<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 19, 1995)
- --------------------------------------------------------------------------------
$149,977,000 (APPROXIMATE)
ACCESS FINANCIAL MANUFACTURED HOUSING CONTRACT TRUST 1996-1
MANUFACTURED HOUSING CONTRACT
SENIOR/SUBORDINATE PASS-THROUGH CERTIFICATES, SERIES 1996-1
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
$33,544,000 (Approximate) 6.400% Class A-1 $23,781,000 (Approximate) 7.575% Class A-5
$26,360,000 (Approximate) 6.750% Class A-2 $12,764,000 (Approximate) 7.975% Class A-6
$23,862,000 (Approximate) 6.975% Class A-3 $17,551,000 (Approximate) 8.040% Class B-1
$12,115,000 (Approximate) 7.300% Class A-4
</TABLE>
- --------------------------------------------------------------------------------
ACCESS FINANCIAL CORP., SERVICER
[LOGO]
- --------------------------------------------------------------------------------
The Manufactured Housing Contract Senior/Subordinate Pass-Through Certificates,
Series 1996-1 (The 'Certificates') will represent interests in a pool (the
'Contract Pool') of actuarial manufactured housing installment sales contracts
and installment loan agreements (the 'Contracts') and certain related property
held by the Access Financial Manufactured Housing Contract Trust 1996-1 (the
'Trust'). Cargill Financial Services Corporation (the 'Sponsor') will cause the
Trust to acquire the Contracts from Access Financial Receivables Corp.
('Receivables Corp.' or the 'Seller'), as described herein. Each Contract was
originated or purchased from certain dealers or brokers by Access Financial
Corp. ('AFC') in the ordinary course of its business. AFC will serve as servicer
of the Contracts (in such capacity and together with any successor servicer, the
'Servicer'). The term 'approximate,' with respect to the aggregate principal
amount of any Certificates or Contracts, means that the amount is subject to a
variance of plus or minus 5%. Terms used and not otherwise defined herein have
the respective meanings ascribed to such terms in the Prospectus dated October
19, 1995 and attached hereto (the 'Prospectus').
The Certificates will consist of five classes of senior certificates
(collectively, the 'Senior Certificates') designated as the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates and the Class A-5 Certificates, four classes of subordinate
certificates designated as the Class A-6 Certificates, the Class B-1
Certificates, the Class B-2 Certificates and the Class C Certificates
(collectively, the 'Subordinate Certificates'). The Trust will also issue a
residual class of Certificates for each REMIC election made by the Trust (the
'Residual Certificates'). Only the Senior Certificates, the Class A-6
Certificates and the Class B-1 Certificates are being offered hereby (the
'Offered Certificates'). The Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates, the Class A-5 Certificates, the
Class A-6 Certificates, the Class B-1 Certificates and the Class B-2
Certificates will evidence in the aggregate initial undivided interests in the
Contract Pool of approximately 20.71%, 16.27%, 14.73%, 7.48%, 14.68%, 7.88%,
10.84% and 5.91%, respectively, based on their Original Certificate Principal
Balances (as defined herein); the Class C Certificate is a subordinate
'interest-only' certificate and does not have a Certificate Principal Balance.
See 'Description of the Certificates' herein.
(continued on following page)
- --------------------------------------------------------------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER 'RISK
FACTORS' ON PAGE S-24 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 15 OF 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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS SPONSOR(1)(2)
--------------- ------------- ---------------
<S> <C> <C> <C>
Class A-1 Certificates................................................ 100.000000% 0.35% 99.650000%
Class A-2 Certificates................................................ 100.000000% 0.35% 99.650000%
Class A-3 Certificates................................................ 99.984375% 0.35% 99.634375%
Class A-4 Certificates................................................ 99.921875% 0.35% 99.571875%
Class A-5 Certificates................................................ 100.000000% 0.35% 99.650000%
Class A-6 Certificates................................................ 100.000000% 0.35% 99.650000%
Class B-1 Certificates................................................ 99.984375% 0.50% 99.484375%
Total................................................................. $149,961,064.38 $551,246.00 $149,409,818.38
--------------- ------------- ---------------
--------------- ------------- ---------------
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from May 1, 1996.
(2) Before deducting expenses, payable by the Seller estimated to be $500,000.
- --------------------------------------------------------------------------------
The Offered Certificates are offered by the Underwriters, when, as and if
issued by the Trust, delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates in book-entry form will be made through
The Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear
System on or about May 29, 1996 against payment in immediately available funds.
PRUDENTIAL SECURITIES INCORPORATED J.P. MORGAN & CO.
May 24, 1996
<PAGE>
<PAGE>
(Continued from previous page)
One or more elections will be made to treat certain segregated pools of
assets held by the Trust as real estate mortgage investment conduits (each, a
"REMIC") for federal income tax purposes. The Certificates (other than the
Residual Certificates) will represent "regular interests" in a REMIC and each
class of the Residual Certificates will represent "residual interests" in a
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
None of the Sponsor, AFC or Receivables Corp. or any of their
affiliates will have any obligations with respect to the Certificates except, in
the case of the Sponsor and AFC for obligations arising from certain
representations and warranties of AFC with respect to certain characteristics of
the Contracts. In the event of an uncured breach of any such representation or
warranty that materially adversely affects a Contract, AFC (or if AFC fails to
do so, the Sponsor), will be obligated under certain circumstances to repurchase
such Contract or substitute another contract therefor, as described herein and
in the Prospectus.
The interests of the owners of the Offered Certificates (the
"Certificate Owners") will be represented by book-entries on the records of The
Depository Trust Company and participating members thereof. See "Description of
the Certificates -- Registration of Offered Certificates" herein.
Prudential Securities Incorporated and J.P. Morgan Securities Inc. (the
"Underwriters") intend to make a secondary market in the Offered Certificates,
but have no obligation to do so. There can be no assurance that a secondary
market for the Offered Certificates will develop, or if it does develop, that it
will continue to exist or provide sufficient liquidity.
The Offered Certificates will not be insured or guaranteed by any
governmental agency or instrumentality, the Underwriters or any of their
affiliates, or the Sponsor, Receivables Corp., AFC or any of their affiliates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
CERTIFICATES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
---------------------------
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained in
the Prospectus and purchasers are urged to read both this Prospectus Supplement
and the Prospectus in full. Sales of the Offered Certificates may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus. Terms used and not otherwise defined herein have the
respective meanings ascribed to such terms in the Prospectus.
To the extent that any statements in this Prospectus Supplement
conflict with statements contained in the Prospectus, the statements in the
Prospectus Supplement shall control.
S-2
<PAGE>
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used and not otherwise defined herein
have the respective meanings assigned them in the Prospectus or elsewhere in
this Prospectus Supplement. Reference is made to the "Index of Significant
Definitions" herein and in the Prospectus for the location of the definitions of
certain capitalized terms.
ISSUER..................................Access Financial Manufactured Housing
Contract Trust 1996-1
OFFERED CERTIFICATES....................Manufactured Housing Contract
Senior/Subordinate Pass-Through
Certificates, Series 1996-1 (the
"Certificates"). The Offered
Certificates consist of five classes
of senior certificates designated as
the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Certificates
(collectively, the "Senior
Certificates") and two classes of
Subordinate Certificates, designated
as the Class A-6 and Class B-1
Certificates. The Trust will also
issue two additional classes of
Subordinate Certificates and the
Residual Certificates.
SPONSOR.................................Cargill Financial Services Corporation.
SERVICER................................Access Financial Corp., a Delaware
corporation ("AFC" or, together with
any successor servicer under the
Agreement referred to below, the
"Servicer") and a wholly-owned
subsidiary of Access Financial
Holdings Corp., which is a
wholly-owned subsidiary of the
Sponsor.
SELLER..................................The Contracts will be acquired by the
Trust from Access Financial
Receivables Corp. (the "Seller") on
the Closing Date. See "The Contract
Pool" herein.
TRUSTEE.................................The Bank of New York.
RISK FACTORS............................Certain special considerations are
particularly relevant to a decision to
invest in the Offered Certificates
sold hereunder. See "Risk Factors"
herein and in the Prospectus.
CUT-OFF DATE............................May 1, 1996.
CLOSING DATE............................May 29, 1996.
ORIGINAL CLASS A-1 PRINCIPAL BALANCE....$33,544,000 (Approximate, subject to a
variance of plus or minus 5%).
ORIGINAL CLASS A-2 PRINCIPAL BALANCE....$26,360,000 (Approximate, subject to a
variance of plus or minus 5%.
ORIGINAL CLASS A-3 PRINCIPAL BALANCE....$23,862,000 (Approximate, subject to a
variance of plus or minus 5%).
ORIGINAL CLASS A-4 PRINCIPAL BALANCE....$12,115,000 (Approximate, subject to a
variance of plus or minus 5%).
S-3
<PAGE>
<PAGE>
ORIGINAL CLASS A-5 PRINCIPAL BALANCE....$23,781,000 (Approximate, subject to a
variance of plus or minus 5%).
ORIGINAL CLASS A-6 PRINCIPAL BALANCE....$12,764,000 (Approximate, subject to a
variance of plus or minus 5%).
ORIGINAL CLASS B-1 PRINCIPAL BALANCE....$17,551,000 (Approximate, subject to a
variance of plus or minus 5%).
CLASS A-1 REMITTANCE RATE...............6.400% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
The "Weighted Average Net Contract
Rate" with respect to each Remittance
Date is a rate equal to (i) the
weighted average of the Contract Rates
applicable to the Scheduled Payments
that were due in the related
Collection Period on outstanding
Contracts less (ii) 1.00% per annum,
representing the Monthly Servicing Fee
(as defined herein), if AFC is no
longer the Servicer.
CLASS A-2 REMITTANCE RATE...............6.750% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
CLASS A-3 REMITTANCE RATE...............6.975% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
CLASS A-4 REMITTANCE RATE...............7.300% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
CLASS A-5 REMITTANCE RATE...............7.575% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
CLASS A-6 REMITTANCE RATE...............7.975% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
CLASS B-1 REMITTANCE RATE...............8.040% per annum, calculated on the
basis of a 360-day year comprised of
twelve 30-day months, payable monthly,
subject to a maximum rate equal to the
Weighted Average Net Contract Rate.
REMITTANCE DATE.........................The 15th day of each month (or if such
15th day is not a business day, the
next succeeding business day),
commencing in June 1996. The first
Remittance Date is June 17, 1996.
RECORD DATE.............................The last business day of the month
preceding the related Remittance Date.
S-4
<PAGE>
<PAGE>
COLLECTION PERIOD.......................With respect to any Remittance Date, the
calendar month prior to the month of
such Remittance Date (each, a
"Collection Period").
AGREEMENT...............................The Pooling and Servicing Agreement
dated as of May 1, 1996 (the
"Agreement"), by and among the
Sponsor, AFC, Receivables Corp. and
The Bank of New York, as trustee (the
"Trustee").
THE CONTRACT POOL.......................The Contract Pool is comprised of
actuarial manufactured housing
installment sales contracts and
installment loan agreements
(collectively, the "Contracts")
originated or purchased from certain
dealers or brokers by AFC in the
ordinary course of its business.
Each Contract will be secured by (i) a
new or used manufactured home (each
manufactured home securing a Contract
being referred to herein as a
"Manufactured Home") (a Contract
secured by a Manufactured Home, a
"Manufactured Home Contract") or (ii)
a Manufactured Home together with the
real estate on which such Manufactured
Home is located (a Contract secured by
a Manufactured Home and such real
estate, a "Land Secured Contract").
The Contracts will not be insured by
any governmental agency or
instrumentality.
As of the Cut-off Date, the Contract
Pool consisted of approximately 5,660
Contracts having a Cut-off Date Pool
Principal Balance of approximately
$161,980,708. The Contracts, as of
their origination, were secured by
Manufactured Homes located in 38
states and have been selected by AFC
from the manufactured housing
installment sale contracts and
installment loan portfolio of AFC on
the basis of the criteria specified in
the Agreement. Approximately 23.51% of
the Contracts by outstanding principal
balance as of the Cut-off Date were
secured by Manufactured Homes located
in Texas, 22.44% in North Carolina,
10.31% in South Carolina, 6.32% in
Arizona and 5.23% in Georgia. No other
state represented more than 5% of the
Contracts. All of the Contracts bear
interest at a fixed annual percentage
rate (the "Contract Rate") which is
specified in the Contract. Monthly
payments of principal and interest on
the Contracts will be due on various
days (each, a "Due Date") throughout
each month. As of the Cut-off Date,
the Contract Rates on the Contracts
ranged from 6.49% to 16.00%, with a
weighted average Contract Rate of
approximately 10.45%. Because the
Servicing Fee is subordinated while
AFC is the Servicer, the Weighted
Average Net Contract Rate as of the
Cut-off Date is also 10.45%. As of the
Cut-off Date, the Contracts had a
weighted average original term to
maturity of approximately 254 months
and a weighted average remaining term
to maturity of approximately 252
months. The final scheduled payment
date on the Contract with the
S-5
<PAGE>
<PAGE>
latest maturity is in May, 2026. The
Contracts were originated or purchased
from certain dealers or brokers during
1994, 1995 and 1996. See "The Contract
Pool" and "Prepayment and Yield
Considerations" herein for a detailed
description of the Contracts.
DESCRIPTION OF CERTIFICATES.............The Certificates evidence undivided
interests in the Contract Pool and
certain other property held in trust
for the benefit of the
Certificateholders. The Class A-1,
Class A-2, Class A-3, Class A-4 and
Class A-5 Certificates are Senior
Certificates and the Class A-6, Class
B-1, Class B-2 and Class C
Certificates are Subordinate
Certificates, all as described herein.
The Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6 and
Class B-1 Certificates are the Offered
Certificates. The Offered Certificates
will be offered in book-entry form
only in denominations of $1,000. The
undivided percentage interest (the
"Percentage Interest") evidenced by
any particular Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class
A-6 or Class B-1 Certificate for
purposes of calculating distributions
to the holder of such Certificate will
be equal to the percentage obtained by
dividing the original denomination of
such Certificate by the Original Class
A-1 Principal Balance, the Original
Class A-2 Principal Balance, the
Original Class A-3 Principal Balance,
the Original Class A-4 Principal
Balance, the Original Class A-5
Principal Balance, the Original Class
A-6 Principal Balance or the Original
Class B-1 Principal Balance, as
appropriate.
In addition to the Offered Certificates,
the Trust will issue two additional
classes of Subordinate Certificates,
the Class B-2 and the Class C
Certificates, which are subordinated
to the Senior Certificates, the Class
A-6 and the Class B-1 Certificates to
the extent described herein. The Class
B-2 and the Class C Certificates are
not being offered hereby. The Class
B-2 Certificates will have an original
balance of $9,573,000 and a Remittance
Rate which, for purposes of this
Prospectus Supplement, has been
assumed on each Remittance Date to
equal 10.025% per annum, subject to a
maximum rate equal to the Weighted
Average Net Contract Rate. The Trust
will also issue one residual class of
Certificates with respect to each
REMIC election made by the Trust (the
"Residual Certificates") which are not
being offered hereby. The Class C
Certificates and the Residual
Certificates will initially be
retained by the Seller or an affiliate
thereof.
The Class B-2, Class C and Residual
Certificates are not offered hereby,
and any information contained herein
with respect to the Class B-2, Class C
and Residual Certificates is provided
only to permit a better understanding
of the cash flow mechanics and
subordination provisions of the Trust,
insofar as such
S-6
<PAGE>
<PAGE>
mechanics and provisions are relevant
to the Offered Certificates. The
Senior Certificates, the Class A-6,
the Class B-1, the Class B-2, the
Class C Certificates and the Residual
Certificates are collectively referred
to as the "Certificates."
DISTRIBUTIONS...........................On each Remittance Date, distributions
on the Certificates will be made in
the following order of priority: (i)
to the holders of the Senior
Certificates, (ii) to the holders of
the Class A-6 Certificates, (iii) to
the holders of the Class B-1
Certificates, (iv) to the holders of
the Class B-2 Certificates and (v) to
the holders of the Class C
Certificates, in the manner described
below.
Distributions of interest and principal
to the holders of a Class of Senior
Certificates will be made in an amount
equal to the sum of (i) their
respective Percentage Interests of the
amount of interest calculated as
described below under "A. Senior
Interest" and (ii) their respective
Percentage Interests of an amount of
principal calculated as described
below under "B. Senior Principal."
Distributions of interest and principal
to the Class A-6 Certificateholders
will be made in an amount equal to
their respective Percentage Interests
multiplied by the Class A-6
Distribution Amount (as defined
below).
Distributions of interest and principal
to the Class B-1 Certificateholders
will be made in an amount equal to
their respective Percentage Interests
multiplied by the Class B-1
Distribution Amount (as described
below).
Distributions of interest and principal
to the Class B-2 Certificateholders
will be made in an amount equal to
their respective Percentage Interests
of the Class B-2 Distribution Amount
(as described below).
The rights of the Subordinate
Certificateholders and the Residual
Certificateholders to receive
distributions are subordinated to the
rights of the Senior
Certificateholders to the extent
described herein. The rights of the
Class B-1, Class B-2, Class C and
Residual Certificateholders to receive
distributions are subordinated to the
rights of the Class A-6
Certificateholders, and the rights of
the Class B-2, Class C and Residual
Certificateholders to receive
distributions are subordinated to the
rights of the Class B-1
Certificateholders to the extent
described herein. The Class C
Certificates represent a class of
subordinated, "interest-only"
certificates, the distributions on
which are subordinated to the rights
of the Class B-2 Certificateholders
and, if AFC is no longer the Servicer,
to the payment of the Monthly
Servicing Fee. The holders of the
Residual Certificates will be entitled
to receive only miscellaneous amounts
not required to be distributed
S-7
<PAGE>
<PAGE>
on account of the other classes of
Certificates (the "Residual
Distribution Amount").
Distributions will be made on each
Remittance Date commencing in June
1996 to holders of record on the
related Record Date, except that the
final distribution in respect of the
Offered Certificates will only be made
upon presentation and surrender of the
Offered Certificates at the office or
agency appointed by the Trustee for
that purpose in New York, New York.
The "Class A-6 Distribution Amount" for
any Remittance Date is intended to be
equal to the "Class A-6 Formula
Distribution Amount," which equals the
sum of (i) the amount of interest
calculated as described under "C.
Class A-6 Interest" below and (ii) an
amount of principal calculated as
described under "D. Class A-6
Principal" below. The "Class A-6
Distribution Amount" for any
Remittance Date will equal the lesser
of (i) the Class A-6 Formula
Distribution Amount for such
Remittance Date or (ii) the Amount
Available in the Certificate Account
available for distribution to the
Class A-6 Certificateholders (after
giving effect to the distributions
made to Senior Certificateholders) on
such Remittance Date (the "Class A-6
Remaining Amount Available").
The "Class B-1 Distribution Amount" for
any Remittance Date is intended to be
equal to the "Class B-1 Formula
Distribution Amount," which equals the
sum of (i) the amount of interest
calculated as described under "E.
Class B-1 Interest" below and (ii) an
amount of principal calculated as
described under "F. Class B-1
Principal" below. The "Class B-1
Distribution Amount" for any
Remittance Date will equal the lesser
of (i) the Class B-1 Formula
Distribution Amount for such
Remittance Date or (ii) the Amount
Available in the Certificate Account
available for distribution to the
Class B-1 Certificateholders (after
giving effect to the distributions
made to Senior and Class A-6
Certificateholders) on such Remittance
Date (the "Class B-1 Remaining Amount
Available").
The "Class B-2 Distribution Amount" for
any Remittance Date is intended to be
equal to the "Class B-2 Formula
Distribution Amount," which equals the
sum of (i) the amount of interest
calculated as described below under
"G. Class B-2 Interest," and (ii) the
amount of principal calculated as
described below under "H. Class B-2
Principal." The "Class B-2
Distribution Amount" for any
Remittance Date will equal the lesser
of (i) the Class B-2 Formula
Distribution Amount for such
Remittance Date or (ii) the Amount
Available in the Certificate Account
available for distribution to the
Class B-2 Certificateholders (after
giving effect to the distributions
made to Senior, Class A-6 and Class
B-1
S-8
<PAGE>
<PAGE>
Certificateholders) on such Remittance
Date (the "Class B-2 Remaining Amount
Available").
See "Description of the Certificates"
for a detailed description of the
amounts on deposit in the Certificate
Account that will constitute the
Amount Available on each Remittance
Date (the "Amount Available"). The
Amount Available will include amounts
otherwise payable to the holders of
the Class A-6, the Class B-1, the
Class B-2 and the Class C
Certificates, to AFC as the Monthly
Servicing Fee and to the Residual
Certificateholders. The Class A-6
Remaining Amount Available will
include amounts otherwise payable to
the holders of the Class B-1, the
Class B-2 and the Class C
Certificates, to AFC as the Monthly
Servicing Fee and to the Residual
Certificateholders. The Class B-1
Remaining Amount Available will
include amounts otherwise payable to
the holders of the Class B-2 and the
Class C Certificates, to AFC as the
Monthly Servicing Fee and to the
Residual Certificateholders. The Class
B-2 Remaining Amount Available will
include amounts otherwise payable to
the holders of the Class C
Certificates, to AFC as the Monthly
Servicing Fee and to the Residual
Certificateholders.
The "Certificate Principal Balance" of a
Class of Certificates as of any
Remittance Date is the original
principal balance of such Class of
Certificates less all amounts
previously distributed to such Class
on account of principal. The Senior
Principal Balance as of any Remittance
Date is the sum of the Class A-1
Principal Balance, the Class A-2
Principal Balance, the Class A-3
Principal Balance, the Class A-4
Principal Balance and the Class A-5
Principal Balance as of such date.
A. SENIOR INTEREST......................Interest on the outstanding Principal
Balance of each Class of Senior
Certificates will accrue with respect
to each Remittance Date for the period
commencing on the first day of the
calendar month and ending on the last
day of such calendar month preceding
such Remittance Date (each such
period, an "Accrual Period"),
commencing May 1, 1996. Interest will
be paid concurrently on each Class of
Senior Certificates on each Remittance
Date, to the extent of the Amount
Available for such date in the
Certificate Account, at the related
Remittance Rate on the Class A-1
Principal Balance, the Class A-2
Principal Balance, the Class A-3
Principal Balance, the Class A-4
Principal Balance and the Class A-5
Principal Balance, respectively,
before giving effect to any
distributions on such Remittance Date.
In the event that, on a particular
Remittance Date, the Amount Available
in the Certificate Account is not
sufficient to make a full distribution
of interest to the holders of each
Class of Senior Certificates, the
Amount Available will be distributed
among the outstanding Classes of
Senior Certificates pro rata based on
the
S-9
<PAGE>
<PAGE>
aggregate amount of interest due on
each such Class, and the amount of the
shortfall will be carried forward and
added to the amount such holders will
be entitled to receive on the next
Remittance Date. Any such amount so
carried forward will bear interest at
the related Remittance Rate, to the
extent legally permissible. See
"Description of the Certificates."
B. SENIOR PRINCIPAL.....................Holders of a Class of Senior
Certificates will be entitled to
receive on each Remittance Date as
payments of principal, in the order of
priority set forth below and to the
extent of the Amount Available in the
Certificate Account on such date after
payment of interest on all Classes of
Senior Certificates, the sum of (x)
the Senior Percentage of the Formula
Principal Distribution Amount for such
Remittance Date, and (y) any portion
of the amount described in clause (x)
preceding which was due to the holders
of the Senior Certificates on prior
Remittance Dates, but which remains
unpaid on such Remittance Date. The
Agreement defines the "Formula
Principal Distribution Amount" with
respect to a Remittance Date as the
sum of (i) all scheduled payments of
principal due on each outstanding
Contract during the related Collection
Period, (ii) the Scheduled Principal
Balance of each Contract which, during
the related Collection Period, was
purchased by AFC pursuant to the
Agreement on account of certain
breaches of its representations and
warranties, (iii) all Partial
Principal Prepayments applied and all
Principal Prepayments in full received
during the related Collection Period,
(iv) the Scheduled Principal Balance
of each Contract that became a
Liquidated Contract during such
related Collection Period and (v) the
Accelerated Principal Payment, if any,
for such Remittance Date. When the
Certificate Principal Balance of a
Class of Senior Certificates is
reduced to zero, no further
distributions of principal will be
made to the holders of such Class.
The "Senior Percentage" for any
Remittance Date prior to the Class B
Cross-over Date (as defined below),
and for any Remittance Date on or
after the Class B Cross-over Date on
which any Class B Principal
Distribution Test (as described below)
has not been satisfied, will equal
100%. On each Remittance Date on or
after the Class B Cross-over Date, if
each Class B Principal Distribution
Test has been satisfied on such
Remittance Date, the "Senior
Percentage" will equal a fraction,
expressed as a percentage, the
numerator of which is the sum of the
Senior Principal Balance and the Class
A-6 Principal Balance for such
Remittance Date (before giving effect
to any distributions on such
Remittance Date) and the denominator
of which is the Pool Scheduled
Principal Balance at the end of the
second preceding Collection Period.
S-10
<PAGE>
<PAGE>
The "Scheduled Principal Balance" of a
Contract for any Collection Period is
its principal balance as specified in
its amortization schedule, after
giving effect to any previous partial
principal prepayments, any principal
prepayment in full and to the
principal portion of the scheduled
payment due on its scheduled payment
date (the "Due Date") in that
Collection Period, but without giving
effect to any adjustments due to
bankruptcy or similar proceedings and
after giving effect to any partial
principal prepayments applied and
principal prepayments in full received
during the related Collection Period.
The "Pool Scheduled Principal Balance"
with respect to any Collection Period
is the aggregate of the Scheduled
Principal Balances of all Contracts
(other than Liquidated Contracts and
Contracts repurchased by AFC during
such Collection Period) outstanding at
the end of such Collection Period. A
"Liquidated Contract" is a defaulted
Contract as to which all amounts that
the Servicer expects to recover
through the date of disposition of the
Manufactured Home have been received.
The principal distribution to be made to
the holders of the Senior Certificates
on any Remittance Date will be
distributed, to the extent of the
Amount Available after payment of
interest on all Classes of Senior
Certificates, first, to the Class A-1
Certificateholders until the Class A-1
Principal Balance has been reduced to
zero, then to the Class A-2
Certificateholders until the Class A-2
Principal Balance has been reduced to
zero, then to the Class A-3
Certificateholders until the Class A-3
Principal Balance has been reduced to
zero, then to the Class A-4
Certificateholders until the Class A-4
Principal Balance has been reduced to
zero, then to the Class A-5
Certificateholders until the Class A-5
Principal Balance has been reduced to
zero.
If, on any Remittance Date prior to the
Class A-5 Principal Balance being
reduced to zero, the Pool Scheduled
Principal Balance at the close of
business on the last day of the
related Collection Period would be
less than the sum of the Class A-1
Principal Balance, the Class A-2
Principal Balance, the Class A-3
Principal Balance, the Class A-4
Principal Balance and the Class A-5
Principal Balance on such Remittance
Date after giving effect to
distributions of principal to be made
on such date, then the Amount
Available remaining after distribution
of interest on the Senior Certificates
will be distributed to the Classes of
Senior Certificates on a pro rata
basis as a distribution of principal,
and the amount of the shortfall will
be allocated pro rata among the
outstanding Classes of Senior
Certificates, based upon their
respective outstanding Certificate
Principal Balances.
S-11
<PAGE>
<PAGE>
C. CLASS A-6 INTEREST...................Interest on the outstanding Class A-6
Principal Balance will accrue with
respect to each Remittance Date during
the related Accrual Period, commencing
May 1, 1996. On each Remittance Date,
to the extent of the Class A-6
Remaining Amount Available, if any, on
such Remittance Date after payment of
the Senior Distribution Amount,
interest will be paid to the Class A-6
Certificateholders at the Class A-6
Remittance Rate on the Class A-6
Principal Balance (before giving
effect to any distributions on such
Remittance Date). The "Class A-6
Principal Balance" is the Original
Class A-6 Principal Balance less all
amounts previously distributed to the
Class A-6 Certificateholders on
account of principal. In the event
that, on a particular Remittance Date,
the Class A-6 Remaining Amount
Available, plus other funds, if any,
in the Certificate Account available
therefor, are not sufficient to make a
full distribution of interest to the
Class A-6 Certificateholders, the
amount of the deficiency will be
carried forward as an amount that the
Class A-6 Certificateholders are
entitled to receive on the next
Remittance Date. Any amount so carried
forward will bear interest at the
Class A-6 Remittance Rate, to the
extent legally permissible. See
"Description of the Certificates --
Class A-6 Interest."
D. CLASS A-6 PRINCIPAL..................Payments of principal on the Class A-6
Certificates will not commence until
the Senior Principal Balance has been
reduced to zero. On each Remittance
Date on or after the date on which the
Senior Principal Balance has been
reduced to zero, holders of Class A-6
Certificates will be entitled to
receive the Senior Percentage of the
Formula Principal Distribution Amount,
until the Class A-6 Principal Balance
has been reduced to zero.
E. CLASS B-1 INTEREST...................Interest on the outstanding Class B-1
Principal Balance will accrue with
respect to each Remittance Date during
the related Accrual Period, commencing
May 1, 1996.
On each Remittance Date, to the extent
of the Class B-1 Remaining Amount
Available, if any, on such Remittance
Date after payment of the Senior
Distribution Amount and the Class A-6
Distribution Amount, interest will be
paid to the Class B-1
Certificateholders at the Class B-1
Remittance Rate on the Class B-1
Principal Balance (before giving
effect to any distributions on such
Remittance Date). The "Class B-1
Principal Balance" is the Original
Class B-1 Principal Balance less all
amounts previously distributed to the
Class B-1 Certificateholders on
account of principal.
In the event that, on a particular
Remittance Date, the Class B-1
Remaining Amount Available, plus other
funds, if any, in the Certificate
Account available therefor, are not
sufficient to make a full distribution
S-12
<PAGE>
<PAGE>
of interest to the Class B-1
Certificateholders, the amount of the
deficiency will be carried forward as
an amount that the Class B-1
Certificateholders are entitled to
receive on the next Remittance Date.
Any amount so carried forward will
bear interest at the Class B-1
Remittance Rate, to the extent legally
permissible. See "Description of the
Certificates-Class B-1 Interest."
F. CLASS B-1 PRINCIPAL..................Payments of principal on the Class B-1
Certificates will not commence until
the Class B Cross-over Date, and will
be made on that Remittance Date and
each Remittance Date thereafter only
if each Class B Principal Distribution
Test is satisfied on such Remittance
Date (unless the Senior Principal
Balance and the Class A-6 Principal
Balance have been reduced to zero in
which event none of the Class B
Distribution Tests need be satisfied).
