, 1998.............................................................................. 527,914,719.65
December 15, 1998.............................................................................. 522,639,203.44
January 15, 1999............................................................................... 516,443,488.27
February 15, 1999.............................................................................. 509,357,099.24
March 15, 1999................................................................................. 501,396,467.44
April 15, 1999................................................................................. 492,582,860.68
May 15, 1999................................................................................... 483,113,796.69
June 15, 1999.................................................................................. 473,539,215.67
July 15, 1999.................................................................................. 464,147,491.96
August 15, 1999................................................................................ 454,935,194.53
September 15, 1999............................................................................. 445,898,956.15
October 15, 1999............................................................................... 437,035,472.24
November 15, 1999.............................................................................. 428,341,499.68
December 15, 1999.............................................................................. 419,813,855.67
January 15, 2000............................................................................... 411,449,416.64
February 15, 2000.............................................................................. 403,245,117.15
March 15, 2000................................................................................. 395,197,948.77
April 15, 2000................................................................................. 387,304,959.09
May 15, 2000................................................................................... 379,563,250.64
June 15, 2000.................................................................................. 371,969,979.87
July 15, 2000.................................................................................. 364,522,356.17
August 15, 2000................................................................................ 357,217,640.88
September 15, 2000............................................................................. 350,053,146.33
October 15, 2000............................................................................... 343,026,234.92
November 15, 2000.............................................................................. 336,134,318.13
December 15, 2000.............................................................................. 329,374,855.67
January 15, 2001............................................................................... 322,745,354.55
February 15, 2001.............................................................................. 316,243,368.23
March 15, 2001................................................................................. 309,866,495.76
April 15, 2001................................................................................. 303,612,380.89
May 15, 2001................................................................................... 297,478,711.32
June 15, 2001.................................................................................. 291,463,217.80
July 15, 2001.................................................................................. 285,563,673.37
August 15, 2001................................................................................ 279,777,892.61
September 15, 2001............................................................................. 274,103,730.84
October 15, 2001............................................................................... 268,539,083.32
November 15, 2001.............................................................................. 263,081,884.59
December 15, 2001.............................................................................. 257,730,107.69
January 15, 2002............................................................................... 252,481,763.47
February 15, 2002.............................................................................. 247,334,899.87
March 15, 2002................................................................................. 242,287,601.25
April 15, 2002................................................................................. 237,337,987.71
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
REMITTANCE DATE NOTIONAL AMOUNTS
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
May 15, 2002................................................................................... $ 232,484,214.40
June 15, 2002.................................................................................. 227,724,470.93
July 15, 2002.................................................................................. 223,056,980.67
August 15, 2002................................................................................ 218,480,000.16
September 15, 2002............................................................................. 213,991,818.47
October 15, 2002............................................................................... 209,590,756.63
November 15, 2002.............................................................................. 205,275,166.99
December 15, 2002.............................................................................. 201,043,432.71
January 15, 2003............................................................................... 196,893,967.09
February 15, 2003.............................................................................. 192,825,213.11
March 15, 2003................................................................................. 188,835,642.81
April 15, 2003................................................................................. 184,923,756.79
May 15, 2003................................................................................... 181,088,083.65
June 15, 2003.................................................................................. 177,327,179.51
July 15, 2003.................................................................................. 173,639,627.44
August 15, 2003................................................................................ 170,036,844.71
September 15, 2003............................................................................. 166,521,894.01
October 15, 2003............................................................................... 163,075,378.84
November 15, 2003.............................................................................. 159,696,002.87
December 15, 2003.............................................................................. 156,382,493.97
January 15, 2004............................................................................... 153,133,603.83
February 15, 2004.............................................................................. 149,948,107.47
March 15, 2004................................................................................. 146,824,802.79
April 15, 2004................................................................................. 143,762,510.17
May 15, 2004................................................................................... 140,760,072.09
June 15, 2004.................................................................................. 137,816,352.63
July 15, 2004.................................................................................. 134,930,237.13
August 15, 2004................................................................................ 132,100,631.81
September 15, 2004............................................................................. 129,326,463.35
October 15, 2004............................................................................... 126,606,678.47
November 15, 2004.............................................................................. 123,940,243.68
December 15, 2004.............................................................................. 121,326,144.77
January 15, 2005............................................................................... 118,763,386.56
February 15, 2005.............................................................................. 116,250,992.48
March 15, 2005................................................................................. 113,788,004.27
April 15, 2005................................................................................. 111,373,481.60
May 15, 2005................................................................................... 109,006,501.77
June 15, 2005.................................................................................. 106,686,159.36
July 15, 2005.................................................................................. 104,411,565.92
August 15, 2005................................................................................ 102,181,849.64
September 15, 2005............................................................................. 99,996,155.07
October 15, 2005............................................................................... 97,853,642.80
November 15, 2005.............................................................................. 95,753,489.12
December 15, 2005.............................................................................. 93,694,885.84
January 15, 2006............................................................................... 91,677,039.85
February 15, 2006.............................................................................. 89,699,172.97
March 15, 2006................................................................................. 87,760,521.60
April 15, 2006................................................................................. 85,860,336.49
May 15, 2006................................................................................... 83,997,882.44
June 15, 2006.................................................................................. 82,172,438.03
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
REMITTANCE DATE NOTIONAL AMOUNTS
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
July 15, 2006.................................................................................. $ 80,383,295.43
August 15, 2006................................................................................ 78,629,760.07
September 15, 2006............................................................................. 76,911,150.41
October 15, 2006............................................................................... 75,226,797.79
November 15, 2006.............................................................................. 73,576,046.03
December 15, 2006.............................................................................. 71,958,251.29
January 15, 2007............................................................................... 70,372,781.91
February 15, 2007.............................................................................. 68,819,018.00
March 15, 2007................................................................................. 67,296,351.40
April 15, 2007................................................................................. 65,804,185.36
May 15, 2007................................................................................... 64,341,934.33
June 15, 2007.................................................................................. 62,909,023.85
July 15, 2007.................................................................................. 61,504,890.19
August 15, 2007................................................................................ 60,128,980.27
September 15, 2007............................................................................. 58,780,751.40
October 15, 2007............................................................................... 57,459,671.15
November 15, 2007.............................................................................. 56,165,217.05
December 15, 2007.............................................................................. 54,896,876.55
January 15, 2008............................................................................... 53,654,146.69
February 15, 2008.............................................................................. 52,436,534.03
March 15, 2008................................................................................. 51,243,554.39
April 15, 2008................................................................................. 50,074,732.76
May 15, 2008................................................................................... 48,929,603.05
June 15, 2008.................................................................................. 47,844,102.28
July 15, 2008.................................................................................. 46,754,425.69
August 15, 2008................................................................................ 45,725,224.07
September 15, 2008............................................................................. 44,716,618.24
October 15, 2008............................................................................... 43,728,212.80
November 15, 2008.............................................................................. 42,759,619.80
December 15, 2008.............................................................................. 41,810,458.55
January 15, 2009............................................................................... 40,880,355.55
February 15, 2009.............................................................................. 39,968,944.35
March 15, 2009................................................................................. 39,075,865.39
April 15, 2009................................................................................. 38,200,765.87
May 15, 2009................................................................................... 37,343,299.64
June 15, 2009.................................................................................. 36,503,127.09
July 15, 2009.................................................................................. 35,679,915.00
August 15, 2009................................................................................ 34,873,336.44
September 15, 2009............................................................................. 34,083,070.61
October 15, 2009............................................................................... 33,308,802.84
November 15, 2009.............................................................................. 32,550,224.29
December 15, 2009.............................................................................. 31,807,032.04
January 15, 2010............................................................................... 31,078,928.84
February 15, 2010.............................................................................. 30,365,623.05
March 15, 2010................................................................................. 29,666,828.56
April 15, 2010................................................................................. 28,982,264.65
May 15, 2010................................................................................... 28,311,655.91
June 15, 2010.................................................................................. 27,654,732.09
July 15, 2010.................................................................................. 27,011,228.13
August 15, 2010................................................................................ 0.00
</TABLE>
II-3
<PAGE>
ANNEX III
AUCTION PROCEDURES
The following description of the Auction Rate Procedures applies to the
Class AF-2 Notes. To the extent that the provisions contained herein contradict
the provisions contained in Appendix I to the Prospectus, the provisions herein
shall control.
The term "Security," as used in this Annex III, refers to the Class AF-2
Notes, and the term "Securityholder" refers to Holders of Class AF-2 Notes.
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:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR.
"Auction" means the implementation of the Auction Procedures on an Auction
Date.
"Auction Date" means, with respect to the Initial Period for each Class of
Securities, October 14, 1998 and thereafter, the Business Day immediately
preceding the first day of each Auction Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the Securities is
no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance of an
Event of Default; or
(C) each Auction Period commencing less than two Business Days after the
cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Indenture, as described herein.
"Auction Period" means, with respect to each Security, the Interest Period
applicable to such Security during which time the applicable Security Interest
Rate is determined pursuant to the Indenture, which Auction Period (after the
Initial Period for such Security) initially shall consist of between 7 days and
one year (as set forth in the related Prospectus Supplement), as the same may be
adjusted pursuant to such related Agreement.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the Indenture, as described herein.
"Auction Procedures" means the procedures set forth and described herein by
which the Auction Rate applicable to a Security is determined.
"Auction Rate" means, with respect to any Security, the rate of interest per
annum that results from the implementation of the Auction Procedures and is
determined as described in the Indenture and this Annex III.
"Estimated Range of Interest Rate" has the meaning as set forth in this
Annex III.
"Initial Period" means, as to any Security, the period commencing on the
Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
III-1
<PAGE>
"Interest Period" means, with respect to a Security, the Initial Period for
such Security and each period commencing on the Rate Adjustment Date for such
Security and ending on the day before (i) the next Rate Adjustment Date for such
Security or (ii) the final maturity date of such Security, as applicable.
"Interest Rate Services Agreement" means the initial Interest Rate Services
Agreement unless and until a substitute Interest Rate Services Agreement is
entered into, after which "Interest Rate Services Agreement" shall mean such
substitute Interest Rate Services Agreement.
"Maximum Auction Rate" generally means the lesser of (i) either (A)
One-Month LIBOR plus 0.40% (if both ratings assigned by the Rating Agencies to
the applicable Security are "Aa3" or "AA-" or better) or (B) One-Month LIBOR
plus 1.25% (if any one of the ratings assigned by the Rating Agencies to the
Security is less than "Aa3" or "AA-") or (ii) 14.00%. For purposes of the
Remarketing Agent and the Auction Procedures, the ratings referred to in this
definition shall be the last ratings of which the Remarketing Agent has been
given notice pursuant to the Interest Rate Services Agreement.
"Non-Payment Rate" means the then applicable Maximum Auction Rate.
"One-Month LIBOR" means LIBOR as defined in the Agreement.
"Rate Adjustment Date" means, with respect to each Security, the date on
which the applicable Security Interest Rate is effective and means, with respect
to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the Auction
Date, or if no Auction Date is applicable to such Security, the Business Day
immediately preceding the date of commencement of an Auction Period.
"Remarketing Agent" means the initial remarketing agent under the initial
Interest Rate Services Agreement unless and until a substitute Interest Rate
Services Agreement becomes effective, after which "Remarketing Agent" shall mean
the substitute remarketing agent.
"Remarketing Agent Fee" has the meaning set forth in the Interest Rate
Services Agreement.
"Security Initial Rate" means, with respect to any Security, the rate at
which interest accrues on such Security during the Initial Period.
"Security Initial Rate Adjustment Date" means October 15, 1998.
"Three-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months commencing on the related
Interest Determination Date (the "Three-Month Index Maturity") which appears on
Telerate page 3750 as of 11:00 a.m., London time, on such Interest 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 Three 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
Interest Determination Date to prime banks in the London interbank market by the
Reference Banks. The Remarketing 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 Remarketing Agent, at approximately 11:00 a.m., New
York City time, on such Interest Determination Date for loans in U.S. dollars to
leading European banks having the Three 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,
Three-Month LIBOR in effect for the applicable Interest Period will be
Three-Month LIBOR in effect for the previous Interest Period.
"Trustee" means the Indenture Trustee.
III-2
<PAGE>
REMARKETING AGENT
The Representative has appointed First Union Capital Markets as initial
Remarketing Agent. The Remarketing Agent, may, with the consent of the
Representative and MBIA and notice to the Trustee and designation of the party
authorized to direct the Trustee, enter into an agreement with one or more co-
remarketing agents under which certain duties of the Remarketing Agent may be
delegated to the co-remarking agent. The Remarketing Agent and all
co-remarketing agents, if any, shall be members of the National Association of
Securities Dealers, Inc. having a capitalization acceptable to the
Representative and the Rating Agencies and authorized by law to perform all the
duties imposed upon them by the Pooling and Servicing Agreement and the Interest
Rate Services Agreement. Subject to certain limitations set forth in the
Interest Rate Services Agreement, the Remarketing Agent may at any time resign
and be discharged of the duties and obligations created by the Indenture and the
Interest Rate Services Agreement by giving at least 60 days' written notice to
the Representative, MBIA and the Trustee. Subject to certain limitations set
forth in the Interest Rate Services Agreement, the Remarketing Agent may be
removed upon at least 60 days' written notice to the Remarketing Agent, at the
direction of the Representative with the prior written consent of the Trustee
and MBIA, by an instrument signed by the Representative and filed with the
Remarketing Agent, MBIA and the Trustee. Any subsequent Remarketing Agent shall
be selected by the Representative, with the prior written consent of MBIA with
notice to the Trustee, provided, however, that, with the Representative's
consent, the co-remarketing agent (or one of them, at the Representative's
discretion and the prior written consent of MBIA shall become the Remarketing
Agent automatically if the Remarketing Agent ceases to act as Remarketing Agent
for any reason.
The Remarketing 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 Remarketing 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 Interest Rate Services Agreement and will not be liable for
any error of judgment made in good faith unless the Remarketing Agent will have
been negligent in ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay from the Expense Account to the Remarketing Agent the
Remarketing Agent Fee on the Remittance Date set forth in the related Prospectus
Supplement, and will reimburse the Remarketing Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the
Remarketing Agent from the Expense Account in accordance with any provision of
the Interest Rate Services Agreement (including the reasonable compensation and
the expenses and disbursements of its agents and counsel).
AUCTION PROCEDURES
GENERAL
Pursuant to the Agreement, Auctions to establish the Auction Rate for each
Security 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 the Class AF-2 Notes.
The Remarketing Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each
Auction Date. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If MBIA is in default under the MBIA
Policies and an Event of Default has occurred under the Indenture, 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 Event of Default and (ii) any Interest Period commencing less than two
Business Days after the cure of any Event of Default. The Remarketing Agent will
determine One-Month LIBOR or the Three-Month
III-3
<PAGE>
LIBOR, as applicable, for each Interest Period other than the Initial Period for
a Security; provided, that if the ownership of the Securities is no longer
maintained in Book-Entry Form, or if an Event of Default has occurred, then the
Trustee will determine the One-Month LIBOR or the Three-Month LIBOR, as
applicable, for each such Interest Period. The determination by the Trustee or
the Remarketing Agent, as the case may be, of the One-Month LIBOR or the
Three-Month LIBOR, as applicable, will (in the absence of manifest error) be
final and binding upon the Securityholders and all other parties. If calculated
or determined by the Remarketing Agent, the Remarketing Agent will promptly
advise the Trustee of One-Month LIBOR or Three-Month LIBOR, as applicable.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Remarketing Agent has made the determinations described
above, the Remarketing Agent is to advise the Trustee of 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 Class AF-2 Notes.