The "Class B Cross-over Date" will be
the later of (A) the Remittance Date
in June 2001, or (B) the first
Remittance Date on which the sum of
(i) the Senior Principal Balance on
such Remittance Date (before taking
into account any distributions to be
made on such Remittance Date) and (ii)
the Class A-6 Principal Balance on
such Remittance Date (before taking
into account any distributions to be
made on such Remittance Date) (such
sum expressed as a percentage of the
Pool Scheduled Principal Balance at
the end of the second preceding
Collection Period) is less than
63.51%. The Class B Principal
Distribution Tests on each Remittance
Date relate to losses and
delinquencies on the Contracts, and
are described under "Description of
the Certificates -- Class B-1
Principal."
On each Remittance Date on or after the
Class B Cross-over Date, if each Class
B Principal Distribution Test is
satisfied on such Remittance Date
(unless the Senior Principal Balance
and the Class A-6 Principal Balance
have been reduced to zero in which
event none of the Class B Distribution
Tests need be satisfied), Class B-1
Certificateholders will be entitled to
receive, as payments of principal, the
sum of (i) the Class B Percentage of
the Formula Principal Distribution
Amount and (ii) any portion of the
amount described in clause (i)
preceding which was due to the Class
B-1 Certificateholders on prior
Remittance Dates but which remains
unpaid on such Remittance Date; such
amount will only be distributed to the
extent of the Class B-1 Remaining
Amount Available in the Certificate
Account on such date after payment of
all interest payable on the Class B-1
Certificates.
The Class B Percentage for any
Remittance Date on or after the Class
B Cross-over Date on which each Class
B Principal Distribution Test has been
satisfied will be equal to 100% minus
the Senior Percentage.
S-13
<PAGE>
<PAGE>
The Class B Percentage for each
Remittance Date, if any, after the
Senior Principal Balance and the Class
A-6 Principal Balance have both been
reduced to zero, will be equal to
100%.
G. CLASS B-2 INTEREST...................Interest on the outstanding Class B-2
Principal Balance will accrue with
respect to each Remittance Date during
the related Accrual Period, commencing
May 1, 1996.
On each Remittance Date, to the extent
of the Class B-2 Remaining Amount
Available, if any, for a Remittance
Date after payment of the Senior
Distribution Amount, the Class A-6
Distribution Amount and the Class B-1
Distribution Amount for such date,
interest will be paid to the Class B-2
Certificateholders on such Remittance
Date at the Class B-2 Remittance Rate
on the Class B-2 Principal Balance
(before giving effect to any
distributions on such Remittance
Date). The "Class B-2 Principal
Balance" is the Original Class B-2
Principal Balance less all amounts
previously distributed to the Class
B-2 Certificateholders on account of
principal.
In the event that, on a particular
Remittance Date, the Class B-2
Remaining Amount Available, plus other
funds, if any, in the Certificate
Account available therefor, are not
sufficient to make a full distribution
of interest to the Class B-2
Certificateholders, the amount of the
deficiency will be carried forward as
an amount that the Class B-2
Certificateholders are entitled to
receive on the next Remittance Date.
Any amount so carried forward will
bear interest at the Class B-2
Remittance Rate, to the extent legally
permissible. See "Description of the
Certificates -- Class B-2 Interest."
H. CLASS B-2 PRINCIPAL..................Payments of principal on the Class B-2
Certificates will not commence until
the Remittance Date on which the Class
B-1 Principal Balance has been reduced
to zero and will be made on such
Remittance Date and each Remittance
Date thereafter only if each Class B
Principal Distribution Test is
satisfied on such Remittance Date
(unless the Senior Principal Balance
and the Class A-6 Principal Balance
have been reduced to zero in which
event none of the Class B Distribution
Tests need be satisfied). See
"Description of the Certificates --
Class B-2 Principal."
On each Remittance Date, on or after the
date on which the Class B-1 Principal
Balance has been reduced to zero and
on which each Class B Principal
Distribution Test is satisfied (unless
the Senior Principal Balance and the
Class A-6 Principal Balance have been
reduced to zero in which event none of
the Class B Distribution Tests need be
satisfied), the Class B-2
Certificateholders will be entitled to
receive, as payments of principal, the
sum of (i) the Class B
S-14
<PAGE>
<PAGE>
Percentage of the Formula Principal
Distribution Amount and (ii) any
portion of the amount described in
clause (i) preceding which was due to
the Class B- 2 Certificateholders on
prior Remittance Dates but which
remains unpaid on such Remittance
Date; such amount will only be
distributed to the extent of the Class
B-2 Remaining Amount Available in the
Certificate Account on such date,
after payment of all interest payable
on the Class B-2 Certificates.
I. CLASS C DISTRIBUTIONS;
OVERCOLLATERALIZATION AMOUNT.........The Weighted Average Net Contract Rate
for the Contract Pool is expected
generally to be higher than the
weighted average of the Remittance
Rates applicable to the Class A-1,
Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class B-1 and Class
B-2 Certificates (collectively, the
"Non-IO Certificates"), thus
generating certain excess interest
collections which, in the absence of
losses and delinquencies, will not be
necessary to fund distributions on the
Non-IO Certificates. The Agreement
provides that this excess interest,
together with, if AFC is then the
Servicer, the Monthly Servicing Fee
then otherwise due to AFC, be applied,
to the extent available, to make
accelerated payments of principal to
the class or classes then entitled to
receive distributions of principal;
such application is expected to cause
the aggregate Certificate Principal
Balance of the Non-IO Certificates to
amortize more rapidly than the
Contract Pool, resulting in
"overcollateralization" (i.e., the
excess of the Pool Scheduled Principal
Balance over the aggregate Certificate
Principal Balance of the Non-IO
Certificates). This excess interest
for a Collection Period, together with
interest on the overcollateralization
amount itself, on the related
Remittance Date is the "Class C
Formula Distribution Amount" for such
Remittance Date. On any Remittance
Date the "Overcollateralization
Amount" will be an amount equal to the
difference between the Pool Scheduled
Principal Balance as of the end of the
immediately preceding Collection
Period and the aggregate Certificate
Principal Balance of the Non-IO
Certificates on such Remittance Date
(and after taking into account all
other distributions to be made on such
Remittance Date).
The amounts available to fund the Class
C Formula Distribution Amount (which
amount will be the Class B-2 Remaining
Amount Available less the Class B-2
Distribution Amount and less the
Monthly Servicing Fee (for such
Remittance Date) such amount being the
"Class C Distribution Amount") will be
applied, together with the Monthly
Servicing Fee if AFC is the Servicer,
to make such accelerated payments of
principal on each Remittance Date
until the Overcollateralization Amount
is approximately equal to $4,859,000
(the "Initial Required
Overcollateralization Amount").
Thereafter, the Class C Distribution
Amount will be available to
S-15
<PAGE>
<PAGE>
make distributions of the Class C
Formula Distribution Amount to the
holders of the Class C Certificates,
unless, due to losses, the
Overcollateralization Amount is
decreased, in which event such
applications will commence to the
extent necessary to increase the
actual Overcollateralization Amount to
the Required Overcollateralization
Amount. The level of the Required
Overcollateralization Amount is equal
to, for any Remittance Date, (x) prior
to the Class B Cross-over Date, the
Initial Required Overcollateralization
Amount, (y) on and after the Class B
Cross-over Date, and as long as each
Class B Principal Distribution Test is
then satisfied, the lesser of (i) the
Initial Required Overcollateralization
Amount and (ii) the greater of (a) 6%
of the then Scheduled Pool Principal
Balance and (b) 0.75% of the Cut-off
Date Pool Principal Balance and (z) on
and after the Class B Cross-over Date,
if any Class B Distribution Test is
not satisfied, the required level as
of the immediately preceding
Remittance Date.
The amount, if any, of the Class C
Distribution Amount actually applied
as an accelerated payment of principal
on any Remittance Date (such amount to
be the lesser of (x) the excess of (i)
the Required Overcollateralization
Amount over (ii) the actual
Overcollateralization Amount on such
Remittance Date and (y) the Class C
Distribution Amount and the Monthly
Servicing Fee if AFC is the Servicer
for the immediately preceding
Collection Period) is the "Accelerated
Principal Payment" for such Remittance
Date.
SUBORDINATION OF CLASS A-6, CLASS B-1,
CLASS B-2, CLASS C AND RESIDUAL
CERTIFICATES..........................The rights of the holders of the Class
A-6, Class B-1, Class B-2, Class C
Certificates and Residual Certificates
to receive distributions with respect
to the Contracts in the Trust will be
subordinated, to the extent described
herein, to such rights of the holders
of the Senior Certificates. This
subordination is intended to enhance
the likelihood of regular receipt by
the holders of the Senior Certificates
of the full amount of their scheduled
monthly payments of interest and
principal and to afford such holders
protection against losses on
Liquidated Contracts.
The protection afforded to the holders
of the Senior Certificates by means of
the subordination of the Class A-6,
Class B-1, Class B-2, Class C and
Residual Certificates will be
accomplished by the preferential right
of the Senior Certificateholders to
receive, prior to any distribution
being made on a Remittance Date in
respect of the Class A-6, Class B-1,
Class B-2, Class C and Residual
Certificates, the amounts of interest
and principal due them on each
Remittance Date out of the Amount
Available on such
S-16
<PAGE>
<PAGE>
date in the Certificate Account and,
if necessary, by the right of such
Senior Certificateholders to receive
future distributions of Amounts
Available that would otherwise be
payable to the holders of the Class
A-6, Class B-1, Class B-2, Class C and
Residual Certificates.
In addition, the rights of the holders
of the Class B-1, Class B-2, Class C
and Residual Certificates to receive
distributions with respect to the
Contracts will be subordinated, to the
extent described herein, to such
rights of the holders of the Class A-6
Certificates. This subordination is
intended to enhance the likelihood of
regular receipt by the holders of the
Class A-6 Certificates of the full
amount of their scheduled monthly
payments of interest and principal and
to afford such holders protection
against losses on Liquidated
Contracts.
The protection afforded to the holders
of the Class A-6 Certificates by means
of the subordination of the Class B-1,
Class B-2, Class C and Residual
Certificates will be accomplished by
the preferential right of the Class
A-6 Certificateholders to receive,
prior to any distribution being made
on a Remittance Date in respect of the
Class B-1, Class B-2, Class C and
Residual Certificates, the amounts of
interest and principal due them on
each Remittance Date out of the Class
A-6 Remaining Amount Available on such
date in the Certificate Account and,
if necessary, by the right of such
Class A-6 Certificateholders to
receive future distributions of Class
A-6 Remaining Amounts Available that
would otherwise be payable to the
holders of the Class B-1, Class B-2,
Class C and Residual Certificates.
The rights of the holders of the Class
B-2, Class C and Residual Certificates
to receive distributions with respect
to the Contracts will be subordinated
in the same manner to such rights of
the holders of the Senior
Certificates, Class A-6 Certificates
and Class B-1 Certificates.
The rights of the holders of the Class C
Certificates to receive distributions
with respect to the Contracts on each
Remittance Date will be subordinated
to the rights of the holders of the
Senior Certificates, Class A-6
Certificates, Class B-1 Certificates
and Class B-2 Certificates and to the
payment of the Monthly Servicing Fee.
See "Description of the
Certificates-Subordination of Class
A-6, Class B-1, Class B-2, Class C and
Residual Certificates."
The rights of the holders of the
Residual Certificates to receive
distributions with respect to the
Contracts on each Remittance Date will
be subordinated to the rights of the
holders of all other classes of
Certificates and to the payment of the
Monthly Servicing Fee. See
"Description of the Certificates --
S-17
<PAGE>
<PAGE>
Subordination of Class A-6, Class B-1,
Class B-2, Class C and Residual
Certificates."
LOSSES ON LIQUIDATED CONTRACTS..........As described above, the distribution of
principal to the Senior and the Class
A-6 Certificateholders and to the
Class B-1 Certificateholders is
intended to include the Senior
Percentage and the Class B Percentage,
respectively, of the Scheduled
Principal Balance of each Contract
that became a Liquidated Contract
during the preceding Collection
Period. If the Net Liquidation
Proceeds (as defined below) from a
Liquidated Contract are less than the
Scheduled Principal Balance of such
Liquidated Contract plus accrued and
unpaid interest thereon plus amounts
reimbursable to the Servicer for
advances of certain taxes and
insurance premiums, the deficiency (a
"Realized Loss") will, in effect, be
absorbed first, by the Residual
Certificateholders, second, by the
Class C Certificateholders (both
through the application of the Class C
Distribution Amount to fund such
deficiency and through a reduction in
the Overcollateralization Amount),
third, by the Monthly Servicing Fee
(so long as AFC is the Servicer),
fourth, by the Class B-2
Certificateholders, fifth, by the
Class B-1 Certificateholders and
sixth, by the Class A-6
Certificateholders, since a portion of
the Amount Available equal to such
deficiency and otherwise distributable
to them will be paid to the Senior
Certificateholders. If AFC is no
longer the Servicer, then the Monthly
Servicing Fee will become senior to
all Certificateholders' distributions.
"Liquidation Proceeds" means cash
(including insurance proceeds)
received in connection with the
liquidation of defaulted Contracts,
whether through repossession,
foreclosure sale or otherwise,
including any rental income realized
from the repossessed Manufactured
Home. "Net Liquidation Proceeds"
means, as to a Liquidated Contract,
all Liquidation Proceeds received on
or prior to the last day of the
Collection Period in which such
Contract became a Liquidated Contract,
net of Liquidation Expenses.
"Liquidation Expenses" means
out-of-pocket expenses (exclusive of
any overhead expenses) which are
incurred by the Servicer in connection
with the liquidation of any defaulted
Contract, on or prior to the date on
which the related Manufactured Home is
disposed of, including, without
limitation, legal fees and expenses,
and any related and unreimbursed
expenditures for property taxes,
property preservation or restoration
of the property to marketable
condition.
If the Amount Available is not
sufficient to cover the entire
principal portion of the Senior
Formula Distribution Amount due to the
Senior Certificateholders or the
entire principal portion of the Class
A-6 Formula Distribution Amount due to
the Class A-6 Certificateholders on a
particular Remittance Date, then (i)
if the Senior Percentage is less than
100%, the Senior Percentage on future
S-18
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<PAGE>
Remittance Dates will be increased and
the Class B Percentage on future
Remittance Dates will be reduced as a
result of such deficiency and (ii) the
amount of the deficiency will be
carried forward as an amount the
Senior Certificateholders or the Class
A-6 Certificateholders are entitled to
receive on future Remittance Dates,
until paid in full. If the Amount
Available is sufficient to cover the
entire principal portion of the Senior
Formula Distribution Amount due to the
Senior Certificateholders and the
entire principal portion of the Class
A-6 Formula Distribution Amount due to
the Class A-6 Certificateholders on a
particular Remittance Date but is not
sufficient to cover the entire
principal portion of the Class B-1
Formula Distribution Amount due to the
Class B-1 Certificateholders, the
amount of the deficiency will be
carried forward as an amount that the
Class B-1 Certificateholders are
entitled to receive on the next
Remittance Date.
As a result of the subordination of the
Class B-1 and the Class B-2
Certificates, the Monthly Servicing
Fee (so long as AFC is the Servicer),
and the subordination of the Class C
and Residual Certificates, the Class
A-6 Certificateholders will not absorb
(i) losses resulting from Realized
Losses or (ii) delinquent payments on
the Contracts, at least to the extent
that such subordination has not been
exhausted. See "Description of the
Certificates -- Subordination of Class
A-6, Class B-1, Class B-2, Class C and
Residual Certificates" and "Prepayment
and Yield Considerations."
As a result of the subordination of the
Class B-2 Certificates, the Monthly
Servicing Fee (so long as AFC is the
Servicer), and the subordination of
the Class C and Residual Certificates,
the Class B-1 Certificateholders will
not absorb (i) losses resulting from
Realized Losses or (ii) delinquent
payments on the Contracts, at least to
the extent that such subordination has
not been exhausted. See "Description
of the Certificates -- Subordination
of Class A-6, Class B-1, Class B-2,
Class C and Residual Certificates" and
"Prepayment and Yield Considerations."
As a result of the subordination of the
Monthly Servicing Fee (so long as AFC
is the Servicer) and of the Class C
and Residual Certificates, the Class
B-2 Certificateholders will not absorb
(i) losses resulting from Realized
Losses or (ii) delinquent payments on
the Contracts, at least to the extent
that such subordination has not been
exhausted. See "Description of the
Certificates -- Subordination of Class
A-6, Class B-1, Class B-2, Class C and
Residual Certificates" and "Prepayment
and Yield Considerations."
S-19
<PAGE>
<PAGE>
FINAL SCHEDULED REMITTANCE DATE.........The Final Scheduled Remittance Date for
each Class of the Offered Certificates
will be the Remittance Date in
November, 2026. The Final Scheduled
Remittance Date has been determined by
adding six months to the maturity date
of the Contract with the latest stated
maturity. Because the rate of
distributions in reduction of the
Principal Balances of the Offered
Certificates will depend on the rate
of amortization of the Contracts
(including amortization due to
prepayments and defaults), the actual
final distribution on any Class of
Offered Certificates could occur
significantly earlier than the Final
Scheduled Remittance Date. The rate of
payments on the Contracts will depend
on their particular characteristics,
as well as on interest rates
prevailing from time to time and other
economic factors, and no assurance can
be given as to the actual payment or
default experience of the Contracts.
OPTIONAL TERMINATION....................The Servicer has the option to purchase
from the Trust all Contracts then
outstanding and all other property in
the Trust if, among other conditions,
on any Remittance Date the Pool
Scheduled Principal Balance is less
than 10% of the Cut-off Date Pool
Principal Balance. See "Description of
the Certificates -- Optional
Termination" herein.
AUCTION SALE............................The Agreement requires that, within
ninety days following the first
Remittance Date as of which the Pool
Scheduled Principal Balance is less
than 10% of the Cut-off Date Pool
Principal Balance, if the Servicer has
not exercised its optional termination
right by such date, the Trustee
solicit bids for the purchase of all
Contracts remaining in the Trust. In
the event that satisfactory bids are
received as described in the
Agreement, the net sale proceeds will
be distributed to Certificateholders,
in the same order of priority as
collections received in respect of the
Contracts. If satisfactory bids are
not received, the Trustee shall
decline to sell the Contracts and
shall not be under any obligation to
solicit any further bids or otherwise
negotiate any further sale of the
Contracts. Such sale and consequent
termination of the Trust must
constitute a "qualified liquidation"
of each REMIC established by the Trust
under Section 860F of the Internal
Revenue Code of 1986, as amended,
including, without limitation, the
requirement that the qualified
liquidation takes place over a period
not to exceed 90 days. See
"Description of the Certificates --
Auction Sale".
ADVANCES................................The Servicer will be required, not later
than each Remittance Date, to deposit
into the Certificate Account an amount
equal to the Scheduled Payments due,
but not collected, with respect to
delinquent Contracts during the prior
Collection Period, but only if, in its
good faith business judgment, the
Servicer believes that such amounts
will ultimately be recovered on or
with respect to the related Contract.
S-20
<PAGE>
<PAGE>
Any such amounts so advanced are
"Delinquency Advances." See
"Description of the Certificates
-- Advances" herein.
REGISTRATION OF OFFERED CERTIFICATES....The Offered Certificates initially will
be issued in book- entry form. Persons
acquiring beneficial ownership
interests in such Offered Certificates
("Beneficial Certificate Owner") may
elect to hold their interests through
The Depository Trust Company ("DTC"),
in the United States, or Cedel Bank,
societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant
system. So long as the Offered
Certificates are book-entry
certificates, such Offered
Certificates will be evidenced by one
or more Offered Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one
of the relevant depositories
(collectively, the "European
Depositories"). Cross-market transfers
between persons holding directly or
indirectly through DTC, on the one
hand, and counterparties holding
directly or indirectly through CEDEL
or Euroclear, on the other, will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Company of New York ("Morgan"), the
relevant depositories of CEDEL or
Euroclear, respectively, and each a
participating member of DTC. The
Offered Certificates will initially be
registered in the name of Cede. The
interests of such Beneficial
Certificate Owners will be represented
by book-entries on the records of DTC
and participating members thereof. No
Beneficial Certificate Owner will be
entitled to receive a definitive
certificate representing such person's
interest, except under the limited
circumstances described herein. All
references herein to any Offered
Certificates reflect the rights of
Beneficial Certificate Owners only as
such rights may be exercised through
DTC and its participating
organizations for so long as such
Offered Certificates are held by DTC.
See "Description of the Certificates
-- Registration of Offered
Certificates" herein.
FEDERAL INCOME TAX CONSEQUENCES.........For federal income tax purposes, the
Trust will make one or more elections
with respect to certain segregated
pools of assets held by the Trust to
treat each such segregated pool as a
real estate mortgage investment
conduit ("REMIC"). The Offered
Certificates will constitute "regular
interests" in a REMIC and generally
will be treated as debt instruments of
the Trust for federal income tax
purposes with payment terms equivalent
to the terms of such Certificates. The
Residual Certificates will be treated
as the "residual interest" in a REMIC
for federal income tax purposes.
Offered Certificateholders that would
otherwise report income under a cash
method of accounting will be required
to include in income
S-21
<PAGE>
<PAGE>
interest on the Offered Certificates
(including original issue discount, if
any) in accordance with an accrual
method of accounting. See "Certain
Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA CONSIDERATIONS....................Senior Certificates. Subject to the
conditions and discussion set forth
herein, the Senior Certificates may be
purchased by employee benefit plans
that are subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"). See "ERISA
Considerations" herein and in the
Prospectus.
Subordinate Certificates. Except for an
insurance company using assets of its
general account, a fiduciary of any
employee benefit plan or other plan
subject to ERISA and/or Section 4975
of the Internal Revenue Code of 1986,
as amended (the "Code"), should not
purchase or hold the Subordinate
Certificates as such actions may give
rise to a transaction prohibited under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in
the Prospectus.
LEGAL INVESTMENT........................The Offered Certificates (other than the
Class B-1 Certificates) at the time of
issuance qualify as "mortgage related
securities" under the Secondary
Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") and, as
such, will constitute legal
investments for certain types of
investors to the extent provided in
SMMEA. The Class B-1 Certificates are
not "mortgage related securities"
under SMMEA. Accordingly, many
institutions with legal authority to
invest in comparably rated securities
may not be legally authorized to
invest in the Class B-1 Certificates.
Investors should consult their own
legal advisors in determining whether
and to what extent the Offered
Certificates (other than the Class B-1
Certificates) constitute legal
investments for such investors. See
"Legal Investment Matters" in the
Prospectus.
RATINGS.................................It is a condition to the issuance of the
Senior Certificates that they be rated
"Aaa" by Moody's Investors Service,
Inc. ("Moody's") and "AAA" by Fitch
Investors Service, L.P. ("Fitch"). It
is a condition to the issuance of the
Class A-6 Certificates that they be
rated at least "Aa3" by Moody's and
"AA-" by Fitch. It is a condition to
the issuance of the Class B-1
Certificates that they be rated at
least "Baa3" by Moody's and "BBB-" by
Fitch. The Seller has not requested a
rating on the Offered Certificates by
any rating agency other than Moody's
and Fitch. However, there can be no
assurance as to whether any other
rating agency will rate any or all of
the Offered Certificates, or if it
does, what rating would be assigned by
any such other rating agency. A rating
on any or all of the Offered
Certificates by certain other rating
agencies, if assigned at all, may
S-22
<PAGE>
<PAGE>
be lower than the rating assigned to
such Certificates by either Moody's or
Fitch. See "Ratings" herein.
A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time.
S-23
<PAGE>
<PAGE>
RISK FACTORS
Prospective Offered Certificateholders should consider, among other
things, the factors discussed in the Prospectus under "Risk Factors." In
addition, prospective Offered Certificateholders should consider the following
in connection with the purchase of Offered Certificates:
1. General. An investment in the Certificates may be affected by, among
other things, a downturn in national, regional or local economic conditions. The
geographic locations of the Manufactured Homes in the Contract Pool are set
forth herein. Regional and local economic conditions are often volatile and,
historically, regional and local economic conditions, as well as national
economic conditions, have affected the delinquency, loan loss and repossession
experience of manufactured housing installment sales contracts. Adverse economic
conditions in any of the states with high concentrations could adversely affect
the delinquency or loan loss experience of the Contracts. Moreover, regardless
of its location, manufactured housing generally depreciates in value. Thus,
Certificateholders should expect that, as a general matter, the market value of
any Manufactured Home will be lower than the outstanding principal balance of
the related Contract. See "The Contract Pool." Sufficiently high delinquencies
and liquidation losses on the Contracts in the Contract Pool will have the
effect of reducing, and could eliminate, the protection against loss afforded by
any credit enhancement supporting any Class of the related Certificates. See
"Description of Credit Enhancement" in the Prospectus. If such protection is
eliminated, or if no such protection is provided, the holders of such
Certificates will bear all risk of loss on the Contracts and must rely on the
value of the Manufactured Homes for recovery of the outstanding principal of and
unpaid interest on any defaulted Contracts.
2. AFC; Limited History, Start-up Operations. AFC was incorporated in
January 1994. AFC commenced originating, purchasing and servicing Contracts on a
limited scale in May 1994, and since that time has experienced rapid growth. As
a result, AFC has only limited historical information concerning the loss,
delinquency and prepayment experience of Contracts originated or purchased by
AFC, and the delinquency and loss percentages presented herein may be affected
by the size and relative lack of seasoning of its serviced portfolio. As a
result of these factors, AFC believes such data would not provide meaningful
information concerning the quality or performance of the Contracts.
Although management of AFC has had considerable experience while
employed at other companies in the origination, purchasing and servicing of
Contracts, and AFC believes that its underwriting criteria and servicing
standards are consistent with industry norms, there can be no assurance that the
loss and delinquency rates on the Contracts will not exceed normal industry
rates.
3. Key Personnel. AFC's success depends in large part upon a number of
key management personnel and technical employees. The loss of the services of
one or more of its management personnel could have a material adverse impact on
the business and operations of AFC.
4. Security Interests in the Manufactured Homes; Transfer of Contracts
and Security Interests. On or prior to the Closing Date, AFC will convey the
related Contracts to the Seller and the Seller will convey the related Contracts
to the Trust.
Each Contract is secured by a security interest in a Manufactured Home
together with, in the case of Land Secured Contracts, the real estate on which
the related Manufactured Home is located. Perfection of security interests in
the Manufactured Homes and enforcement of rights to realize upon the value of
the Manufactured Homes as collateral for the Contracts are subject to a number
of federal and state laws, including the Uniform Commercial Code (the "UCC") as
adopted in the states in which the Manufactured Homes are located and such
states' certificate of title statutes, but generally not their real estate laws.
Under such federal and state laws, a number of factors may limit the ability of
a holder of a perfected security interest in Manufactured Homes to realize upon
such Manufactured Homes or may limit the amount realized to less than the amount
due under the related Contract. See "Certain Legal Aspects of the Contracts."
S-24
<PAGE>
<PAGE>
In addition, because of the expense and administrative inconvenience
involved, AFC will not amend any certificates of title relating to any
Manufactured Home to change the lienholder specified therein to the Trustee, and
will not execute any transfer instrument (including, among, other instruments,
UCC-3 assignments) relating to any Manufactured Home in favor of the Trustee or
note thereon the Trustee's interest. As a result, AFC will remain the lienholder
on the certificate of title relating to the Manufactured Home. In some states,
in the absence of such an amendment, execution or notation, the assignment to
the Trustee of the security interest in the Manufactured Homes located therein
may not be effective or such security interest may not be perfected. If any
otherwise effectively assigned security interest in favor of the Trustee is not
perfected, such assignment of the security interest to the Trustee may not be
effective against creditors of AFC to the extent it continues to be specified as
lienholder on any certificate of title or as secured party on any UCC filing, or
against a trustee in bankruptcy of AFC.
Each Contract (other than a Land Secured Contract) will be "chattel
paper" as defined in the UCC as in effect in Georgia (where AFC's executive
office is currently located), Minnesota (where the Sponsor's executive office is
located) and the jurisdiction in which the related Manufactured Home was located
at origination. Under the UCC as in effect in each such jurisdiction, the sale
of chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the Agreement, the Trustee will have possession
of the Contracts. In addition, AFC and the Seller will make appropriate filings
of UCC-1 financing statements in the office of the Secretary of State of the
State where their principal place of business is located to give notice of the
Trustee's ownership of the Contracts. The Trustee's interest in the Contracts
could, through the fraud or negligence of the Trustee, be defeated if a
subsequent purchaser were able to take physical possession of the Contracts
without notice of such assignment.
Further, because of the expenses and administrative inconvenience
involved, the assignment of mortgages or deeds of trust to the Trustee will not
be recorded with respect to the mortgages or deeds of trust (each, a"Mortgage")
securing each Land Secured Contract. The failure to record the assignments to
the Trustee of the Mortgage securing Land Secured Contracts may result in the
sale of such Contracts or the Trustee's rights in the land secured by the
Mortgage being ineffective against creditors of AFC or against a trustee in
bankruptcy of AFC or against a subsequent purchaser of such Contracts from AFC
or Receivables Corp., without notice of the sale to the Trustee. See "The
Contract Pool" herein for a description of the programs under which Contracts
are originated or purchased by AFC.
5. Federal and State Consumer Protection Laws. Numerous federal and
state consumer protection laws could adversely affect the interest of the Trust
in the Contracts in the Contract Pool. For instance, as described herein under
"Certain Legal Aspects of the Contracts -- Consumer Protection Laws," the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
could, under certain circumstances, cap the amount of interest that may be
charged on certain Contracts at 6% and may hinder the ability, of the Servicer
to foreclose on such Contracts in a timely fashion. In addition, other federal
and state consumer protection laws impose requirements on lending under
installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and the right of set-off against claims by such assignees. These
laws could apply to the Trust as assignee of the related Contracts. AFC will
represent and warrant that, as of the Cut-Off Date, each Contract complies with
all requirements of law. A breach of any such representation or warranty that
materially adversely affects the Trust's interest in any Contract will create an
obligation by AFC to repurchase, or at its option substitute another contract
for, such Contract, unless such breach is cured within the time period specified
in the Agreement. AFC will have no obligation to repurchase any Contract subject
to the Relief Act, however.
6. No Recourse. The purchase of the Certificates will be without
recourse. See "Description of Credit Enhancement" in the Prospectus. The
Certificates will not represent an interest in or obligation of, and the
Certificates will not be guaranteed by, AFC, Receivables Corp. or the Sponsor or
any of their other affiliates. In addition, the Certificates will not be insured
or guaranteed by any governmental agency or instrumentality.
S-25
<PAGE>
<PAGE>
7. Prepayment Considerations. The prepayment experience on the
Contracts underlying the Certificates (including prepayments due to liquidations
of defaulted Contracts) will affect the average life and the maturity of such
Certificates. Prepayments on the Contracts in the Contract Pool may be
influenced by a variety of economic, geographic, social and other factors,
including repossessions, seasonality and interest rates. Other factors affecting
prepayment on the Contracts include changes in housing needs, job transfers and
unemployment. See "Prepayment and Yield Considerations" herein.