Promptly after the Remarketing Agent has determined the Auction Rate, the
Remarketing Agent will determine and advise the Trustee of such Auction Rate for
each applicable Security, which rate will be lesser of (a) the Maximum Auction
Rate for each such Security and (b) the rate established by the Remarketing
Agent for the Class AF-2 Notes no later than 1:00 p.m., New York City time, on
the Auction Date immediately preceding each Interest Period for the Class AF-2
Notes as being the minimum rate of interest that would be necessary, in the best
professional judgment of the Remarketing Agent, taking into account prevailing
market conditions, to sell all of the Class AF-2 Notes for the next succeeding
Interest Period on such date in the secondary market at a price equal to the
principal amount thereof for settlement on the next succeeding Remittance Date
for the Class AF-2 Notes (or, in the case of the Initial Rate Adjustment Date
for the Class AF-2 Notes, the rate announced as such for such period on or prior
to delivery of the Class AF-2 Notes).
In the process of taking into account prevailing market conditions, the
Remarketing Agent shall take, among other actions it may deem appropriate, the
following actions. Not more than one Business Day before the Auction Date, the
Remarketing Agent shall make available to all interested parties an estimated
range of interest rates for the Class AF-2 Notes for the next ensuing Interest
Period (the "Estimated Range of Interest Rate"). The Remarketing Agent shall
then inquire of owners of the Class AF-2 Notes that communicate with the
Remarketing Agent as to whether or not such owners choose to continue to hold
their Class AF-2 Notes at the Estimated Range of Interest Rate or, if not, as to
the specific interest rate, if any, at which such owners would choose to
continue to hold such Class AF-2 Notes. The Remarketing Agent shall thereupon
establish the Auction Rate for the Class AF-2 Notes for the next ensuing Auction
Period or Periods and communicate the same to the parties and in the manner
required by the Auction Procedures. In no event shall a Security Interest Rate
exceed the rate (the "Security Interest Rate Limitation") set forth in the
related Prospectus Supplement.
REMARKETING AGENT
For each Auction Date, the Trustee shall notify the Remarketing Agent of the
principal amount of Securities outstanding not later than the Business Day
preceding each Auction Date. The Remarketing Agent will accept bids that satisfy
the lowest possible bid for all outstanding Securities and will allocate
payments accordingly. 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 Securities
delivered as necessary to effect the purchases and sales of Securities 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
III-4
<PAGE>
procedures, which now provide for payment against delivery by its Participants
in immediately available funds.
TRUSTEE NOT RESPONSIBLE FOR REMARKETING AGENT
The Trustee shall not be liable or responsible for the actions of or failure
to act by the Remarketing Agent under the related Agreement, the related Terms
Supplement or under the Interest Rate Services Agreement. The Trustee may
conclusively rely upon any information required to be furnished by the
Remarketing Agent without undertaking any independent review or investigation of
the truth or accuracy of such information.
CHANGES IN AUCTION TERMS
CHANGES IN THE AUCTION DATE
The Remarketing Agent, at the written direction of the Representative, 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 Securities. The Representative will not
consent to such change in the Auction Date unless the Representative will have
received from the Remarketing 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 Remarketing 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 Remarketing Agent, the Trust, MBIA and the
Representative.
Subject to the prior written consent of MBIA, the changes in Auction terms
described above may be made with respect to any Class of the Securities. In
connection with any change in Auction Terms described above, the Remarketing
Agent is to provide such further notice to such parties as is specified in the
Interest Rate Services Agreement.
III-5
<PAGE>
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates (the
"Certificates") and The Money Store Asset Backed Notes (the "Notes" and
collectively with the Certificates, the "Securities") described herein, issuable
in one or more series (each a "Series"), which may be sold from time to time on
terms determined at the time of sale and described in the related Supplement to
this Prospectus (each a "Prospectus Supplement"), evidencing specified interests
in, or rights to receive payments from, one or more trust funds (each, a
"Trust"), the primary assets of which will consist of one or more 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 and/or Notes.
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") or other affiliates of 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 of the related Securities 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. Securities 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, maturity
protection or derivative instruments, to the extent described in the related
Prospectus Supplement. The Prospectus Supplement for each Series of Securities
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 servicers (each, in such capacity, the
"Master Servicer") of such Mortgage Assets.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Each Class of Securities of any series will represent the right to
receive, or be secured by, a specified amount of payments of principal and/or
interest on the related Mortgage Assets in the manner described herein and in
the related Prospectus Supplement. The right of each Class of Securities to
receive payments may be senior or subordinate to the rights of one or more of
the other Classes of such Series. The right of the holders of any Class of Notes
("Noteholders") and the right of the holders of any Class of Certificates
("Certificateholders" and collectively with the Noteholders, "Securityholders"
or "Holders") to receive any distributions of principal and interest will be set
forth in the related Prospectus Supplement. A Series may include two or more
Classes of Certificates and/or Notes which differ as to the timing and priority
of payment, interest rate or amount of distributions in respect of principal or
interest or both. A Series may include one or more Classes of Certificates
and/or Notes entitled to distributions in respect of principal, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Distributions on Certificates of any Series will be subordinated to
prior payments due on the related Notes, if any, to the extent described herein
and in the related Prospectus Supplement. The Securities of each Series will
represent fractional undivided ownership interests in the related Trust.
SEE RISK FACTORS ON PAGE 23 HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
Distributions to Holders of Securities 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 at which any Class of Certificates (the
"Pass-Through Rate") or the rate at which any Class of Notes (the "Interest
Rate") bear interest or the method of calculating such Pass-Through Rate or
Interest Rate, which may be fixed or variable, will be set forth in the related
Prospectus Supplement. Distributions on the Certificates and/or Notes of a
Series will be made only from the assets of the related Trust and certain
related property. The Pass-Through Rate for a Class of Certificates or the
Interest Rate for a Class of Notes that bear interest based upon a floating rate
of interest, as specified in the related Prospectus Supplement, may base such
floating rate upon any of following: (i) the auction procedures described herein
(such Securities being referred to herein as "Auction Rate Securities"), (ii)
the London interbank offered rate for U.S. dollar deposits for a specified
period ("LIBOR") plus an amount set forth in the related Prospectus Supplement ,
(iii) the average bond equivalent rates of weekly auctions of Treasury bills for
a specified period (the "T-Bill Rate") plus an amount set forth in the related
Prospectus Supplement or (iv) any such other method or procedures used to
determine the floating rate of interest as may be described in the applicable
Prospectus Supplement.
The Securities will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as otherwise specified in the related Prospectus Supplement) 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 Securities 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 and/or Notes will be limited
to its contractual servicing obligations. If the amount available for
distribution to Holders 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 Holders, to the extent such deficiency is attributable to
delinquent payments of principal and/or interest during the immediately
preceding Due Period (as defined herein). See "Description of the
Securities--Monthly Advances and Compensating Interest."
The yield to Holders on each Class of Certificates and/or Notes 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.
------------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 28, 1998
<PAGE>
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, including First Union Capital Markets,
a division of Wheat First Securities, Inc., an affiliate of the Representative,
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 Securities will be set forth in the related Prospectus Supplement.
There can be no assurance that a secondary market for the Securities will
develop, or if it does develop, that it will continue. This Prospectus may not
be used to consummate sales of a Series of Securities unless accompanied by a
Prospectus Supplement.
First Union Capital Markets expects to enter into market making transactions
in the Securities and may act as principal or agent in any such transactions.
Any such purchases or sales will be made at prices related to prevailing market
prices at the time of sale. This Prospectus and the related Prospectus
Supplement may be used by First Union Capital Markets in connection with such
transactions.
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 and/or Notes
to be offered hereunder, among other things, will set forth with respect to such
Series of Certificates and/or Notes: (i) the aggregate principal amount, the
Pass-Through Rate, Interest 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 and/or Notes; (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 or other derivative instruments, if any, relating to the
Pools or all or part of the related Certificates and/or Notes; (iii) the
specified interest of each Class of Certificates and/or Notes 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 and/or Notes, 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 and/or Notes.
AVAILABLE INFORMATION
The Representative and the Originators have filed a Registration Statement
under the Securities Act of 1933, as amended (the "1933 Act"), with the
Securities and Exchange Commission (the "Commission") with respect to the
Securities. 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. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http:// www.sec.gov.
2
<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 Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the Securityholders as described in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, a Series of
Certificates and/or Notes may be issuable in book-entry form. In such event, the
related Certificates and/or Notes may be registered in the name of Cede & Co.
("Cede"), the nominee of The Depository Trust Company ("DTC") or another
nominee. All reports will be provided to Cede or such other nominee, which in
turn will provide such reports to Participants and Indirect Participants (as
defined herein) of DTC or such other entities as described in the related
Prospectus Supplement. Such Participants and Indirect Participants will then
forward such reports to the beneficial owners of Securities. See "Description of
the Securities--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 Securities issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and the related
Prospectus Supplement and to be a part hereof 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 incorporated by reference in
such documents). Requests for such copies should be directed to The Money Store
Inc., 707 Third Street, West Sacramento, California 95605, Attention: Finance
Department, Telephone: (916) 617-2001.
3
<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.
<TABLE>
<S> <C>
Securities Offered............ The Money Store Asset Backed Certificates (the
"Certificates") and The Money Store Asset Backed
Notes (the "Notes"). Notes are issuable from
time to time in Series pursuant to an Indenture
(an "Indenture"), and Certificates are issuable
from time to time in Series pursuant to either a
Pooling and Servicing Agreement (a "Pooling and
Servicing Agreement") or a Trust Agreement (a
"Trust Agreement"). As used herein, "Agreements"
means, collectively, with respect to a Series of
Certificates, the related Pooling and Servicing
Agreement or the related Trust Agreement, with
respect to a Series of Notes, the related
Indenture and the related Sale and Servicing
Agreement, as the context requires, and with
respect to a Series of Securities, the relevant
combination of Agreements for such Series. Each
Certificate of a Series will evidence an
interest in the Trust Fund or Trust Funds for
such Series, as specified in the related
Prospectus Supplement. Each Series of Securities
will consist of one or more Classes, each Class
may differ in, among other things, the amounts
allocated to and the priority of principal and
interest payments. The Securities of each Class
will be issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities or
certain Classes of such Securities offered
thereby may be available in book-entry form
only.
Issuers....................... Certain trust funds (each, a "Trust")
represented by The Money Store or its
affiliates, the primary assets of which will be
one or more Pools of Mortgage Loans and certain
other Mortgage Assets.
Representative and Master The Money Store Inc. ("The Money Store"), a New
Servicer.................... Jersey corporation, or certain of its
affiliates, including First Union National Bank
or certain of its affiliates. The Prospectus
Supplement relating to any Series of
Certificates and/or Notes 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"), on the terms
and conditions set forth in the related Pooling
and Servicing Agreement or Sale and Servicing
Agreement (a "Sale and Servicing Agreement").
The principal offices of The Money Store are
located in Sacramento, California and Union, New
Jersey. The Money Store is a wholly-owned
subsidiary of First Union National Bank, a
national banking subsidiary of First Union
Corporation. See "The Representative and the
Originators."
</TABLE>
4
<PAGE>
The Mortgage Assets........... The Securities 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 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 not constituting
Agency 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 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." The Mortgage Loans may be
closed-end or revolving as described in the
related Prospectus Supplement.
5
<PAGE>
<TABLE>
<S> <C>
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 otherwise 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
"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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
("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 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, the District of Columbia, the
Commonwealth of Puerto Rico or any other
commonwealth, territory or possession of the
United States. 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 may
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
Securities 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.
The Prospectus Supplement for each Series of
Securities generally 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
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
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
weighted average Combined Loan-to-Value Ratios
at origination (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 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, if any, and terms of any
other credit enhancement or other derivative
instruments to be provided with respect to all
or any Mortgage Loans or the Pool and (xiii) 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
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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 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 (each an "Underlying Mortgage Loan")
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. Unless otherwise
specified in the Prospectus Supplement relating
to a Series of Securities, 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
Securities will specify, with respect to any
Private Mortgaged-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 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
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
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."
In addition, if any Series of Securities
includes Private Mortgage-Backed Securities,
such Private Mortgage-Backed Securities will be
registered to the extent required under the 1933
Act and the rules, regulations and
interpretations thereof by the Staff of the
Commission.
Pre-Funding Account........... If provided in the related Prospectus
Supplement, the original principal amount of a
Series of Securities may exceed the principal
balance of the Mortgage Assets initially being
delivered to the Trustee. Cash in an amount up
to the amount of such difference (such amount,
the "Pre-Funded Amount") will be deposited into
a separate trust account (the "Pre-Funding
Account") maintained with 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 current
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 Securities 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
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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, 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
and/or Notes.
Revolving Period and
Amortization Period;
Retained Interest........... If the related Prospectus Supplement so
provides, there may be a period commencing on
the date of issuance of a Class or Classes of
Notes and/or Certificates of a Series and ending
on the date set forth in the related Prospectus
Supplement (each, a "Revolving Period") during
which limited or no principal payments will be
made to one or more Classes of Notes and/or
Certificates of the related Series as are
identified in such Prospectus Supplement. Some
or all collections of principal otherwise
allocated to such Classes of Notes or
Certificates may be (i) utilized during the
Revolving Period to acquire additional Mortgage
Assets which satisfy the criteria described
under "The Trusts--The Mortgage Loans" and the
criteria set forth in the related Prospectus
Supplement, (ii) held in an account and invested
in Permitted Investments (as defined herein),
for later distribution to Securityholders, (iii)
applied to those Notes or Certificates for such
Series, if any, specified in the related
Prospectus Supplement as then are in
amortization, or (iv) otherwise applied as
specified in the related Prospectus Supplement.
An "Amortization Period" is the period during
which an amount of principal is payable to
Holders of Securities which, during the
Revolving Period, were not otherwise entitled to
such payments. If so specified in the related
Prospectus Supplement, during an Amortization
Period all or a portion of principal collections
on the Mortgage Loans may be applied as
specified above for a Revolving Period and, to
the extent not so applied, will be distributed
to the Classes of Notes and/or Certificates for
such Series specified in the related Prospectus
Supplement as then being entitled to payments of
principal. In addition, if so specified in the
related Prospectus Supplement, amounts deposited
in certain accounts for the benefit of one or
more Classes of Notes or Certificates for such
Series may be released from time to time or on a
specified date and applied as a payment of
principal on such Classes of Notes and/or
Certificates. The related Prospectus Supplement
will set forth the circumstances which will
result in the commencement of an Amortization
Period.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Each Series which has a Revolving Period may
also issue to the Representative or one of its
affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in
such Series not represented by the other
Securities issued by the related Trusts. As
further described in the related Prospectus
Supplement, the value of such Retained Interest
will fluctuate as the amount of Notes and
Certificates of the related Series of Securities
outstanding is reduced.
Description of the Each Certificate will represent a fractional
Certificates................ undivided ownership interest in 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").
In addition, a Series may include one or more
Series entitled to (i) principal payments with
disproportionate, nominal or no interest
payments or (ii) interest payments with
disproportionate, nominal or no principal
payments (such Certificates, "Strip
Certificates"). Certain Series or Classes of
Certificates may be covered by a 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, or derivative products 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
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 a
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
floating 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 Pass-
Through Rate for a Class of Certificates that
pay interest based upon a floating rate of
interest, as specified in the related Prospectus
Supplement, may base such floating rate upon any
of following: (i) the auction procedures for
Auction Rate Securities described herein, (ii)
LIBOR plus an amount set forth in the related
Prospectus Supplement, (iii) the T-Bill Rate
plus an amount set forth in the related
Prospectus Supplement or (iv) any such other
method or procedures used to determine the
floating rate of interest as may be described in
the applicable 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
Securities."
With respect to any Series of Securities
including one or more Classes of Notes,
distributions in respect of the Certificates may
be subordinated in priority of payment to
payments on the Notes of such Series, to the
extent specified in the related Prospectus
Supplement.
Description of the Notes...... Any Series of Securities may include one or more
Classes of Notes, as specified in the related
Prospectus Supplement, each of which will be
issued pursuant to an Indenture and will be
treated as debt obligations of the related
Trust.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be available
for purchase in denominations of $1,000 and
integral multiples of $1,000 (or such other
accounts as may be set forth in a Prospectus
Supplement), except that one Note of each Class
may be issued in a different denomination, in
book-entry form or in definitive form, as
specified in the related Prospectus Supplement.
See "Description of the Securities."
Each Class of Notes will have a stated principal
amount and will bear interest at the Interest
Rate or Rates as specified in the related
Prospectus Supplement, which may be different
for each Class of Notes and may be fixed,
variable, adjustable, or any combination of the
foregoing. The related Prospectus Supplement
will specify the Interest Rate for each Class of
Notes or the method for determining the Interest
Rate. The Interest Rate for a Class of Notes
that pay interest based upon a
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
floating rate of interest, as specified in the
related Prospectus Supplement, may base such
floating rate upon any of following: (i) the
auction procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount set
forth in the related Prospectus Supplement ,
(iii) the T-Bill Rate plus an amount set forth
in the related Prospectus Supplement or (iv) any
such other method or procedures used to
determine the floating rate of interest as may
be described in the applicable Prospectus
Supplement. Each Note may also represent a
fractional undivided interest in, or be entitled
to receive payments from, monies on deposit, if
any, in the Pre-Funding Account as specified in
the related Prospectus Supplement and any other
account established for the benefit of
Noteholders, as specified in the related
Prospectus Supplement.
A Series may include two or more Classes of
Notes which differ as to the timing and priority
of payment, seniority, allocations of loss,
Interest Rate or amount of payments of principal
or interest, or as to which payments of
principal or interest may or may not be made
upon the occurrence of specified events or on
the basis of collections from designated
portions of the Mortgage Assets for such Series.
In addition, a Series may include one or more
Classes of Notes entitled to (i) principal
payments with disproportionate, nominal or no
interest payments or (ii) interest payments with
disproportionate, nominal or no principal
payments (such Notes, "Strip Notes"). A Series
of Notes may include one or more Classes of
senior Notes (collectively, "Senior Notes")
which receive certain preferential treatment
specified in the related Prospectus Supplement
with respect to one or more Classes of
subordinate Notes (collectively, the
"Subordinated Notes"). Certain Series or Classes
of Notes may be covered by a 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 or derivative
instruments, as described herein and in the
related Prospectus Supplement.
Credit Enhancement............ The Mortgage Assets in a Trust or the Securities
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 all Certificateholders will be
subordinated to the rights of all Noteholders of
a Series to receive distributions to the extent
described in the related Prospectus Supplement,
with respect to the Mortgage Assets and other
assets in the related Trust. The rights of the
holders of Subordinated Certificates
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
and/or Subordinated Notes, as the case may be
(collectively, "Subordinated Securities"), of a
Series to receive distributions will be
subordinated to the rights of the holders of the
Senior Certificates and/or Senior Notes, as the
case may be (collectively, "Senior Securities"),
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 Securities of the full amount
of payments which such holders would be entitled
to receive if there had been no losses or
delinquencies. The protection afforded to the
holders of Senior Securities 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 Securities 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
Distribution Account (as defined herein) to the
extent described in the related Prospectus
Supplement. The protection afforded to the
holders of Senior Securities through
subordination also may be accomplished by
allocating certain types of losses or
delinquencies to the related Subordinated
Securities to the extent described in the
related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, the same Class of Securities may
constitute Senior Certificates and/or Senior
Notes, as the case may be, with respect to
certain types of payments or certain losses or
delinquencies and Subordinated Certificates
and/or Subordinated Notes, as the case may be,
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 and/or Subordinated Notes, as the
case may be, 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
and/or Subordinated Notes, as the case may be,
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 holders of Senior
Certificates and/or Senior Notes, as the case
may be, or released to holders of Subordinated
Certificates and/or Subordinated Notes, as the
case may be, from the related Trust.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
B. Guaranty Insurance Policy...... A certificate or note guaranty insurance policy (each a
"Guaranty Insurance Policy") may be obtained and
maintained for each Class or Series of Certificates
and/or Notes. 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 holders
of the covered Securities. 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 Securities
on any specified date.
C. Spread Amount.................. If so specified in the related Prospectus Supplement,
certain Classes of Certificates and/or Notes 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 Securities. 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 Securities. 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 may
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 Securities 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
Securities 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 Securities.
D. Mortgage Pool Insurance A mortgage pool insurance policy or policies ("Mortgage
Policy.......................... 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
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
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 In the case of Mortgage Loans or Contracts, certain
Policy.......................... 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
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 and/or Notes. In such
case, credit support may be provided by a cross-support
feature which requires that distributions be made with
respect to certain Certificates and/or Notes evidencing
interests in one or more Trusts or asset groups prior to
distributions to other Certificates and/or Notes
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 If so specified in the Prospectus Supplement, one or
Payments........................ more Classes of Certificates and/or Notes 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
Securities 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 Securities 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.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
I. Maturity Protection............ If so specified in the Prospectus Supplement, one or
more Classes of Certificates and/or Notes may be
entitled to third-party payments to help provide that
the holders of such Securities receive their unpaid
principal on or prior to a specified date.
J. Other Insurance, Guarantees,
Swaps, 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, other 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 Securities 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
hedge contract providing limited protection against
interest rate risks. If provided in the related
Prospectus Supplement, interest and/or principal on one
or more Classes of the Securities of a Series may be
paid to Holders thereof in a currency other than U.S.
dollars. If so provided, the Trust may, in connection
therewith, enter into one or more currency rate swaps to
provide limited protection against foreign currency rate
fluctuation risks. One or more Classes of Securities
also may be issued in conjunction with a put or call
feature entitling (in the case of a put) or obligating
(in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named
in the applicable Prospectus Supplement on the date or
dates set forth therein. Any such arrangement must be
acceptable to each nationally recognized rating agency
that provides a rating for the related Series of
Securities (the "Rating Agency"). Additionally, to the
extent a significant portion of the Mortgage Loans
underlying a given Series of Securities 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.
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
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
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
Securities--Monthly Advances and Compensating Interest")
on the then outstanding principal balance of the related
Series of Certificates and/or Notes 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. The Master Servicer will not be required
to make any Monthly Advances which it determines, in
good faith, would be nonrecoverable from amounts
received in respect of the Mortgage Loans. See
"Description of the Securities--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 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
certain classes of Certificates or Notes, or certain
other entities specified in the related Prospectus
Supplement may have the option to effect early
retirement of a Series of Securities through the
purchase of the related Mortgage Assets and other assets
in the related Trust under the circumstances and in the
manner
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
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 Securities 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 Securities (each, a "Trustee") will be
specified in the related Prospectus Supplement.
Additionally, any Co-Trustees, Custodians or
Co-Custodians will be set forth 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 the
Trust) as a "real estate mortgage investment conduit"
("REMIC") under the Internal Revenue Code of 1986, as
amended (the "Code"), and, if such election is not made,
whether the Trust is structured and intended to be
treated as a grantor trust, a partnership or otherwise.
REMIC. If an election is to be made to treat the Trust
(or certain assets of the Trust) for 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 LLP, special federal tax counsel
("Federal Tax Counsel"), Certificates representing an
interest in the REMIC generally will be considered "real
estate assets" for purposes of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C)
of the Code, but generally will not be considered
"residential loans" for purposes of Section 593(g)(4)(B)
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.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
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.
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 may be classified
as a grantor trust for federal income tax purposes and
not as an association taxable as a corporation or a
taxable mortgage pool. 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 in the related Prospectus
Supplement, Non-REMIC Certificates generally will
represent interests in "real estate assets" for purposes
of Section 856(c)(4)(A) of the Code and
"Loans . . . principally secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code, but should not be
considered "residential loans" for purposes of Section
593(g)(4)(B) of the Code.
PARTNERSHIP. If no election is to be made to treat the
Trust for a Series as a REMIC and it is so specified in
the related Prospectus Supplement, the Trust generally
will be treated as a partnership for federal income tax
purposes, and Federal Tax Counsel will deliver its
opinion generally to the effect that the Trust will not
be an association (or publicly traded partnership)
taxable as a corporation, or a taxable mortgage pool,
for federal income tax purposes. Each Noteholder, by the
acceptance of a
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
Note of such Series, will agree to treat such Note as
indebtedness, and each Certificateholder, by the
acceptance of a Certificate of such Series, generally
will agree to treat the related Trust as a partnership
in which such Certificateholder is a partner for federal
income and state tax purposes.
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 Section 4975 of the Code should
carefully review with their legal advisors whether an
investment in Securities 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
Securities 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 Securities 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.
Registration of Securities........ Securities may be represented by global certificates and
notes registered in the name of Cede, as nominee of DTC
or another nominee. In such case, Securityholders will
not be entitled to receive definitive certificates
and/or notes representing such Holders' interests,
except in certain circumstances described in the related
Prospectus Supplement. See "Description of the
Securities--Book-Entry Registration" herein.
</TABLE>
22
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities will
develop or, if a secondary market does develop, that it will provide Holders of
the Securities with liquidity of investment or that it will continue for the
lives of the Securities.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates and/or Notes in book-entry form may reduce the
liquidity of such Securities in the secondary trading market since investors may
be unwilling to purchase Securities for which they cannot obtain physical
Securities.
Since transactions in Certificates and Notes will, in most cases, be able to
be effected only through DTC, Direct or Indirect Participants and certain banks,
the ability of a Securityholder to pledge a Certificate or Note to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Securities, may be limited due to lack of a physical
certificate or note representing such Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities 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 Securityholders either directly or indirectly through Indirect
Participants or such other entities as described in the related Prospectus
Supplement. See "Description of the Securities--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 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. 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."
23
<PAGE>
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.
Although a low interest rate environment may facilitate the refinancing of a
balloon payment, the receipt and reinvestment by Securityholders 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 Securityholders 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.
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
24
<PAGE>
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,
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.
PRE-FUNDING ACCOUNTS
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Mortgage Loans delivered to the Trust Fund during the Pre-Funding
Period is less than the original Pre-Funded Amount, the Holders of the
Securities of the related Series will receive a prepayment of principal as and
to the extent described in the related Prospectus Supplement. Any such principal
prepayment may adversely affect the yield to maturity of the applicable
Securities.
The ability of a Trust Fund to obtain subsequent Mortgage Loans during the
related Pre-Funding Period will be dependent on the ability of the Originators
to originate or acquire Mortgage Loans that satisfy the requirements for
transfer to the Trust Fund. The ability of the Originators to originate or
acquire such Mortgage Loans will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perception of general economic conditions.
COMBINED LOAN-TO-VALUE RATIOS
The Originators' underwriting standards allow loans to be approved with
Combined Loan-to-Value Ratios (as defined below) that exceed 100%. Because the
original Combined Loan-to-Value Ratios of certain of the Mortgage Loans may be
high relative to that of other similar mortgage loans, recoveries on defaulted
Mortgage Loans may be lower than the level of recoveries experienced by such
other defaulted mortgage loans.
25
<PAGE>
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 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
26
<PAGE>
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 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 Securities. 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 affected Securityholders 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 subordinated interest in a Trust
Fund, a trustee in bankruptcy of the 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 Securityholders 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 Securities and
liquidate the Mortgage Loans, with the Securityholders entitled to the then
outstanding principal amount thereof together with accrued interest. Thus, the
Securityholders could lose the right to future payments of interest, and might
suffer reinvestment loss in a lower interest rate environment.
27
<PAGE>
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.
SECURITY RATING
If set forth in the related Prospectus Supplement, the rating of one or more
Classes of Securities may depend, to a large extent, on the creditworthiness of
a third party provider of credit enhancement. In such event, any reduction in
the rating assigned to the claims-paying ability of such provider below the
rating initially given to such Class of Securities would likely result in a
reduction in the rating of such Class of Securities. See "Rating."
OTHER
To the extent a significant portion of the Mortgage Loans underlying a given
Series of Securities 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.
THE TRUSTS
A Trust for any Series of Securities will include the Mortgage Assets
consisting of (A) one or more Pools* 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
Mortgage Loans may be closed-end or revolving as described in the related
Prospectus Supplement.
The Notes of each Series will be secured by the pledge of the assets of the
related Trust, and the Certificates of each Series will represent interest in
the assets of the related Trust. The Securities 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 Securities
- ------------------------
* Whenever the terms "Pool," "Certificates," "Notes," and "Securities" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool, the Certificates representing
certain undivided fractional interests, as described below, in a single Trust
consisting primarily of the Mortgage Loans in such Pool, and the Notes shall
refer to debt obligations of such Trust secured by the related Pool of
Mortgage Loans. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates of one specific Series, the terms
"Interest Rate" will refer to the Interest Rate borne by the Notes of one
specific Series and the term "Trust" will refer to one specific Trust.
28
<PAGE>
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 Securities 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 Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities 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
Securities.
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, the District of Columbia, the
Commonwealth of Puerto Rico or any other commonwealth, territory or possession
of the United States. 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 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
29
<PAGE>
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 may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred payment of
some or all of the payments due during a specified period, which may be
recouped as deferred interest through negative amortization or otherwise.
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.
To the extent a significant portion of the Mortgage Loans underlying a given
Series of Securities 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 Securities 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 weighted average Combined Loan-to-Value
Ratios at origination (except with respect to home improvement loans), (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) the amount, if any, and terms of any
other credit enhancement or other derivative instruments to be provided with
respect to all or a material portion of the Mortgage Loans or the Pool and
(xiii) 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 Securities are initially offered, more general information
of the nature described
30
<PAGE>
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 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 Securities 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, if
applicable, 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.