8. Certain Matters Relating to Insolvency. As described herein under
"The Contract Pool," each of the Contracts will be conveyed by AFC to
Receivables Corp. and by Receivables Corp. to the Trust. Each of AFC and
Receivables Corp. intend that their respective conveyance of the Contracts
constitute a sale, rather than a pledge of the Contracts to secure its
respective indebtedness. However, if any such entity were to become a debtor
under the federal bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of such entity or such entity as debtor-in-possession may argue that
the sale of the Contracts by such entity was a pledge of the Contracts rather
than a sale. This position, if presented to or accepted by a court, could result
in a delay in or reduction of distributions to the Certificateholders.
THE CONTRACT POOL
All of the Contracts to be sold by Receivables Corp. to the Trust were
originated or purchased by AFC. On or prior to the Closing Date, AFC will sell
such Contracts to Receivables Corp. On the date of initial issuance of the
Offered Certificates, the Sponsor will cause the Trust to acquire the Contracts
comprising the Contract Pool from Receivables Corp. The Trustee will have
possession of the Contracts.
Each Contract provides for scheduled payments of principal and interest
on specified monthly due dates (each, a "Due Date"). The day of each month
constituting the Due Date varies from Contract to Contract. The scheduled
payment due on each monthly Due Date (the "Scheduled Payment") is specified in
the Contract.
The Contracts are all actuarial Contracts. Each Contract bears interest
at a fixed annual percentage rate (the "Contract Rate") and provides for level
payments over the term of such Contract that fully amortize the principal
balance of such Contract. The Contract Pool does not contain any "step-up rate"
Contracts or any manufactured housing contracts purchased in bulk from an
unrelated third party.
The Contract Pool contains a limited number of Contracts as to which
the real estate is either (i) in lieu of a cash down payment on the Manufactured
Home (the "Land-in-Lieu Contracts"), representing 1.81% of the Contract Pool (by
aggregate principal balance as of the Cut-off Date) or (ii) taken as collateral
against a loan advanced on the related Manufactured Home together with the real
estate on which the Manufactured Home is located (the "Land-Home Contracts")
(together, the "Land Secured Contracts"), representing 4.73% of the Contract
Pool (by aggregate principal balance as of the Cut-off Date).
Under the Agreement, the Manufactured Homes are required to comply with
the requirements of certain federal statutes. These statutes generally require
the Manufactured Homes to have a minimum of 400 square feet of living space and
a minimum width of 102 inches and to be of a kind customarily used at a fixed
location. Such statutes also require the Manufactured Homes to be transportable
in one or more sections, and to be built on a permanent chassis and designed to
be used as dwellings, with or without permanent foundations, when connected to
the required utilities. The Manufactured Homes include the plumbing, heating,
air conditioning and electrical systems contained therein.
Management of AFC estimates that as of the date of origination in
excess of 95% of the Manufactured Homes are used as primary residences by the
obligors under the Contracts (each, an "Obligor") secured by such Manufactured
Homes.
All Contracts have fixed Contract Rates. As of the Cut-off Date, the
Contract Rates on the Contracts ranged from 6.49% to 16.00%. The weighted
average Contract Rate as of the Cut-off Date
S-26
<PAGE>
<PAGE>
was approximately 10.45%. Because the Servicing Fee is subordinated while AFC is
the Servicer, the Weighted Average Net Contract Rate as of the Cut-off Date is
also 10.45%. As of the Cut-off Date, the Contracts had remaining terms to
maturity of at least 10 months but not more than 360 months, and original terms
to maturity of at least 12 months but not more than 360 months. As of the
Cut-off Date, the Contracts had a weighted average remaining term to maturity of
approximately 252 months, and a weighted average original term to maturity of
approximately 254 months. The average outstanding principal balance of the
Contracts as of the Cut-off Date was $28,618 and the outstanding principal
balances of the Contracts as of the Cut-off Date ranged from $2,955 to $150,613.
The weighted average loan-to-value ratio for the Contracts at origination was
89.96%. "Value" in such calculation, (i) in the case of Manufactured Home
Contracts and Land as Additional Collateral Contracts, is equal to the stated
cash sale price of such Manufactured Home, including sales and other taxes,
plus, to the extent financed, filing and recording fees imposed by law, premiums
for related insurance and prepaid finance charges, (ii) in the case of Land-Home
Contracts and Land-in-Lieu Contracts, is equal to the sum of Value in (i) above
and the appraised value of the land securing the Contract and (iii) in the case
of Refinanced Contracts, is equal to the outstanding principal balance of the
Contract refinanced at the time such Refinanced Contract was originated.
Manufactured homes, unlike site-built homes, generally depreciate in value, and
it has been AFC's experience that, upon repossession, the market value of a
manufactured home securing a manufactured housing contract is generally lower
than the principal balance of the related manufactured housing contract.
The Contracts are secured by Manufactured Homes located in 38 states;
approximately 23.51% of the Contracts by outstanding principal balance as of the
Cut-off Date were secured by Manufactured Homes located in Texas, 22.44% in
North Carolina, 10.31% in South Carolina, 6.32% in Arizona and 5.23% in Georgia.
No other state represented more than 5% of the Contracts.
Approximately 89.01% of the Contracts by outstanding principal balance
as of the Cut-off Date are secured by Manufactured Homes which were new at the
time the related Contracts were originated and approximately 10.99% of the
Contracts by outstanding principal balance as of the Cut-off Date are secured by
Manufactured Homes which were used at the time the related Contracts were
originated.
All of the Contracts are conventional Contracts in that they are not
insured or guaranteed by any governmental agency or instrumentality.
S-27
<PAGE>
<PAGE>
Set forth below is a description of certain additional characteristics
of the Contracts:
GEOGRAPHICAL DISTRIBUTION OF MANUFACTURED HOMES AS OF ORIGINATION(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
STATE CUT-OFF DATE DATE OF CUT-OFF DATE
----- ------------ ------------- --------------------
<S> <C> <C> <C>
Alabama...................................... 264 $7,127,904 4.40%
Arizona...................................... 244 10,232,694 6.32
Arkansas..................................... 216 6,084,016 3.76
California................................... 17 640,146 0.40
Colorado..................................... 11 340,387 0.21
Delaware..................................... 26 607,203 0.37
Florida...................................... 138 4,081,214 2.52
Georgia...................................... 293 8,473,131 5.23
Idaho........................................ 2 55,895 0.03
Illinois..................................... 23 608,887 0.38
Indiana...................................... 11 299,097 0.18
Iowa......................................... 1 16,873 0.01
Kansas....................................... 30 889,902 0.55
Kentucky..................................... 74 1,491,487 0.92
Louisiana.................................... 124 3,439,812 2.12
Maryland..................................... 6 139,032 0.09
Michigan..................................... 34 1,036,030 0.64
Minnesota.................................... 8 243,479 0.15
Mississippi.................................. 108 2,894,861 1.79
Missouri..................................... 199 5,400,649 3.33
Montana...................................... 2 35,689 0.02
Nebraska..................................... 4 140,590 0.09
Nevada....................................... 23 934,859 0.58
New Mexico................................... 187 5,314,405 3.28
New York..................................... 19 636,972 0.39
North Carolina............................... 1,316 36,346,498 22.44
Oklahoma..................................... 106 3,093,872 1.91
Oregon....................................... 8 284,761 0.18
Pennsylvania................................. 8 185,512 0.11
South Carolina............................... 639 16,707,769 10.31
Tennessee.................................... 88 2,319,001 1.43
Texas........................................ 1,288 38,087,548 23.51
Utah......................................... 7 309,307 0.19
Virginia..................................... 98 2,455,384 1.52
Washington................................... 9 271,322 0.17
West Virginia................................ 24 641,001 0.40
Wisconsin.................................... 4 85,327 0.05
Wyoming...................................... 1 28,192 0.02
------ ------------- --------
TOTAL...................................... 5,660 $161,980,708 100.00%
====== ============= ========
</TABLE>
- --------------------
(1) Based on billing address of Obligors.
S-28
<PAGE>
<PAGE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
YEARS CUT-OFF DATE DATE OF CUT-OFF DATE
----- ------------ ------------- --------------------
<S> <C> <C> <C>
1994......................................... 2 $ 31,581 0.02%
1995......................................... 1,922 55,277,177 34.13
1996......................................... 3,736 106,671,950 65.85
----- ----------- ------
TOTAL...................................... 5,660 $161,980,708 100.00%
===== =========== =======
</TABLE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES OF CONTRACTS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
PRINCIPAL CONTRACT POOL
NUMBER OF BALANCE BY OUTSTANDING
CONTRACTS OUTSTANDING PRINCIPAL BALANCE
AS OF AS OF CUT-OFF AS OF CUT-OFF
DISTRIBUTION CUT-OFF DATE DATE DATE
------------ ------------ ------------- -----------------
<S> <C> <C> <C>
$ 5,000 or less........................... 2 $ 7,560 0.00%(2)
$ 5,000+ - 10,000............................ 156 1,238,577 0.76
$ 10,000+ - 20,000............................ 941 14,766,825 9.12
$ 20,000+ - 30,000............................ 2,475 62,451,709 38.57
$ 30,000+ - 40,000............................ 1,326 44,934,872 27.74
$ 40,000+ - 50,000............................ 469 20,862,184 12.88
$ 50,000+ - 60,000............................ 198 10,717,904 6.62
$ 60,000+ - 70,000............................ 37 2,376,802 1.47
$ 70,000+ - 80,000............................ 32 2,355,804 1.45
$ 80,000+ - 90,000............................ 12 1,020,532 0.63
$ 90,000+ - 100,000........................... 6 567,282 0.35
$100,000+ - 110,000........................... 4 411,663 0.25
$110,000+ - 120,000........................... 1 118,381 0.07
$150,000+... ... .................................. 1 150,613 0.09
------ ------------ -------
TOTAL............................................ 5,660 $161,980,708 100.00%
===== =========== ======
</TABLE>
(1) The maximum original Contract principal balance is $151,655, which
represents 0.09% of the original principal balance of the Contracts at
origination.
(2) This percentage is less than 0.01%.
S-29
<PAGE>
<PAGE>
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
DISTRIBUTION CUT-OFF DATE DATE OF CUT-OFF DATE
------------ ------------ ------------- --------------------
<S> <C> <C> <C>
50% or less.................................. 30 $ 512,764 0.32%
50.01 - 60%.................................. 31 731,202 0.45
60.01 - 70%.................................. 54 1,297,931 0.80
70.01 - 80%.................................. 288 6,960,697 4.30
80.01 - 90%.................................. 3,557 98,038,375 60.52
90.01 - 100%................................. 1,700 54,439,739 33.61
----- ------------ ------
TOTAL...................................... 5,660 $161,980,708 100.00%
===== ============ =======
</TABLE>
- ------------------
(1) Determined at the time of loan origination. The definition of "Value" is
set forth above under "The Contract Pool". Manufactured Homes, unlike
site-built homes, generally depreciate in value, and it should generally be
expected, especially with Contracts with high loan-to-value ratios at
origination, that at any time after the origination of a Contract the
market value of the Manufactured Home securing such Contract may be lower
than the outstanding principal balance of such Contract. The original
loan-to-value ratio of a Refinanced Contract is determined at the time of
origination of such Refinanced Contract for purposes of preparing this
table and other statistical information presented herein related to
loan-to-value ratios. See "Access Financial Corp. -- Underwriting
Guidelines -- Loan-toValue Ratio" herein. The Contract Pool contained
$7,629,494 in aggregate principal balance of Refinanced Contracts as of the
Cut-Off Date.
The weighted average original loan-to-value ratio of the Contracts as of
the Cut-off Date was approximately 89.96%.
CONTRACT RATES(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
CONTRACT RATE CUT-OFF DATE DATE OF CUT-OFF DATE
------------- ------------ ------------- --------------------
<S> <C> <C> <C>
6.01 - 7.00%................................ 6 $ 516,234 0.32%
7.01 - 8.00%................................ 29 1,705,317 1.05
8.01 - 9.00%................................ 198 9,178,468 5.67
9.01 - 10.00%............................... 743 24,986,504 15.43
10.01 - 11.00%............................... 3,617 102,554,227 63.30
11.01 - 12.00%............................... 1,005 21,749,701 13.43
12.01 - 13.00%............................... 60 1,274,960 0.79
13.01 - 14.00%............................... 1 12,342 0.01
14.01 - 16.00%............................... 1 2,955 0.00(2)
------ -------------- ----------
TOTAL...................................... 5,660 $161,980,708 100.00%
===== =========== =======
</TABLE>
- ------------------
(1) The weighted average Contract Rate of the Contracts as of the Cut-off Date
was approximately 10.45%.
(2) This percentage is less than 0.01%.
S-30
<PAGE>
<PAGE>
REMAINING TERMS TO MATURITY (IN MONTHS)(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
REMAINING TERMS CUT-OFF DATE DATE OF CUT-OFF DATE
--------------- ------------ ------------- --------------------
<S> <C> <C> <C>
1 - 60..................................... 49 $ 433,585 0.27%
61 - 84..................................... 205 2,494,729 1.54
85 - 120.................................... 331 5,836,595 3.60
121 - 180.................................... 996 20,731,281 12.80
181 - 240.................................... 2,560 71,535,200 44.17
241 - 300.................................... 1,054 40,096,269 24.75
301 - 360.................................... 465 20,853,049 12.87
------ ----------- ------
TOTAL...................................... 5,660 $161,980,708 100.00%
===== =========== =======
</TABLE>
- ------------------
(1) The weighted average remaining term to maturity of the Contracts as of the
Cut-off Date was approximately 252 months.
LOAN PURPOSE
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
PURPOSE CUT-OFF DATE DATE OF CUT-OFF DATE
--------------- ------------ ------------- --------------------
<S> <C> <C> <C>
Purchase..................................... 5,320 $154,351,214 95.29%
Refinance.................................... 340 7,629,494 4.71
----- ------------ -------
TOTAL...................................... 5,660 $161,980,708 100.00%
===== =========== =======
</TABLE>
MANUFACTURED HOME TYPE
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
NUMBER OF BALANCE CONTRACT POOL
CONTRACTS OUTSTANDING BY OUTSTANDING
AS OF AS OF CUT-OFF PRINCIPAL BALANCE AS
TYPE CUT-OFF DATE DATE OF CUT-OFF DATE
--------------- ------------ ------------- --------------------
<S> <C> <C> <C>
Single Wide.................................. 3,884 $ 92,860,295 57.33%
Double Wide.................................. 1,776 69,120,413 42.67
----- ------------ ------
TOTAL...................................... 5,660 $161,980,708 100.00%
===== =========== =======
</TABLE>
S-31
<PAGE>
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The general prepayment and yield considerations discussed in the
Prospectus under "Yield Considerations" are applicable to the Offered
Certificates. In addition, prospective Offered Certificateholders should
consider the following:
The Contracts had maturities at origination ranging from 12 months to
360 months, but may be prepaid in full or in part at any time. The prepayment
experience of the Contracts (including prepayments due to liquidations of
defaulted Contracts) will affect the weighted average life of the Offered
Certificates. Based on AFC's experience with the portfolio of conventional
manufactured housing contracts serviced by it, AFC anticipates that a number of
Contracts will be prepaid in full prior to their maturity. A number of factors,
including homeowner mobility, general and regional economic conditions and
prevailing interest rates, may influence prepayments. Natural disasters may also
influence prepayments. In addition, repurchases of Contracts on account of
certain breaches of representations and warranties will have the effect of
prepaying such Contracts and therefore will affect the weighted average life of
the Offered Certificates. Most of the Contracts contain provisions that prohibit
the owner from selling the Manufactured Home without the prior consent of the
holder of the related Contract. Such provisions are similar to "due-on-sale"
clauses and may not be enforceable in certain states. See "Certain Legal Aspects
of the Contracts -- Transfers of Manufactured Homes; Enforceability of
Restrictions on Transfer" herein. Notwithstanding the inclusion of such "due on
sale" clauses in the Contract, it is AFC's current policy to permit most sales
of Manufactured Homes where the proposed buyer meets AFC's then current
underwriting standards and enters into an assumption agreement. See "-- Weighted
Average Life of the Offered Certificates" below.
The allocation of distributions to the Offered Certificateholders in
accordance with the Agreement will have the effect of accelerating the
amortization of the Classes of Senior Certificates and delaying the amortization
of certain other Classes of Offered Certificates from the amortization that
otherwise would be applicable if the principal were distributed pro rata
according to the outstanding principal balances of each Offered Certificate. If
a purchaser of Offered Certificates purchases them at a discount and calculates
its anticipated yield to maturity based on an assumed rate of distributions of
principal on the Offered Certificates that is faster than the rate actually
realized, such purchaser's actual yield to maturity will be lower than the yield
so calculated by such purchaser. See "Description of the Certificates
- -- Distributions."
As described herein under "Description of the Certificates --
Subordination of Class A-6, Class B-1, Class B-2, Class C and Residual
Certificates" and "-- Losses on Liquidated Contracts," to the extent that, on
any Remittance Date, the Amount Available is not sufficient to permit a full
distribution of the principal to the Offered Certificateholders, the effect will
be to cause the Offered Certificates to be amortized more slowly than they
otherwise would have been amortized, and losses on Liquidated Contracts and
delinquencies on the Contracts will be borne by the Offered Certificateholders
in the manner described thereunder and as described below.
The distribution of Accelerated Principal Payments to create and
thereafter maintain the Overcollateralization Amount at the Required
Overcollateralization Amount will accelerate the amortization of the Non-IO
Certificates relative to the amortization of the Contract Pool. It is possible
that, under certain scenarios and with respect to certain Remittance Dates, if
the Required Overcollateralization Amount is reduced and Overcollateralization
Reduction Amounts (as defined herein) are paid to the holders of the Class C
Certificates, the holders of the Senior, Class A-6, Class B-1 and Class B-2
Certificates may receive no, or reduced, distributions of principal. See
"Description of the Certificates - Class C Distributions, Overcollateralization
Amounts."
The Servicer (whether or not AFC remains the Servicer) has the option
to repurchase the Contracts and any other property constituting the Trust if on
any Remittance Date the Pool Scheduled Principal Balance is less than 10% of the
Cut-off Date Pool Principal Balance. See "Description of the Certificates --
Optional Termination" herein. If the Servicer does not exercise such option on
the first
S-32
<PAGE>
<PAGE>
Remittance Date on which such option may be exercised, the Trustee will be
required to conduct an auction sale as described herein. See "Description of the
Certificates -- Auction Sale" herein.
Although Contract Rates on the Contracts vary, in the event that, with
respect to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class B-1 and Class B-2 Certificates, a large number of Contracts having Net
Contract Rates equal to or higher than the applicable Remittance Rate (without
giving effect to the maximum rate) were to prepay while Contracts having Net
Contract Rates lower than such Remittance Rate did not prepay, with the result
that the interest collections on the remaining Contracts were not sufficient to
support such Remittance Rate, then the Remittance Rate for such Class of
Certificates would be equal to the weighted average of the Net Contract Rates on
each Contract remaining in the Contract Pool. The "Net Contract Rate" is the
contractual rate of interest payable under a Contract (the "Contract Rate"),
less, if AFC is no longer the Servicer, the Monthly Servicing Fee allocable to
such Contract for such Collection Period.
Obligors are not required to pay interest on the Contracts after the
date of full prepayment of principal or the date of a partial prepayment of
principal (to the extent of such partial prepayment). As a result, partial or
full prepayments in advance of the related Due Dates for such Contracts in any
Collection Period will reduce the amount of interest received from the related
Obligors during such Collection Period to less than one month's interest.
However, when a Contract is prepaid in full during any Collection Period, but
after the Due Date for such Contract in such Collection Period, the effect will
be to increase the amount of interest received from the related Obligor during
such Collection Period to more than one month's interest. If a sufficient amount
of partial prepayments are made or a sufficient number of Contracts are prepaid
in full in a given Collection Period in advance of their respective Due Dates,
interest received on all of the Contracts during that Collection Period, after
netting out the Monthly Servicing Fee (and other expenses of the Trust), may be
less than the interest payable on the Senior and/or Subordinate Certificates
with respect to such Collection Period. As a result, the Amount Available for
the related Remittance Date may not be sufficient to distribute the interest on
the Offered Certificates in the full amount set forth herein under "Description
of the Certificates -- Distributions on the Certificates" and to make a full
distribution of the Formula Principal Distribution Amount to the Senior and/or
Subordinate Certificateholders. Although no assurance can be given in this
matter, Receivables Corp. does not anticipate that the net shortfall of interest
received because of partial prepayments or prepayments in full in any Collection
Period would be great enough, in the absence of delinquencies or liquidation
losses, to reduce the Amount Available for a Remittance Date below the amount
that would have been required to be distributed to Offered Certificateholders on
that Remittance Date in the absence of such prepayment interest shortfalls.
Because the Contracts are actuarial Contracts, the outstanding
principal balances thereof will reduce, for purposes of accrual of interest
thereon, by a precomputed amortization amount on each Due Date whether or not
the Scheduled Payment for such Due Date is received in advance of or subsequent
to such Due Date. Thus, the effect of delinquent Scheduled Payments, even if
they are ultimately paid by the Obligor, will be to reduce the yields on such
Contracts below their respective Contract Rates (because interest will not have
accrued on the principal portion of any Scheduled Payment while it is
delinquent). If the Servicer does not make a Monthly Advance with respect to
such delinquent Contracts as described herein, the result will be to reduce the
effective yield to the Trust derived from such Contracts to a yield below their
Contract Rates. Under certain circumstances, such yield reductions could cause
the aggregate yield to the Trust derived from the Contract Pool to be
insufficient to support the distribution of interest on the Offered
Certificates, after netting out other expenses of the Trust.
To the extent that on any Remittance Date the Class A-6 Remaining
Amount Available, Class B-1 Remaining Amount Available or Class B-2 Remaining
Amount Available is not sufficient to pay to the holders of the Class A-6
Certificates, Class B-1 Certificates or Class B-2 Certificates, respectively,
all payments of interest to which such Certificateholders are entitled on such
Remittance Date, the Trustee will withdraw the amount of such deficiency from
the Certificate Account from funds, if any, which would otherwise constitute a
portion of the Amount Available for the following Remittance Date and distribute
such funds to the Class A-6, Class B-1 and Class B-2 Certificateholders, as the
case may be.
S-33
<PAGE>
<PAGE>
In such event, the Amount Available to be distributed to all Certificateholders,
including the holders of the Senior Certificates, on the next Remittance Date
will be reduced by such amount.
The yield to Offered Certificateholders will be below that otherwise
produced by the applicable remittance rates because, while, in the absence of
losses or delinquencies, one month's interest on the Contracts will be collected
during each Collection Period, the portion of such interest to which the Offered
Certificateholders are entitled will not be distributed until the 15th day (or,
if such day is not a business day, the next business day) of the month following
the Collection Period.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average lives of the Offered
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time 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 life of an Offered
Certificate is determined by (i) multiplying the amount of cash distributions in
reduction of the Principal Balance of such Certificate by the number of years
from the date of issuance of such Certificate to the stated Remittance Date,
(ii) adding the results, and (iii) dividing the sum by the Original Principal
Balance of such Certificate. The weighted average life of the Offered
Certificates will be affected by the rate at which principal on the Contracts is
paid. Principal payments on Contracts may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
repayments (other than from scheduled amortization) and liquidations due to
default or other dispositions of Contracts). Prepayments on Contracts may be
measured by a prepayment standard or model. The model used in this Prospectus
Supplement ("Prepayment Model") is based on an assumed rate of prepayment each
month of the then unpaid principal balance of a pool of new contracts. 100% of
the Prepayment Model assumes constant prepayment rates of 3.7% per annum of the
then unpaid principal balance of such Contracts in the first month of the life
of the Contracts and an additional 0.1% per annum in each month thereafter until
the 24th month. Beginning in the 24th month and in each month thereafter during
the life of the Contracts, 100% of the Prepayment Model assumes a constant
prepayment rate of 6% per annum.
As used in the following table, "0% of the Prepayment Model" assumes no
prepayments on the Contracts; "75% of the Prepayment Model" assumes the
Contracts will prepay at rates equal to 75% of the Prepayment Model assumed
prepayment rates; "100% of the Prepayment Model" assumes the Contracts will
prepay at rates equal to 100% of the Prepayment Model assumed prepayment rates;
"150% of the Prepayment Model" assumes the Contracts will prepay at rates equal
to 150% of the Prepayment Model assumed prepayment rates; "200% of the
Prepayment Model" assumes the Contracts will prepay at rates equal to 200% of
the Prepayment Model assumed prepayment rates; and "300% of the Prepayment
Model" assumes the Contracts will prepay at rates equal to 300% of the
Prepayment Model assumed prepayment rates.
There is no assurance, however, that prepayments of the Contracts will
conform to any level of the Prepayment Model, and no representation is made that
the Contracts will prepay at the prepayment rates shown or any other prepayment
rate. The rate of principal payments on pools of manufactured housing contracts
is influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates and the rate at which manufactured
homeowners sell their manufactured homes or default on their contracts. Other
factors affecting prepayment of such contracts include changes in obligors'
housing needs, jobs transfers, unemployment and obligors' net equity in the
manufactured homes. In the case of mortgage loans secured by site-built homes,
in general, if prevailing interest rates fall significantly below the interest
rates on such mortgage loans, the mortgage loans are likely to be subject to
higher prepayments rates than if prevailing interest rates remained at or above
the rates borne by such mortgage loans. Conversely, if prevailing interest rates
rise above the interest rates on such mortgage loans, the rate of prepayment
would be expected to decrease. In the case of manufactured housing contracts,
however, because the outstanding principal balances are, in general, much
smaller than
S-34
<PAGE>
<PAGE>
mortgage loan balances and the original term to maturity of each such contract
is generally shorter, the reduction or increase in the size of the monthly
payments on contracts of the same maturity and principal balance arising from a
change in the interest rate there on is generally much smaller. Consequently,
changes in prevailing interest rates may not have a similar effect, or may have
a similar effect, but to a smaller degree, on the prepayment rates on
manufactured housing contracts.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the Prepayment Model set forth in the tables; (ii) the
Servicer does not exercise its right of optional termination described above;
(iii) the Contracts, as of the Cut-off Date, will be grouped into eight groups
having the additional characteristics set forth in the table entitled 'Assumed
Contract Characteristics' below; (iv) the Original Principal Balance and
Remittance Rate of each Class of Certificates is as described herein; (v) no
interest shortfalls will arise in connection with prepayment in full of the
Contracts; (vi) there will be no losses on the Contract Pool; (vii) a servicing
fee of 1.00% per annum will be paid to the Servicer after distribution on the
Offered Certificates; (viii) amounts, including Accelerated Principal Payments,
will be distributed on account of each class of Certificates in accordance with
the payment priorities described herein; (ix) distributions are made on the
Certificates on the 15th day of each month commencing on June 17, 1996, (x) the
Closing Date for the issuance of the Certificates is May 29, 1996 and (xi) the
Class B-2 Remittance Rate is 10.025%. The tables assume that there are no losses
or delinquencies on the Contracts. No representation is made that losses or
delinquencies on the Contracts will be experienced at the rate assumed in the
preceding sentence or at any other rate.
ASSUMED CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
ORIGINAL REMAINING
PRINCIPAL TERM TO MATURITY TERM TO MATURITY
POOL BALANCE CONTRACT RATE (MONTHS) (MONTHS)
- ---- --------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1.............. $ 8,302,522.10 10.76900% 100 97
2.............. 20,323,003.69 10.90800 173 170
3.............. 68,593,984.32 10.64000 240 237
4.............. 38,269,803.37 10.18100 300 298
5.............. 19,258,879.41 9.63400 360 359
6.............. 3,811,879.80 11.02300 222 222
7.............. 1,826,465.79 10.51600 300 300
8.............. 1,594,169.53 9.68700 360 360
---------------
$161,980,708.01
===============
</TABLE>
Since the tables were prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of the
actual Contracts and the characteristics of the Contracts assumed in preparing
the tables. Any such discrepancy may have an effect upon the percentages of the
Original Class A-1 Principal Balance, Original Class A-2 Principal Balance,
Original Class A-3 Principal Balance, Original Class A-4 Principal Balance,
Original Class A-5 Principal Balance, Original Class A-6 Principal Balance and
Original Class B-1 Principal Balance outstanding and weighted average lives of
such Certificates set forth in the tables. In addition, since the actual
Contracts and the Trust have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Senior Certificates may be made earlier or later than indicated in the tables.
It is not likely that Contracts will prepay at any constant percentage
of the Prepayment Model to maturity or that all Contracts will prepay at the
same rate. In addition, the diverse remaining terms to maturity of the Contracts
(which include recently originated Contracts) could produce slower distributions
of principal than indicated in the tables at the various percentages of the
Prepayment Model specified even if the weighted average remaining term to
maturity of the Contracts is 252 months.
S-35
<PAGE>
<PAGE>
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
resulting weighted average lives of the Offered Certificates and set forth the
percentage of the Original Class A-1 Balance, Original Class A-2 Principal
Balance, Original Class A-3 Principal Balance, Original Class A-4 Principal
Balance, Original Class A-5 Principal Balance, Original Class A-6 Principal
Balance and Original Class B-1 Principal Balance that would be outstanding after
each of the dates shown at the indicated percentages of the Prepayment Model.
[Remainder of page intentionally left blank]
S-36
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS A-1 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model)
-------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 84 68 63 52 42 20
May 15, 1998........... 74 40 28 6 0 0
May 15, 1999........... 63 11 0 0 0 0
May 15, 2000........... 51 0 0 0 0 0
May 15, 2001........... 38 0 0 0 0 0
May 15, 2002........... 23 0 0 0 0 0
May 15, 2003........... 6 0 0 0 0 0
May 15, 2004........... 0 0 0 0 0 0
May 15, 2005........... 0 0 0 0 0 0
May 15, 2006........... 0 0 0 0 0 0
May 15, 2007........... 0 0 0 0 0 0
May 15, 2008........... 0 0 0 0 0 0
May 15, 2010........... 0 0 0 0 0 0
May 15, 2011........... 0 0 0 0 0 0
May 15, 2012........... 0 0 0 0 0 0
May 15, 2013........... 0 0 0 0 0 0
May 15, 2014........... 0 0 0 0 0 0
May 15, 2015........... 0 0 0 0 0 0
May 15, 2016........... 0 0 0 0 0 0
May 15, 2017........... 0 0 0 0 0 0
May 15, 2018........... 0 0 0 0 0 0
May 15, 2019........... 0 0 0 0 0 0
May 15, 2020........... 0 0 0 0 0 0
May 15, 2021........... 0 0 0 0 0 0
May 15, 2022........... 0 0 0 0 0 0
May 15, 2023........... 0 0 0 0 0 0
May 15, 2024........... 0 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)............... 3.9 1.6 1.4 1.0 0.9 0.6
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
S-37
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS A-2 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model)
-------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 100 100 100 100 100 100
May 15, 1998........... 100 100 100 100 81 28
May 15, 1999........... 100 100 92 52 14 0
May 15, 2000........... 100 77 51 1 0 0
May 15, 2001........... 100 42 11 0 0 0
May 15, 2002........... 100 8 0 0 0 0
May 15, 2003........... 100 0 0 0 0 0
May 15, 2004........... 84 0 0 0 0 0
May 15, 2005........... 63 0 0 0 0 0
May 15, 2006........... 41 0 0 0 0 0
May 15, 2007........... 16 0 0 0 0 0
May 15, 2008........... 0 0 0 0 0 0
May 15, 2009........... 0 0 0 0 0 0
May 15, 2010........... 0 0 0 0 0 0
May 15, 2011........... 0 0 0 0 0 0
May 15, 2012........... 0 0 0 0 0 0
May 15, 2013........... 0 0 0 0 0 0
May 15, 2014........... 0 0 0 0 0 0
May 15, 2015........... 0 0 0 0 0 0
May 15, 2016........... 0 0 0 0 0 0
May 15, 2017........... 0 0 0 0 0 0
May 15, 2018........... 0 0 0 0 0 0
May 15, 2019........... 0 0 0 0 0 0
May 15, 2020........... 0 0 0 0 0 0
May 15, 2021........... 0 0 0 0 0 0
May 15, 2022........... 0 0 0 0 0 0
May 15, 2023........... 0 0 0 0 0 0
May 15, 2024........... 0 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)............... 9.5 4.8 4.0 3.0 2.5 1.8
</TABLE>
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
S-38
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS A-3 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model)
-------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 100 100 100 100 100 100
May 15, 1998........... 100 100 100 100 100 100
May 15, 1999........... 100 100 100 100 100 38
May 15, 2000........... 100 100 100 100 50 0
May 15, 2001........... 100 100 100 49 0 0
May 15, 2002........... 100 100 70 12 0 0
May 15, 2003........... 100 71 30 0 0 0
May 15, 2004........... 100 35 5 0 0 0
May 15, 2005........... 100 12 0 0 0 0
May 15, 2006........... 100 0 0 0 0 0
May 15, 2007........... 100 0 0 0 0 0
May 15, 2008........... 87 0 0 0 0 0
May 15, 2009........... 53 0 0 0 0 0
May 15, 2010........... 20 0 0 0 0 0
May 15, 2011........... * 0 0 0 0 0
May 15, 2012........... 0 0 0 0 0 0
May 15, 2013........... 0 0 0 0 0 0
May 15, 2014........... 0 0 0 0 0 0
May 15, 2015........... 0 0 0 0 0 0
May 15, 2016........... 0 0 0 0 0 0
May 15, 2017........... 0 0 0 0 0 0
May 15, 2018........... 0 0 0 0 0 0
May 15, 2019........... 0 0 0 0 0 0
May 15, 2020........... 0 0 0 0 0 0
May 15, 2021........... 0 0 0 0 0 0
May 15, 2022........... 0 0 0 0 0 0
May 15, 2023........... 0 0 0 0 0 0
May 15, 2024........... 0 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)................ 13.1 7.7 6.6 5.0 4.0 2.9
</TABLE>
- --------
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
* This figure is less than 0.5% but greater than 0%.
S-39
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS A-4 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model)
-------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 100 100 100 100 100 100
May 15, 1998........... 100 100 100 100 100 100
May 15, 1999........... 100 100 100 100 100 100
May 15, 2000........... 100 100 100 100 100 25
May 15, 2001........... 100 100 100 100 86 0
May 15, 2002........... 100 100 100 100 28 0
May 15, 2003........... 100 100 100 69 0 0
May 15, 2004........... 100 100 100 20 0 0
May 15, 2005........... 100 100 68 0 0 0
May 15, 2006........... 100 85 29 0 0 0
May 15, 2007........... 100 47 0 0 0 0
May 15, 2008........... 100 9 0 0 0 0
May 15, 2009........... 100 0 0 0 0 0
May 15, 2010........... 100 0 0 0 0 0
May 15, 2011........... 100 0 0 0 0 0
May 15, 2012........... 59 0 0 0 0 0
May 15, 2013........... 13 0 0 0 0 0
May 15, 2014........... 0 0 0 0 0 0
May 15, 2015........... 0 0 0 0 0 0
May 15, 2016........... 0 0 0 0 0 0
May 15, 2017........... 0 0 0 0 0 0
May 15, 2018........... 0 0 0 0 0 0
May 15, 2019........... 0 0 0 0 0 0
May 15, 2020........... 0 0 0 0 0 0
May 15, 2021........... 0 0 0 0 0 0
May 15, 2022........... 0 0 0 0 0 0
May 15, 2023........... 0 0 0 0 0 0
May 15, 2024........... 0 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)................ 16.2 10.9 9.5 7.4 5.6 3.8
</TABLE>
- --------
(1) The weighted average life of a Class A-4 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-4 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-4 Certificate.
S-40
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS A-5 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model)
-------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 100 100 100 100 100 100
May 15, 1998........... 100 100 100 100 100 100
May 15, 1999........... 100 100 100 100 100 100
May 15, 2000........... 100 100 100 100 100 100
May 15, 2001........... 100 100 100 100 100 51
May 15, 2002........... 100 100 100 100 100 31
May 15, 2003........... 100 100 100 100 88 13
May 15, 2004........... 100 100 100 100 65 0
May 15, 2005........... 100 100 100 89 46 0
May 15, 2006........... 100 100 100 70 30 0
May 15, 2007........... 100 100 96 52 16 0
May 15, 2008........... 100 100 77 36 3 0
May 15, 2009........... 100 85 60 22 0 0
May 15, 2010........... 100 66 43 8 0 0
May 15, 2011........... 100 51 29 0 0 0
May 15, 2012........... 100 36 16 0 0 0
May 15, 2013........... 100 21 3 0 0 0
May 15, 2014........... 81 6 0 0 0 0
May 15, 2015........... 53 0 0 0 0 0
May 15, 2016........... 28 0 0 0 0 0
May 15, 2017........... 18 0 0 0 0 0
May 15, 2018........... 7 0 0 0 0 0
May 15, 2019........... 0 0 0 0 0 0
May 15, 2020........... 0 0 0 0 0 0
May 15, 2021........... 0 0 0 0 0 0
May 15, 2022........... 0 0 0 0 0 0
May 15, 2023........... 0 0 0 0 0 0
May 15, 2024........... 0 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)................ 19.4 15.1 13.7 11.3 9.0 5.5
</TABLE>
- --------
(1) The weighted average life of a Class A-5 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-5 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-5 Certificate.
S-41
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS A-6 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model)
--------------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 100 100 100 100 100 100
May 15, 1998........... 100 100 100 100 100 100
May 15, 1999........... 100 100 100 100 100 100
May 15, 2000........... 100 100 100 100 100 100
May 15, 2001........... 100 100 100 100 100 100
May 15, 2002........... 100 100 100 100 100 100
May 15, 2003........... 100 100 100 100 100 100
May 15, 2004........... 100 100 100 100 100 97
May 15, 2005........... 100 100 100 100 100 76
May 15, 2006........... 100 100 100 100 100 59
May 15, 2007........... 100 100 100 100 100 46
May 15, 2008........... 100 100 100 100 100 35
May 15, 2009........... 100 100 100 100 86 26
May 15, 2010........... 100 100 100 100 69 19
May 15, 2011........... 100 100 100 96 55 7
May 15, 2012........... 100 100 100 78 43 0
May 15, 2013........... 100 100 100 62 31 0
May 15, 2014........... 100 100 84 47 16 0
May 15, 2015........... 100 84 62 28 3 0
May 15, 2016........... 100 61 45 12 0 0
May 15, 2017........... 100 52 33 5 0 0
May 15, 2018........... 100 40 21 0 0 0
May 15, 2019........... 90 25 10 0 0 0
May 15, 2020........... 65 9 0 0 0 0
May 15, 2021........... 40 0 0 0 0 0
May 15, 2022........... 29 0 0 0 0 0
May 15, 2023........... 17 0 0 0 0 0
May 15, 2024........... 4 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)................ 25.0 21.2 20.1 17.8 15.5 11.2
</TABLE>
- --------
(1) The weighted average life of a Class A-6 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-6 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-6 Certificate.
S-42
<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL CLASS B-1 PRINCIPAL BALANCE AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
<TABLE>
<CAPTION>
Prepayments (% of Prepayment Model
-------------------------------------------------------------------
Date 0% 75% 100% 150% 200% 300%
- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
May 15, 1997........... 100 100 100 100 100 100
May 15, 1998........... 100 100 100 100 100 100
May 15, 1999........... 100 100 100 100 100 100
May 15, 2000........... 100 100 100 100 100 100
May 15, 2001........... 100 100 100 100 100 100
May 15, 2002........... 100 100 100 87 77 72
May 15, 2003........... 100 100 100 69 57 45
May 15, 2004........... 100 100 83 52 39 23
May 15, 2005........... 100 87 69 39 24 7
May 15, 2006........... 100 74 56 26 11 0
May 15, 2007........... 100 61 44 15 * 0
May 15, 2008........... 100 49 32 4 0 0
May 15, 2009........... 100 36 20 0 0 0
May 15, 2010........... 94 24 9 0 0 0
May 15, 2011........... 79 13 0 0 0 0
May 15, 2012........... 65 4 0 0 0 0
May 15, 2013........... 50 0 0 0 0 0
May 15, 2014........... 33 0 0 0 0 0
May 15, 2015........... 15 0 0 0 0 0
May 15, 2016........... 0 0 0 0 0 0
May 15, 2017........... 0 0 0 0 0 0
May 15, 2018........... 0 0 0 0 0 0
May 15, 2019........... 0 0 0 0 0 0
May 15, 2020........... 0 0 0 0 0 0
May 15, 2021........... 0 0 0 0 0 0
May 15, 2022........... 0 0 0 0 0 0
May 15, 2023........... 0 0 0 0 0 0
May 15, 2024........... 0 0 0 0 0 0
May 15, 2025........... 0 0 0 0 0 0
May 15, 2026........... 0 0 0 0 0 0
May 15, 2027........... 0 0 0 0 0 0
Weighted Average Life
(1) (years)............... 16.9 12.0 10.6 8.4 7.6 7.0
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-1 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
* This figure is less than 0.5% but greater than 0.0%.
S-43
<PAGE>
<PAGE>
THE SPONSOR
Cargill Financial Services Corporation ("CFSC"), a Delaware
corporation, is a wholly-owned financial services subsidiary of Cargill,
Incorporated ("Cargill"), a privately-held Delaware corporation. CFSC's
operations consists of global proprietary trading activities, as well as other
specialized financial services. CFSC was formed in 1984 and currently manages
over $6 billion in assets. CFSC is headquartered in Minneapolis and has over 650
employees worldwide. CFSC is the financial services arm of Cargill. Established
in 1865, Cargill began as a grain trading company. Since then, Cargill has grown
to become a major international merchant and processor of agricultural,
industrial and financial commodities. Cargill operates in 66 countries, with
73,000 employees and approximately $51 billion in annual sales.
Access Financial Holdings Corp., a Delaware corporation and a
wholly-owned subsidiary of CFSC, was formed in January 1996 to facilitate the
continued growth of CFSC's housing finance business. The two principal operating
subsidiaries of Access Financial Holdings Corp. are Access Financial Corp., the
manufactured housing division, and Access Financial Lending Corp., the mortgage
lending division.
As described herein, the only obligations of CFSC will be pursuant to
certain representations and warranties made with respect to itself and to the
Contracts. See "The Contract Pool" herein and "Mortgage Loan Program" in the
accompanying Prospectus.
ACCESS FINANCIAL CORP.
GENERAL
Access Financial Corp. was incorporated in January 1994 in the State of
Delaware. AFC is a wholly-owned subsidiary of Access Financial Holdings Corp.
AFC is engaged in the business of, among other things, purchasing, originating,
selling and servicing installment sales contracts and installment loan
agreements for manufactured housing (hereinafter referred to as "contracts" or
"manufactured housing contracts"). AFC's principal office is currently located
at 1100 Abernathy Road, Suite 1200, Atlanta, Georgia 30328 (telephone
770-828-0040). AFC plans to relocate its principal offices to St. Louis Park,
Minnesota in the Fall of 1996.
AFC purchases and originates manufactured housing contracts through
four regional offices throughout the United States, servicing 39 states.
Through its regional offices, AFC arranges to purchase manufactured
housing installment sales contracts originated by manufactured housing dealers
located throughout the United States. Generally, these purchases result from
AFC's regional office personnel contacting dealers located in their regions and
explaining AFC's available financing plans, terms, prevailing rates and credit
and financing policies. Under AFC's procedures currently in place, if a dealer
wishes to make such financing available to its customers, the dealer must make
an application to AFC for dealer approval. Upon satisfactory results of AFC's
investigation of the dealer's creditworthiness and general business reputation,
AFC and the dealer will enter into a dealer agreement. Prior to August 1995, any
dealer which had inventory financing (i.e., 'floor plan' financing) from ITT
Commercial Finance Corp. was automatically considered to be a dealer eligible to
execute a dealer agreement with AFC without the necessity for such a prior
investigation. It is AFC's policy to conduct an annual review of all dealers.
AFC is not currently aware of any reason why any of its existing dealer
agreements would not be renewed.
In addition to its purchases of manufactured housing contracts from
dealers, since August 1995, AFC has originated certain contracts through
brokers. Each broker will solicit potential obligors to refinance contracts on
used manufactured homes with AFC. All broker-originated contracts must meet
AFC's underwriting criteria, as described below.
S-44
<PAGE>
<PAGE>
UNDERWRITING POLICIES
General.
All manufactured housing contracts that are purchased by AFC from
dealers or originated by AFC through a broker are written on forms provided by
AFC and are purchased or underwritten, as the case may be, on an individually
approved basis. With respect to each retail manufactured housing contract to be
purchased from a dealer or submitted by a broker and underwritten, as the case
may be, AFC's general practice is to have the dealer or broker submit the
customer's credit application, manufacturer's invoice (if the contract is for a
new home) and certain other information relating to the contract to the
applicable regional office of AFC. Personnel at the regional office make an
analysis of the creditworthiness of the customer and of other aspects of the
proposed transaction. If the creditworthiness of the customer and other aspects
of the transaction are approved by the regional office, AFC purchases the
contract after the manufactured home is delivered and set up.
Because manufactured homes generally depreciate in value, AFC's
management believes that the creditworthiness of a potential obligor under a
manufactured housing contract should be the most important criterion in
determining whether to approve the purchase or origination of such manufactured
housing contract. In this regard, AFC uses an underwriting guideline matrix
based upon each applicant's credit history, residence history, employment
history, debt-to-income ratio and down payment percentage. Although, with
respect to certain of these criteria, AFC has minimum requirements, AFC
management does not believe that these minimum requirements are themselves
generally sufficient to warrant a credit approval of an applicant. Thus, there
were and are no requirements on the basis of which, if they are met, credit is
routinely approved, and if they are not met, credit is routinely denied. Rather,
if an applicant has a low rating with respect to one of the criteria mentioned
above, there generally must be a compensating higher rating with respect to
other items in order for such applicant to be approved. In addition, in certain
cases, credit applications are approved even if certain of the minimum criteria
are not met. The ultimate decision to approve or reject a credit application is
thus the result of a judgment made by either regional management or AFC senior
management.
AFC's policy is to approve or reject each credit application within 72
hours of receipt. Thus, there is generally less time for credit investigation
than is the case, for instance, with loans for site-built homes. Although AFC's
management believes that the 72 hour period for approval or rejection of each
credit application is in line with industry practice, no assurance can be given
that any credit application that was approved in 72 hours would have been
approved if a longer period had been provided for credit investigation.
The qualifications of all regional office personnel authorized to
approve or reject credit applications are reviewed by the President and/or the
Chief Executive Officer of AFC. All such personnel have certain lending limits
applicable to their approval authority. AFC has no set qualifications for any
employees to whom authority to approve or reject credit applications may be
delegated.
The credit review and approval practices of each regional office are
subject to internal reviews and audits that, through sampling, examine the
nature of the verification of credit histories, residence histories, employment
histories and debt-to-income ratios of the applicants and evaluate the credit
risks associated with the contracts purchased through such regional office by
rating the obligors on such contracts according to their credit histories,
residence histories, employment histories, debt-to-income ratios and down
payment percentage. Selection of underwriting files for review is generally made
by the personnel performing the examination, without prior knowledge on the part
of regional office personnel of the files to be selected for review. However,
AFC has no requirement that any specific random selection procedures be
followed, and no assurance can be given that the files reviewed in any
examination process are representative of the contract originations in the
related regional office. In addition, no statistical analysis is performed on
the results of any such examination of underwriting files.
AFC currently purchases or originates only conventional manufactured
housing contracts (that is, contracts that are not insured or guaranteed by a
governmental agency or instrumentality).
S-45
<PAGE>
<PAGE>
Underwriting policies for the origination or purchase on an individual
basis of manufactured housing contracts are established by AFC's management at
its corporate office in Atlanta, Georgia and are applicable to all regional
offices in AFC's manufactured housing regional office system. Except as
described above, during the period in which any Contracts were originated or
purchased on an individual basis by AFC there were no significant changes in the
aspects of such policies that are described above.
LOAN-TO-VALUE RATIOS.
Generally, AFC's policy is to finance no more than (a) 95% of the
buyer's total cost of any new manufactured home and (b) 90% of the buyer's total
cost of any used manufactured home. Such buyer's total cost includes (x) (i)
with respect to a new manufactured home, the sales price of such manufactured
home or (ii) with respect to a used manufactured home, the lesser of the
verified sales price or retail value as specified in the National Automobile
Dealers Association Mobile/Manufactured Housing Appraisal Guide ("NADA") and (y)
the sum of certain additional items, including (i) limited dealer-installed
extras, (ii) limited furniture, (iii) freight, (iv) sales tax, title and fees,
(v) certain insurance premiums and (vi) limited set-up allowance (such items,
collectively, the "Extras").
NEW HOMES.
The maximum amount financed with respect to new manufactured homes is
based on the lesser of (a) the sum of (x) 130% of the manufacturer's net invoice
and (y) the value of the Extras and (b) 95% of the buyer's total cost.
The maximum amount financed with respect to new manufactured homes
related to Land-Home Contracts is based on the sum of (x) the lesser of (a) 130%
of the manufacturer's net invoice, plus the value of the Extras and (b) 95% of
the buyer's total cost, and (y) 95% of the lesser of property appraised value or
the purchase price of the land.
The maximum amount financed with respect to new manufactured homes
related to Land-in-Lieu Contracts is based on the sum of (x) (i) 135% of the
manufacturer's net invoice when the value of the land (as appraised by an AFC
approved independent appraiser or as determined by a tax valuation statement, as
the case may be) is at least 20% of the buyer's total cost, computed as
described above or (ii) 130% of the manufacturer's net invoice when the value of
the land is at least 10% of the buyer's total cost, computed as described above
and (y) the value of the Extras.
USED HOMES AND REFINANCINGS.
The maximum amount financed with respect to used manufactured homes is
the lower of (x) 90% of the buyer's total cost or (y) 90% of retail value as
specified in NADA plus the value of any Extras.
The maximum amount financed with respect to used manufactured homes
related to Land-Home Contracts is based on the sum of (x) the lesser of 95% of
appraised value as determined by an AFC appraiser or 120% of the retail value as
specified in NADA, (y) 95% of the lesser of property appraised value or the
purchase price of the land and (z) the value of any Extras.
The maximum amount financed with respect to used manufactured homes
related to Land-in-Lieu Contracts is based on the lesser of (x) 90% of the total
buyer's cost or (y) 90% of the retail value as specified in NADA plus the value
of any Extras. The value of the land, computed as described above, must be at
least 10% of the total buyer's cost.
AFC may re-finance a used manufactured housing Contract through its
broker network. Consistent with AFC's general underwriting policy, an obligor's
creditworthiness is the most important underwriting criterion, in connection
with a refinancing. Special emphasis is placed on the customer's actual payment
history record in connection with a re-financing transaction, with relatively
less weight being placed on the value of the related collateral. Even in the
re-financing context, however, it is AFC's policy not to allow the original
principal balance of the new Contract to exceed 115% of the related
S-46
<PAGE>
<PAGE>
manufactured home's NADA retail value at the time of the re-financing. Each
re-financed Contract included in the Contract Pool is a "Refinanced Contract".
For purposes of the statistical presentation of Loan-to-Value Ratios set forth
herein, each Refinanced Contract has been assigned a Loan-to-Value Ratio of
100%.
Contracts in excess of the maximums stated above require special
circumstances (e.g., particularly strong credit) before AFC will originate or
purchase them.
CERTAIN ORIGINATION STATISTICS.
The volume of manufactured housing contracts originated by AFC or
purchased by AFC from dealers on an individual basis for the periods indicated
below and certain other information at the end of such periods are as follows:
CONTRACTS ORIGINATED OR PURCHASED ON AN INDIVIDUAL BASIS
<TABLE>
<CAPTION>
Thirteen Months Nine Months
Ended Ended
May 31, 1995(1) February 29, 1996
--------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Principal balance of contracts purchased..................... $83,358 $209,905
Number of contracts purchased................................ 3,339 7,392
Average contract size(2)..................................... $ 25.0 $ 28.4
Average interest rate(2)(3).................................. 12.01% 10.78%
Number of regional offices(4)................................ 3 4
</TABLE>
- --------
(1) Access Financial Corp. commenced operation in May 1994. Consequently, the
May 31, 1995 column covers Access Financial Corp.'s first 13 months of
operation.
(2) As of period end.
(3) Weighted average gross coupon.
(4) Includes regional offices originating or purchasing manufactured housing
contracts as of the end of the time period.
As of the date of this Prospectus Supplement, AFC has not purchased any
Contracts from bulk sellers.
SERVICING
AFC services all of the manufactured housing contracts that it
purchases or originates. AFC plans to retain servicing responsibilities with
respect to contracts sold by it. Generally, such servicing responsibilities are
also carried out through AFC's centralized servicing facility and regional
offices. Servicing responsibilities include collecting principal and interest
payments, taxes, insurance premiums and other payments from obligors and, where
such contracts have been sold, remitting principal and interest payments to the
holders thereof, to the extent such holders are entitled thereto. Collection
procedures include repossession and resale of manufactured homes securing
defaulted contracts and, if deemed advisable by AFC, entering into workout
arrangements with obligors under certain defaulted contracts. Although decisions
as to whether to repossess any manufactured home are made on an individual
basis, AFC's general policy is to institute repossession procedures promptly
after AFC personnel determine that it is unlikely that a defaulted contract will
be brought current, and thereafter to diligently pursue the resale of such
manufactured homes if the market is favorable. In addition, AFC may enter into
arrangements, pursuant to which it will service manufactured housing contracts
held by other entities. Such contracts would not be purchased by AFC or sold to
such other entities by AFC.
S-47
<PAGE>
<PAGE>
AFC plans to relocate its principal offices from Atlanta, Georgia to
St. Louis Park, Minnesota in the Fall of 1996; certain servicing activities may
be affected during such relocation.
The following tables show the size of the portfolio of manufactured
housing contracts originated and serviced by AFC, together with certain
delinquency, loan loss and liquidation experience on the dates indicated:
SIZE OF SERVICED PORTFOLIO
<TABLE>
<CAPTION>
As of As of
May 31, 1995(1) February 29, 1996
--------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Unpaid principal balance of contracts being serviced.... $82,567 $285,217
Average unpaid principal balance............................ $ 24.8 $ 27.1
Number of contracts being serviced........... ............. 3,324 10,543
</TABLE>
- --------
(1) Access Financial Corp. commenced operation in May 1994. Consequently, the
May 31, 1995 column covers Access Financial Corp.'s first 13 months of
operation.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
As of As of
May 31, 1995 February 29, 1996
----------------- ---------------------
(Dollars in Thousands)
<S> <C> <C>
Number of Contracts Outstanding(1)................................. 3,307 10,455
Number of Contracts Delinquent:(2)
30 - 59 Days................................................... 34 158
60 - 89 Days................................................... 8 44
90 Days or More................................................ 10 53
Total Contracts Delinquent......................................... 52 255
Delinquencies as a Percentage of Contracts Outstanding(3).......... 1.57% 2.44%
</TABLE>
- --------
(1) Excludes contracts already held in repossession.
(2) The period of delinquency is based on the number of days payments are
contractually past due (assuming 30-day months).
(3) As a percentage of the total number of contracts outstanding as of period
end.
S-48
<PAGE>
<PAGE>
LOAN LOSS AND REPOSSESSION EXPERIENCE
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR FOR THE NINE
END ENDING MONTHS ENDING
MAY 31, FEBRUARY 29,
1995(1) 1996
------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Number of Contracts Serviced(2)................................ 3,324 10,543
Principal Balance of Contracts Serviced(2)..................... $82,567 $285,217
Contract Liquidations(3)....................................... 0.06% 0.80%
Net Losses:
Dollars(4)................................................. $ 12 $ 570
Percentage(5).............................................. 0.01% 0.20%
</TABLE>
- --------
(1) Access Financial Corp. commenced operation in May 1994. Consequently,
fiscal year end 1995 covers Access Financial Corp.'s first 13 months of
operation.
(2) As of period end. Includes contracts already in repossession and stage
funding of Land Home contracts.
(3) As a percentage of the total number of contracts being serviced as of
period end. The percentage for the nine months ending February 29, 1996 is
not annualized.
(4) The calculation of net loss on liquidated contracts included unpaid
interest to the date of repossession and all expenses of repossession and
liquidation. The dollar amount for the nine months ending February 29, 1996
is not annualized.
(5) As a percentage of the aggregate principal balance of contracts being
serviced as of period end. The percentage for the nine months ending
February 29, 1996 is not annualized.
The data presented in the foregoing tables is for illustrative purposes
only. AFC has been in business since May 1994 and has experienced rapid growth
since that time; therefore, the delinquency and loss percentages may be affected
by the size and relative lack of seasoning of its servicing portfolio.
S-49
<PAGE>
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Offered Certificates will be issued pursuant to the Agreement. A
form of the Agreement will be made available to prospective investors upon
request (made to the Sponsor at the address specified in the Prospectus under
"Incorporation of Certain Documents by Reference") and will be filed with the
Securities and Exchange Commission after the initial issuance of the
Certificates as an exhibit to a Current Report on Form 8-K. Reference is made to
the Prospectus for additional information regarding the terms and conditions of
the Agreement.
Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Agreement. When particular
provisions or terms used in the Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
GENERAL
The Offered Certificates initially will be issued in book-entry form.
Persons acquiring beneficial ownership interests in such Offered Certificates
("Beneficial Certificate Owner") may elect to hold their interests through The
Depository Trust Company ("DTC"), in the United States, or Cedel Bank, societe
anonyme ("CEDEL") or the Euroclear System ("Euroclear"), in Europe. Transfers
within DTC, CEDEL or Euroclear, as the case may be, will be in accordance with
the usual rules and operating procedures of the relevant system. So long as the
Offered Certificates are book-entry certificates, such Offered Certificates will
be evidenced by one or more Offered Certificates registered in the name of Cede
& Co. ("Cede"), as the nominee of DTC or one of the relevant depositories
(collectively, the "European Depositories"). Cross-market transfers between
persons holding directly or indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through CEDEL or Euroclear, on the
other, will be effected in DTC through Citibank N.A. ("Citibank") or Morgan
Guaranty Trust Company of New York ("Morgan"), the relevant depositories of
CEDEL or Euroclear, respectively, and each a participating member of DTC. The
Offered Certificates will initially be registered in the name of Cede. The
interests of such Beneficial Certificate Owners will be represented by
book-entries on the records of DTC and participating members thereof. No
Beneficial Certificate Owner will be entitled to receive a definitive
certificate representing such person's interest, except under the limited
circumstances described herein. All references herein to any Offered
Certificates reflect the rights of Beneficial Certificate Owners only as such
rights may be exercised through DTC and its participating organizations for so
long as such Offered Certificates are held by DTC. See " -- Registration of
Offered Certificates" below.
The Percentage Interest of a Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 Certificate or Class B-1 Certificate is the percentage
obtained from dividing the original denomination of such Certificate by the
Original Class A-1 Principal Balance, the Original Class A-2 Principal Balance,
the Original Class A-3 Principal Balance, the Original Class A-4 Principal
Balance, the Original Class A-5 Principal Balance, the Original Class A-6
Principal Balance or the Original Class B-1 Principal Balance, as appropriate.
Definitive Senior Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee at its Corporate Trust Department
in New York or, if it so elects, at the office of an agent in New York, New
York. No service charge will be made for any registration of exchange or
transfer, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge.
The Class B-2 and Class C Certificates are not being offered hereby.
The Trust will also issue a residual class in each REMIC created by the Trust
(the "Residual Certificates") which are not being offered hereby and will
initially be retained by the Seller. The Senior Certificates, the Class A-6
Certificates, the Class B-1 Certificates, the Class B-2 Certificates, the Class
C Certificates and the Residual Certificates are collectively referred to as the
"Certificates."
The Trust includes (i) the Contract Pool, including certain rights to
receive payments due on the Contracts on and after the Cut-off Date, (ii) the
amounts held from time to time in the "Certificate
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Account" (as described herein under " -- Payment on Contracts; Certificate
Account") maintained by the Trustee pursuant to the Agreement, (iii) any
property which initially secured a Contract and which is acquired in the process
of realizing thereon and (iv) the obligation of AFC under certain conditions, to
repurchase Contracts sold by it with respect to which certain representations
and warranties have been breached and not cured.
AFC will convey the Contracts to Receivables Corp. and Receivables
Corp. will convey the Contracts to the Trust. See "The Contract Pool" herein.
AFC, as Servicer, will service the Contracts pursuant to the Agreement. The
Contracts will be held by the Trustee.
Distributions of principal and interest to the holders of the Offered
Certificates will be made on the 15th day of each month, or, if such day is not
a business day, the next succeeding business day (each, a "Remittance Date")
beginning in June 1996, to the persons in whose names the Offered Certificates
are registered at the close of business on the last business day of the month
preceding the month in which such distribution payment is made (the "Record
Date").