The Mortgage Loans in any Trust may include Mortgage Loans whose Combined
Loan to Value Ratios exceed 100%. The related Mortgaged Properties are unlikely
to provide adequate security for such Mortgage Loans. Even assuming that a
Mortgaged Property provides adequate security for the related Mortgage Loan,
substantial delays could be encountered in connection with the liquidation of a
Mortgage Loan that would result in current shortfalls in payments to
Securityholders to the extent such shortfalls are not covered by any credit
enhancement as described in the related Prospectus Supplement. In addition,
liquidation expenses relating to any liquidated Mortgage Loan (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the liquidation proceeds otherwise available for payment to Securityholders. In
the event that any Mortgaged Property fails to provide adequate security for the
related Mortgage Loan, any losses in connection with such Mortgage Loan will be
borne by Securityholders as described in the related Prospectus Supplement to
the extent that the applicable credit enhancement described in the related
Prospectus Supplement is insufficient to absorb all such losses.
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.
31
<PAGE>
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 credit enhancements, such losses will be borne, at
least in part, by the Securityholders 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 Securities 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 Securities 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 Securities 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 Securities--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.
32
<PAGE>
If provided in the related Prospectus Supplement, the original principal
amount of a Series of Securities 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 Securities at the time and in
the manner set forth in the related Prospectus Supplement.
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 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.
33
<PAGE>
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 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.
34
<PAGE>
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.
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 unsecured 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 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
35
<PAGE>
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, 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
36
<PAGE>
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.
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 Securities 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 Securities
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 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
37
<PAGE>
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 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
38
<PAGE>
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 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 Security 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 Securities, 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) 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,
39
<PAGE>
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 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
the interest distributions) or the interest distributions (but not the principal
distributions), or in some
40
<PAGE>
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
participations or pass-through certificates representing beneficial interests in
certain mortgage loans or (b) CMOs secured by such 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 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 MORTGAGE LOANS. The Underlying 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
41
<PAGE>
payment features. Such Underlying 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 Underlying Mortgage
Loan 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 Underlying Mortgage Loans or
with respect to the Private Mortgage-Backed Securities themselves.
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 Underlying Mortgage Loans including (A) the payment
features of such Underlying 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 Underlying Mortgage Loans 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.
In addition, if any Series of Securities includes Private Mortgage-Backed
Securities, such Private Mortgage-Backed Securities will be registered to the
extent required under the 1933 Act and the rules, regulations and
interpretations thereof by the Staff of the Commission.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Securities of each Series for general corporate
purposes, including repayment of debt, including but not limited to warehouse
facilities, and the origination and acquisition of residential mortgage loans
and other loans. The Representative expects Securities 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 or certain of its affiliates, including First Union National
Bank or certain of its affiliates, may act as a Master Servicer of the Mortgage
Loans and other Mortgage Assets. Except for certain representations and
warranties relating to the Mortgage Loans and other Mortgage Assets and certain
other matters, the
42
<PAGE>
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 wholly-owned
subsidiary of First Union National Bank, a national banking association
subsidiary of First Union Corporation.
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, and student
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.
The Originators originate and purchase Single Family Loans with original
terms of up to 40 years. 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
Securities 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
43
<PAGE>
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 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, which may include 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 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.
44
<PAGE>
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 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. From time-to-time, the Originators may originate or purchase
Single Family Loans containing other features. To the extent that a substantial
portion of a Trust Fund consists of such Single Family Loans such features will
be described in the related Prospectus Supplement.
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.
Commencing in 1997, the Originators began originating Single Family Loans
with Combined Loan-to-Value Ratios exceeding 100%. Such Single Family Loans are
originated to borrowers believed by the
45
<PAGE>
Originators to have the income capacity and credit history to offset the lack of
equity in the related Mortgaged Property. Such Single Family Loans generally
bear a higher rate of interest than Single Family Loans with lower Combined
Loan-to-Value Ratios.
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 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 or one of its affiliates, 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 Securities 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 or monthly statements 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.
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:
46
<PAGE>
(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 Securityholders 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 SECURITIES
Each Series of Certificates will be issued, from time to time, pursuant to
either a Pooling and Servicing Agreement or a Trust Agreement, and each Series
of Notes will be issued, from time to time, pursuant to an Indenture, each to be
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/or certain affiliates thereof and the Trustee for the benefit of the related
Certificateholders or Noteholders, as the case may be, of such Series. A Series
may contain either Certificates or Notes or a combination thereof. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust. A form
of a Pooling and Servicing Agreement, Trust Agreement, Sale and Servicing
Agreement and an Indenture have each 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 Securities 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
Securities 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 Security of such Series
addressed to The Money Store Inc., 707 Third Street, West Sacramento, California
95605, Attention: Managing Attorney.
GENERAL
The Securities of each Series will represent debt obligations of, in the
case of Notes, or fractional undivided ownership interests in, in the case of
Certificates, a Trust created pursuant to the related Agreement and/or such
other assets as may be described in the related Prospectus Supplement. The
Securities will be issued in fully registered form, in minimum denominations of
$1,000 and integral
47
<PAGE>
multiples of $1,000 in excess thereof (or such other amounts do may be set forth
in a Prospectus Supplement), except that one Certificate or Note of each Class
may be issued in a different denomination.
Definitive Securities, 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 Security 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 security administrator may
perform certain duties in connection with the administration of the Securities.
The Securities will not represent obligations of the Representative (except
with respect to a Guaranty issued in connection with a Series), 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 Distribution 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 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 or other derivative instrument
covering any Securities, 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 Securities will be issued in one or more Classes. Each Class
of Securities 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 Securities may be divided into two or more Sub-Classes, as specified in
the related Prospectus Supplement.
A Series may include two or more Classes of Certificates, as specified in
the related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Pass-Through Rate or amount of payments
of principal or interest, or as to which payments of principal or interest may
or may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Mortgage Assets for such Series. A
Series of Certificates may include one or more Classes of Senior Certificates
that receive certain preferential treatment, specified in the related Prospectus
Supplement, with respect to one or more Classes of Subordinated Certificates of
such Series. Certain Series or Classes of Certificates within a Series may be
covered by a 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, or derivative products, in each case as described herein
and in the related Prospectus Supplement. The Pass-Through Rate for a Class of
Certificates that pay interest based upon a floating rate of interest, as
specified in the related Prospectus Supplement, may base such floating rate upon
any of the following: (i) the auction procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount set forth in the related Prospectus
Supplement , (iii) the T-Bill Rate plus an amount set forth in the related
Prospectus Supplement or (iv) any such other method or procedures used to
determine the floating rate of interest as may be described in the applicable
Prospectus Supplement. In addition, a Series may include one or more Classes of
Certificates entitled to (a) principal payments with disproportionate, nominal
or no interest payments or (b) interest payments with disproportionate, nominal
or no principal payments (Strip Certificates).
48
<PAGE>
A Series may include two or more Classes of Notes, as specified in the
related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Interest Rate or amount of payments of
principal or interest, or as to which payments of principal or interest may or
may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Mortgage Assets for such Series. A
Series of Notes may include one or more Classes of Senior Notes which receive
certain preferential treatment specified in the related Prospectus Supplement
with respect to one or more Classes of Subordinated Notes of such Series.
Certain Series or Classes of Notes within a Series may be covered by a 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, or derivative products, in each case as described herein and in the
related Prospectus Supplement. The Interest Rate for a Class of Notes that pay
interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of following: (i)
the auction procedures for Auction Rate Securities described herein, (ii) LIBOR
plus an amount set forth in the related Prospectus Supplement, (iii) the T-Bill
Rate plus an amount set forth in the related Prospectus Supplement or (iv) any
such other method or procedures used to determine the floating rate of interest
as may be described in the applicable Prospectus Supplement. In addition, a
Series may include one or more Classes of Notes entitled to (a) principal
payments with disproportionate, nominal or no interest payments or (b) interest
payments with disproportionate, nominal or no principal payments (Strip Notes).
With respect to any Series of Securities that includes one or more Classes
of Notes, distributions in respect of the Certificates may be subordinated in
priority of payment to payments on the Notes of such Series, to the extent
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 Securities 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 Securities are
registered at the close of business on the record dates specified in the
Prospectus Supplement unless Definitive Securities have been issued, the
registered holder of all Securities will be Cede or such other nominee specified
in the related Prospectus Supplement. Distributions will be made by check mailed
to the persons entitled thereto at the address appearing in the register
maintained for holders of Securities (the "Security Register") or, to the extent
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 Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee or other person
specified in the final distribution notice to Securityholders.
DISTRIBUTIONS ON SECURITIES
Each Class of Securities 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 Securities 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 Securities of such Series
throughout the lives of the Securities 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 Securities entitled to distributions allocable to interest, the
right to receive interest at a Fixed Rate or an Adjustable Rate; and (vii)
include, as to Securities entitled to distributions allocable to
49
<PAGE>
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 Securities will be
made by the Trustee out of, and only to the extent of, funds available in the
related Distribution 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 Distribution Account and such other accounts as may be described in
the related Prospectus Supplement and distribute to the Securityholders 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 Distribution Account as of the
Determination Date, or, in the case of Classes which have been assigned an
aggregate principal balance and Pass-Through Rate or Interest Rate, payments of
interest and payments in reduction of such aggregate principal balance from all
amounts on deposit in the Distribution 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 Distribution Account for the benefit
of the Master Servicer; and (vii) any Advances deposited in the Distribution
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 Securityholders will have the effect of
accelerating the amortization of Senior Notes or Senior Certificates, as the
case may be, while increasing the interests evidenced by the Subordinated Notes
or Senior Certificates, as the case may be, in the related Trust. Distributions
to any Class of Certificates or Notes will be made pro rata to all
Securityholders of that Class, or as otherwise described in a Prospectus
Supplement.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in determining
the interest rates on any Notes or Certificates that are Auction Rate
Securities. Appendix I hereto contains a more detailed description of these
procedures. Prospective investors in the Auction Rate Securities should read
carefully the following summary, along with the more detailed description in
Appendix I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The broker/
dealers are notified by the auction agent of the interest rate for the upcoming
interest period and are provided with settlement instructions relating to
purchases and sales of Auction Rate Securities.
50
<PAGE>
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders--the minimum interest rate that a current investor
is willing to accept in order to continue to HOLD some or all of its Auction
Rate Securities for the upcoming interest period;
(ii) Sell Orders--an order by a current investor to SELL a specified
principal amount of Auction Rate Securities, regardless of the upcoming
interest rate; and
(iii) Potential Bid Orders--the minimum interest rate that a potential
investor (or a current investor wishing to purchase additional Auction Rate
Securities) is willing to accept in order to BUY a specified principal
amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
In connection with each auction, Auction Rate Securities will be purchased
and sold between investors and potential investors at a price equal to their
then outstanding principal balance (I.E., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
<TABLE>
<CAPTION>
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
- ---------------------- ---------------- ----------------------
<S> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
300 Units 50 Units at 3.14%
100 Units at 3.15%
350 Units
</TABLE>
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
NUMBER OF CUMULATIVE CUMULATIVE TOTAL
ORDER NUMBER UNITS TOTAL (UNITS) ORDER % NUMBER NUMBER OF UNITS (UNITS) %
- ------------- ----------- --------------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
</TABLE>
- ------------------------
(W) Winning Order (L) Losing Order
51
<PAGE>
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next period that interest will accrue (each an "Interest
Period"), when another auction will be held. Multiple orders at the winning rate
are allocated units on a pro rata basis. Notwithstanding the foregoing, in no
event will the interest rate exceed the lesser of the Net Loan Rate or the
Maximum Auction Rate (each as described in Appendix I).
The above example assumes that a successful auction has occurred (I.E., all
Sell Orders and all Bid/Hold Orders below the new interest rate were fulfilled).
In certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (I.E., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate (as
defined below).
As stated above, the foregoing is only a summary of the auction procedures.
A more detailed description of these procedures is contained in Appendix I.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Securityholders (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
Securities 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 Securities,
the "Adjusted Mortgage Loan Remittance Rate" will equal the sum of the related
Pass-Through Rate or Interest Rate and the rate used in determining certain
expenses payable by the related Trust, as more specifically set forth in the
related Prospectus Supplement. The Master Servicer will not be required to make
any Monthly Advances which it determines, in good faith, would be nonrecoverable
from amounts received in respect of the Mortgage Loans.
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 Distribution 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").
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Mortgage Assets which satisfy the criteria specified above and the
criteria set forth in the related
52
<PAGE>
Prospectus Supplement, (ii) held in an account and invested in Permitted
Investments for later distribution to Securityholders, (iii) applied to those
Notes or Certificates for such Series, if any, specified in the related
Prospectus Supplement as then are in amortization, or (iv) otherwise applied as
specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of principal
is payable to Holders of a Series which, during the Revolving Period, were not
otherwise entitled to such payments. If so specified in the related Prospectus
Supplement, during an Amortization Period all or a portion of principal
collections on the Mortgage Loans may be applied as specified above for a
Revolving Period and, to the extent not so applied, will be distributed to the
Classes of Notes or Certificates for such Series specified in the related
Prospectus Supplement as then being entitled to payments of principal. In
addition, if so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or more Classes of Notes or
Certificates for such Series may be released from time to time or on a specified
date and applied as a payment of principal on such Classes of Notes or
Certificates. The related Prospectus Supplement will set forth the circumstances
which will result in the commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Notes and Certificates of the related Series of
Securities outstanding is reduced.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
and/or Notes of a Series 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 and/or Noteholders, as
applicable, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Certificates and/or Notes of a
Series registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Securityholders will
receive all distributions of principal of and interest on the Securities and
reports relating to the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
and reports relating to the Securities 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 its Participants which thereafter will be required to forward them to
Indirect Participants or Securityholders. Unless and until Definitive Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Agreement. The beneficial
holders of such Certificates and/or Notes of a Series will only be permitted to
exercise the rights of Certificateholders and/ or Noteholders, as applicable,
under the applicable Agreement indirectly through DTC and its Participants who
in turn will exercise their rights through DTC.
53
<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit reports and payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities similarly are required to make
book-entry transfers and receive and transmit such reports and payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the rules provide a mechanism by
which Securityholders will receive distributions and reports and will be able to
transfer their interests.
Unless and until Definitive Securities are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
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
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a physical certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken by
a Securityholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Securityholders only at the direction of and on
behalf of Participants whose holdings include current principal amounts of
outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Notes and/or Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Securityholders or their nominees ("Definitive Securities"), 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 Securities. Upon surrender by DTC of the certificates and/or notes
representing the Securities and instruction for re-registration, the Trustee
will issue the Notes and/or Certificates in the form of Definitive Securities,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders. Thereafter, payments of principal of and interest
on the Securities will be made by the Trustee directly to Securityholders in
accordance with the procedures set forth herein and in the related Agreement.