REPRESENTATIONS AND WARRANTIES
AFC will make certain warranties with respect to each Contract as of
the Closing Date, including that: (a) as of the Cut-off Date the most recent
scheduled payment was made or was not delinquent more than 59 days; (b) no
provision of a Contract has been waived, altered or modified in any respect,
except by instruments or documents contained in the related Contract file; (c)
each Contract is a legal, valid and binding obligation of the Obligor and is
enforceable in accordance with its terms (except as may be limited by laws
affecting creditors' rights generally); (d) no Contract is subject to any right
of rescission, set-off, counterclaim or defense; (e) each Manufactured Home
securing a Contract is covered by hazard insurance; (f) each Contract has been
originated by a manufactured housing dealer or AFC in the ordinary course of
such dealer's or AFC's business and, if originated by a manufactured housing
dealer, was purchased by AFC in the ordinary course of business; (g) no Contract
was originated in or is subject to the laws of any jurisdiction whose laws would
make unlawful the transfer of the Contract or an interest therein to the Trust;
(h) each Contract complies with all requirements of law; (i) no Contract has
been satisfied, subordinated in whole or in part or rescinded and the
Manufactured Home securing the Contract has not been released from the lien of
the Contract in whole or in part; (j) each Contract creates a valid and
enforceable first priority security interest in favor of AFC in the Manufactured
Home covered thereby and, with respect to each Land Secured Contract, the lien
created thereby has been recorded or will be recorded within six months, and
such security interest or lien has been assigned by AFC; (k) all parties to each
Contract had capacity to execute such Contract; (l) prior to the transfer of the
Contracts by AFC, AFC had good and marketable title to each Contract free and
clear of any encumbrance, equity, loan, pledge, charge, claim or security
interest, and was the sole owner and had full right to transfer such Contract;
(m) as of the Cut-off Date, there was no default, breach, violation or event
permitting acceleration under any Contract (except for payment delinquencies
permitted by clause (a) above), no event which with notice and the expiration of
any grace or cure period would constitute a default, breach, violation or event
permitting acceleration under such Contract, and AFC has not waived any of the
foregoing; (n) as of the Closing Date there were no liens or claims which have
been filed for work, labor or materials affecting a Manufactured Home or any
related real property securing a Contract, which are or may be liens prior or
equal to the lien of the Contract; (o) each Contract is a fully-amortizing loan
with a fixed Contract Rate and provides for level payments over the term of such
Contract; (p) each Contract contains customary and enforceable provisions such
as to render the rights and remedies of the holder thereof adequate for
realization against the collateral of the benefits of the security; (q) the
description of each Contract set forth in the list of Contracts delivered to the
Trustee is true and correct; (r) there is only one original of each Contract and
each Contract (other any Land Secured Contract) constitutes chattel paper within
the meaning of the applicable Uniform Commercial Code; (s) none of the Contracts
had a loan-to-value ratio at origination greater than those described for the
applicable underwriting program under "Access Financial Corp. - Underwriting
Policies -- Loan-to-Value Ratios"; (t) the principal balance of each Refinanced
Contract at the time of origination did not exceed the then outstanding
principal balance of the Contract refinanced thereby together with certain
insurance and refinancing costs; (u) to the best knowledge of AFC, not less than
95% of the Contract Pool relates to
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Manufactured Homes which were the related Obligors' primary residence at the
time of origination; (v) the related Manufactured Home (other than any
Manufactured Home relating to a Land-Home Contract) is not considered or
classified as part of the real estate on which it is located under the laws of
the jurisdiction in which it is located, and as of the Closing Date such
Manufactured Home was free of damage and in good repair and (w) each Contract is
a "qualified mortgage" under Section 860G(a)(3) of the Code and each
Manufactured Home is "manufactured housing" within the meaning of Section
25(e)(10) of the Code.
Subject to AFC's option to effect a substitution as described in the
next paragraph, AFC will be obligated to repurchase for the Repurchase Price (as
defined below) any Contract on the first business day after the first
Determination Date which is more than 90 days after AFC becomes aware, or AFC's
receipt of written notice from the Trustee or the Servicer, of a breach of any
representation or warranty of AFC that materially adversely affects the Trust's
interest in any Contract if such breach has not been cured. The Repurchase Price
for any Contract will be the remaining principal amount outstanding on such
Contract on the date of repurchase plus accrued and unpaid interest thereon at
its Contract Rate to the end of the related Due Date. The Sponsor will guarantee
AFC's repurchase obligation if Access fails to honor such obligation within 30
days of being required to make any such repurchase.
In lieu of purchasing a Contract as specified in the preceding
paragraph, during the two-year period following the Closing Date, AFC may, at
its option, substitute an Eligible Substitute Contract (as defined below) for
the Contract that it is otherwise obligated to repurchase (referred to herein as
the "Replaced Contract"). An Eligible Substitute Contract is a Contract that (a)
as of the date of its substitution, satisfies all of the representations and
warranties, (b) after giving effect to the scheduled payment due in the month of
such substitution has a Scheduled Principal Balance that is not greater than the
Scheduled Principal Balance of the Replaced Contract, (c) has a Contract Rate
that is at least equal to the Contract Rate of the Replaced Contract and (d) has
a remaining term to maturity that is not greater than the remaining term to
maturity of the Replaced Contract. AFC will be required to deposit in the
Certificate Account cash in the amount, if any, by which the Scheduled Principal
Balance of the Replaced Contract exceeds the Scheduled Principal Balance of the
Contract being substituted and the Sponsor will guarantee this obligation of
AFC.
PAYMENTS ON CONTRACTS; CERTIFICATE ACCOUNT
The Trustee will initially establish and maintain an account (the
"Certificate Account") at a depository institution organized under the laws of
the United States or any state, the deposits of which are insured to the full
extent permitted by law by the Federal Deposit Insurance Corporation (the
"FDIC") whose commercial paper, long-term deposits or long-term unsecured senior
debt has a rating of F-1 by Fitch and P-1 by Moody's in the case of commercial
paper or in one of the two highest rating categories by Fitch and Moody's in the
case of long-term deposits or long-term unsecured senior debt, and which is
subject to examination by federal or state authorities or a depository
institution otherwise acceptable to Fitch and Moody's (an "Eligible
Institution"). The funds in the Certificate Account are required to be invested
in Eligible Investments that will mature not later than the business day
preceding the applicable Remittance Date. "Eligible Investments" include, among
other investments, obligations of the United States or of any agency thereof
backed by the full faith and credit of the United States; certificates of
deposit, time deposits and bankers' acceptances sold by eligible financial
institutions; commercial paper rated F-1+ by Fitch and P-1 by Moody's; and other
obligations acceptable to Fitch and Moody's.
All payments in respect of principal and interest on the Contracts
received by the Servicer (exclusive of Scheduled Payments due prior to the
Cut-off Date), including Liquidation Proceeds (net of Liquidation Expenses), are
required to be paid into the Certificate Account not later than the second
business day following receipt thereof. Amounts received as late payment fees,
extension fees, assumption fees or similar fees may be retained by the Servicer
as part of its servicing fees. See " -- Servicing Compensation" herein. In
addition, the amount paid by AFC for any Contract repurchased as a result of a
breach of a representation or warranty under the Agreement, and amounts required
to be deposited upon substitution of an Eligible Substitute Contract because of
a breach of a representation or
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warranty (which amounts will be treated as partial principal prepayments) are
required to be paid in the Certificate Account.
On the third business day prior to each Remittance Date (the
"Determination Date"), the Servicer will determine the Amount Available and the
amounts to be distributed on the Certificates on such Remittance Date. The
"Amount Available" for any Remittance Date is (I) the sum of (a) the amount in
the Certificate Account on the close of business on the day immediately
preceding such Determination Date and (b) the aggregate amount of Delinquency
Advances relating to such Remittance Date, together with certain
insurance-related amounts to be deposited by the Servicer for such Remittance
Date, less (II) the sum of (a) payments on Contracts that have been repurchased
as a result of a breach of a representation or warranty, (b) the Amount Held For
Future Distribution, (c) any portion of Liquidation Proceeds used to reimburse
the Servicer for Servicing Advances and Delinquency Advances previously made by
the Servicer with respect to the related Contract, (d) amounts used to reimburse
the Servicer with respect to Nonrecoverable Delinquency Advances and Delinquency
Advances and Servicing Advances to the extent permitted by the Agreement, (e) if
AFC is not the Servicer, the Monthly Servicing Fee, and (f) amounts which may be
withdrawn from the Certificate Account as a result of a deposit thereto made in
error, or to fund certain rebates or refunds due to Obligors. The "Amount Held
For Future Distribution" as of a Determination Date are amounts representing
Scheduled Payments or other collections and recoveries which relate to the
second following, or any future, Remittance Date. See " -- Advances" below for a
description of the Servicer's advancing responsibilities.
The Trustee or its Paying Agent will withdraw funds from the
Certificate Account on each Remittance Date (but only to the extent of the
related Amount Available and, in certain limited circumstances to pay interest
on the Subordinate Certificates, from certain other amounts) to make payments to
Offered Certificateholders as specified under " -- Distributions" below. As more
fully described herein under "The Contract Pool," the day of each month
constituting the Due Date of the Scheduled Payments for each Contract will vary
from Contract to Contract. In addition, the Contracts may be prepaid in full or
in part at any time. Thus, the Amount Available for any Remittance Date (other
than the portion thereof consisting of the applicable monthly Delinquency
Advance, if any) will have been deposited into the Certificate Account on
various days throughout the preceding calendar month. As a result, payments
received at any time during a calendar month will not be distributed to the
Offered Certificateholders until the 15th day of the succeeding calendar month
(or if such 15th day is not a business day, on the next succeeding business
day.) See "Prepayment and Yield Considerations" herein and "Yield
Considerations" in the Prospectus. From time to time, as provided in the
Agreement, the Servicer will also withdraw funds from the Certificate Account to
make payments to it as permitted by the Agreement and described in subclauses
(ii), (iv) and (v) of clause (b) in the second preceding paragraph.
DISTRIBUTIONS
On each Remittance Date, distributions on the Offered Certificates will
be made in the following order of priority: (i) to the holders of the Senior
Certificates, (ii) to the holders of the Class A-6 Certificates, (iii) to the
holders of the Class B-1 Certificates, (iv) to the holders of the Class B-2
Certificates, and (v) to the holders of the Class C Certificates, as described
below.
Distributions of interest and, to the extent specified below, principal
to holders of a Class of Senior Certificates will be made on each Remittance
Date in an amount equal to the sum of (i) their respective Percentage Interests
of the amount of interest calculated as described under "Senior Interest" below
and (ii) their respective Percentage Interests, distributed to each Class of
Senior Certificates in the order of priority described under "Senior Principal"
below, of an amount of principal calculated as described below under "Senior
Principal." Distributions on the Senior Certificates will be applied first to
the payment of interest and then to the payment of principal. The Senior
Distribution Amount for any Remittance Date is intended to be equal to the sum
(referred to as the "Senior Formula Distribution Amount") of (i) the amount of
interest calculated as set forth under "Senior Interest" below and (ii) the
amount of principal described below under "Senior Principal," except that, if
the Senior Formula
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Distribution Amount exceeds the Amount Available in the Certificate Account on
such Remittance Date, then the Senior Distribution Amount shall instead equal
the Amount Available.
Distributions of interest and, to the extent specified below, principal
to holders of Class A-6 Certificates will be made on each Remittance Date in an
amount equal to their respective Percentage Interests multiplied by the Class
A-6 Distribution Amount. Distributions on the Class A-6 Certificates will be
applied first to the payment of interest and then to the payment of principal.
The Class A-6 Distribution Amount for any Remittance Date is intended to be
equal to the sum (referred to as the "Class A-6 Formula Distribution Amount") of
(i) the amount of interest calculated as set forth under "Class A-6 Interest"
below and (ii) on and after the Remittance Date on which the Senior Principal
Balance is reduced to zero, the amount of principal described below under "Class
A-6 Principal." If the Amount Available in the Certificate Account available for
distribution to the Class A-6 Certificateholders (after giving effect to any
distribution made to Senior Certificateholders on such Remittance Date) (the
"Class A-6 Remaining Amount Available") is less than the Class A-6 Formula
Distribution Amount, then the Class A-6 Distribution Amount will equal the Class
A-6 Remaining Amount Available and the amount of such deficiency, to the extent
not funded by certain other amounts on deposit in the Certificate Account and
available therefor, will be carried forward and added to the amount such holders
will be entitled to receive on the next Remittance Date.
Distributions of interest and, to the extent specified below, principal
to holders of Class B-1 Certificates will be made on each Remittance Date in an
amount equal to their respective Percentage Interests multiplied by the Class
B-1 Distribution Amount. Distributions on the Class B-1 Certificates will be
applied first to the payment of interest and then to the payment of principal.
The Class B-1 Distribution Amount for any Remittance Date is intended to be
equal to the sum (referred to as the "Class B-1 Formula Distribution Amount") of
(a) the amount of interest calculated as set forth under "Class B-1 Interest"
below and (b) on and after the Class B Cross-over Date, if each Class B
Principal Distribution Test was satisfied on such Remittance Date, the Formula
Principal Distribution Amount calculated as described under "Class B-1
Principal" below. If the Amount Available in the Certificate Account available
for distribution to the Class B-1 Certificateholders (after giving effect to any
distribution made to Senior and Class A-6 Certificateholders on such Remittance
Date) (the "Class B-1 Remaining Amount Available") is less than the Class B-1
Formula Distribution Amount, then the Class B-1 Distribution Amount will equal
the Class B-1 Remaining Amount Available and the amount of such deficiency, to
the extent not funded by certain other amounts on deposit in the Certificate
Account and available therefor, will be carried forward and added to the amount
such holders will be entitled to receive on the next Remittance Date.
Distributions of interest and, to the extent specified below, principal
to holders of the Class B-2 Certificates will be made on each Remittance Date in
an amount equal to their respective Percentage Interests of the Class B-2
Distribution Amount. The Class B-2 Distribution Amount for any Remittance Date
is intended to equal to the sum (referred to as the "Class B-2 Formula
Distribution Amount") of (a) the amount of interest calculated as set forth
under "Class B-2 Interest" below and (b) on and after the Remittance Date on
which the Class B-1 Principal Balance is reduced to zero, if each Class B
Principal Distribution Test was satisfied on such Remittance Date, the amount of
principal described below under "Class B-2 Principal" below. Distributions on
the Class B-2 Certificates will be applied first to the payment of interest and
then to the payment of principal. If the Amount Available in the Certificate
Account available for distribution to the Class B-2 Certificateholders (after
giving effect to distributions made to Senior, Class A-6 and Class B-1
Certificateholders on such Remittance Date) (the "Class B-2 Remaining Amount
Available") is not sufficient to make a full distribution of the Class B-2
Formula Distribution Amount to the Class B-2 Certificateholders, then the Class
B-2 Distribution Amount will equal the Class B-2 Remaining Amount Available and
the amount of such deficiency, to the extent not funded by certain other amounts
on deposit in the Certificate Account and available therefor, will be carried
forward and added to the amount such holders will be entitled to receive on the
next Remittance Date.
The rights of the Subordinate Certificateholders and the Residual
Certificateholders to receive distributions are subordinated to the rights of
the Senior Certificateholders, the rights of the Class B-1,
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Class B-2, Class C and Residual Certificateholders to receive distributions are
subordinated to the rights of the Class A-6 Certificateholders, the rights of
the Class B-2, Class C and Residual Certificateholders to receive distributions
are subordinated to the rights of the Class B-1 Certificateholders, in each
case, to the extent described herein. The Class C Certificates represent a class
of subordinated, "interest-only" certificates, the distributions on which are
subordinated to the rights of the Class B-2 Certificateholders and, for so long
as AFC is the Servicer, the payment of the Monthly Servicing Fee. The holders of
the Residual Certificates will be entitled to receive only miscellaneous amounts
not required to be distributed on account of the other classes of Certificates.
Each distribution with respect to a Book-Entry Certificate will be paid
to DTC, which will credit the amount of such distribution to the accounts of its
Participants in accordance with its normal procedures. Each Participant will be
responsible for disbursing such distribution to the Certificate Owners that it
represents and to each indirect participating brokerage firm (a "brokerage firm"
or "indirect participating firm") for which it acts as agent. Each brokerage
firm will be responsible for disbursing funds to the Certificate Owners that it
represents. All such credits and disbursements with respect to a Book-Entry
Certificate are to be made by DTC and the Participants in accordance with DTC's
rules.
The Servicer will furnish to the Trustee, and the Trustee will send
with each distribution on a Remittance Date to each holder of the Offered
Certificates, a statement or statements setting forth, among other things, (i)
the amount of such distribution allocable to principal (including Principal
Prepayments, if any) and (ii) the amount of such distribution allocable to
interest.
SENIOR INTEREST
One month's interest (computed on the basis of a 360-day year of twelve
30-day months) will be paid concurrently to the holders of each Class of Senior
Certificates on each Remittance Date, to the extent of the Amount Available in
the Certificate Account on such date, at the related Remittance Rate on the then
outstanding Principal Balance of each Class of Senior Certificates. Interest on
each Class of Senior Certificates will accrue with respect to each Remittance
Date during the related Accrual Period, commencing May 1, 1996.
The Remittance Rates for the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificates are 6.400%, 6.750%, 6.975%, 7.300% and 7.575% per
annum, respectively, subject to a maximum rate equal to the Weighted Average Net
Contract Rate, computed on the basis of a 360-day year of twelve 30-day months.
In all but the most unusual prepayment scenarios, it is anticipated that the
applicable Remittance Rate on the Senior Certificates will be the Remittance
Rate without giving effect to the maximum rate of the Weighted Average Net
Contract Rate. In the unlikely event that a large number of Contracts having Net
Contract Rates equal to or greater than such applicable Remittance Rate were to
prepay while the Contracts having Net Contract Rates less than such applicable
Remittance Rate did not prepay, with the result that interest collections on the
remaining Contracts were not sufficient to support such applicable Remittance
Rate, then the Remittance Rate for any such Class would be equal to the Weighted
Average Net Contract Rate.
The Certificate Principal Balance of any Class of Senior Certificates
of any Remittance Date is the Original Principal Balance of such Class less all
amounts previously distributed to holders of such Class on account of principal.
The Senior Principal Balance as of any Remittance Date is the sum of the Class
A-1 Principal Balance, the Class A-2 Principal Balance, the Class A-3 Principal
Balance, the Class A-4 Principal Balance and the Class A-5 Principal Balance.
In the event that, on a particular Remittance Date, the Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of each Class of Senior Certificates,
the Amount Available will be distributed among the outstanding Classes of Senior
Certificates pro rata based on the aggregate amount of interest due on each such
Class, and the amount of shortfall will be carried forward and added to the
amount such holders will be entitled to receive on the future Remittance Dates,
until paid in full. Such a shortfall could occur, for example, if delinquencies
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or losses realized on the Contracts were exceptionally high and were
concentrated in a particular month. In addition, the Amount Available in the
Certificate Account with respect to any Remittance Date may be reduced by the
amount of funds, if any, used to cover an interest shortfall on the Class A-6,
Class B-1 or Class B-2 Certificates, as described below. Any such amount so
carried forward will bear interest at the applicable Remittance Rate for each
Class of Senior Certificates, to the extent permitted by law.
SENIOR PRINCIPAL
Holders of a Class of Senior Certificates will be entitled to receive
on each Remittance Date as payments of principal, in the order of priority set
forth below and to the extent of the Amount Available in the Certificate Account
on such date after payment of interest on all Classes of Senior Certificates,
the sum of (x) the Senior Percentage of the Formula Principal Distribution
Amount for such Remittance Date, and (y) any portion of the amount described in
clause (x) preceding which was due to the holders of the Senior Certificates on
prior Remittance Dates, but which remains unpaid on such Remittance Date. The
Agreement defines the "Formula Principal Distribution Amount" with respect to a
Remittance Date as the sum of (i) all scheduled payments of principal due on
each outstanding Contract during the related Collection Period, (ii) the
Scheduled Principal Balance of each Contract which, during the related
Collection Period, was purchased by AFC pursuant to the Agreement on account of
certain breaches of its representations and warranties, (iii) all Partial
Principal Prepayments applied and all Principal Prepayments in full received
during the related Collection Period, (iv) the Scheduled Principal Balance of
each Contract that became a Liquidated Contract during such related Collection
Period and (v) the Accelerated Principal Payment, if any, for such Remittance
Date. When the Certificate Principal Balance of a Class of Senior Certificates
is reduced to zero, no further distributions of principal will be made to the
holders of such Class.
The "Senior Percentage" for any Remittance Date prior to the Class B
Cross-over Date, and for any Remittance Date on or after the Class B Cross-over
Date on which any Class B Principal Distribution Test is not satisfied (each as
described under "Class B-1 Principal" below) will be 100%, and for any
Remittance Date on or after the Class B Cross-over Date on which each Class B
Principal Distribution Test is satisfied will equal a fraction, expressed as a
percentage, the numerator of which is the sum of the Senior Principal Balance
and the Class A-6 Principal Balance for such Remittance Date (before giving
effect to any distributions on such Remittance Date) and the denominator of
which is the Pool Scheduled Principal Balance at the end of the second preceding
Collection Period. The Scheduled Principal Balance of a Contract for any
Collection Period is its principal balance as specified in its amortization
schedule at the time relating thereto (before any adjustment to such schedule by
reason of bankruptcy, moratorium or similar waiver or grace period) as of the
Due Date in the Collection Period next preceding such Remittance Date, after
giving effect to the principal portion of the scheduled payment due on such Due
Date and irrespective of any delinquency in payment on such Contract and after
giving effect to any partial prepayments applied and prepayments in full
received during the related Collection Period. The "Pool Scheduled Principal
Balance" is the aggregate of the Scheduled Principal Balances of all Contracts
(other than Liquidated Contracts and Contracts purchased by AFC during such
Collection Period) outstanding at the end of such Collection Period. A
"Liquidated Contract" is a defaulted Contract as to which all amounts that the
Servicer expects to recover through the date of disposition of the Manufactured
Home have been received.
The principal distribution to be made to the holders of the Senior
Certificates on any Remittance Date will be distributed, to the extent of the
Amount Available after payment of interest on all Classes of Senior
Certificates, first to the Class A-1 Certificateholders until the Class A-1
Principal Balance has been reduced to zero, then to the Class A-2
Certificateholders until the Class A-2 Principal Balance has been reduced to
zero, then to the Class A-3 Certificateholders until the Class A-3 Principal
Balance has been reduced to zero, then to the Class A-4 Certificateholders until
the Class A-4 Principal Balance has been reduced to zero, then to the Class A-5
Certificateholders until the Class A-5 Principal Balance has been reduced to
zero.
If, on any Remittance Date prior to the Class A-5 Principal Balance
being reduced to zero, the Pool Scheduled Principal Balance at the close of
business on the last day of the related Collection Period
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would be less than the sum of the Class A-1 Principal Balance, the Class A-2
Principal Balance, the Class A-3 Principal Balance, the Class A-4 Principal
Balance and the Class A-5 Principal Balance on such Remittance Date after giving
effect to distributions of principal to be made on such date, then the Amount
Available remaining after distribution of interest on the Senior Certificates
will be distributed to the Classes of Senior Certificates on a pro rata basis as
a distribution of the Senior Percentage of the Formula Principal Distribution
Amount, and the amount of the shortfall will be allocated pro rata among the
outstanding Classes of Senior Certificates, based upon their respective
outstanding Certificate Principal Balances.
As hereinafter described, all Realized Losses will be absorbed first,
by the Residual Certificates, second, by the Class C Certificates, third, by the
Monthly Servicing Fee otherwise payable to AFC in its capacity as Servicer,
fourth, by the Class B-2 Certificates, fifth, by the Class B-1 Certificates and
sixth, by the Class A-6 Certificates. If the Amount Available on any Remittance
Date is less than the Senior Distribution Amount, the Amount Available will be
applied first to the payment of interest pro rata to the outstanding Senior
Certificates, based on the aggregate amount of interest then payable on each
Class of Senior Certificates and then to the payment of principal to the Class
of Senior Certificates then entitled thereto.
CLASS A-6 INTEREST
Interest will be paid to the Class A-6 Certificateholders on each
Remittance Date, to the extent of the Class A-6 Remaining Amount Available, if
any. Interest on the outstanding Class A-6 Principal Balance will accrue with
respect to each Remittance Date during the related Accrual Period, commencing
May 1, 1996. On each Remittance Date, to the extent of the Class A-6 Remaining
Amount Available, if any, on such Remittance Date after payment of the Senior
Distribution Amount, interest will be paid to the Class A-6 Certificateholders
at the Class A-6 Remittance Rate on the Class A-6 Principal Balance (before
giving effect to any distributions on such Remittance Date). The Class A-6
Principal Balance is the Original Class A-6 Principal Balance less the sum of
all amounts previously distributed to Class A-6 Certificateholders on account of
principal. In the event that, on a particular Remittance Date, the Class A-6
Remaining Amount Available in the Certificate Account is not sufficient to make
a full distribution of interest to the Class A-6 Certificateholders, funds in
the Certificate Account representing collections received after the related
Collection Period will be applied to such deficiency, and any remaining
deficiency will be carried forward and added to the amount such holders will be
entitled to receive on the next Remittance Date. Any such amount so carried
forward will bear interest at the Class A-6 Remittance Rate, to the extent
permitted by law.
The Class A-6 Remittance Rate on each Remittance Date will be 7.975%
per annum, subject to a maximum rate equal to the Weighted Average Net Contract
Rate, computed on the basis of a 360-day year of twelve 30-day months. In all
but the most unusual prepayment scenarios, it is anticipated that the Class A-6
Remittance Rate will be 7.975%. In the unlikely event that a large number of
Contracts having Net Contract Rates equal to or higher than 7.975% (which
Contracts represent approximately 99.28% of the Cut-off Date Pool Principal
Balance) were to prepay while the Contracts having Net Contract Rates lower than
7.975% did not prepay, with the result that the interest collections on the
remaining Contracts were not sufficient to support a Class A-6 Remittance Rate
of 7.975%, then the Class A-6 Remittance Rate would be equal to the Weighted
Average Net Contract Rate.
CLASS A-6 PRINCIPAL
On each Remittance Date on or after the date on which the Senior
Principal Balance has been reduced to zero, Class A-6 Certificateholders will be
entitled to receive, as payments of principal, the sum of (i) the Senior
Percentage of the Formula Principal Distribution Amount, and (ii) any portion of
the amount described in clause (i) preceding which was due to the Class A-6
Certificateholders on prior Remittance Dates, but which remains unpaid on such
Remittance Date; such amount will only be distributed to the extent of the Class
A-6 Remaining Amount Available in the Certificate Account on such Remittance
Date, after payment of all interest payable on the Class A-6 Certificates. On
each Remittance Date on or after the Class B Cross-over Date on which each Class
B Principal Distribution Test is
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satisfied, payments of principal will be made to Class B-1 or Class B-2
Certificateholders, even if Class A-6 Certificateholders are not yet entitled to
receive payments of principal because the Senior Principal Balance has not been
reduced to zero.
CLASS B-1 INTEREST
Interest will be paid to the Class B-1 Certificateholders on each
Remittance Date, to the extent of the Class B-1 Remaining Amount Available if
any. Interest on the outstanding Class B-1 Principal Balance will accrue with
respect to each Remittance Date during the related Accrual Period, commencing
May 1, 1996. On each Remittance Date, to the extent of the Class B-1 Remaining
Amount Available, if any, on such Remittance Date after payment of the Senior
Distribution Amount and the Class A-6 Distribution Amount, interest will be paid
to the Class B-1 Certificateholders at the Class B-1 Remittance Rate on the
Class B-1 Principal Balance (before giving effect to any distributions on such
Remittance Date). The Class B-1 Principal Balance is the Original Class B-1
Principal Balance less the sum of all amounts previously distributed to Class
B-1 Certificateholders on account of principal. In the event that, on a
particular Remittance Date, the Class B-1 Remaining Amount Available is not
sufficient to make a full distribution of interest to the Class B-1
Certificateholders, funds in the Certificate Account representing collections
received after the related Collection Period will be applied to such deficiency,
and any remaining deficiency will be carried forward and added to the amount
such holders will be entitled to receive on the next Remittance Date.
The Class B-1 Remittance Rate on each Remittance Date will be 8.040%
per annum, subject to a maximum rate equal to the Weighted Average Net Contract
Rates, computed on the basis of a 360-day year of twelve 30-day months. In all
but the most unusual prepayment scenarios, it is anticipated that the Class B-1
Remittance Rate will be 8.040%. In the unlikely event that a large number of
Contracts having Net Contract Rates equal to or higher than 8.040% (which
Contracts represent approximately 98.63% of the Cut-off Date Pool Principal
Balance) were to prepay while the Contracts having Net Contract Rates lower than
8.040% did not prepay, with the result that the interest collections on the
remaining Contracts were not sufficient to support a Class B-1 Remittance Rate
of 8.040%, then the Class B-1 Remittance Rate would be equal to the Weighted
Average Net Contract Rate.
CLASS B-1 PRINCIPAL
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B-1 Certificates. The Class B Cross-over Date will be the
later of (A) the Remittance Date in June 2001 or the first Remittance Date on
which the sum of (i) the Senior Principal Balance on such Remittance Date
(before taking into account any distributions to be made on such Remittance
Date) and (ii) the Class A-6 Principal Balance on such Remittance Date (before
taking into account any distributions to be made on such Remittance Date) (such
sum expressed as a percentage of the Pool Scheduled Principal Balance at the end
of the second preceding Collection Period) is less than 63.51%.
On each Remittance Date on or after the Class B Cross-over Date and
prior to the Remittance Date on which the Senior Principal Balance and the Class
A-6 Principal Balance are reduced to zero, holders of Class B-1 and Class B-2
Certificates will be entitled to distributions of principal only if each of the
following tests (each a "Class B Principal Distribution Test") is satisfied on
such Remittance Date: (i) the Average Sixty-Day Delinquency Ratio (as defined
below) as of such Remittance Date must not exceed 5%; (ii) the Average
Thirty-Day Delinquency Ratio (as defined below) as of such Remittance Date must
not exceed 7%; (iii) the Cumulative Realized Losses (as defined below) as of
such Remittance Date must not exceed a certain specified percentage of the
Cut-off Date Pool Principal Balance, depending on the year in which such
Remittance Date occurs; (iv) the Current Realized Loss Ratio (as defined below)
as of such Remittance Date must not exceed 2.75% if AFC is the Servicer, or
2.25% if AFC is not the Servicer; (v) the sum of (a) the Senior Principal
Balance on such Remittance Date and (b) the Class A-6 Principal Balance divided
by the Pool Scheduled Principal Balance at the end of the second preceding
Collection Period must be less than 63.51%; and (vi) the sum of (a) the Class
B-1 and Class B-2 Principal Balance and (b) the Overcollateralization Amount
must not be less than 2% of the Aggregate Principal Balance of the Contracts as
of the Cut-off Date.
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The "Average Sixty-Day Delinquency Ratio" for any Remittance Date will
be equal to the arithmetic average, for such Remittance Date and for the two
immediately preceding Remittance Dates, of a fraction, expressed as a
percentage, the numerator of which is the aggregate of the Scheduled Principal
Balance of all Contracts (including Contracts in repossession) that were
delinquent 60 days or more as of the end of the Collection Period preceding such
Remittance Date, and the denominator of which is the Pool Scheduled Principal
Balance as of such date. The "Average Thirty-Day Delinquency Ratio" for any
Remittance Date will be equal to the arithmetic average, for such Remittance
Date and for the two immediately preceding Remittance Dates, of a fraction,
expressed as a percentage, the numerator of which is the aggregate of the
Scheduled Principal Balance of all Contracts (including Contracts in
repossession) that were delinquent 30 days or more as of the end of the
Collection Period preceding such date, and the denominator of which is the Pool
Scheduled Principal Balance as of such date. The "Current Realized Loss Ratio"
for any Remittance Date will be equal to a fraction, expressed as a percentage,
the numerator of which is the aggregate of all Realized Losses during the twelve
immediately preceding Collection Periods, and the denominator of which is the
arithmetic average of the Pool Scheduled Principal Balance as of the last day of
the twelfth preceding Collection Period and the Pool Scheduled Principal Balance
as of the last day of the immediately preceding Collection Period. The
"Cumulative Realized Losses" for any Remittance Date will be equal to the sum of
all liquidation losses of all Contracts that became Liquidated Contracts since
the Cut-off Date.
On each Remittance Date on or after the Class B Cross-over Date, if
each Class B Principal Distribution Test is satisfied on such Remittance Date
(unless the Senior Principal Balance and the Class A-6 Principal Balance have
been reduced to zero in which event none of the Class B Distribution Tests need
be satisfied), Class B-1 Certificateholders will be entitled to receive, as
payments of principal, the sum of (i) the Class B Percentage of the Formula
Principal Distribution Amount and (ii) any portion of the amount described in
clause (i) preceding which was due to the Class B-1 Certificateholders on prior
Remittance Dates but which remains unpaid on such Remittance Date; such amount
will only be distributed to the extent of the Class B-1 Remaining Amount
Available in the Certificate Account on such date after payment of all interest
payable on the Class B-1 Certificates. The Agreement provides that in no event
shall an amount of principal be distributed to the holders of the Class B-1 or
Class B-2 Certificates if, after paying such amount, the test set forth in
clause (vi) of "Class B Principal Distribution Test" would be violated; any such
principal not so distributed shall instead be distributed to the Class of Senior
Certificates or the Class A-6 Certificates, whichever is then entitled to
receive distributions of principal. The Class B-2 Certificateholders will not be
entitled to any distributions of principal until the Class B-1 Principal Balance
has been reduced to zero. The Class B Percentage for any Remittance Date on or
after the Class B Cross-over Date on which each Class B Principal Distribution
Test has been satisfied will be equal to 100% minus the Senior Percentage. The
Class B Percentage for each Remittance Date, if any, after the Senior Principal
Balance and the Class A-6 Principal Balance have both been reduced to zero, will
be equal to 100%.
CLASS B-2 INTEREST
Interest will be paid to the Class B-2 Certificateholders on each
Remittance Date, to the extent of the Class B-2 Remaining Amount Available, if
any. Interest on the outstanding Class B-2 Principal Balance will accrue with
respect to each Remittance Date during the Related Accrual Period, commencing
May 1, 1996. On each Remittance Date, to the extent of the Class B-2 Remaining
Amount Available, if any, for a Remittance Date after payment of the Senior
Distribution Account, the Class A-6 Distribution Amount and the Class B-1
Distribution Amount, interest will be paid to the Class B-2 Certificateholders
on such Remittance Date at the Class B-2 Remittance Rate on the Class B-2
Principal Balance (before giving effect to any distributions on such Remittance
Date). The Class B-2 Principal Balance is the Original Class B-2 Principal
Balance less the sum of all amounts previously distributed to Class B-2
Certificateholders on account of principal. In the event that, on a particular
Remittance Date, the Class B-2 Remaining Amount Available is not sufficient to
make a full distribution of interest to the Class B-2 Certificateholders, funds
in the Certificate Account representing collections received after the related
Collection Period will be applied to such deficiency and any remaining
deficiency will be carried forward and added to the amount such holders will be
entitled to receive on the next Remittance Date.
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For purposes of this Prospectus Supplement, the Class B-2 Remittance
Rate on each Remittance Date has been assumed to be 10.025% per annum, subject
to a maximum rate equal to the Weighted Average Net Contract Rates, computed on
the basis of a 360-day year of twelve 30-day months.
CLASS B-2 PRINCIPAL
Prior to the Remittance Date on which the Class B-1 Principal Balance
is reduced to zero, there will be no distributions of principal on the Class B-2
Certificates. Prior to the Class B Cross-over Date, there will be no
distributions of principal on the Class B-1 Certificates. On each Remittance
Date, on or after the date on which the Class B-1 Principal Balance has been
reduced to zero and on which each Class B Principal Distribution Test is
satisfied (unless the Senior Principal Balance and the Class A-6 Principal
Balance have been reduced to zero in which event none of the Class B
Distribution Tests need be satisfied), the Class B-2 Certificateholders will be
entitled to receive, as payments of principal, the sum of (i) the Class B
Percentage of the Formula Principal Distribution Amount and (ii) any portion of
the amount described in clause (i) preceding which was due to the Class B-2
Certificateholders on prior Remittance Dates but which remains unpaid on such
Remittance Date; such amount will only be distributed to the extent of the Class
B-2 Remaining Amount Available in the Certificate Account on such date, after
payment of all interest payable on the Class B-2 Certificates. The Agreement
provides that in no event shall an amount of principal be distributed to the
holders of the Class B-1 or Class B-2 Certificates if, after paying such amount,
the test set forth in clause (vi) of "Class B Principal Distribution Test" would
be violated; any such principal not so distributed shall instead be distributed
to the Class of Senior Certificates or the Class A-6 Certificates, whichever is
then entitled to receive distributions of principal.
CLASS C DISTRIBUTIONS; OVERCOLLATERALIZATION AMOUNT
The Weighted Average Net Contract Rate for the Contract Pool is
expected generally to be higher than the weighted average of the fixed
Remittance Rates applicable to the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6, Class B-1 and Class B-2 Certificates (collectively, the
"Non-IO Certificates"), thus generating certain excess interest collections
which, in the absence of losses and delinquencies, will not be necessary to fund
distributions on the Non-IO Certificates. The Agreement provides that this
excess interest, together with, if AFC is then the Servicer, the Monthly
Servicing Fee then otherwise due to AFC, be applied, to the extent available, to
make accelerated payments of principal to the Class or Classes then entitled to
receive distributions of principal. Such accelerated payments are expected to
cause the aggregate Principal Balance of the Non-IO Certificates to amortize
more rapidly than the Contract Pool, resulting in "overcollateralization" (i.e.,
the excess of the Pool Scheduled Principal Balance over the aggregate Principal
Balance of the Non-IO Certificates). This excess interest for a Collection
Period, together with interest on the overcollateralization amount itself, on
the related Remittance Date is the "Class C Formula Distribution Amount" for
such Remittance Date. On any Remittance Date, the "Overcollateralization Amount"
will be an amount equal to the difference between the Pool Scheduled Principal
Balance as of the end of the immediately preceding Collection Period and the
aggregate Certificate Principal Balance of the Non-IO Certificates on such
Remittance Date (and after taking into account all other distributions to be
made on such Remittance Date).
The amounts available to fund the Class C Formula Distribution Amount
(which amount will be the Class B-2 Remaining Amount Available less the Class
B-2 Distribution Amount and less the Monthly Servicing Fee for such Remittance
Date, such amount being the "Class C Distribution Amount") will be applied,
together with the Monthly Servicing Fee if AFC is the Servicer, to make such
accelerated payments of principal on each Remittance Date until the
Overcollateralization Amount is equal to approximately $4,859,000 (the "Initial
Overcollateralization Amount"). Thereafter, the Class C Distribution Amount will
be available to make distributions of the Class C Formula Distribution Amount to
the holders of the Class C Certificates, unless, due to losses, the
Overcollateralization Amount is decreased, in which event such applications will
commence to the extent necessary to increase the actual Overcollateralization
Amount to the Required Overcollateralization Amount. The level of the Required
Overcollateralization Amount is equal to, for any Remittance Date, (x) prior to
the Class B Cross-over Date, the Initial Required Overcollateralization Amount,
(y) on and after the Class B Cross-over Date,
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and as long as each Class B Principal Distribution Test is then satisfied, the
lesser of (i) the Initial Required Overcollateralization Amount and (ii) the
greater of (a) 6% of the then Scheduled Pool Principal Balance and (b) 0.75% of
the Cut-off Date Pool Principal Balance and (z) on and after the Class B
Crossover Date, if any Class B Distribution Test is not satisfied, the required
level as of the immediately preceding Remittance Date. If, on any Remittance
Date, the level of Required Overcollateralization Amount is permitted to be
reduced, the "Excess Overcollateralization Amount" (the excess of (x) the actual
Overcollateralization Amount on such Remittance Date (after taking into account
all other distributions on such Remittance Date) over (y) the Required
Overcollateralization Amount for such Remittance Date) will be paid to the Class
C Certificateholders from the Formula Principal Distribution Amount otherwise
payable to the holders of the Non-IO Certificates on such Remittance Date (any
such amount so paid to the Class C Certificateholders, an "Overcollateralization
Reduction Amount"). The Overcollateralization Reduction Amount, if any, on any
Remittance Date shall be funded first, from the Class B Percentage of the
Formula Principal Distribution Amount otherwise distributable to the holders of
the Class B-1 or Class B-2 Certificates on such Remittance Date, and, if such
amount is insufficient to fund in full the Overcollateralization Reduction
Amount on such Remittance Date, then, second, from the Senior Percentage of the
Formula Principal Distribution Amount otherwise distributable to the holders of
the Senior or Class A-6 Certificates on such Remittance Date. The Agreement
provides that in no event shall an Overcollateralization Reduction Amount be
paid to the Class C Certificateholders if, after paying such amount, the test
set forth in clause (vi) of the definition of "Class B Principal Distribution
Test" would be violated.
The amount, if any, of the Class C Distribution Amount actually applied
as an accelerated payment of principal on any Remittance Date (such amount to be
the lesser of (x) the excess of (i) the Required Overcollateralization Amount
over (ii) the actual Overcollateralization Amount on such Remittance Date and
(y) the Class C Distribution Amount and the Monthly Servicing Fee if AFC is the
Servicer for the immediately preceding Collection Period) is the "Accelerated
Principal Payment" for such Remittance Date.
SUBORDINATION OF CLASS A-6, CLASS B-1, CLASS B-2, CLASS C AND RESIDUAL
CERTIFICATES
The rights of the holders of the Class A-6, the Class B-1, the Class
B-2, Class C Certificates and the Residual Certificates to receive distributions
with respect to the Contracts in the Trust will be subordinated to such rights
of the Senior Certificateholders. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Senior Certificates of the
full amount of their scheduled monthly payments of principal and interest and to
afford such holders protection against losses on Liquidated Contracts. The
protection afforded to the Senior Certificateholders by means of the
subordination feature will be accomplished by the preferential right of the
Senior Certificateholders to receive, prior to any distribution being made on a
Remittance Date in respect of the Class A-6, the Class B-1, the Class B-2, the
Class C Certificates and the Residual Certificates, the amount of principal and
interest due them on each Remittance Date out of the Amount Available on deposit
on such date in the Certificate Account and by the right of the Senior
Certificateholders to receive future distributions on the Contracts that would
otherwise be payable to the holders of Class A-6, Class B-1, Class B-2, Class C
and Residual Certificates. On each Remittance Date the Class A-6
Certificateholders will be entitled to receive only amounts described above
under "Class A-6 Interest" and "Class A-6 Principal," the Class B-1
Certificateholders will be entitled to receive only amounts described above
under "Class B-1 Interest" and "Class B-1 Principal," and the Class B-2
Certificateholders will be entitled to receive only amounts described above
under "Class B-2 Interest" and "Class B-2 Principal."
In addition, the rights of the holders of the Class B-1, the Class B-2,
the Class C and the Residual Certificates to receive distributions will be
subordinate to such rights of the Class A-6 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class A-6 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders protection
against losses on Liquidated Contracts. The protection afforded to the Class A-6
Certificateholders by means of the subordination feature will be accomplished by
the preferential right of the Class A-6 Certificateholders to receive, prior to
the distribution being made on a Remittance Date in respect of the Class B-1,
the Class B-2, the Class C and the Residual Certificates, the amount of
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principal and interest due them on each Remittance Date out of the Class A-6
Remaining Amount Available on deposit on such date in the Certificate Account
and by the right of the Class A-6 Certificate holders to receive future
distributions on the Contracts that would otherwise be payable to the holders of
Class B-1, Class B-2, Class C and Residual Certificates.
In addition, the rights of the holders of the Class B-2, the Class C
and the Residual Certificates to receive distributions will be subordinate to
such rights of the Class B-1 Certificateholders. This subordination is intended
to enhance the likelihood of regular receipt by the holders of the Class B-1
Certificates of the full amount of their scheduled monthly payments of principal
and interest and to afford such holders protection against losses on Liquidated
Contracts. The protection afforded to the Class B-1 Certificateholders by means
of the subordination feature will be accomplished by the preferential right of
the Class B-1 Certificateholders to receive, prior to any distribution being
made on a Remittance Date in respect of the Class B-2, the Class C and the
Residual Certificates, the amount of principal and interest due them on each
Remittance Date out of the Class B-1 Remaining Amount Available on deposit on
such date in the Certificate Account and by the right of the Class B-1
Certificateholders to receive future distributions on the Contracts that would
otherwise be payable to the holders of Class B-1, Class B-2, Class C and
Residual Certificates.
The rights of the holders of the Class C Certificates to receive
distributions with respect to the Contracts on each Remittance Date will be
subordinated to the rights of the holders of the Senior Certificates, Class A-6
Certificates, Class B-1 Certificates and Class B-2 Certificates, and to the
payment of the Monthly Servicing Fee.
The rights of the Residual Certificateholders to receive distributions
will be subordinated to the rights of the holders of all other classes of
Certificates and to the payment of the Monthly Servicing Fee. On each Remittance
Date the Residual Certificateholders will receive the remaining Amount
Available, if any, after payment of the amount distributed to the Senior, Class
A-6, Class B-1, Class B-2 and Class C Certificateholders as described above
(less the Monthly Servicing Fee and less amounts retained by the Servicer to
reimburse itself for taxes paid in respect of prohibited transactions) plus
aggregate Repossession Profits (as defined in the Agreement).
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to the Senior and the
Class A-6 Certificateholders and to the Class B-1 Certificateholders is intended
to include the Senior Percentage and the Class B Percentage, respectively, of
the Scheduled Principal Balance of each Contract that became a Liquidated
Contract during the preceding Collection Period. If the Net Liquidation Proceeds
(as defined below) from a Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract plus accrued and unpaid interest
thereon plus amounts reimbursable to the Servicer for advances of certain taxes
and insurance premiums, the deficiency (a "Realized Loss") will, in effect, be
absorbed first, by the Residual Certificateholders, second, by the Class C
Certificateholders (both through the application of the Class C Distribution
Amount to fund such deficiency and through a reduction in the
Overcollateralization Amount), third, by the Monthly Servicing Fee (so long as
AFC is the Servicer), fourth, by the Class B-2 Certificateholders, fifth, by the
Class B-1 Certificateholders and sixth, by the Class A-6 Certificateholders,
since a portion of the Amount Available equal to such deficiency and otherwise
distributable to them will be paid to the Senior Certificateholders. If AFC is
no longer the Servicer, then the Monthly Servicing Fee will become senior to all
Certificateholders distributions.
"Liquidation Proceeds" means cash (including insurance proceeds)
received in connection with the liquidation of defaulted Contracts, whether
through repossession, foreclosure sale or otherwise. 'Net Liquidation Proceeds'
means, as to a Liquidated Contract, all Liquidation Proceeds received on or
prior to the last day of the Collection Period in which such Contract became a
Liquidated Contract, net of Liquidation Expenses. "Liquidation Expenses" means
out-of-pocket expenses (exclusive of any overhead expenses) which are incurred
by the Servicer in connection with the liquidation of any defaulted Contract, on
or prior to the date on which the related Manufactured Home is disposed of,
including, without
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limitation, legal fees and expenses, and any related and unreimbursed
expenditures for property taxes, property preservation or restoration of the
property to marketable condition.
If the Amount Available is not sufficient to cover the entire principal
portion of the Senior Formula Distribution Amount due to the Senior
Certificateholders or the entire principal portion of the Class A-6 Formula
Distribution Amount due to the Class A-6 Certificateholders on a particular
Remittance Date, then (i) if the Senior Percentage is less than 100%, the Senior
Percentage on future Remittance Dates will be increased and the Class B
Percentage on future Remittance Dates will be reduced as a result of such
deficiency and (ii) the amount of the deficiency will be carried forward as an
amount the Senior Certificateholders or the Class A-6 Certificateholders are
entitled to receive on future Remittance Dates, until paid in full. If the
Amount Available is sufficient to cover the entire principal portion of the
Senior Formula Distribution Amount due to the Senior Certificateholders and the
entire principal portion of the Class A-6 Formula Distribution Amount due to the
Class A-6 Certificateholders on a particular Remittance Date but is not
sufficient to cover the entire principal portion of the Class B-1 Formula
Distribution Amount due to the Class B-1 Certificateholders, the amount of the
deficiency will be carried forward as an amount that the Class B-1
Certificateholders are entitled to receive on the next Remittance Date.
As a result of the subordination of the Class B-1 and the Class B-2
Certificates, the Monthly Servicing Fee (so long as AFC is the Servicer), and
the subordination of the Class C and Residual Certificates, the Class A-6
Certificateholders will not absorb (i) losses resulting from Realized Losses or
(ii) delinquent payments on the Contracts, at least to the extent that such
subordination has not been exhausted. See " -- Subordination of Class A-6, Class
B-1, Class B-2, Class C and Residual Certificates" and "Prepayment and Yield
Considerations."
As a result of the subordination of the Class B-2 Certificates, the
Monthly Servicing Fee (so long as AFC is the Servicer), and the subordination of
the Class C and Residual Certificates, the Class B-1 Certificateholders will not
absorb (i) losses resulting from Realized Losses or (ii) delinquent payments on
the Contracts, at least to the extent that such subordination has not been
exhausted. See " --Subordination of Class A-6, Class B-1, Class B-2, Class C and
Residual Certificates" and "Prepayment and Yield Considerations."
As a result of the subordination of the Monthly Servicing Fee (so long
as AFC is the Servicer) and of the Class C and Residual Certificates, the Class
B-2 Certificateholders will not absorb (i) losses resulting from Realized Losses
or (ii) delinquent payments on the Contracts at least to the extent that such
subordination has not been exhausted. See " -- Subordination of Class A-6, Class
B-1, Class B-2, Class C and Residual Certificates" and "Prepayment and Yield
Considerations."
REPORTS TO CERTIFICATEHOLDERS
The Servicer will furnish to the Trustee, and the Trustee will include
with each distribution to a Offered Certificateholder, a statement in respect of
the related Remittance Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of
Certificates allocable to principal (separately identifying the aggregate
amount of any principal prepayments included);
(c) the amount of any shortfall in the Formula Principal Distribution
Amount allocated to each Class of Certificateholders for such Remittance
Date, as applicable;
(d) the Principal Balance of each Class of Certificates after giving
effect to the distribution of principal on such Remittance Date;
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(e) the Senior Percentage for the following Remittance Date;
(f) the Pool Scheduled Principal Balance of the Contracts for the
following Remittance Date;
(g) the Pool Factor (a percentage derived from a fraction the
numerator of which is (f) and the denominator of which is the Cut-off Date
Pool Principal Balance);
(h) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days;
(i) the number of Manufactured Homes that were repossessed during the
Collection Period ending immediately prior to such Remittance Date;
(j) the number of Manufactured Homes that were repossessed but remain
in inventory as of the last day of the Collection Period ending immediately
prior to such Remittance Date;
(k) the Weighted Average Net Contract Rate of all outstanding
Contracts; and
(l) the Overcollateralization Amount and any Overcollateral Reduction
Amount for such Remittance Date.
Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Senior Certificate with a 1% Percentage
Interest or per $1,000 denomination of Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Certificateholder of
record at any time during such calendar year as to the aggregate of amounts
reported pursuant to (a) and (b) above for such calendar year.
OPTIONAL TERMINATION
The Agreement provides that on any Remittance Date after the first
Remittance Date on which the Pool Scheduled Principal Balance is less than 10%
of the Cut-off Date Pool Principal Balance, the Servicer will have the option to
repurchase, upon giving notice mailed no earlier than the 15th and no later than
the 25th day of the month next preceding the month of the exercise of such
option, all outstanding Contracts at a price equal to the greater of (i) the sum
of (w) 100% of the Scheduled Principal Balance of each Contract (other than any
Contract as to which the related Manufactured Home has been acquired and not yet
disposed of and whose fair market value is included pursuant to clause (x)
below) as of the final Remittance Date; (x) the fair market value of such
acquired property (as determined by the Servicer); (y) the aggregate amount of
any unreimbursed Delinquency Advances and unreimbursed Servicing Advances and
(z) any unpaid interest on the Certificates due on prior Remittance Dates as
well as one month's interest, at a rate equal to the related remittance rate
borne by any outstanding Class of Certificates plus the Monthly Servicing Fee,
on the Scheduled Principal Balance of each Contract (including any Contract as
to which the related Manufactured Home has been repossessed and not yet disposed
of), but in no event less than the amount necessary to pay all Classes of
Certificates in full, including accrued and unpaid interest thereon (the amount
described in this clause (i) being the "Termination Price") and (ii) the sum of
(x) the aggregate fair market value (as determined by the Servicer) of all of
the assets of the Trust and (y) the amount described in clause (i)(z) above.
AUCTION SALE
The Agreement requires that, within ninety days following a Remittance
Date as of which the Pool Scheduled Principal Balance is less than 10% of the
Cut-off Date Pool Principal Balance, if the Servicer has not exercised its
optional termination rights by such date, the Trustee shall solicit bids for the
purchase of all Contracts remaining in the Trust. In the event that satisfactory
bids are received as
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described in the Agreement, the net sale proceeds will be distributed to
Certificateholders, in the same order of priority as collections received in
respect of the Contracts. The Trustee, however, will not accept any bid for the
Contracts unless certain requirements are met, including the requirement that
such bid is in an amount at least equal to the Termination Price. The sale of
the Contracts must be for an amount no less than fair market value. If
satisfactory bids are not received, the Trustee shall decline to sell the
Contracts and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the Contracts. Such sale and consequent
termination of the Trust must constitute a "qualified liquidation" of each REMIC
established by the Trust under Section 860F of the Internal Revenue Code of
1986, as amended, including, without limitation, the requirement that the
qualified liquidation takes place over a period not to exceed 90 days.
TERMINATION OF THE AGREEMENT
The Agreement will terminate upon the last action required to be taken
by the Trustee on the final Remittance Date following the later of (i) the
purchase by the Servicer of all Contracts and all property acquired in respect
of any Contract remaining in the Trust as described above under "-- Optional
Termination", (ii) the sale of the Contracts as described under "-- Auction
Sale" or (iii) the final payment or other liquidation (or any advance with
respect thereto) of the last Contract remaining in the Trust or the disposition
of all property acquired upon repossession of any Manufactured Home.
Upon presentation and surrender of the Certificates, the Trustee shall
cause to be distributed, to the extent of funds available, to such
Certificateholders on the final Remittance Date in proportion to their
respective Percentage Interests an amount equal to the respective unpaid
Principal Balances of the Certificates, together with any unpaid interest on
such Certificates due on prior Remittance Dates and one month's interest at the
applicable Remittance Rates on such unpaid Principal Balances. If the Agreement
is then being terminated, any amount which remains on deposit in the Certificate
Account (other than amounts retained to meet claims) after distribution to the
Certificateholders will be distributed to the Residual Certificateholders.
AMENDMENT
The Agreement may be amended by the Sponsor, Receivables Corp., the
Servicer and the Trustee without the consent of the Certificateholders (i) to
cure any ambiguity, (ii) to correct or supplement any provision therein that may
be inconsistent with any other provision therein, (iii) to add to the duties or
obligations of the Servicer, (iv) to obtain a rating from a nationally
recognized rating agency or to maintain or improve the ratings of any Class of
the Offered Certificates then given by any rating agency (it being understood
that, after obtaining the rating of the Offered Certificates from Moody's and
Fitch, none of the Trustee, the Sponsor or the Servicer is obligated to obtain,
maintain or improve any rating assigned to the Offered Certificates), or (v) to
make any other provisions with respect to matters or questions arising under
such Agreement, provided that such action will not, as evidenced by an opinion
of counsel, adversely affect in any material respect the interests of the
Certificateholders. The Agreement may also be amended by the Sponsor,
Receivables Corp., the Servicer and the Trustee with the consent of the holders
of Certificates of each Class affected thereby evidencing, as to such Class,
Percentage Interests aggregating not less than 51% 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 the rights of the
Certificateholders; provided, however, that no such amendment shall (i) reduce
in any manner the amount of, or delay the timing of, any distributions which are
required to be made on any Certificate without the consent of the holder of each
Certificate affected thereby or (ii) reduce the aforesaid percentage of
Certificates the holders of which are required to consent to any such amendment,
without the consent of the holders of all Certificates then outstanding, and no
such amendment shall adversely affect the status of the Trust as a REMIC.
The Agreement may also be amended from time to time, without the
consent of any Certificateholders, by the Sponsor, the Trustee, Receivables
Corp., and the Servicer to modify, eliminate or add to the provisions of the
Agreement to (i) maintain the qualification of the Trust as a REMIC under the
Code or avoid, or minimize the risk of, the imposition of any tax on the Trust
under the Code that
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would be a claim against the Trust assets, provided that an opinion of counsel
is delivered to the Trustee to the effect that such action is necessary or
appropriate to maintain such qualification or avoid any such tax or minimize the
risk of its imposition, or (ii) prevent the Trust from entering into any
"prohibited transaction" as defined in Section 860F of the Code, provided that
an opinion of counsel is delivered to the Trustee to the effect that such action
is necessary or appropriate to prevent the Trust from entering into such
prohibited transaction.
SERVICING COMPENSATION
For its servicing of the Contracts, the Servicer will be entitled to
receive a monthly servicing fee equal to 1/12th of the product of 1.00% and the
Pool Scheduled Principal Balance for the related Remittance Date (the "Monthly
Servicing Fee"). The Amount Available will be net of the Monthly Servicing Fee
if AFC is not the Servicer; if AFC is the Servicer, the Monthly Servicing Fee
will be subordinate to distributions on account of the Certificates except
distributions to the Class C and Residual Certificateholders. See "-- Payments
on the Contracts; Certificate Account" herein.
ADVANCES
Delinquency Advances. The Servicer will be required, not later than
each Remittance Date, to deposit into the Certificate Account an amount equal to
the Scheduled Payments due, but not collected, with respect to delinquent
Contracts during the prior Collection Period, but only if, in its good faith
business judgment, the Servicer believes that such amounts will ultimately be
recovered on or with respect to the related Contract. Any such amounts so
advanced are "Delinquency Advances." The Servicer will be permitted to fund its
payment of Delinquency Advances on any Remittance Date from collections on any
Contract deposited to the Certificate Account subsequent to the related
Collection Period not required to be distributed to Certificateholders on the
related Remittance Date, and will be required to reimburse the Certificate
Account for such amounts from its own funds or from payments collected on the
Contracts in a Collection Period that are not otherwise distributable on the
related Remittance Date. Delinquency Advances are intended to maintain a regular
flow of scheduled interest and principal payments to Certificateholders rather
than to guarantee or insure against losses.
A Contract is "delinquent" if any payment due thereon is not made by
the close of business on its Due Date.
The Servicer is permitted to reimburse itself for Delinquency Advances
funded from its own funds only from subsequent collections on the related
delinquent Contract, unless the Servicer determines that any unreimbursed
Delinquency Advance constitutes a Nonrecoverable Delinquency Advance, in which
event it will be reimbursable to the Servicer from collections on the Contract
Pool generally.
A "Nonrecoverable Delinquency Advance" is a Delinquency Advance
previously made by the Servicer but which the Servicer subsequently, in its good
faith business judgment, determines not to be recoverable from the related
Contract.
Servicing Advances. The Agreement requires the Servicer to pay, from
its own funds, all reasonable and customary out-of-pocket costs and expenses
incurred in connection with its servicing duties, including property
preservation expenses, the costs of enforcing the Contracts, the security
interests in the related Manufactured Homes, the management and liquidation of
repossessed Manufactured Homes, advances for taxes, insurance, ground rents and
similar types of charges (all such amounts, "Servicing Advances"). The Servicer
will be required to make a Servicing Advance only if it believes that such
amount will be recoverable with respect to the related Contract, or, if the
related Manufactured Home is being liquidated, if such amount will increase the
related Net Liquidation Proceeds. Servicing Advances are reimbursable to the
Servicer only from the related Contract or related Liquidation Proceeds, and,
except as otherwise provided in the Agreement, not from collections on the
Contract Pool generally.
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Both unreimbursed Delinquency Advances and unreimbursed Servicing
Advances are a priority claim against subsequent collections on or with respect
to the related Contract, and the payment of such claims thus will reduce the
Amount Available.
SERVICER TERMINATION EVENTS
Events of Termination under the Agreement will include the following
(i) any failure by the Servicer to distribute to the Certificateholders any
required payment which continues unremedied for 5 days after the giving of
written notice; (ii) any failure by the Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Agreement
that materially and adversely affects the interests of Certificateholders,
which, in either case, continues unremedied for 30 days after the giving of
written notice of such failure of breach; (iii) any assignment or delegation by
the Servicer of its duties or rights under the Agreement, except as specifically
permitted under the Agreement, or any attempt to make such an assignment or
delegation; (iv) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings regarding the Servicer, and (v)
the Servicer is no longer an Eligible Servicer (as defined in the Agreement).
Notice as used herein shall mean notice to the Servicer by the Trustee or AFC,
or to AFC, the Servicer, if any, and the Trustee by the holders of Certificates
representing interests aggregating not less than 25% of the Trust.
THE TRUSTEE
The Bank of New York (the "Trustee") has its corporate trust offices at
101 Barclay Street, New York, New York. The Trustee may resign at any time, in
which event Receivables Corp. will be obligated to appoint a successor Trustee.
Receivables Corp. may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. In such circumstances, Receivables Corp. will also be obligated to
appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
The Agreement requires the Trustee to maintain, at its own expense, an
office or agency in New York City where Certificates may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Trustee and the Certificate Registrar in respect of the Certificates
pursuant to the Agreement may be served.
The Trustee, or any of its affiliates, in its individual or any other
capacity, may become the owner or pledgee of Certificates with the same rights
as it would if it were not Trustee.
The Trustee will also act as Certificate Administrator under the
Agreement. In such capacity it will act as Paying Agent, Certificate Registrar
and Authenticating Agent.