The final distribution of any Security (whether Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Remittance Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Securities 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 Notes and/or Certificates of such Series, (ii) the use of a
54
<PAGE>
Guaranty 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, third party guarantees or maturity protection, derivative instruments,
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 guarantee repayment of the entire principal balance of the
Securities 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 Securities will bear their allocable share of
deficiencies. If a form of credit enhancement applies to several Classes of
Securities, 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 Securities. 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
All Classes of Certificates are Subordinated in right of payment to any
Class of Notes in a given Series to the extent described in the related
Prospectus Supplement. To enhance the likelihood of regular receipt by holders
of Senior Certificates or Senior Notes, as the case may be, 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 or Subordinated Notes, as the case may be,
of a Series will instead be payable to holders of one or more Classes of Senior
Certificates or Senior Notes, as the case may be, under the circumstances and to
the extent specified in the Prospectus Supplement. If specified in the related
Prospectus Supplement, the holders of Senior Certificates or Senior Notes, as
the case may be, 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 Distribution Account, prior to any such distribution
being made to holders of the related Subordinated Certificates or Subordinated
Notes, a the case may be, 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 or Senior Notes, as the case may be,
through subordination also may be accomplished by first allocating certain types
of losses or delinquencies to the related Subordinated Certificates or
Subordinated Notes, as the case may be, 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 Subordinated Notes, as
the case may be, or, if applicable, were to exceed the specified maximum amount,
holders of Senior Certificates or Senior Notes, as the case may be, would
experience losses on the Securities.
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 Certificates or Subordinated Notes, as the case may be,
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 Senior Notes, as the case may be,
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
Securities specified in the
55
<PAGE>
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
Securities may be Senior Certificates or Senior Notes, as the case may be, with
respect to certain types of payments or certain types of losses or delinquencies
and Subordinated Certificates or Subordinated Notes, as the case may be, 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 or Senior Notes, as the case may be, and Subordinated Certificates
or Subordinated Notes, as the case may be, may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates or Subordinated Notes, as the case may be,
respectively, through a cross support mechanism or otherwise. As between Classes
of Senior Certificates or Senior Notes, as the case may be, and as between
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
distributions may be allocated among such Classes (i) in the order of their
scheduled final Remittance 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 or Subordinated Notes, as the case may be,
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
Holders of Senior Certificates or Senior Notes, as the case may be, or released
to Holder of Subordinated Certificates or Subordinated Notes, as the case may
be, from the related Trust.
GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy may be obtained and maintained for any Class or Series of Certificates
and/or Notes. The issuer of any Guaranty Insurance Policy (a "Security Guaranty
Insurer") will be described in the related Prospectus Supplement. A copy of any
such Guaranty Insurance Policy will be attached as an exhibit to the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy will unconditionally and irrevocably guarantee to Securityholders 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 Securityholders,
for distribution by the Trustee to each Securityholder. The "Insured Payment"
will equal the full amount of the distributions of principal and interest to
which Securityholders are entitled under the related Agreement plus any other
amounts specified therein or in the related Prospectus Supplement.
The specific terms of any Guaranty Insurance Policy will be as set forth in
the related Prospectus Supplement. 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 Securities on any specified date.
Subject to the terms of the related Agreement, the Security Guaranty Insurer
may be subrogated to the rights of each Securityholder to receive payments under
the Securities to the extent of any payments by such Security Guaranty Insurer
under the related Guaranty Insurance Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Securities 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 Securities. This
acceleration feature is intended to create an amount (the "Spread Amount"),
resulting from, and generally equal to, the excess of the
56
<PAGE>
aggregate principal balances of the applicable Mortgage Assets over the
principal balances of the applicable Classes of Securities. 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 Securities 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 Securities 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 Securities.
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.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Securities 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
Securityholders.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
57
<PAGE>
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 Securities 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 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 Securities 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
58
<PAGE>
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 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 Securityholders, 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 Securityholders 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
Securities 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 Securities 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
Securities 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
If so specified in the Prospectus Supplement, one or more Classes of
Securities may be entitled to third-party payments to help provide that the
holders of such Securities receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES, SWAPS, 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.
59
<PAGE>
If any Class of Securities 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 hedge contract
providing limited protection against interest rate risks. If provided in the
related Prospectus Supplement, interest and/or principal on one or more Classes
of the Securities of a Series may be paid to Holders thereof in a currency other
than U.S. dollars. If so provided, the Trust may, in connection therewith, enter
into one or more currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more Classes of Securities also
may be issued in conjunction with a put or call feature entitling (in the case
of a put) or obligating (in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named in the applicable
Prospectus Supplement on the date or dates set forth therein. Any such
arrangements must be acceptable to each nationally recognized rating agency that
provides a rating for the related Series of Securities (the "Rating Agency").
Additionally, to the extent a significant portion of the Mortgage Loans
underlying a given Series of Securities 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.
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 Securities. In such case, credit support may be
provided by a cross-support feature which requires that distributions be made
with respect to Securities 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 Securities 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 allocation of available funds to various Classes of
Securities, the Pass-Through Rate or Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
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
60
<PAGE>
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-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
Securities purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Securities
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 Securities may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Securities 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 Securityholders. 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 Securities 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 Insured Payments, the yield on the Securities 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 Securities. See "The Agreement--Termination; Purchase of
Mortgage Loans."
If so specified in the related Prospectus Supplement, the effective yield to
certain Securityholders may be slightly lower than the yield otherwise produced
by the applicable Remittance Rate and purchase price,
61
<PAGE>
because while interest generally will accrue on such Securities 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 Securities.
The Prospectus Supplement relating to a Series of Securities 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 Securities. 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 Securities.
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 related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as the case may be, at the time of issuance of Securities
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
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 Securities 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 Securityholders; 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.
62
<PAGE>
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
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
(unless opinions of counsel are delivered satisfactory to the Rating Agencies
and the Security Guaranty Insurer, if any, to the effect that recordation of
such assignments is not required in the relevant jurisdictions to protect the
interests of the Trustee in the Mortgage Loans).
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
Security 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 Securities Guaranties Insurer, if any, or the
Trustee is required promptly to notify the Master Servicer, The Money Store, and
the Trustee or the Security 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 Security 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 Security
Guaranty Insurer, if any, related to such Mortgage Loan, which purchase price
will be deposited in the Principal and Interest Account and delivered to 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 Security 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
63
<PAGE>
owners of each Mortgage Loan conveyed by them; and as of the related Cut-off
Date, no Mortgage Loan will be more than 59 days delinquent in payment, no
Mortgage Loan originated within 12 months of the related Cut-off Date will be
delinquent more than 59 days 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 more than 59 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 Security 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 Security 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 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 Securityholders 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 preceding a Remittance Date that is set
forth in a Prospectus Supplement (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 "Distribution 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 amounts recovered as voidable
preferences) during the immediately preceding calendar month (the "Due
Period"), PLUS
64
<PAGE>
(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,
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.
65
<PAGE>
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 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 Security 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.
Notwithstanding the foregoing, with respect to Mortgage Loans with Combined
Loan-to-Value Ratios exceeding 100%, the Master Servicer may, but will be under
no obligation to, permit a borrower who is selling his principal residence to
substitute the new mortgaged property as collateral for the related Mortgage
Loan. In such event, the Master Servicer may require the borrower to make a
partial prepayment in reduction of the principal balance of the Mortgage Loan.
66
<PAGE>
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 Securities, the Security Guaranty Insurer, if
any, or the Holders of not less than 50 percent of each Class of Securities of
the related Series, other than the holders of residual interests (the "Majority
Securityholders"), by notice in writing to the Master Servicer and with the
prior written consent of the Security Guaranty Insurer, if any, which consent
may not be unreasonably withheld, generally may, pursuant to the related
Agreement, remove the Master Servicer upon the occurrence of any of the
following events:
(i) (A) an Event of Nonpayment (as defined below) if the Series of
Securities has the benefit of a Guaranty Insurance Policy; (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 Security
Guaranty Insurer, if any, or the Securityholders; (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 Securityholder or the Security 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,
67
<PAGE>
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 Securityholder or the Security 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, marshaling 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, marshaling 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
(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 Security Guaranty Insurer, if any, the
Trustee and the Majority Securityholders, 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
Securityholders or the Security 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 Security
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
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The Trust established
under a Pooling and Servicing Agreement or a Trust 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 REO Property, (ii) the optional purchase of the assets of
the Trust by the Master Servicer or the Security Guaranty Insurer, if any, as
described below, (iii) mutual consent of the Master Servicer, the Security
Guaranty Insurer, if any, and all Securityholders in writing, or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the
68
<PAGE>
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 Security 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.
If so provided in the related Prospectus Supplement, the Master Servicer or
another entity may purchase some or all of the Mortgage Assets under the
circumstances described in such Prospectus Supplement.
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 Security 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.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture may
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the final scheduled
Remittance Date for such Notes and any installment of interest on such Notes in
accordance with the terms of the Indenture and the Notes of such Series. In the
event of any such defeasance and discharge of Notes of such Series, holders of
Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
REMIC CONSIDERATIONS. If a REMIC election is made for a Series of
Securities, 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 Securityholders 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 Security Guaranty Insurer, if any, may notify the
Trustee of the Security Guaranty Insurer's determination to 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 such REMIC at a price (the "Termination Price") equal to the sum of
(x) 100% of
69
<PAGE>
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
Distribution 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 Security Guaranty Insurer, if any. Upon receipt of such
direction by the Majority Securityholders or of such notice from the Security
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 Securityholders 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 Securityholders shall permit or direct in
writing, after the expiration of the Purchase Option Period and (ii) in the
event that the Security Guaranty Insurer has given the Trustee notice of the
Security Guaranty Insurer's determination to purchase the assets described in
clause (ii) preceding, the Security 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 Security 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 Securityholders and the Security 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 Securityholders 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 Securityholders may exercise
any trust or power conferred on the Trustee with respect to the Securities or
the Trusts, upon satisfaction 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 Securities, only Holders of such Class or Classes may
exercise such trust or power.
EVENTS OF DEFAULT UNDER THE INDENTURE; RIGHTS OF NOTEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Indenture for each Series of Notes include: (i) a default for
thirty (30) days or more in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the
Representative or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement;
70
<PAGE>
(iii) any representation or warranty made by the Representative or the Trust
Fund in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such Series
having been incorrect in a material respect as of the time made, and such breach
is not cured within sixty (60) days after notice thereof is given in accordance
with the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the
Representative or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount of all the Notes of such Series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Holders of a majority in aggregate outstanding
amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Note of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to
71
<PAGE>
the Notes of such Series, and the Holders of a majority of the then aggregate
outstanding amount of the Notes of such Series may, in certain cases, waive any
default with respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of all the Holders of the
outstanding Notes of such Series affected thereby.
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 Security
Guaranty Insurer, if any, without the notice to, or consent of, the
Securityholders, 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 Securityholder 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 Security without the consent of the Holder of such Security, 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 Security Guaranty
Insurer, if any, and the Holders of the majority of the percentage interest in
each Class of Securities 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 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 Securities without the consent of the Holders of 100% of
each Class of Securities 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 Security Guaranty Insurer, if any, without the notice to or consent of
the Securityholders, 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, if the Trustee becomes
insolvent or, if the Trustee enters into certain business combinations. 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.
72
<PAGE>
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 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.
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
73
<PAGE>
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
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
74
<PAGE>
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 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 Securityholders.
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 Securityholders, 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 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
Securityholders 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
75
<PAGE>
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
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
Securityholders 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.
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
76
<PAGE>
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 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,
77
<PAGE>
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 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 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.
78
<PAGE>
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
judgment 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 judgment 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 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 Securities 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
79
<PAGE>
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 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
Mortgage Loan may 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 mortgagor 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 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.
80
<PAGE>
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. 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 Securities. 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.
81
<PAGE>
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 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 Securityholders 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 Securityholders 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 Securityholders 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 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 LLP, 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 or
Notes 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 Certificates or Notes. 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.
82
<PAGE>
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. In addition, if the related Prospectus
Supplement so provides, the transaction documents for a Trust may provide that
an election will be made to qualify such trust as a Financial Asset
Securitization Investment Trust ("FASIT") pursuant to recently effective
provisions of the Code. To the extent provided in the Prospectus Supplement for
a series, Certificateholders may also have the benefit of a Reserve Account and
of certain agreements (each, a "Yield Supplement Agreement") under which payment
will be made from the Reserve Account 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.
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, 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 Account
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 REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. 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.
83
<PAGE>
STATUS OF REMIC CERTIFICATES. The REMIC Certificates will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are 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 (other than yield supplement
agreements). 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 the foregoing sections of the
Code except to the extent provided in the Prospectus Supplement. 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. 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
amounts in a Reserve Account 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. The REMIC Certificates
will not be "residential loans" for the purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
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, Federal Tax Counsel 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 under then
existing law 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
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
assets described in 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.
84
<PAGE>
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 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 Internal Revenue 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. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations 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
85
<PAGE>
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. 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 Remittance Date (or in the case of the first such period, begins on
the Closing Date) and ends on the next succeeding Remittance 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
86
<PAGE>
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 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. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. 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 reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Assets underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered. 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 terms or conditions that would make the likelihood of late payment
or nonpayment remote.
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.
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 Remittance Dates but ends prior to each Remittance 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
87
<PAGE>
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; (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; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
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 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID 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 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 is not reasonably expected as
of the issue date to 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
objective financial or economic information. 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. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate 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. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and
88
<PAGE>
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate. 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 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; (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; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
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 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.
89
<PAGE>
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. In 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.
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 Certificate were treated as a
contingent payment debt obligation, since the OID Regulations relating to
contingent payment debt obligations do not apply to REMIC regular interests.
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 stated interest at the Pass Through Rate or Interest 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 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
90
<PAGE>
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 110% 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."
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
91
<PAGE>
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 Regulations determine the fair market value 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 losses may be carried forward indefinitely to
future quarters subject to the same limitation.
92
<PAGE>
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.
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 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.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide 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. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
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
93
<PAGE>
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 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
derives 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 cause it to 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.
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 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. Treasury
regulations 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.
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 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
94
<PAGE>
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 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-thru 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-thru entities" holding residual interests where a
disqualified organization is a record holder of an interest in the pass-thru
entity. "Pass-thru 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-thru
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
95
<PAGE>
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 the Trustee an affidavit that such transferee is
not a disqualified organization.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on 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
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
96
<PAGE>
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. For taxable years beginning after December 31, 1997,
in the case of a partnership that has 100 or more partners and elects to be
treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners.
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 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 (a) a citizen or resident of the United States, (b) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (c) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (d) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (d), above, unless the trust elects to have its United
States status determined under the criteria set forth in (d) above for tax years
ending after August 20, 1996. Recently issued Treasury regulations (the "Final
Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
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
97
<PAGE>
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 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.
GAIN ON TRANSFERS OF CERTIFICATES. 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 a
REMIC 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 Certificateholder
complies to the extent necessary with certain identification requirements,
including timely delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such holder.
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
98
<PAGE>
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 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 ISSUED BY A GRANTOR TRUST
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made and for which the Trust is
classified as a grantor trust for federal income tax purposes.
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. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the "applicable amount" ($100,000 (or
$50,000 in the case of a separate return by a married individual), adjusted for
changes in the cost of living subsequent to 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. 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 servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Loans. As
a result, individuals, estates, or trusts holding Non-REMIC Certificates may
have taxable income in excess of the cash received.