REGISTRATION OF OFFERED CERTIFICATES
The Offered Certificates will be book-entry certificates (the
"Book-Entry Certificates"). The Beneficial Certificate Owners may elect to hold
their Offered Certificates through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are participants of such systems ("Participants"),
or indirectly through organizations which are Participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates per class of
Offered Certificates which in the aggregate equal the principal balance of such
Offered Certificates and will initially be registered in the name of Cede, the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no Beneficial Certificate Owner will be entitled to receive a physical
certificate representing such Certificate
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(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Owner" of such Offered Certificates
will be Cede, as nominee of DTC. Beneficial Certificate Owners will not be
Owners as that term is used in the Pooling Agreement. Beneficial Certificate
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Certificate Owner's ownership of a Book-Entry
Certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary (each, a "Financial Intermediary")
that maintains the Beneficial Certificate Owner's account for such purpose. In
turn, the Financial Intermediary's Ownership of such Book-Entry Certificate will
be recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Beneficial Certificate Owner's Financial Intermediary is
not a DTC Participant and on the records of CEDEL or Euroclear, as appropriate).
Beneficial Certificate Owners will receive all distributions of
principal of, and interest on, the Offered Certificates from the Trustee through
DTC and DTC Participants. While such Offered Certificates are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating and affecting DTC and its operations (the "Rules"), DTC
is required to make book-entry transfers among Participants on whose behalf it
acts with respect to such Offered Certificates and is required to receive and
transmit distributions of principal of, and interest on, such Offered
Certificates. Participants and indirect participants with whom Beneficial
Certificate Owners have accounts with respect to Offered Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Certificate Owners.
Accordingly, although Beneficial Certificate Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Certificate
Owners will receive distributions and will be able to transfer their interest.
Beneficial Certificate Owners will not receive or be entitled to
receive certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Certificate Owners who are
not Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Certificate Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL 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 or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Foreign Investors" and " -- Backup Withholding" in
the Prospectus and "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 Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will
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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, 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 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 ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depositary. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depositary, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 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
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Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Certificate Owners of
the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Certificate Owners of the
Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Certificate Owners of the
Book-Entry Certificates may experience some delay in their receipt of payments,
since such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Offered Certificates held through CEDEL or Euroclear will be credited
to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. 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 Certificate Owner to pledge Book-Entry Certificates, to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Certificate Owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by an Owner under the Pooling Agreement on behalf
of a CEDEL Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Certificates which conflict with actions taken with respect to other
Offered Certificates.
Definitive Certificates will be issued to Beneficial Certificate Owners
of the Book-Entry Certificates, or their nominees, rather than to DTC, only if
(a) DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as a
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, elects to terminate a book-entry system through
DTC or (c) DTC, at the direction of the Beneficial Certificate Owners
representing a majority of the outstanding Percentage Interests of the Offered
Certificates, advises the Trustee 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 Certificate Owners.
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Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
GENERAL
As a result of the assignment of the Contracts in a Contract Pool to
the Trustee, the Trust will succeed collectively to all of the rights (including
the right to receive payment on such Contracts), and will assume the obligations
of the obligee, under such 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 either the Manufactured Home. Certain aspects of both
features of the Contracts are described more fully below.
The following discussion focuses on issues relating generally to AFC's
or any lender's interest in manufactured housing contracts. See "-- Security
Interests in the Manufactured Homes" herein for a discussion of certain issues
relating to the transfer to the Trust of the Contracts and the related security
interests in the Manufactured Homes.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states and the District of Columbia. Security interests in manufactured homes,
similar to the ones securing the Contracts, ("manufactured homes") generally may
be perfected either by notation of the secured party's lien on the certificate
of title or by delivery of the required documents and payment of a fee to the
state motor vehicle authority, depending on state law. In some non-title states,
perfection pursuant to the provisions of the UCC is required. Generally, with
respect to manufactured housing contracts individually originated or purchased
by AFC, AFC effects such notation or delivery of the required documents and
fees, and obtains possession of the certificate of title or a lien certificate,
as appropriate, under the laws of the state in which any manufactured home
securing a manufactured housing conditional sales contract is registered. If AFC
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), AFC 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, under certain circumstances, may
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. Most of the Contracts in any Contract Pool will contain provisions
prohibiting the Obligor from permanently attaching the Manufactured Home to its
site if it was not so attached on the date of the Contract. As long as each
Manufactured Home was not so attached on the date of the Contract and 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 AFC's
security interest in the Manufactured Home. Upon the conveyance of each Contract
to the Seller, AFC will represent that it had obtained a perfected
first-priority security interest in the Manufactured Home securing the related
Contract. Such representation, however, will not be based upon an inspection of
the site of any Manufactured Home to determine if the Manufactured Home had
become permanently attached to its site.
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In the absence of fraud, forgery or permanent affixation of a
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of AFC on the
certificate of title or delivery of the required documents and fees (or if
applicable, perfection under the UCC) will be sufficient to protect AFC 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 in favor of AFC is not
perfected, such security interest would be subordinate to the claims of, among
others, subsequent purchasers for value of and holders of perfected security
interests in such manufactured homes.
In the event that 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 registers the manufactured home in such state. If the
owner were to relocate a manufactured home to another state and were to
re-register the manufactured home in such state, and if steps are not taken to
re-perfect an existing 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 such manufactured home.
AFC must therefore surrender possession if it holds the certificate of title to
such manufactured home or, in the case of manufactured homes registered in
states which provide for notation of lien, AFC would receive notice of surrender
if its security interest in the manufactured home is noted on the certificate of
title. Accordingly, AFC 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 the perfection. In the ordinary course of servicing
its manufactured housing contracts, AFC takes steps to effect such re-perfection
upon receipt of notice of re-registration or information from the obligor as to
relocation. Similarly, when an obligor under a contract sells a manufactured
home, AFC must surrender possession of the certificate of title or AFC will
receive notice as a result of its lien noted thereon and accordingly AFC will
have an opportunity to require satisfaction of the related contract before
release of the lien. Such protections generally would not be available in the
case of security, interests in manufactured homes located in non-title states
where perfection of such security interest is achieved by appropriate filings
under the UCC (as in effect in such state).
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home. Upon the conveyance of
each Contract to the Seller, AFC will represent that it had obtained a perfected
first-priority security interest in the Manufactured Home securing the related
Contract. The Seller will, in turn, warrant in the Agreement that, as of the
date of initial issuance of such Series of Certificates, no Manufactured Home
was subject to any such lien. However, such warranties will not be based on any
lien searches or other review. In addition, such liens could arise after the
date of initial issuance of the Certificates. Notice may not be given to the
Sponsor, Receivables Corp., the Servicer, the Trustee or Certificateholders in
the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The 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 defaulted Contracts. In general, as long as a
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home 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 manufactured housing contract
generally must give the obligor a number of days' notice 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
obligor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the obligor be given notice of any sales prior to
resale of the unit so that the obligor may redeem at or before such resale.
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Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency, judgment from an obligor for any deficiency on repossession
and resale of the manufactured home securing such obligor's contract. However,
some states impose prohibitions or limitations on deficiency judgments, and in
many cases the defaulting obligor would have no assets with which to pay a
judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay AFC's ability to repossess and resell any Manufactured Home or enforce a
deficiency judgment.
LAND SECURED CONTRACTS
General. The Land Secured Contract will, to the extent described under
"The Contract Pool," be secured by Mortgages on the property on which the
related Manufactured Homes are located. The Mortgages will either be mortgages
or deeds of trust, depending on the general real estate practice in the state in
which the Mortgaged Property is located. A mortgage creates a lien upon the real
property described in the mortgage. There are two parties to a mortgage: the
mortgagor, who is the borrower, and the mortgagee, who is the lender. The
mortgagor delivers to the mortgagee a note or bond evidencing the loan and the
mortgage. A deed of trust normally has three parties: the real property owner
called the trustor (similar to a mortgagor), a lender called the beneficiary
(similar to the mortgagee) and a third-party grantee called the trustee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, "in trust with power of sale" to the trustee to secure payment of the
obligation.
Non-Recordation. Because of the expenses and administrative
inconvenience involved, the assignment of mortgages or deeds of trust to the
Trustee will not be recorded with respect to the Mortgages securing each Land
Secured Contract. The failure to record the assignments to the Trustee of the
Mortgage securing Land Secured Contracts may result in the sale of such
Contracts or the Trustee's rights in the land secured by the Mortgage being
ineffective against creditors of AFC or against a trustee in bankruptcy of AFC
or against a subsequent purchaser of such Contracts from AFC or Receivables
Corp., without notice of the sale to the Trustee.
Foreclosure. 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 of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating and serving necessary parties. Judicial foreclosure proceedings are
generally not contested by any of the parties due to the lack of the mortgagor's
equity in the property. However, when the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time
consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court issues a judgment of foreclosure and a court officer
conducts the sale of the property.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
The sale must be conducted by public auction and must be held in the
county where all or some part of the property subject to the mortgage is
located. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
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of the property may have deteriorated during the foreclosure proceedings, it is
not common for a third party to purchase the property at the foreclosure sale.
Rather, the lender generally purchases the property for an amount equal to the
unpaid principal amount of the note, accrued and unpaid interest and the
expenses of foreclosure. Thereafter, subject to the right of the borrower in
some states to remain in possession during the redemption period, the lender
will assume the burdens 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 commonly will obtain the services of a real estate
broker and pay the broker a 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.
Rights of Redemption. In some states, after a sale pursuant to a deed
of trust or a foreclosure of a mortgage, the borrower and certain foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. Redemption may occur upon payment of the entire principal
balance of the loan, accrued statutory interest and expenses of foreclosure. The
effect of a right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure and before
expiration of the redemption period. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property, and pay the
expenses of ownership until the redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory restrictions that limit the remedies of a
mortgagee under a mortgage relating to a single family residence. In some
states, statutes limit the right of the lender to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
realized upon the foreclosure sale.
Some state statutes may require the lender to exhaust the security
afforded under a mortgage or deed of trust by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security.
Other statutory provisions may limit any deficiency judgment against
the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of such
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state, statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. A bankruptcy court may
grant the debtor a reasonable time to cure a payment default, and in the case of
a mortgage loan not secured by the debtor's principal residence, also may reduce
the monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Certain court decisions have
applied such relief to claims secured by, the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to certain
tax liens over the lien of the mortgage or deed of trust. Numerous federal and
some state consumer protection laws impose substantive requirements upon
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mortgage lenders in connection with the origination, servicing and enforcement
of mortgage loans. These laws include the federal Truth in Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes and regulations.
These federal laws and state laws impose specific statutory liabilities upon
lenders who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the obligor thereunder. The effect of this rule is to
subject the assignee of such a contract to all claims and defenses which the
obligor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under such a contract; however, the obligor also may be
able to assert the rule to set off remaining amounts due as a defense against a
claim brought by the assignee against such obligor. Generally, this rule will
apply to any Contracts conveyed to the Trustee and to any claims made by the
Servicer on behalf of the Trustee, as the assignee of Receivables Corp., and in
turn AFC. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to such
Contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related Contract or create
liability for the Trust.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), if so required by a obligor under a manufactured
housing contract who enters military service after the origination of such
obligor's contract (including a obligor who is a member of the National Guard or
is in reserve status at the time of the origination of the contract and is later
called to active duty), such obligor may not be charged interest above an annual
rate of 6% during the period of such obligor's active duty status, unless a
court orders otherwise upon application of the lender. In addition, the Relief
Act imposes limitations which would impair the ability of any lender to
foreclose on an affected contract during the obligor's period of active duty
status. It is possible that application of the Relief Act to certain of the
Contracts could have an effect, for an indeterminate period of time, on the
ability of the Servicer to collect full amounts of interest or foreclose on such
Contracts and to the extent not covered by a Credit Facility, could result in
delays in payment or losses to the holders of the related Certificates. Neither
AFC nor Receivables Corp. will make any representation or warranty as to whether
any Contract is or could become subject to the Relief Act.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF RESTRICTIONS ON TRANSFER
The Contracts comprising any Contract Pool generally will prohibit the
sale or transfer of the related Manufactured Homes without the consent of the
obligee and permit the acceleration of the maturity of the Contracts by the
obligee upon any such sale or transfer that is not consented to. Under the
Agreement, AFC as Servicer is required to consent to any such transfer and to
permit the assumption of the related Contract if the proposed buyer meets the
Servicer's underwriting standards and enters into an assumption agreement, the
Servicer determines that permitting such assumption will not materially increase
the risk of nonpayment of the Contract and such action will not adversely affect
or jeopardize any coverage under any insurance policy required by the Agreement.
If the Servicer determines that these conditions have not been fulfilled, then
it is required to withhold its consent to the transfer, but only to the extent
permitted under the Contract and applicable law and governmental regulations and
only to the extent that such action will not adversely affect or jeopardize any
coverage under any insurance policy required by the Agreement. In certain cases,
a delinquent Obligor may attempt to transfer a Manufactured Home in order to
avoid a repossession proceeding with respect to such Manufactured Home.
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In the case of a transfer of a Manufactured Home after which the
obligee desires to accelerate the maturity of the related Contract, the
obligee's ability to do so will depend on the enforceability under state law of
the clause permitting acceleration on transfer. The Garn-St. Germain Depositary
Institutions Act of 1982 preempts, subject to certain exceptions and conditions,
state laws prohibiting enforcement of such clauses applicable to manufactured
homes. To the extent such exceptions and conditions apply in some states, the
Servicer may be prohibited from enforcing such a clause in respect of certain
Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Controls Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered under Title V if, among other things, they satisfy
certain conditions governing the terms of any prepayments, late charges and
deferral fees and requiring a 30-day notice period prior to instituting any
action leading to repossession of 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.
Upon the conveyance of each Contract to the Trust, Receivables Corp. will
represent that such Contract complied with applicable usury laws.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Trust will elect that each of certain segregated pools of assets
held by the Trust will be treated as a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes. The Offered Certificates represent
regular interests in a REMIC and, hence, will be Regular Certificates (as
defined in the Prospectus under "Certain Federal Income Tax Consequences --
REMICS"). Generally, the Offered Certificates will be treated as debt
instruments for federal income tax purposes with payment terms equivalent to the
terms of the Offered Certificates. Holders of Offered Certificates will be
required to report income with respect to such Offered Certificates under an
accrual method, regardless of their normal tax accounting method.
Original Issue Discount. It is not anticipated that the Offered
Certificates will have any original issue discount ("OID") other than possibly
OID within a de minimis exception and that accordingly the provisions of section
1271 through 1273 and 1275 of the Internal Revenue Code of 1986, as amended,
generally will not apply to the Offered Certificates. OID will be considered de
minimis if it is less than 0.25% of the stated redemption price at maturity of
an Offered Certificate multiplied by its expected weighted average life.
The prepayment assumption which should be used in determining the rate
of accrual of OID with respect to the Certificates that are issued with OID is
150% of the Prepayment Model. See "Prepayment and Yield Consideration --
Weighted Average Life of the Offered Certificates."
See "Certain Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary restrictions on employee benefit plans that
are subject to ERISA and on persons who are fiduciaries with respect to such
plans. In addition, such plans, as well as certain plans or other retirement
arrangements not subject to ERISA, but which are subject to Section 4975 of the
Code (such as individual retirement accounts) and any entity whose underlying
assets include plan assets by reason of a plan or
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account investing in such entity (collectively, "Plans") are subject to
prohibited transaction restrictions. See "ERISA Considerations" in the
Prospectus.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case interpreting
the fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance
Co. v. Harris Trust & Savings Bank, 114 S. Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for purposes of ERISA under certain
circumstances.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption
(defined below) and other administrative exemptions under ERISA and the
potential consequences in their specific circumstances, prior to making an
investment in the Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification an investment in the Offered Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
SENIOR CERTIFICATES
The Department of Labor ("DOL") has granted to each of Prudential
Securities Incorporated and J.P. Morgan Securities Inc. an administrative
exemption, Prohibited Transaction Exemption 90-24 and Prohibited Transaction
Exemption 90-23, respectively (each, an "Exemption"), from certain of the
prohibited transaction rules of ERISA. The Exemption exempts from the
prohibitions of Sections 406(a) and 407(a) of ERISA, and the related excise tax
provisions of Section 4975 of the Code, the purchase, holding, and resale by
Plans of pass-through certificates representing interests in trusts that hold
assets consisting primarily of certain receivables, loans, and other obligations
that meet the general conditions summarized below. The receivables covered by
the Exemption include manufactured housing installment sales contracts and
installment loan agreements secured by manufactured homes such as the Contracts.
Among the general conditions which must be satisfied for the Exemption
to apply to the acquisition, holding and resale by a Plan of the Senior
Certificates are the following:
(1) The acquisition of the Senior Certificates by a Plan is on
terms (including the price for the Senior Certificates) that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
(2) The rights and interests evidenced by the Senior
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust.
(3) The Senior Certificates acquired by the Plan have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from Moody's, Fitch, Duff & Phelps
Rating Co. or Standard & Poor's Corporation.
(4) The Trustee is not an affiliate of the Underwriters, the
Sponsor, Receivables Corp., AFC, any obligor with respect to Contracts
included in the Trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any
affiliate of such parties. (Such parties and the Trustee and its
affiliates, are sometimes referred to herein collectively as the
"Restricted Group"). As of the date hereof, no Obligor with respect to
Contracts included in the Trust is an Obligor with respect to Contracts
constituting more than 5% of the aggregate unamortized principal
balance of the assets of the Trust.
(5) The sum of all payments made to and retained by the
Underwriters in connection with the distribution of the Senior
Certificates represents not more than reasonable compensation for
underwriting the Senior Certificates. The sum of all payments made to
and retained by Receivables Corp. pursuant to the sale of the Contracts
to the Trust represents not more than the
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fair market value of such Contracts. The sum of all payments made to
and retained by AFC represents not more than reasonable compensation
for AFC's services under the Agreement and reimbursement of AFC's
reasonable expenses in connection therewith.
(6) The Plan is an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act of 1933.
In addition, the Exemption exempts from the prohibitions of Sections
406(a), 406(b) and 407(a) of ERISA, and the related excise tax provisions of
Section 4975 of the Code, transactions undertaken in connection with the
servicing, management and operation of such a trust pursuant to a binding
pooling and servicing agreement, subject to the foregoing general conditions and
to certain additional requirements.
The Exemption also exempts from the prohibition of Sections 406(b)(1)
and 406(b)(2) of ERISA the related excise tax provisions of Section 4975 of the
Code, the direct or indirect sale, exchange or transfer of Senior Certificates
between Receivables Corp. or the Underwriters and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of the Plan's assets in the Senior Certificates (the "Fiduciary") is
(a) an obligor with respect to 5 percent or less of the fair market value of
Contracts in the Trust or (b) an affiliate or any such person, subject to the
general conditions summarized above and to the following additional
requirements:
(1) No member of the Restricted Group is a sponsor of the
Plan.
(2) In connection with the initial issuance of Senior
Certificates, at least 50% in Percentage Interests of each Class of
Senior Certificates is acquired by persons independent of the
Restricted Group and at least 50% of the aggregate interest in the
Trust is acquired by persons independent of the Restricted Group.
(3) The Plan's investment in the Senior Certificates does not
exceed 25% in Percentage Interests of any Class of Senior Certificates
outstanding at the time of acquisition.
(4) Immediately after the acquisition of the Senior
Certificates, no more than 25% of the assets of the Plan with respect
to which the Fiduciary has discretionary authority or renders
investment advice are invested in certificates representing an interest
in a trust containing assets sold or serviced by the same entity.
The exemption also applies to the direct or indirect acquisition or disposition
of Senior Certificates by a Plan in the secondary market if certain conditions
are met and the continued holding of Senior Certificates acquired in initial or
secondary markets.
Before purchasing a Senior Certificate, a fiduciary of a Plan should
make its own determination as to the availability of the exemptive relief
provided in the Exemption, and whether the conditions of such Exemption will be
applicable to the Certificate. Any fiduciary of a Plan considering whether to
purchase a Senior Certificate should also carefully review with its own legal
advisors the applicability of the fiduciary duty and prohibited transaction
provisions of ERISA and the Code to such investment. See "ERISA Considerations"
in the Prospectus.
SUBORDINATE CERTIFICATES
AS INDICATED ABOVE, ONE OF THE GENERAL CONDITIONS FOR USE OF THE
EXEMPTION IS THAT THE RIGHTS AND INTERESTS EVIDENCED BY CERTIFICATES ACQUIRED BY
THE PLAN NOT BE SUBORDINATED TO THE RIGHTS AND INTERESTS EVIDENCED BY OTHER
CERTIFICATES OF THE TRUST. ACCORDINGLY, THE SUBORDINATED CERTIFICATES COULD NOT
GENERALLY BE PURCHASED OR HELD BY A PLAN OR A PERSON USING PLAN ASSETS IN
RELIANCE ON THE EXEMPTION. HOWEVER, PROHIBITED TRANSACTION CLASS EXEMPTION 95-60
("PTCE 95-60") PROVIDES AN EXEMPTION FOR AN INSURANCE COMPANY GENERAL ACCOUNT
PURCHASER OF A CERTIFICATE ISSUED BY AN ASSET-BACKED POOL TRUST IF, AMONG OTHER
CONDITIONS, THE TRUST IS COVERED BY
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AN ADMINISTRATIVE EXEMPTION GRANTED TO THE UNDERWRITER (SUCH AS THE EXEMPTION)
AND THE CONDITIONS FOR SUCH EXEMPTION ARE MET EXCEPT FOR THE GENERAL CONDITIONS
DESCRIBED IN (2) AND (3) ABOVE. THUS, IF THE CONDITIONS OF THE EXEMPTION ARE
SATISFIED WITH RESPECT TO THE SENIOR CERTIFICATES, THE CLASS A-6 AND CLASS B-1
CERTIFICATES MAY BE ACQUIRED BY AN INSURANCE COMPANY USING GENERAL ACCOUNT
ASSETS PROVIDED THE CONDITIONS OF PTCE 95-60 ARE SATISFIED.
BEFORE PURCHASING A CLASS A-6 OR CLASS B-1 CERTIFICATE, AN
INSURANCE COMPANY GENERAL ACCOUNT PURCHASER SHOULD MAKE ITS OWN DETERMINATION AS
TO THE AVAILABILITY OF THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION AND IN
PTCE 95-60, AND WHETHER THE CONDITIONS OF THE EXEMPTION AND PTCE 95-60 WILL BE
APPLICABLE TO THE CERTIFICATE. ANY INSURANCE COMPANY CONSIDERING WHETHER TO
PURCHASE A CLASS A-6 OR B-1 CERTIFICATE SHOULD ALSO CAREFULLY REVIEW WITH ITS
OWN LEGAL ADVISORS THE APPLICABILITY OF THE FIDUCIARY DUTY AND PROHIBITED
TRANSACTION PROVISIONS OF ERISA AND THE CODE TO SUCH INVESTMENT.
RATINGS
It is a condition to the issuance of the Senior Certificates that they
be rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Fitch
Investors Service, L.P. ("Fitch"). It is a condition to the issuance of the
Class A-6 Certificates that they be rated at least "Aa3" by Moody's and "AA-" by
Fitch. It is a condition to the issuance of the Class B-1 Certificates that they
be rated at least "Baa3" by Moody's and "BBB-" by Fitch. 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.
The ratings assigned by Moody's and Fitch to pass-through certificates
address the likelihood of the receipt by the related certificateholders of their
allocable share of principal and interest on the underlying assets. Moody's and
Fitch ratings take into consideration the credit quality of the related
underlying assets, any credit support arrangements, structural and legal aspects
associated with such certificates, and the extent to which the payment stream on
such underlying assets are adequate to make payments required by such
certificates. Moody's and Fitch ratings on such certificates do not, however,
constitute a statement regarding frequency of prepayments on the underlying
assets or as to whether yield may be adversely affected as a result thereof.
Receivables Corp. has not requested a rating on the Offered
Certificates by any rating agency other than Moody's and Fitch. However, there
can be no assurance as to whether any other rating agency will rate any or all
of the Offered Certificates, or if it did, what rating would be assigned to the
Offered Certificates by any such other rating agency. A rating on any or all of
the Offered Certificates by certain other rating agencies, if assigned at all,
may be lower than the rating assigned to such Certificates by Moody's and Fitch.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
May 22, 1996 (the "Underwriting Agreement"), the Sponsor has agreed to sell, and
Prudential Securities Incorporated and J.P. Morgan Securities (the
"Underwriters") have agreed to purchase from the Sponsor, the Offered
Certificates.
In the Underwriting Agreement, each of the Underwriters has agreed,
subject to the terms and conditions set forth therein, to purchase, the
principal amount of the Offered Certificates set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT OF OFFERED CERTIFICATES
<S> <C>
Prudential Securities Incorporated........................ $ 74,988,500
J.P. Morgan Securities Inc................................ 74,988,500
------------
Total................................................ $149,977,000
============
</TABLE>
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The Seller has been advised by the Underwriters that they propose to
offer the Offered Certificates to the public initially at the prices set forth
on the cover page of this Prospectus Supplement, and to certain dealers at such
prices less a concession not to exceed 0.225% of the Original Class A-1
Principal Balance, 0.225% of the Original Class A-2 Principal Balance, 0.225% of
the Original Class A-3 Principal Balance, 0.225% of the Original Class A-4
Principal Balance, 0.225% of the Original Class A-5 Principal Balance, 0.225% of
the Original A-6 Principal Balance and 0.325% of the Original Class B-1
Principal Balance; that the Underwriters and such dealers may allow a discount
of 0.125% of the Original Class A-1 Principal Balance, 0.125% of the Original
Class A-2 Principal Balance, 0.125% of the Original Class A-3 Principal Balance,
0.125% of the Original Class A-4 Principal Balance, 0.125% of the Original Class
A-5 Principal Balance, 0.125% of the Original A-6 Principal Balance and 0.175%
of the Original Class B-1 Principal Balance to certain other dealers. After the
initial public offering of the Offered Certificates, the public offering price
and concession and discount to dealers may be changed by the Underwriters.
The Underwriting Agreement provides that the Sponsor and AFC will
indemnify each Underwriter against certain liabilities, including civil
liabilities, under the Securities Act of 1933, as amended, or contribute to
payments either Underwriter may be required to make in respect thereof.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Certificates will be used by Receivables Corp. for general corporate
purposes, including the purchase of the Contracts, the carrying costs of the
Contracts until the sale of the Certificates and to pay other expenses connected
with pooling the Contracts and issuing the Certificates.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for AFC, the Seller and the Sponsor by Dewey Ballantine, New York, New York.
Stroock & Stroock & Lavan, New York, New York will act as counsel for the
Underwriters.
S-80
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Access
Financial Manufactured Housing Contract Trust 1996-1 Offered Certificates (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, CEDEL 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 through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL 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 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 and Euroclear will
hold positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. 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 or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
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<PAGE>
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to 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 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 or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL 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 or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL 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 the result will depend on each CEDEL
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 crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
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 or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL 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 Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the
I-2
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<PAGE>
account of CEDEL Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the CEDEL 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). In the event that the
CEDEL 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 Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL 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 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 Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL 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 (as defined below), 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 Certificate
Owners of Global Securities that are Non-U.S. Persons (as defined below) 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 (as defined below), 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 residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
I-3
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<PAGE>
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The 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.
On April 22, 1996 the IRS issued proposed regulations relating to (i)
withholding income tax on U.S.-source income paid to Non-U.S. Persons; (ii)
claiming Non-U.S. Person status to avoid backup withholding; and (iii) reporting
to the IRS of payments to Non-U.S. Persons. The proposed regulations would
substantially revise some aspects of the current system for withholding on and
reporting amounts paid to Non-U.S. Persons. The regulations unify current
certification procedures and forms and reliance standards are clarified. Most
forms are proposed to be combined into a single form: Form W-8. The regulations
are proposed to be effective for payments made after December 31, 1997.