STATUS OF THE NON-REMIC CERTIFICATES. The Non-REMIC Certificates generally
will be "real estate assets" for purposes of Section 856(c)(4)(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, and interest income on the Non-REMIC
Certificates generally will be "interest on obligations secured by mortgages on
real property"
99
<PAGE>
within the meaning of Section 856(c)(3)(B) of the Code. However, 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, amounts in
a Reserve Account, or payments on mortgages held pending distribution to
Certificateholders. Further, the Non-REMIC Certificates 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. The Non-REMIC Certificates should not be
"residential loans made by the taxpayer" for purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
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.
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 (other than an interest treated as a "stripped coupon") 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.
Section 1272(a)(6) of the Code provides for use of a prepayment assumption
in determining original issue discount for any pool of debt instruments the
yield on which may be affected by reason of prepayments. Therefore, if there is
original issue discount, 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 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. 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.
100
<PAGE>
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Assets allocable 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 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
101
<PAGE>
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 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 providing the name and address of such holder).
Treasury Regulations (the "Final Withholding Regulations"), which are generally
effective with respect to payments made after December 31, 1999, consolidate and
modify the current certification requirements and means by which a holder may
claim exemption from United States federal income tax withholding and provide
certain presumptions regarding the status of holders when payments to the
holders cannot be reliably associated with appropriate documentation provided to
the payor. All holders
102
<PAGE>
should consult their tax advisors regarding the application of the final
Withholding Regulations. 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, an estate the
income of which is subject to United States federal income taxation regardless
of its source, and a trust for which one or more United States fiduciaries have
the authority to control all substantial decisions and for which a court of the
United States can exercise primary supervision over the trust's administration.
For years beginning before January 1, 1997, the term "United States person"
shall include a trust whose income is includible in gross income for United
States federal income taxation regardless of source, in lieu of trusts just
described, unless the trust elects to have its United States status determined
under the criteria described in the previous sentence for tax years ending after
August 20, 1996.
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 (or, after September 1, 1997, a
FASIT) (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.
NON-REMIC CERTIFICATES AND NOTES OF A TRUST INTENDED TO BE CHARACTERIZED AS A
PARTNERSHIP OR DIVISION
The discussion under this heading applies only to a series of Certificates
and Notes with respect to which a REMIC election is not made and for which the
Trust is intended to be classified as a partnership or a division for federal
income tax purposes.
Federal Tax Counsel will deliver its opinion for a Trust which is intended
to be a partnership for federal income tax purposes, as specified in the related
Prospectus Supplement, generally to the effect that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Agreements and related documents will be complied with, such
that an election has not been and will not be made to treat the Trust as an
association taxable as a corporation, and on counsel's conclusion that the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or such rule is
otherwise inapplicable to the Trust, so that the Trust will not be characterized
as a publicly traded partnership taxable as a corporation, assuming that no
action will be taken that is inconsistent with the treatment of the Trust as a
partnership (such as an election to treat the Trust as a corporation for federal
income tax purposes ("Corporation Election")). If, however, the Trust has a
single owner for federal income tax purposes, it will be treated as a division
of its owner and as such will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming that no Corporation Election is
made.
103
<PAGE>
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 (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists 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 the Trust were treated as a taxable mortgage pool, it 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. Federal Tax Counsel will
deliver its opinion for a Trust which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust will not be a taxable mortgage pool. This
opinion will be based on the assumption that the terms of the Agreements and
related documents will be complied with, and on counsel's conclusion that either
the number of classes of debt obligations issued be the Trust, or the nature of
the assets held by the Trust, will exempt the Trust from treatment as a taxable
mortgage pool.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income, possibly reduced by its
interest expense on the Notes. Any such corporate income tax could materially
reduce cash available to make payments on the Notes and distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust. In additions, all distributions to the Certificateholders
would be taxable as dividends.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Representative that
in its opinion the Notes will be classified as debt for federal income tax
purposes.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of counsel, the IRS successfully asserted that one or more of the Notes did not
represent debt for federal income tax purposes, the Notes might be treated as
equity interests in the Trust. If so treated, the Trust might be taxable as a
corporation with the adverse consequences described above (and the taxable
corporation would not be able to reduce its taxable income by deductions for
interest expense on Notes recharacterized as equity). Alternatively, the Trust
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
foreign holders generally would be subject to United States federal income tax
and United States federal income tax return filing and withholding requirements,
and individual holders might be subject to certain limitations on their ability
to deduct their share of the Trust's expenses.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with original issue discount within
the meaning of Section 1273 of the Code. A subsequent holder who purchases a
Note at a discount that exceeds a statutorily defined DE MINIMIS amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
104
<PAGE>
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any original issue discount (if any), market
discount and gain previously included by such Noteholder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
Noteholder with respect to such Note. Subject to the rules of the Code
concerning market discount on the Notes, any such gain or loss generally will be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be deducted only to the extent the Noteholder has capital gains
for the taxable year, although under certain circumstances non-corporate
Noteholders can deduct losses in excess of available capital gains.
FOREIGN HOLDERS. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Representative (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Representative is a "related person" within the meaning of the Code and (ii)
provides the person otherwise required to withhold United States tax with an
appropriate statement, signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the withholding agent. However, in
that case, the signed statement must be accompanies by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest in not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-United States holder may
claim exemption from United States federal income tax withholding. All
Non-United States holders should consult their tax advisors regarding the
application of the Final Withholding Regulations, which are generally effective
with respect to payments made after December 31, 1999.
105
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Trust will be required to
report annually to the IRS, and to each Noteholder of record, the amount of
interest paid on the Notes (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, tax-exempt organizations, qualified
pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS, as a credit against the holder's federal income tax liability.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE ISSUER AS A PARTNERSHIP. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Representative will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
United States federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Generally, provided the
Certificates are issued at or close to face value, any such characterization
should not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity in
a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, original issue discount
and bond premium) and any gain upon collection or disposition of Mortgage Loans.
The Trust's deductions will consist primarily of interest and original issue
discount accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Mortgage Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Mortgage Loans that corresponds to any excess of the issue price
of Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Representative. Based on the economic arrangement
of the parties, this approach for allocating Trust income should be permissible
under applicable Treasury regulations, although no assurance can be given that
the IRS would not require a greater amount of income to be
106
<PAGE>
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Mortgage Loans were not
issued with original issue discount and, therefore, the Trust should not have
original issue discount income. However, the purchase price paid by the Trust
for the Mortgage Loans may be greater or less than the remaining principal
balance of the Mortgage Loans at the time of purchase. If so, the Mortgage Loan
will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust will make this calculation on an aggregate basis, but
might be required to recompute it on a Mortgage Loan by Mortgage Loan basis.)
If the Trust acquires the Mortgage Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage Loans. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership, which it would then be treated
as transferring to its partners. The Trust will not comply with certain
technical requirements that might apply when such a constructive termination
occurs. As a result, the Trust may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates,
107
<PAGE>
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN REPRESENTATIVE AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Trust might be
reallocated among the Certificateholders. The Trust's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial
108
<PAGE>
institutions that hold Certificates through a nominee are required to furnish
directly to the Trust information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Representative will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear and federal
tax counsel is unable to opine whether the Trust would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-United States persons because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust would be
engaged in a trade or business in the United States for such purposes, the Trust
will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a United States trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If the trust is engaged in a United States trade or business, each foreign
holder might be required to file a United States individual or corporate income
tax return (including, in the case of a corporation, the branch profits tax) on
its share of the Trust's income. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the Trust
taking the position that no taxes were due because the Trust was not engaged in
a United States trade or business. However, interest payments made (or accrued)
to a Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust, and for that reason or because of the nature of the
assets of the Trust probably will not be considered "portfolio interest." As a
result, even if the Trust was not considered to be engaged in a United States
trade or business, Certificateholders will be subject to United States federal
income tax which must be withheld at a rate of 30%, unless reduced or eliminated
pursuant to an applicable treaty. A foreign holder would be entitled to claim a
refund for such withheld tax, taking the position that the interest was
portfolio interest and therefore not subject to United States tax. However, the
IRS may disagree and no assurance can be given as to the appropriate amount of
tax liability. As a result, each potential foreign Certificateholder should
consult its tax advisor as to whether an interest in a Certificate is an
unsuitable investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
109
<PAGE>
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 Security 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 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 Security 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 Securities 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
U.S. 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 Securities, 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 Security 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 Securities or to the servicing
of the Mortgage Loans are noted below.
Regardless of whether the Securities are treated as debt or equity for
purposes of ERISA, the acquisition or holding of Securities which are Notes by
or behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Trust is or becomes a party in interest or disqualified
person with respect to such Plan or in the event that a subsequent transfer of a
Note is made between a Plan and such party in interest or disqualified person.
However, one or more Investor Based Exemptions referred to below may be
applicable to exempt such prohibited transaction.
The DOL 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
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.
110
<PAGE>
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 Certificateholders (except holders of the Class R 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 Securities to a Plan with
respect to which the Representative, the Security 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 Securities and the rights and interests
evidenced by such Securities are not subordinated to the rights and interests
evidenced by other Securities 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 Security 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 Securities is expressly approved by an independent
fiduciary who has authority to manage and control those plan assets being
invested in Securities; (ii) the Plan pays no more for the Securities 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 Securities to
the Plan; (iv) the total value of the Securities purchased by such Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Securities is acquired by persons independent of the Representative, the
Trustee, the Servicer, and the Security Guaranty Insurer.
Before purchasing Securities, a fiduciary of a Plan should confirm that the
Trust is a "mortgage pool," that the Securities 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 Securities on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions (each an "Underwriter
Exemption") 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 Underwriter
Exemption which may be applicable to the Securities. The conditions of
Underwriter Exemption, if applicable, will be set forth in "ERISA
Considerations" in the Prospectus Supplement.
One or more other prohibited transaction exemptions issued by the DOL may be
available to a Plan investing in Securities, depending in part upon the type of
Plan fiduciary making the decision to acquire a Security 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, PTCE 84-14, regarding
investments effectuated by "qualified plan asset managers", PTCE 96-23,
regarding investments effectuated by "in-house asset
111
<PAGE>
managers" and PTCE 95-60, regarding investments by insurance company general
accounts ("Investor Based Exemptions"). However, even if the conditions
specified in an Underwriter 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 Security 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 Securities 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 Securities offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Securities 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 Securities
as legal investments for such purchasers prior to investing in any Class of
Securities.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets, a division of Wheat First Securities, Inc.
("First Union Capital Markets"), an affiliate of the Representative, acting as
underwriter with other underwriters, if any, named therein. In such event, the
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Representative. In connection
with the sale of the Securities, underwriters may receive compensation from the
Representative or from purchasers of the Securities in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Representative.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by First Union Capital Markets acting as agent or in some
cases as principal with respect to the Securities that it has previously
purchased or agreed to purchase. If First Union Capital Markets acts as agent in
the sale of Securities, First Union Capital Markets will receive a selling
commission with respect to each Series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
Securities sold hereunder as of the Cut-off Date. The exact percentage for each
Series of Securities will be disclosed in the related Prospectus Supplement. To
the extent that First Union Capital Markets elects to purchase Securities as
principal, First Union Capital Markets may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Representative and purchasers of
Securities of each Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets, an affiliate of the Representative, in connection with
offers and sales related to market-making transactions in the Securities. First
Union Capital Markets may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
112
<PAGE>
The Representative shall indemnify First Union Capital Markets and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets and any underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets and the
Representative may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the
Representative's Mortgage Loans pending the sale of such Mortgage Loans or
interests therein, including the Securities.
The Representative anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisers in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, the
Representative, its affiliates and the Trustee in the ordinary course of
business.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Securities of each Series will be passed upon for the Representative by Stroock
& Stroock & Lavan LLP, New York, New York and certain legal matters relating to
the validity of the issuance of the Securities of each Series will be passed
upon for the Underwriters of the Securities of each Series by Kilpatrick
Stockton LLP, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new Trust will be formed to own the Mortgage Assets and to issue each
Series of Securities. Each such Trust will have no assets or obligations prior
to the issuance of the Securities 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 Securities 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 securities address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities 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, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through securities in extreme cases might fail to recoup their underlying
investments.
A rating of a security 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.
113
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
<TABLE>
<S> <C>
Accrual Period........................................................................ 86
Adjustable Rate....................................................................... 6
Adjusted Mortgage Loan Remittance Rate................................................ 52
Agency Securities..................................................................... 5
Agreements............................................................................ 4
Amortization Period................................................................... 11
Applicable Federal Rate............................................................... 91
APR................................................................................... 8
ARM................................................................................... 101
Auction Rate Securities............................................................... 1
Available Remittance Amount........................................................... 64
Balloon Loans......................................................................... 24
Balloon Payments...................................................................... 6
Bankruptcy Bond....................................................................... 17
Basis Risk Shortfall.................................................................. 83
Buydown Funds......................................................................... 84
Cash Flow Investments................................................................. 84
Cede.................................................................................. 3
Certificates.......................................................................... 1
Certificateholders.................................................................... 1
Charter Act........................................................................... 37
Class................................................................................. 1
Cleanup Costs......................................................................... 82
CMOs.................................................................................. 9
Code.................................................................................. 20
Commission............................................................................ 2
Compensating Interest................................................................. 19
Contingency Fee....................................................................... 65
Contracts............................................................................. 5
Conventional Loans.................................................................... 5
Cooperative Loans..................................................................... 5
Cooperatives.......................................................................... 5
Corporation Election.................................................................. 103
Curtailment........................................................................... 19
Custodian............................................................................. 63
Cut-off Date.......................................................................... 47
Definitive Securities................................................................. 54
Designated Depository Institution..................................................... 64
Detailed Description.................................................................. 29
Determination Date.................................................................... 18
Distribution Account.................................................................. 64
DOL................................................................................... 22
DTC................................................................................... 3
Due Period............................................................................ 64
Dutch Auction......................................................................... 50
Electing Large Partnerships........................................................... 96
</TABLE>
114
<PAGE>
<TABLE>
<S> <C>
ERISA................................................................................. 22
Event of Nonpayment................................................................... 68
Excess Inclusions..................................................................... 21
Exchange Act.......................................................................... 3
FASIT................................................................................. 83
Federal Tax Counsel................................................................... 20
FHA................................................................................... 5
FHA Loans............................................................................. 5
FHLMC................................................................................. 5
FHLMC Act............................................................................. 38
FHLMC Certificate Group............................................................... 39
FHLMC Certificates.................................................................... 8
FHLMC Project Certificates............................................................ 40
Final Determination................................................................... 69
Final Withholding Regulations......................................................... 97
First Union Capital Markets........................................................... 112
Fixed Rate............................................................................ 6
FNMA.................................................................................. 5
FNMA Certificates..................................................................... 8
FNMA Project Issuers.................................................................. 37
FNMA MBS.............................................................................. 37
FNMA SMBS............................................................................. 37
Foreign Person........................................................................ 105
FTC Rule.............................................................................. 80
Funding Period........................................................................ 10
Garn-St. Germain Act.................................................................. 80
GNMA.................................................................................. 5
GNMA Certificates..................................................................... 8
GNMA Issuer........................................................................... 36
GNMA Project Certificates............................................................. 37
Graduated Payments.................................................................... 6
Guaranty Agreement.................................................................... 36
Guaranty Insurance Policy............................................................. 16
Holders............................................................................... 1
Home Equity Loans..................................................................... 32
Home Ownership Act.................................................................... 26
Housing Act........................................................................... 35
HUD................................................................................... 7
Improper Knowledge.................................................................... 96
Indenture............................................................................. 4
Indirect Participant.................................................................. 53
Insurance Proceeds.................................................................... 19
Insurance Paying Agent................................................................ 56
Insured Payment....................................................................... 56
Interest Period....................................................................... 52
Interest Rate......................................................................... 1
Investor Based Exemptions............................................................. 112
IRS................................................................................... 69
LIBOR................................................................................. 1
Liquidation Proceeds.................................................................. 19
Loan-to-Value Ratio................................................................... 31
</TABLE>
115
<PAGE>
<TABLE>
<S> <C>
Lockout Periods....................................................................... 6
Lower Tier REMIC...................................................................... 93
Majority Securityholders.............................................................. 67
Manufactured Homes.................................................................... 34
Manufacturer's Invoice Price.......................................................... 31
Master Servicer....................................................................... 1
Money Store........................................................................... 1
Monthly Advance....................................................................... 18
Monthly Pay........................................................................... 29
Mortgage Asset Schedule............................................................... 29
Mortgage Assets....................................................................... 1
Mortgage Interest Rate................................................................ 6
Mortgage Loans........................................................................ 5
Mortgage Pool......................................................................... 110
Mortgage Pool Insurance Policy........................................................ 16
Mortgage Pool Pass-through Certificate................................................ 110
Mortgaged Properties.................................................................. 6
Multifamily Loans..................................................................... 5
Multiple Variable Rate REMIC Regular Certificate...................................... 89
NHA Act............................................................................... 34
1933 Act.............................................................................. 2
Noneconomic Residual Interest......................................................... 96
Non-REMIC Certificates................................................................ 21
Noteholders........................................................................... 1
Notes................................................................................. 1
Objective Rate........................................................................ 88
OID Regulations....................................................................... 85
Opinion of Counsel.................................................................... 63
Originators........................................................................... 1
Participants.......................................................................... 53
Pass-Thru Entity...................................................................... 95
Pass-Through Rate..................................................................... 1
Permitted Instruments................................................................. 64
Permitted Investments................................................................. 59
Plan.................................................................................. 110
Plan Asset Regulations................................................................ 22
PMBS.................................................................................. 5
PMBS Agreement........................................................................ 41
PMBS Issuer........................................................................... 10
PMBS Servicer......................................................................... 10
PMBS Trustee.......................................................................... 10
Pool.................................................................................. 1
Pooling and Servicing Agreement....................................................... 4
Pool Insurer.......................................................................... 57
Pre-Funded Amount..................................................................... 10
Pre-Funding Account................................................................... 10
Prepayment Assumption................................................................. 85
Presumed Single Qualified Floating Rate............................................... 88
Presumed Single Variable Rate......................................................... 89
Principal and Interest Account........................................................ 64
Principal Prepayment.................................................................. 19
</TABLE>
116
<PAGE>
<TABLE>
<S> <C>
Principal Prepayment Period........................................................... 50
Prohibited Transaction................................................................ 63
Prospectus Supplement................................................................. 1
Purchase Option Period................................................................ 70
PTCE 83-1............................................................................. 110
Qualified Inverse Floating Rate....................................................... 88
Qualified Substitute Mortgage Loan.................................................... 63
Qualified Floating Rate............................................................... 88
Rating Agency......................................................................... 18
REIT.................................................................................. 93
Released Mortgaged Property Proceeds.................................................. 19
Relief Act............................................................................ 28
REMIC................................................................................. 1
REMIC Certificates.................................................................... 83
REMIC Regular Certificates............................................................ 20
REMIC Residual Certificates........................................................... 20
REMIC Regulations..................................................................... 84
REMIC Qualified Floating Rate......................................................... 85
Remittance Date....................................................................... 1
Representative........................................................................ 1
Reserve Account....................................................................... 15
Retained Interest..................................................................... 12
Revolving Period...................................................................... 11
RICs.................................................................................. 94
Sale and Servicing Agreement.......................................................... 4
Secured Conventional Home Improvement Loans........................................... 5
Securities............................................................................ 1
Security Guaranty Insurer............................................................. 56
Securityholders....................................................................... 1
Security Register..................................................................... 49
Senior Certificates................................................................... 12
Senior Notes.......................................................................... 14
Senior Securities..................................................................... 15
Series................................................................................ 1
Servicing Advance..................................................................... 65
Servicing Fee......................................................................... 65
Single Family Loans................................................................... 5
Single Variable Rate REMIC Regular Certificate........................................ 89
SMMEA................................................................................. 22
Special Hazard Insurance Policy....................................................... 16
Special Hazard Insurer................................................................ 58
Spread Amount......................................................................... 16
Standard Hazard Insurance Policies.................................................... 7
Startup Day........................................................................... 92
Strip Certificates.................................................................... 12
Strip Notes........................................................................... 14
Stripped Bond Rules................................................................... 100
Subordinated Certificates............................................................. 12
Subordinated Notes.................................................................... 14
Subordinated Securities............................................................... 15
Sub-Servicer.......................................................................... 67
</TABLE>
117
<PAGE>
<TABLE>
<S> <C>
Substitution Adjustment............................................................... 63
Successor Servicer.................................................................... 68
Superlien............................................................................. 82
Tax Avoidance Potential............................................................... 98
Taxable Mortgage Pool................................................................. 104
T-Bill Rate........................................................................... 1
Termination Notice.................................................................... 70
Termination Price..................................................................... 69
Tiered REMICs......................................................................... 84
Title I Loan Program.................................................................. 7
Title I Property Improvement Loans.................................................... 34
Title V............................................................................... 81
Trust................................................................................. 1
Trust Agreement....................................................................... 4
Trustee............................................................................... 20
Trustee's Mortgage File............................................................... 63
UCC................................................................................... 53
Underlying Mortgage Loan.............................................................. 9
Underwriter Exemption................................................................. 111
United States person.................................................................. 97
Unrelated Business Taxable Income..................................................... 107
Unsecured Home Improvement Loans...................................................... 5
VA.................................................................................... 5
VA Loans.............................................................................. 35
Variable Rate Debt Instrument......................................................... 88
Variable Rate Non-REMIC Certificates.................................................. 101
Variable Rate REMIC Regular Certificate............................................... 88
Yield Supplement Agreement............................................................ 83
</TABLE>
729938.01
118
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each Class of
Auction Rate Securities (and may be different if otherwise set forth in a
related Prospectus Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Securities that are either Notes or
Certificates and the term "Securityholder" refers to Holders of Auction Rate
Securities.
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:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR or such other
rate as may be set forth in the related Prospectus Supplement.
"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
Securities, the date set forth in the related Prospectus Supplement and
thereafter, the Business Day immediately preceding the first day of each Auction
Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the Securities is
no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance of an
Event of Default; or
(C) each Auction Period commencing less than two Business Days after the
cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the related Agreement and the related Terms
Supplement, as described herein.
"Auction Period" means, with respect to each Security, the Interest Period
applicable to such Security during which time the applicable Security Interest
Rate is determined pursuant to the related Agreement and the related Terms
Supplement, which Auction Period (after the Initial Period for such Security)
initially shall consist of between 7 days and one year (as set forth in the
related Prospectus Supplement), as the same may be adjusted pursuant to such
related Agreement and the related Terms Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the related Terms Supplement, as described herein.
"Auction Procedures" means the procedures set forth in the related Terms
Supplement and described herein by which the Auction Rate applicable to a
Security is determined.
I-1
<PAGE>
"Auction Rate" means, with respect to any Security, the rate of interest per
annum that results from the implementation of the Auction Procedures and is
determined as described in the related Agreement and the related Terms
Supplement and this Appendix I.
"Authorized Denominations" means, the dollar amount set forth in the related
Prospectus Supplement and any integral multiple in excess thereof.
"Broker-Dealer" means the initial broker-dealer under the initial
Broker-Dealer Agreement 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 the
Trustee pursuant to the related Agreement 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, and approved by Representative and the Trust, 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.
"Effective Interest Rate" means, for any Mortgage Loan and any collection
period, the per annum rate at which such Mortgage Loan accrues interest during
such collection period.
"Existing Securityholder" 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 Securityholder 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 Security.
"Existing Securityholder Registry" means the registry of Persons who are
owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal funds
(effective) rate as published on page 118 of 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) on the immediately preceding Business
Day. If no such rate is published on such page on such date, "Federal Funds
Rate" shall mean for any date of determination, the Federal funds (effective)
rate as published by the Federal Reserve Board in the most recent edition of
Federal Reserve Statistical Release No. H.15 (519) that is available on the
Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on the
Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial Period for
such Security and each period commencing on the Rate Adjustment Date for such
Security and ending on the day before (i) the next Rate Adjustment Date for such
Security or (ii) the final maturity date of such Security, as applicable.
"Market Agent" means the entity named as market agent under the related
Agreement, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34 days or
less, either (A) the greater of (1) One-Month LIBOR plus 0.60% or (2) the
Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating Agencies
to the applicable Security are "Aa3" or "AA-" or better) or (B) One-
I-2
<PAGE>
Month LIBOR plus 1.50% (if any one of the ratings assigned by the Rating
Agencies to the Security is less than "Aa3" or "AA-") or (ii) for Auction
Periods of greater than or equal to 35 days, either (A) the greater of One-Month
LIBOR or Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings
assigned by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or
better) or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in
either case, 1.50% (if any one of the ratings assigned by the Rating Agencies to
the applicable Security is less than "Aa3" or "AA-") or such other rate as may
be set forth in the related Prospectus Supplement. 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.
"Net Loan Rate" for any Interest Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Period less the amount set forth in the related Prospectus Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may be
adjusted pursuant to a Terms Supplement or such other rate as may be set forth
in the related Prospectus Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder 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 Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date on
which the applicable Security Interest Rate is effective and means, with respect
to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the Auction
Date, or if no Auction Date is applicable to such Series, the Business Day
immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, with respect to any Class of Notes or
Certificates, the rate identified as such in the related Prospectus Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any Class of
Notes, the date identified as such in the related Prospectus Supplement and,
with respect to any Class of Certificates, the date set forth in the related
Agreement or the related Terms Supplement.
"Three-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three-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 Three 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 Three Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if
I-3
<PAGE>
the banks selected as aforesaid are not quoting as mentioned in this sentence,
Three-Month LIBOR in effect for the applicable Interest Period will be
Three-Month LIBOR in effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing Securityholders,"
which shall mean any Securityholder according to the records of the Auction
Agent at the close of business on the Business Day preceding each Auction Date;
and (ii) "Potential Securityholders," which shall mean any person, including any
Existing Securityholder or a Broker/Dealer, who may be interested in acquiring
Securities (or, in the case of an Existing Securityholder, an additional
principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities 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 Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities 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 Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities 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 Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be subject to
probation procedures on the Auction Date. Each purchase or sale of Securities 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
The entity named in the related Prospectus Supplement, will be appointed as
Auction Agent to serve as agent for a Trust in connection with Auctions. The
Trustee and the Representative will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or 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 Securities 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 related Agreement and under the Auction Agent
Agreement. The Auction Agent may at any time resign and be discharged of the
duties and obligations created by the related Agreement by giving at least 90
days notice to the Trustee, the Trust, the Representative and the Market Agent.
The Auction Agent may be removed at any time by the Trustee
I-4
<PAGE>
upon the written direction of the Security Guaranty Insurer, if applicable, or,
with the consent of the Security Guaranty Insurer, if applicable, the
Securityholders of 66 2/3% of the aggregate principal amount of the Securities
then outstanding, by an instrument signed by the Security Guaranty Insurer, if
applicable, or such Securityholders or their attorneys and filed with the
Auction Agent, the Representative, 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 and has accepted such appointment.
If required by the Trust or the Representative or by the Market Agent, with the
Trust's and the Representative's consent, 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, the Trust, the Representative, the
Security Guaranty Insurer, if applicable, 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 (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 the Note
Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement, 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 Securityholders and Potential Securityholders may participate in
Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer 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 below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust 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.
I-5
<PAGE>
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by
the Auction Agent from monies received from the Trustee, on the Note Remittance
Date or Certificate Remittance Date set forth in the related Prospectus
Supplement.
MARKET AGENT
In connection with each Series of Notes and the Certificates, 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 Securityholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Agreement and the related Terms Supplement, Auctions
to establish the Auction Rate for each Security 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 Notes and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold Rate
and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each Auction
Date. The Administrator will calculate and, no later than the Business Day
preceding each Auction Date, will report to the Auction Agent in writing, the
Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, and
Administrator will report to the Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If an Event of Default has occurred,
under the Indenture or the Pooling and Servicing Agreement, as applicable, 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 Payment Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Event of Default. The Auction Agent
will determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Period other than the Initial Period for a Security; provided, that if
the ownership of the Securities is no longer maintained in Book-Entry Form, or
if an Event of Default has occurred, then the Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Period. The determination by the Trustee or the Auction Agent, as the case may
be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the
absence of manifest error) be final and binding upon the Securityholders and all
other parties. If calculated or determined by the Auction Agent, the Auction
Agent will promptly advise the Trustee of the One- Month LIBOR or the
Three-Month LIBOR, as applicable.
SUBMISSION OF ORDERS
So long as the ownership of the Securities is maintained in Book-Entry Form,
an Existing Securityholder may sell, transfer or otherwise dispose of Securities
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 Securityholder, its Broker-Dealer
or its Participant advises the Auction Agent of such transfer. Auctions for each
Class of Notes and 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 Notes and each Class of Certificates).
I-6
<PAGE>
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 Security:
(a) each Existing Securityholder of the applicable Security may submit to a
Broker-Dealer by telephone or otherwise information as to: (i) the principal
amount and Class of outstanding Securities, if any, held by such Existing
Securityholder which such Existing Securityholder desires to continue to hold
without regard to the Security Interest Rate for such Securities for the next
succeeding Auction Period (a "Hold Order"); (ii) the principal amount and Class
of outstanding Securities, if any, which such Existing Securityholder offers to
sell if the Security Interest Rate for such Securities for the next succeeding
Auction Period will be less than the rate per annum specified by such Existing
Securityholder (a "Bid"); and/or (iii) the principal amount and Class of
outstanding Securities, if any, held by such Existing Securityholder which such
Existing Securityholder offers to sell without regard to the Security Interest
Rate for such Securities for the next succeeding Auction Period (a "Sell
Order"); and
(b) one or more Broker-Dealers may contact Potential Securityholders to
determine the principal amount and Class of Securities which each such Potential
Securityholder offers to purchase, if the Security Interest Rate for such
Securities for the next succeeding Auction Period will not be less than the rate
per annum specified by such Potential Securityholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Securityholder will constitute an irrevocable offer to sell: (i)
the principal amount and Class of the outstanding Securities specified in such
Bid if the Security Interest Rate for such Securities will be less than the rate
specified in such Bid, (ii) such principal amount or a lesser principal amount
and Class of the outstanding Securities to be determined as described below in
"Acceptance and Rejection of Orders," if the Security Interest Rate for such
Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities 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 Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Security specified in such Sell Order or
(ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security 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 Securityholder will constitute an irrevocable offer to purchase:
(i) the principal amount of the Security specified in such Bid if the Security
Interest Rate for such Securities will be higher than the rate specified in such
Bid or (ii) such principal amount or a lesser principal amount of such
Securities as described below in "Acceptance and Rejection of Orders," if the
Security 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
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and Class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and Class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and Class
I-7
<PAGE>
of Securities, if any, subject to any Sell Order placed by such Existing
Securityholder, and (iv) to the extent such Bidder is a Potential
Securityholder, the rate specified in such Potential Securityholder'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 Securities of the applicable Class held
by any Existing Securityholder 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 Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, 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 Securityholder or Potential
Securityholder.
An Existing Securityholder may submit multiple Orders, of different types
and specifying different rates, in an Auction with respect to Securities then
held by such Existing Securityholder. An Existing Securityholder that offers to
purchase additional Securities is, for purposes of such offer, treated as a
Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Securityholder and (ii) not
be accepted if submitted by a Potential Securityholder.
VALIDITY OF ORDERS
If any Existing Securityholder 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 Securities held by such Existing
Securityholder, 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 Securities held by such Existing
Securityholder, and if the aggregate principal amount of the Class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the Class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the Class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the Class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the Class of Securities held by such Existing Securityholder.
BIDS. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, 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
Securityholder and the aggregate principal amount of Securities 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
Securityholder, 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 Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder 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 Securities of the Class held by such
Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
I-8
<PAGE>
If more than one Bid for a Class of Security is submitted on behalf of any
Potential Securityholder, 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 Securityholder covering an aggregate principal amount of Securities
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
Securityholder covering an aggregate principal amount of Securities 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").
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 Security, the excess of the total principal amount of
such Securities over the sum of the aggregate principal amount of such
Securities subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal amount of
Securities of such Class subject to Submitted Bids by Potential Securityholders
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
Securities of such Class subject to Submitted Bids by Existing Securityholders
specifying one or more rates higher than the Maximum Auction Rate and (ii) the
aggregate principal amount of Securities of such Class subject to Submitted Sell
Orders (in the event such excess or such equality exists other than because all
of the Securities are subject to Submitted Hold Orders, such Submitted Bids by
Potential Securityholders 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 Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Existing Securityholders of such Security specifying lower rates were
rejected (thus entitling such Existing Securityholders to continue to hold
the principal amount of Securities subject to such Submitted Bids); and
(ii) each such Submitted Bid from Potential Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Potential Securityholders specifying lower rates, were accepted, the result
would be that such Existing Securityholders described in subparagraph (c)(i)
above would continue to hold an aggregate principal amount of Securities
which, when added to the aggregate principal amount of Securities to be
purchased by such Potential Securityholders described in this subparagraph
(ii) would equal not less than the Available Securities.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, 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 Security 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;
I-9
<PAGE>
(b) if Sufficient Bids do not exist (other than because all of the
Securities of the applicable Security 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 Securities of the applicable Security are subject to Submitted
Hold Orders, that the Auction Rate for the next succeeding Interest Period will
be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Security Interest
Rate for each applicable Security, which rate will be the lesser of (a) the
Auction Rate for each such Security and (b) the Net Loan Rate. In no event shall
a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Securityholders of the applicable Security will continue to hold
the principal amount of Securities of such Class that are subject to Submitted
Hold Orders. If, with respect to a Security, the Net Loan Rate 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 Security
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
related Agreement and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security Interest
Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are
both greater than the Security Interest Rate Limitation, the Security Interest
Rate for each series shall be equal to the Security 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 Securities are subject to Submitted Holds Orders), the Security Interest
Rate will be the lesser of the Maximum Auction Rate or the Net Loan Rate. 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
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the 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 Securityholders' Submitted Bids specifying any rate that is
higher than the Security Interest Rate will be accepted, thus requiring each
such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate that is
lower than the Security Interest Rate will be rejected, thus entitling each such
Existing Securityholder to continue to hold the aggregate principal amount of
Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate that is
lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a rate that is
equal to the Security Interest Rate will be rejected, thus entitling such
Existing Securityholder to continue to hold the aggregate principal amount of
Securities subject to such Submitted Bid, unless the aggregate principal amount
of Securities subject to such Submitted Bids will be greater than the principal
amount of Securities (the "remaining principal amount") equal to the excess of
the Available Securities over the aggregate principal
I-10
<PAGE>
amount of Securities subject to Submitted Bids described in subparagraphs (b)
and (c) above, in which event such Submitted Bid of such Existing Securityholder
will be rejected in part and such Existing Securityholder will be entitled to
continue to hold the principal amount of Securities subject to such Submitted
Bid, but only in an amount equal to the aggregate principal amount of Securities
obtained by multiplying the remaining principal amount by a fraction, the
numerator of which will be the principal amount of Securities held by such
Existing Securityholder subject to such Submitted Bid and the denominator of
which will be the sum of the principal amount of Securities subject to such
Submitted Bids made by all such Existing Securityholders that specified a rate
equal to the Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a rate that is
equal to the Security Interest Rate will be accepted, but only in an amount
equal to the principal amount of Securities obtained by multiplying the excess
of the aggregate principal amount of Available Securities over the aggregate
principal amount of Securities 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 Securities subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Securities subject to Submitted Bids made by all such Potential Securityholders
that specified a rate equal to the Security Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect to a
Security (other than because all of the Securities of such Class are subject to
Submitted Hold Orders) or if the Net Loan Rate is less than the Bid Auction Rate
(in which case the Security Interest Rate shall be the Net Loan Rate) or if the
Security 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 Securityholders' Submitted Bids specifying any rate that is
equal to or lower than the
Security Interest Rate will be rejected, thus entitling such Existing
Securityholders to continue to hold the aggregate principal amount of Securities
subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any rate that is
equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) Each Existing Securityholder's Submitted Bid specifying any rate that is
higher than the Security Interest Rate and the Submitted Sell Order of each
Existing Securityholder will be accepted, thus entitling each Existing
Securityholder that submitted any such Submitted Bid or Submitted Sell Order to
sell the Securities subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Securities obtained by multiplying the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of Securities held by
such Existing Securityholder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Securities 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
Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities 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
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the
I-11
<PAGE>
procedures described above regarding Insufficient Bids, any Potential
Securityholder would be entitled or required to purchase less than a principal
amount of Securities 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 Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Securities of each Class to be purchased and the
aggregate principal amount of Securities of each Class to be sold by Potential
Securityholders and Existing Securityholders 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 Securities to be sold differs
from such aggregate principal amount of Securities 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, Securities.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Security Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum Auction
Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate will, in the
absence of manifest error, be binding on all other parties.
Notwithstanding anything in any related Agreement or, a related Terms
Supplement 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 related
Agreement and available to pay the principal of and interest due on the
applicable Security on the Note Remittance Date or Certificate 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 Security Interest Rate for a Security 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 p.m., eastern time, on the Auction Date if the Interest Rate is the
Auction Rate and not later than 4:00 p.m. eastern time on the Auction Date if
the Interest Rate is the Net Loan Rate. Each Broker-Dealer that submitted an
Order on behalf of a Bidder is required to then advise such Bidder of the
applicable Security 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 Securities as a result of the Auction and advise each
Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders 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 Securities delivered as necessary to
effect the purchases and sales of Securities 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 Securityholder selling Securities in an Auction fails to
deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise
I-12
<PAGE>
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 Securities to be delivered will be determined by such Broker-Dealer.
Delivery of such lesser principal amount of Securities 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 Securityholder, Existing
Securityholder or their respective Broker-Dealer or Participant to deliver the
principal amount of Securities or to pay for the Securities 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 related
Agreement, the related Terms Supplement 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 AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Securities are outstanding, the Administrator, may, from
time to time, change the length of the one or more 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 length of the Auction Period and the interest rate borne by the Securities
(an "Auction Period Adjustment"). The Administrator will not initiate such
change in the length of the Auction Period unless it shall have received the
written consent from the Market Agent, which consent will not be unreasonably
withheld, not less than three days nor more than 20 days prior to the effective
date of an Auction Period Adjustment. The Administrator will initiate an Auction
Period Adjustment by giving written notice to the Trustee, the Auction Agent,
the Market Agent, the Security Guaranty Insurer and DTC in substantially the
form of, or containing substantially the information contained in, the related
Agreement at least 10 days prior to the Auction Date for such Auction Period.
Any such Auction Period Adjustment shall not result in an Auction Period of
less than 7 days nor more than 91 days. If any such Auction Period Adjustment
will result in an Auction Period of less than the number of days in the then
current Auction Period, the notice described above will be effective only if it
is accompanied by a written statement of the Trustee, the Auction Agent and DTC
to the effect that they are capable of performing their duties, if any, under
the related Agreement, the Auction Agent Agreement and any Broker-Dealer
Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (A) the Trustee and
the Auction Agent receive, by 11:00 a.m., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Representative authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Trustee, the Auction Agent DTC described above and (B)
Sufficient Bids exist at the Auction on the Auction Date for such first Auction
Period. If the condition referred to in (A) is not met, the Security Interest
Rate applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (A) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
I-13
<PAGE>
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Representative, 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 Securities. 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 Trust, the Representative, and DTC.
The changes in Auction terms described above may be made with respect to any
Class of the Securities. 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.
I-14
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Class of Securities and
may be different if specified in the related Prospectus Supplement.
(a) Not later than (1) 3:00 p.m. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, 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 Securityholder or Potential Securityholder of:
(i) the Security 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 Securityholder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the principal
amount of Securities, if any, to be sold by such Existing Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Securityholder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of Securities, if
any, to be purchased by such Potential Securityholder;
(v) if the aggregate amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted Bids
or Sell Orders exceeds the aggregate principal amount of Securities to be
purchased by all Potential Securityholders 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 Securities and the principal amount of Securities
to be purchased from one or more Existing Securityholders on whose behalf
such Seller's Broker-Dealer acted by one or more Potential Securityholders
on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Securities to be purchased by all
Potential Securityholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Securities to be sold by all Existing
Securityholders 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 Securities and the principal amount of Securities to be sold to
one or more Potential Securityholders on whose behalf such Buyer's
Broker-Dealer acted by one or more Existing Securityholder 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 Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential Securityholder 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 Securityholder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Securityholder's Participant to pay to such Buyer's
Broker-Dealer (or its Participant) through DTC the amount necessary to
purchase the principal amount of
II-1
<PAGE>
the Securities to be purchased pursuant to such Bid against receipt of such
Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Securityholder 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
Securityholder's Participant to deliver to such Seller's Broker-Dealer (or
its Participant) through DTC the principal amount of the Securities to be
sold pursuant to such Order against payment therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on whose
behalf such Broker-Dealer submitted a Bid of the Security Interest Rate for
the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder 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 Securities received by it in
connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Securityholders, if any, on whose behalf such Broker-Dealer submitted
Bids, the Existing Securityholder, 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 Securityholder and Existing Securityholder 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 in DTC's
system will instruct its Participant to deliver such Securities through DTC
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 DTC's
system will instruct its Participant to pay through DTC to Seller's
Broker-Dealer (or its Participant) identified following such Auction
pursuant to (a)(vi) above the amount necessary to purchase the Securities to
be purchased pursuant to (b)(ii) above against receipt of such Securities.
(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 DTC to execute the transactions
described under (b)(ii) or (b)(iii) above for such Auction, and DTC will
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct DTC to
execute the transactions described in (d)(ii) above for such Auction, and
DTC will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct DTC to
execute the transactions described in (d)(iii) above for such Auction, and
DTC will execute such transactions.
(f) If an Existing Securityholder selling Securities in an Auction fails to
deliver such Securities (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Securityholder on behalf of which it submitted a Bid that was
accepted a principal amount of Securities that is less than the principal amount
of Securities that otherwise was to be purchased by such Potential
Securityholder. In such event, the principal
II-2
<PAGE>
amount of Securities to be so delivered will be determined solely by such
Broker-Dealer (but only in Authorized Denominations). Delivery of such lesser
principal amount of Securities will constitute good delivery. Notwithstanding
the foregoing terms of this paragraph (f), any delivery or nondelivery of
Securities 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
Securityholder, Existing Securityholder or their Respective Broker-Dealer or
Participant to take delivery of or deliver, as the case may be, the principal
amount of the Securities purchased or sold pursuant to an Auction or otherwise.
II-3
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
---------------------
TABLE OF CONTENTS
-------------------
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Incorporation of Certain Documents by
Reference................................... S-3
Summary of Terms.............................. S-4
Risk Factors.................................. S-21
The Trust..................................... S-24
The Representative and the Originators........ S-24
The Loan Pools................................ S-27
Maturity, Prepayment and Yield
Considerations.............................. S-53
Description of the Notes...................... S-59
The MBIA Policies and MBIA.................... S-70
The Transfer and Servicing Agreements......... S-74
Federal Income Tax Considerations............. S-84
State Tax Considerations...................... S-84
ERISA Considerations.......................... S-84
Legal Investment Considerations............... S-85
Underwriting.................................. S-85
Experts....................................... S-86
Legal Matters................................. S-86
Rating of the Notes........................... S-86
Financial Information......................... S-86
Index of Principal Terms...................... S-87
Annex I--Global Clearance, Settlement and Tax
Documentation Procedures.................... I-1
Annex II--Notional Amounts.................... II-1
Annex III--Auction Procedures................. III-1
PROSPECTUS
Prospectus Supplement......................... 2
Available Information......................... 2
Reports to Securityholders.................... 3
Incorporation of Certain Documents by
Reference................................... 3
Summary of Terms.............................. 4
Risk Factors.................................. 23
The Trusts.................................... 28
Use of Proceeds............................... 42
The Representative and the Originators........ 42
The Single Family Loan Lending Program........ 43
Description of the Securities................. 47
Credit Enhancement............................ 54
Maturity, Prepayment and Yield
Considerations.............................. 60
The Agreements................................ 62
Certain Legal Aspects of the Mortgage Loans... 73
Federal Income Tax Consequences............... 82
ERISA Considerations.......................... 110
Legal Investment Considerations............... 112
Plan of Distribution.......................... 112
Legal Matters................................. 113
Financial Information......................... 113
Rating........................................ 113
Index of Principal Terms...................... 114
Appendix I Auction Procedures................. I-1
Appendix II Settlement Procedures............. II-1
</TABLE>
$895,000,000
[LOGO]
THE MONEY STORE TRUST 1998-C
-------------------------
PROSPECTUS SUPPLEMENT
---------------------
Pool I Notes
FIRST UNION CAPITAL MARKETS
BARCLAYS CAPITAL
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
Pool II Notes
FIRST UNION CAPITAL MARKETS
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
September 28, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