Certificates issued, however, on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
All proposed regulations are subject to change before adoption in their final
form. No reliable prediction can be made as to when, if ever, the proposed
regulations will be made final and if so, as to their final form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
<PAGE>
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accelerated Principal Payment..................................................................................S-16
Accrual Period .................................................................................................S-9
AFC .......................................................................................................S-1, S-3
Agreement ......................................................................................................S-5
Amount Available .........................................................................................S-9, S-53
Beneficial Certificate Owner.............................................................................S-21, S-50
Book-Entry Certificates........................................................................................S-67
Cargill .......................................................................................................S-44
Cede ....................................................................................................S-21, S-50
CEDEL ...................................................................................................S-21, S-50
CEDEL Participants.............................................................................................S-69
Certificate Account............................................................................................S-52
Certificate Owners..............................................................................................S-2
Certificate Principal Balance...................................................................................S-9
Certificates ..............................................................................................S-1, S-7
CFSC ..........................................................................................................S-44
Citibank ................................................................................................S-21, S-50
Class A-1 Remittance Rate.......................................................................................S-4
Class A-2 Remittance Rate.......................................................................................S-4
Class A-3 Remittance Rate.......................................................................................S-4
Class A-4 Remittance Rate.......................................................................................S-4
Class A-5 Remittance Rate.......................................................................................S-4
Class A-6 Distribution Amount...................................................................................S-8
Class A-6 Formula Distribution Amount.....................................................................S-8, S-54
Class A-6 Principal Balance....................................................................................S-12
Class A-6 Remaining Amount Available......................................................................S-8, S-54
Class A-6 Remittance Rate.......................................................................................S-4
Class B Cross-over Date........................................................................................S-13
Class B Principal Distribution Test............................................................................S-58
Class B-1 Distribution Amount...................................................................................S-8
Class B-1 Formula Distribution Amount.....................................................................S-8, S-54
Class B-1 Interest.............................................................................................S-13
Class B-1 Principal..........................................................................S-13, S-15, S-56, S-60
Class B-1 Principal Balance....................................................................................S-12
Class B-1 Remaining Amount Available......................................................................S-8, S-54
Class B-1 Remittance Rate.......................................................................................S-4
Class B-2 Distribution Amount...................................................................................S-8
Class B-2 Formula Distribution Amount.....................................................................S-8, S-54
Class B-2 Interest.............................................................................................S-14
Class B-2 Principal............................................................................................S-14
Class B-2 Principal Balance....................................................................................S-14
Class B-2 Remaining Amount Available......................................................................S-9, S-54
Class C Distribution Amount....................................................................................S-15
Class C Formula Distribution Amount............................................................................S-15
Closing Date ...................................................................................................S-3
Code ..........................................................................................................S-22
Collection Period ..............................................................................................S-5
Contract Pool ..................................................................................................S-1
Contract Rate ......................................................................................S-5, S-26, S-33
Contracts .................................................................................................S-1, S-5
Cooperative ...................................................................................................S-69
Cut-off Date ...................................................................................................S-3
</TABLE>
i
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Definitive Certificate.........................................................................................S-68
Determination Date.............................................................................................S-53
DOL ...........................................................................................................S-77
DTC .....................................................................................................S-21, S-50
DTC Participants ..............................................................................................S-69
Due Date ...........................................................................................S-5, S-11, S-26
Eligible Institution...........................................................................................S-52
Eligible Investments...........................................................................................S-52
ERISA ...................................................................................................S-22, S-76
Euroclear ...............................................................................................S-21, S-50
Euroclear Operator.............................................................................................S-69
Euroclear Participants.........................................................................................S-69
European Depositaries..........................................................................................S-67
European Depositories....................................................................................S-21, S-50
Extras ........................................................................................................S-46
FDIC ..........................................................................................................S-52
Financial Intermediary.........................................................................................S-68
Fitch ...................................................................................................S-22, S-79
Global Securities ..............................................................................................S-1
Land Secured Contract...........................................................................................S-5
Land Secured Contracts.........................................................................................S-26
Land-Home Contracts............................................................................................S-26
Land-in-Lieu Contracts.........................................................................................S-26
Liquidated Contract............................................................................................S-11
Liquidation Expenses.....................................................................................S-18, S-62
Liquidation Proceeds...........................................................................................S-18
Manufactured Home ..............................................................................................S-5
Manufactured Home Contract......................................................................................S-5
Monthly Servicing Fee..........................................................................................S-66
Moody's .................................................................................................S-22, S-79
Morgan ..................................................................................................S-21, S-50
Mortgage ......................................................................................................S-25
NADA ..........................................................................................................S-46
Non-IO Certificates......................................................................................S-15, S-60
Non-U.S. Person ................................................................................................S-4
Obligor .......................................................................................................S-26
OID ...........................................................................................................S-76
Original Class A-1 Principal Balance............................................................................S-3
Original Class A-2 Principal Balance............................................................................S-3
Original Class A-3 Principal Balance............................................................................S-3
Original Class A-4 Principal Balance............................................................................S-3
Original Class A-5 Principal Balance............................................................................S-4
Original Class A-6 Principal Balance............................................................................S-4
Original Class B-1 Principal Balance............................................................................S-4
Overcollateralization..........................................................................................S-15
Overcollateralization Amount...................................................................................S-15
Overcollateralization Reduction Amount.........................................................................S-61
Participants ..................................................................................................S-67
Plans .........................................................................................................S-77
Pool Scheduled Principal Balance...............................................................................S-11
Prepayment Model ..............................................................................................S-34
Prospectus .....................................................................................................S-1
Realized Loss ...........................................................................................S-18, S-62
</TABLE>
ii
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Receivables Corp. ..............................................................................................S-1
Record Date ..............................................................................................S-4, S-51
Refinanced Contract............................................................................................S-47
Regular interests ..............................................................................................S-2
Relevant Depositary............................................................................................S-67
Relief Act ..............................................................................................S-25, S-75
REMIC ..............................................................................................S-2, S-21, S-76
Remittance Date ..........................................................................................S-4, S-51
Replaced Contract .............................................................................................S-52
Required Overcollateralization Amount....................................................................S-15, S-60
Residual Certificates.....................................................................................S-6, S-50
Residual Distribution Amount....................................................................................S-8
Residual interests..............................................................................................S-2
Rules .........................................................................................................S-68
Scheduled Payment .............................................................................................S-26
Scheduled Principal Balance....................................................................................S-11
Seller ....................................................................................................S-1, S-3
Senior Certificates.............................................................................................S-1
Senior Formula Distribution Amount.............................................................................S-53
Senior Percentage .......................................................................................S-10, S-56
Servicer ..................................................................................................S-1, S-3
Servicing Advances.............................................................................................S-66
SMMEA .........................................................................................................S-22
Sponsor ........................................................................................................S-1
Subordinate Certificates........................................................................................S-1
Terms and Conditions...........................................................................................S-69
Title V .......................................................................................................S-76
Trust ..........................................................................................................S-1
Trustee ..................................................................................................S-5, S-67
U.S. Person ....................................................................................................S-4
UCC ...........................................................................................................S-24
Underwriters .............................................................................................S-2, S-79
Underwriting Agreement.........................................................................................S-79
Weighted Average Net Contract Rate..............................................................................S-4
</TABLE>
iii
<PAGE>
<PAGE>
PROSPECTUS
Mortgage Loan Asset Backed Securities, issuable in Series
Cargill Financial Services Corporation
Sponsor
This Prospectus describes certain Mortgage Loan Asset Backed Securities (the
"Securities") that may be issued from time to time in series and certain classes
of which may be offered hereby from time to time as described in the related
Prospectus Supplement. Each series of Securities will be issued by a separate
trust (each, a "Trust"). The primary assets of each Trust will consist of a
segregated pool (a "Mortgage Pool") of (i) conventional one- to four-family
residential mortgage loans, (ii) multi-family residential mortgage loans, (iii)
mixed use mortgage loans, (iv) cooperative apartment loans secured by security
interests in shares issued by a cooperative housing corporation, (v) contracts
for manufactured homes (vi) home improvement loans or (vii) certificates of
interest or participation therein (collectively or individually, the "Mortgage
Loans"), to be acquired by such Trust from Cargill Financial Services
Corporation (the "Company") or one or more subsidiaries or other affiliated
institutions, including, but not limited to, Equicon Corporation ("Equicon"), a
wholly-owned subsidiary of the Company. The Company and such subsidiaries and
other affiliated institutions are hereinafter collectively referred to as the
"Sponsor." The Sponsor will acquire the Mortgage Loans from one or more
affiliated or unaffiliated institutions (the "Originators"). See "The Mortgage
Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets described
herein and in the related Prospectus Supplement (collectively with respect to
each Trust, the "Trust Estate") will be held by the related Trust for the
benefit of the holders of the related series of Securities (the
"Securityholders") pursuant to a Pooling and Servicing Agreement to the extent
and as more fully described herein and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Pool will consist of one or more of the various types of Mortgage Loans
described under "The Mortgage Pools."
Each series of Securities will include one or more classes. The Securities of
any particular class may represent beneficial ownership interests in the related
Mortgage Loans held by the related Trust, or may represent debt secured by such
Mortgage Loans, as described herein and in the related Prospectus Supplement. A
series may include one or more classes of Securities entitled to principal
distributions, with disproportionate, nominal or no interest distributions, or
to interest distributions, with disproportionate, nominal or no principal
distributions. The rights of one or more classes of Securities of any series may
be senior or subordinate to the rights of one or more of the other classes of
Securities. A series may include two or more classes of Securities which differ
as to the timing, sequential order, priority of payment, interest rate or amount
of distributions of principal or interest or both. Information regarding each
class of Securities of a series, and certain characteristics of the Mortgage
Loans to be evidenced by such Securities, will be set forth in the related
Prospectus Supplement.
The Sponsor's and the related Originators' only obligations with respect to a
series of Securities will be pursuant to certain representations and warranties
made by the Sponsor or by such Originators, except as otherwise described in the
related Prospectus Supplement. The Prospectus Supplement for each series of
Securities will name one or more servicers (the "Servicer(s)") which will act,
directly or through one or more sub-servicers (the "Sub-Servicer(s)"). The
principal obligations of the Servicer will be pursuant to its contractual
servicing obligations (which may include a limited obligation to make certain
advances in the event of delinquencies in payments on the Mortgage Loans and
interest shortfalls due to prepayment of Mortgage Loans). See "Description of
the Securities."
If so specified in the related Prospectus Supplement, the Trust Estate for a
series of Securities may include any combination of a mortgage pool insurance
policy, letter of credit, financial guaranty insurance policy, bankruptcy bond,
special hazard insurance policy, reserve fund or other form of credit
enhancement (collectively, "Credit Enhancement"). In addition to or in lieu of
the foregoing, Credit Enhancement with respect to certain classes of Securities
of any series may be provided by means of subordination, cross-support among
Mortgage Assets (as defined herein) or over-collateralization. See "Description
of Credit Enhancement."
The rate of payment of principal of each class of Securities entitled to
principal payments will depend on the priority of payment of such class and the
rate of payment (including prepayments, defaults, liquidations and repurchases
of
(cover continued on next page)
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
-------------
The date of this Prospectus is October 19, 1995.
<PAGE>
<PAGE>
(continued from previous page)
Mortgage Loans) of the related Mortgage Loans. A rate of principal payment lower
or higher than that anticipated may affect the yield on each class of Securities
in the manner described herein and in the related Prospectus Supplement. The
various types of Securities, the different classes of such Securities and
certain types of Mortgage Loans in a given Mortgage Pool may have different
prepayment risks and credit risks. The Prospectus Supplement for a series of
Securities or the related Current Report on Form 8-K will contain information as
to (i) types, maturities and certain statistical information relating to credit
risks of the Mortgage Loans in the related Mortgage Pool, (ii) the effect of
certain rates of prepayment, based upon certain specified assumptions for a
series of Securities and (iii) priority of payment and maturity dates of the
Securities. An investor should carefully review the information in the related
Prospectus Supplement concerning the different consequences of the risks
associated with the different types and classes of Securities. See "Yield
Considerations." A Trust may be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or more
segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. If applicable, the
Prospectus Supplement for a series of Securities will specify which class or
classes of the related series of Securities will be considered to be regular
interests in a REMIC and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. Alternatively, a Trust may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of secured debt. See
"Certain Federal Income Tax Consequences".
THE ASSETS OF THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET
FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES
NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE SERVICER, ANY
ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT. SEE ALSO "RISK FACTORS" PAGE 14.
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement. There will be no
secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
2
<PAGE>
<PAGE>
No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement, and, if given or made,
such information must not be relied upon as having been authorized by the
Company or any dealer, salesman, or any other person. Neither the delivery of
this Prospectus or the related Prospectus Supplement nor any sale made hereunder
or thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement are not an offer to sell or a
solicitation of an offer to buy any security in any jurisdiction in which it is
unlawful to make such offer or solicitation.
TABLE OF CONTENTS
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ............................ 5
SUMMARY OF PROSPECTUS ...................................................... 6
RISK FACTORS ............................................................... 15
THE TRUSTS ................................................................. 20
THE MORTGAGE POOLS ......................................................... 27
General ............................................................... 27
The Mortgage Pools .................................................... 27
MORTGAGE LOAN PROGRAM ...................................................... 29
Equicon Mortgage Loan Program ......................................... 29
Negotiated Transactions ............................................... 32
Bulk Acquisitions ..................................................... 32
Quality Control ....................................................... 32
Qualifications of Originators ......................................... 33
Representations by Originators ........................................ 34
Sub-Servicing by Originators .......................................... 35
Master Servicer ....................................................... 37
DESCRIPTION OF THE SECURITIES .............................................. 37
General ............................................................... 37
Form of Securities .................................................... 39
Assignment of Mortgage Loans .......................................... 41
Forward Commitments; Pre-Funding ...................................... 42
Payments on Mortgage Loans; Deposits to Distribution Account .......... 43
Withdrawals from the Principal and Interest Account ................... 46
Distributions ......................................................... 46
Principal and Interest on the Securities .............................. 47
Advances .............................................................. 48
Reports to Securityholders ............................................ 49
Collection and Other Servicing Procedures ............................. 50
Realization Upon Defaulted Mortgage Loans ............................. 51
SUBORDINATION .............................................................. 52
DESCRIPTION OF CREDIT ENHANCEMENT .......................................... 53
HAZARD INSURANCE; CLAIMS THEREUNDER ........................................ 59
Hazard Insurance Policies ............................................. 59
THE SPONSOR ................................................................ 60
THE SERVICER ............................................................... 60
THE POOLING AND SERVICING AGREEMENT ........................................ 60
Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield .................................... 60
Evidence as to Compliance ............................................ 61
Removal and Resignation of the Servicer .............................. 61
Resignation of the Master Servicer ................................... 62
Amendments ........................................................... 63
Termination; Retirement of Securities ................................ 63
THE TRUSTEE ................................................................ 64
YIELD CONSIDERATIONS ....................................................... 66
MATURITY AND PREPAYMENT
CONSIDERATIONS ............................................................. 68
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS ................ 70
General .............................................................. 70
Cooperative Loans .................................................... 70
Foreclosure .......................................................... 71
Foreclosure on Shares of Cooperatives ................................ 72
Rights of Redemption ................................................. 73
Anti-Deficiency Legislation and Other Limitations on Lenders ......... 73
Environmental Legislation ............................................ 74
Enforceability of Certain Provisions ................................. 75
Certain Provisions of California Deeds of Trust ...................... 75
Applicability of Usury Laws .......................................... 76
Alternative Mortgage Instruments ..................................... 76
Soldiers' and Sailors' Civil Relief Act of 1940 ...................... 77
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ......................................................... 77
General .............................................................. 77
Grantor Trust Estates ................................................ 78
REMICS ............................................................... 86
Debt Securities ...................................................... 101
Taxation of the Securities Classified as Partnership Interests ....... 103
ERISA CONSIDERATIONS ....................................................... 103
Plan Asset Regulations ............................................... 104
Prohibited Transaction Class Exemption ............................... 104
Tax Exempt Investors ................................................. 106
Consultation With Counsel ............................................ 106
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LEGAL INVESTMENT MATTERS ................................................... 106
USE OF PROCEEDS ............................................................ 107
METHODS OF DISTRIBUTION .................................................... 107
LEGAL MATTERS .............................................................. 108
ADDITIONAL INFORMATION ..................................................... 109
INDEX OF PRINCIPAL DEFINITIONS ............................................. 110
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Securities, whether or not participating
in the distribution thereof, may be required to deliver this Prospectus and the
related Prospectus Supplement. This delivery requirement 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.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by each respective Trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities of
such Trust offered hereby shall be deemed to be incorporated by reference into
this Prospectus when delivered with respect to such Trust. Any statement
contained 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 any other
subsequently filed document which also is or is deemed to be 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.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference). Requests
should be directed to Cargill Financial Services Corporation, 6000 Clearwater
Drive, Minnetonka, Minnesota 55343-9497, Attention: Structured Finance
(telephone number 612-984-3444).
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. Capitalized terms used
in this summary that are not otherwise defined shall have the meanings ascribed
thereto in this Prospectus. An index indicating where certain terms used herein
are defined appears at the end of this Prospectus.
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Securities Offered................... Mortgage Loan Asset Backed Securities.
Sponsor.............................. Cargill Financial Services Corporation, together with one or more
subsidiaries and affiliated institutions from which any Trust may
acquire Mortgage Loans.
Originators.......................... The Sponsor will acquire the Mortgage Loans from one or more institutions
affiliated with the Sponsor ("Affiliated Originators") or institutions
unaffiliated with the Sponsor ("Unaffiliated Originators") (the
Affiliated Originators and the Unaffiliated Originators are collectively
referred to as the "Originators").
Servicer............................. One or more servicers (the "Servicer(s)") for each series of Securities will
be specified in the related Prospectus Supplement.
Master Servicer...................... A master servicer (the "Master Servicer") may be specified in the related
Prospectus Supplement for the related series of Securities. See
"Mortgage Loan Program -- Master Servicer."
Sub-Servicers........................ Originators may act as Sub-Servicers for Mortgage Loans acquired by the
Sponsor from such Originators unless all servicing duties relating to
such Mortgage Loans have been transferred to the Servicer. See "Mortgage
Loan Program--Sub-Servicers."
Trustee.............................. The trustee (the "Trustee") for each series of Securities will be specified
in the related Prospectus Supplement.
The Securities....................... Issuance of Securities. Each series of Securities will be issued at the
direction of the Sponsor by a separate Trust (each, a "Trust"). The
primary assets of each Trust will consist of a segregated pool (each, a
"Mortgage Pool") of (i) conventional one- to four-family residential
mortgage loans (ii) multi-family residential mortgage loans, (iii) mixed
use mortgage loans, (iv) cooperative apartment loans secured by security
interests in shares issued by a cooperative housing corporation, (v)
contracts for manufactured homes (vi) home improvement loans or (vii)
certificates of interest or participation therein (collectively or
individually, the "Mortgage Loans") or certificates of interest or
participation therein, acquired by such Trust from the Sponsor. The
Sponsor will acquire the Mortgage Loans from one or more of the
Originators. The Securities issued by any Trust may represent beneficial
ownership interests in the related Mortgage Loans held by the related
Trust, or may represent debt secured by such Mortgage Loans, as
described herein and in the related Prospectus Supplement. Securities
which represent beneficial ownership interests in the related Trust will
be referred to as "Certificates" in the related Prospectus Supplement;
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Securities which represent debt issued by the related Trust will be
referred to as "Notes" in the related Prospectus Supplement.
Each Trust will be established pursuant to an agreement (each, a "Trust
Agreement") by and between the Sponsor and the Trustee named therein.
Each Trust Agreement will describe the related pool of assets to be held
in trust (each such asset pool, the "Trust Estate"), which will include
the related Mortgage Loans and, if so specified in the related
Prospectus Supplement, may include any combination of a mortgage pool
insurance policy, letter of credit, financial guaranty insurance policy,
special hazard policy, reserve fund or other form of Credit Enhancement.
The Mortgage Loans held by each Trust will be serviced by the Servicer
pursuant to a servicing agreement (each, a "Servicing Agreement") by and
among the Sponsor, the related Servicer and the related Trustee.
With respect to Securities that represent debt issued by the related
Trust, the related Trust will enter into an indenture (each, an
"Indenture") by and between such Trust and the trustee named on such
Indenture (the "Indenture Trustee"), as set forth in the related
Prospectus Supplement. Securities that represent beneficial ownership
interests in the related Trust will be issued pursuant to the related
Trust Agreement.
In the case of any individual Trust, the contractual arrangements
relating to the establishment of the Trust, the servicing of the related
Mortgage Loans and the issuance of the related Securities may be
contained in a single agreement, or in several agreements which combine
certain aspects of the Trust Agreement, the Servicing Agreement and the
Indenture described above (for example, a pooling and servicing
agreement, or a servicing and collateral management agreement). For
purposes of this Prospectus, the term "Pooling and Servicing Agreement"
as used with respect to a Trust means, collectively, and except as
otherwise specified, any and all agreements relating to the
establishment of the related Trust, the servicing of the related
Mortgage Loans and the issuance of the related Securities.
Securities Will Be Recourse to the Assets of the Related Trust Only. The
sole source of payment for any series of Securities will be the assets
of the related Trust (i.e., the related Trust Estate). The Securities
will not be obligations, either recourse or non-recourse (except for
certain non-recourse debt described under "Certain Federal Income Tax
Consequences"), of the Sponsor, the Servicer, any Sub-Servicer, any
Originator or any Person other than the related Trust. In the case of
Securities that represent beneficial ownership interest in the related
Trust Estate, such Securities will represent the ownership of such Trust
Estate; with respect to Securities that represent debt issued by the
related Trust, such Securities will be secured by the related Trust
Estate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of Credit Enhancement, such
as a financial guaranty insurance policy or a letter of credit, may
constitute a full recourse obligation of the issuer of such Credit
Enhancement.
General Nature of the Securities as Investments. The Securities will
consist of two basic types: (i) Securities of the fixed-income type
("Fixed-Income Securities") and (ii) Securities of the equity
participation type
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("Equity Securities"). No Class of Equity Securities will be offered
pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities will generally be styled as debt instruments,
having a principal balance and a specified interest rate ("Interest
Rate"). Fixed-Income Securities may be either beneficial ownership
interests in the related Mortgage Loans held by the related Trust, or
may represent debt secured by such Mortgage Loans. Each series or class
of Fixed-Income Securities may have a different Interest Rate, which may
be a fixed or adjustable Interest Rate. The related Prospectus
Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled (i) to principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) to
interest distributions, with disproportionate, nominal or no principal
distributions. In addition, a series may include two or more classes of
Fixed-Income Securities that differ as to timing, sequential order,
priority of payment, Interest Rate or amount of distributions of
principal or interest or both, or as to which distributions of principal
or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the
basis of collections from designated portions of the related Mortgage
Pool, which series may include one or more classes of Fixed-Income
Securities ("Accrual Securities"), as to which certain accrued interest
will not be distributed but rather will be added to the principal
balance (or nominal principal balance, in the case of Accrual Securities
which are also Strip Securities) thereof on each Payment Date, as
hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more other classes of Fixed-Income
Securities (collectively, the "Senior Securities") that are senior to
one or more other classes of Fixed-Income Securities (collectively, the
"Subordinate Securities") in respect of certain distributions of
principal and interest and allocations of losses on Mortgage Loans. In
addition, certain classes of Senior (or Subordinate) Securities may be
senior to other classes of Senior (or Subordinate) Securities in respect
of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to
the Securityholders of the related Fixed-Income Securities (both Senior
Securities and Subordinate Securities), and following any required
deposits to any reserve account which may be established for the benefit
of the Fixed-Income Securities. Equity Securities may constitute what
are commonly referred to as the "residual interest", "seller's interest"
or the "general partnership interest", depending upon the treatment of
the related Trust for federal income tax purposes. As distinguished from
the Fixed-Income Securities, the Equity Securities will not be styled as
having principal and interest components. Any losses suffered by the
related Trust will first be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus
Supplement.
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No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity
Securities may be offered on a private placement basis or pursuant to a
separate Registration Statement to be filed by the Sponsor. In addition,
the Sponsor and their affiliates may initially or permanently hold any
Equity Securities issued by any Trust.
General Payment Terms of Securities. As provided in the related Pooling and
Servicing Agreement and as described in the related Prospectus
Supplement, Securityholders will be entitled to receive payments on
their Securities on specified dates (each, a "Payment Date"). Payment
Dates with respect to Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the related Prospectus
Supplement; Payment Dates with respect to Equity Securities will occur
as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its
paying agent will fix the identity of the Securityholders for the
purpose of receiving payments on the next succeeding Payment Date.
Each Pooling and Servicing Agreement will describe a period (each, a
"Remittance Period") antecedent to each Payment Date (for example, in
the case of monthly-pay Securities, the calendar month preceding the
month in which a Payment Date occurs or such other specified period).
Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans
during a Remittance Period will be required to be remitted by the
Servicer to the related Trustee prior to the related Payment Date and
will be used to fund payments to Securityholders on such Payment Date.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may
be applied by the related Trustee to the acquisition of additional
Mortgage Loans during a specified period (rather than be used to fund
payments of principal to Securityholders during such period) with the
result that the related securities will possess an interest-only period,
also commonly referred to as a revolving period, which will be followed
by an amortization period. Any such interest-only or revolving period
may, upon the occurrence of certain events to be described in the
related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of
the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that
all or a portion of such collected principal may be retained by the
Trustee (and held in certain temporary investments, including Mortgage
Loans) for a specified period prior to being used to fund payments of
principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related
Securities relative to the amortization rate of the related Mortgage
Loans, or to attempt to match the amortization rate of the related
Securities to
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an amortization schedule established at the time such Securities are
issued. Any such feature applicable to any Securities may terminate upon
the occurrence of events to be described in the related Prospectus
Supplement, resulting in the current distribution of principal payments
to the specified Securityholders and an acceleration of the amortization
of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Sponsor,
the Servicer, any Master Servicer, any Sub-Servicer, any Originator or
any of their affiliates.
No Investment Companies.............. Neither the Sponsor nor any Trust will register as an "investment company"
under the Investment Company Act of 1940, as amended (the "Investment
Company Act").
Cross-Collateralization.............. Unless otherwise provided in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement, the source of payment
for Securities of each series will be the assets of the related Trust
Estate only. However, as may be described in the related Prospectus
Supplement, a Trust Estate may include the right to receive moneys from
a common pool of Credit Enhancement which may be available for more than
one series of Securities, such as a master reserve account or a master
insurance policy. Notwithstanding the foregoing, unless specifically
described otherwise in the related Prospectus Supplement, no collections
on any Mortgage Loans held by any Trust may be applied to the payment of
Securities issued by any other Trust (except to the limited extent that
certain collections in excess of amounts needed to pay the related
Securities may be deposited in a common, master reserve account that
provides Credit Enhancement for more than one series of Securities).
The Mortgage Pools................... Unless otherwise specified in the related Prospectus Supplement, each Trust
Estate will consist primarily of Mortgage Loans secured by liens on one-
to four-family residential properties, multi-family residential
properties, mixed use properties, cooperative apartments or contracts
for manufactured homes ("Mortgages"), located in any one of the fifty
states, the District of Columbia, Puerto Rico or any other Territories
of the United States. All Mortgage Loans will have been acquired by the
related Trust from the Sponsor or at the Sponsor's direction from one or
more Originators. All Mortgage Loans will have been originated either by
(i) Affiliated Originators; (ii) Unaffiliated Originators; or (iii) the
Sponsor. In addition, the Mortgage Loans may be purchased by the Sponsor
as bulk acquisitions ("Bulk Acquisitions") or on a "spot" or negotiated
basis ("Negotiated Transactions"). The Mortgage Loans generally will
have been originated pursuant to (i) the underwriting guidelines of
Equicon in effect as of the date on which the Mortgage Loan was
submitted to Equicon pursuant to the Equicon Mortgage Loan Program (as
defined herein) ("Equicon's Guidelines"); (ii) underwriting guidelines
utilized by certain Originators and approved by the Sponsor ("Approved
Guidelines"); or (iii) underwriting guidelines ("Bulk Guidelines")
utilized by certain Unaffiliated Originators of individual Mortgage
Loans or portfolios of Mortgage Loans subsequently purchased in whole or
part by the Sponsor as Bulk Acquisitions. See "Mortgage
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Loan Program." For a description of the types of Mortgage Loans that may
be included in the Mortgage Pools, see "The Mortgage Pools--The Mortgage
Loans."
If specified in the related Prospectus Supplement, Mortgage Loans that
are converted from an adjustable rate to a fixed rate will be
repurchased by the Sponsor or purchased by the applicable Sub-Servicer,
Servicer or another party, or a designated remarketing agent will use
its best efforts to arrange the sale thereof as further described
herein.
A Current Report on Form 8-K will be available to purchasers or
underwriters of the related series of Securities and will generally be
filed, together with the related Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the
initial issuance of such series.
Forward Commitments;
Pre-Funding........................ A Trust may enter into an agreement (each, a "Forward Purchase Agreement")
with the Sponsor whereby the Sponsor will agree to transfer additional
Mortgage Loans to such Trust following the date on which such Trust is
established and the related Securities are issued. Any Forward Purchase
Agreement will require that any Mortgage Loans so transferred to a Trust
conform to the requirements specified in such Forward Purchase
Agreement, this Prospectus and the related Prospectus Supplement. In
addition, the Forward Purchase Agreement will state that the Sponsor
shall only transfer the Subsequent Mortgage Loans upon the satisfaction
of certain conditions, including that the Sponsor shall have delivered
opinions of counsel (including bankruptcy, corporate and tax opinions)
with respect to the transfer of the Subsequent Mortgage Loans to the
Certificate Insurer, the Rating Agencies and the Trustee. If a Forward
Purchase Agreement is to be utilized, and unless otherwise specified in
the related Prospectus Supplement, the related Trustee will be required
to deposit in a segregated account (each, a "Pre-Funding Account") all
or a portion of the proceeds received by the Trustee in connection with
the sale of one or more classes of Securities of the related series;
subsequently, the additional Mortgage Loans will be transferred to the
related Trust in exchange for money released to the Sponsor from the
related PreFunding Account in one or more transfers. Each Forward
Purchase Agreement will set a specified period during which any such
transfers must occur. The Forward Purchase Agreement or the related
Pooling and Servicing Agreement will require that, if all moneys
originally deposited to such Pre-Funding Account are not so used by the
end of such specified period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Securities
as specified in the related Prospectus Supplement.
Credit Enhancement................... If so specified in the Prospectus Supplement, the Trust Estate with respect
to any series of Securities may include any one or any combination of a
letter of credit, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, financial guaranty insurance policy,
reserve fund or other type of Credit Enhancement to provide full or
partial coverage for certain defaults and losses relating to the
Mortgage Loans. Credit support also may be provided in the form of the
related class of Equity Securities, and/or by subordination of one or
more classes of Fixed-Income Securities in a series under which losses
in
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excess of those absorbed by any related class of Equity Securities are
first allocated to any Subordinate Securities up to a specified limit,
cross-support among groups of Mortgage Assets or overcollateralization.
Unless otherwise specified in the related Prospectus Supplement, any
mortgage pool insurance policy will have certain exclusions from
coverage thereunder, which will be described in the related Prospectus
Supplement, which may be accompanied by one or more separate Credit
Enhancements that may be obtained to cover certain of such exclusions.
To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of
any subordination and related information will be set forth in the
Prospectus Supplement relating to a series of Securities. See
"Description of Credit Enhancement" and "Subordination."
Advances............................. As to be described in the related Prospectus Supplement, the Servicer may
be obligated to make certain advances with respect to payments of
delinquent scheduled interest and/or principal on the Mortgage Loans,
but only to the extent that the Servicer believes that such amounts will
be recoverable by it. Any such advance made by the Servicer with respect
to a Mortgage Loan is recoverable by it as provided herein under
"Description of the Securities--Advances" either from recoveries on the
specific Mortgage Loan or, with respect to any such advance subsequently
determined to be nonrecoverable, out of funds otherwise distributable to
the holders of the related series of Securities, which may include the
holders of any Senior Securities of such series.
As to be described in the related Prospectus Supplement, the Servicer
may be required to advance Compensating Interest as defined hereafter
under "Description of the Securities--Advances."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will be required to pay all "out of pocket"
costs and expenses incurred in the performance of its servicing
obligations, but only to the extent that the Servicer reasonably
believes that such amounts will increase Net Liquidation Proceeds on the
related Mortgage Loan. See "Description of the Securities--Advances."
Optional Termination................. The Servicer, the Sponsor, or, if specified in the related Prospectus
Supplement, the holders of the related class of Equity Securities or the
Credit Enhancer may at their respective option effect early retirement
of a series of Securities through the purchase of the Mortgage Loans and
other assets in the related Trust Estate under the circumstances and in
the manner set forth herein under "The Pooling and Servicing
Agreement--Termination; Retirement of Securities" and in the related
Prospectus Supplement.
Mandatory Termination................ The Trustee, the Servicer or certain other entities specified in the related
Prospectus Supplement may be required to effect early retirement of a
series of Securities by soliciting competitive bids for the purchase of
the related Trust Estate or otherwise, under other circumstances and in
the manner specified in "The Pooling and Servicing Agreement --
Termination; Retirement of Securities" and in the related Prospectus
Supplement.
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Legal Investment..................... Not all of the Mortgage Loans in a particular Mortgage Pool may represent
first liens. Accordingly, as disclosed in the related Prospectus
Supplement, certain classes of Securities offered hereby and by the
related Prospectus Supplement may not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") and, if so, will not be legal investments for
certain types of institutional investors under SMMEA.
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may
be subject to additional restrictions on investment in certain classes
of Securities. Any such institution should consult its own legal
advisors in determining whether and to what extent a class of Securities
constitutes legal investments for such investors. See "Legal Investment"
herein.
ERISA Considerations................. A fiduciary of an employee benefit plan and certain other retirement plans
and arrangements, including individual retirement accounts and
annuities, Keogh plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or arrangements are
invested, that is subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of the Code (each such
entity, a "Plan") should carefully review with its legal advisors
whether the purchase or holding of Securities could give rise to a
transaction that is prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. Investors are advised to
consult their counsel and to review "ERISA Considerations" herein and in
the Prospectus Supplement.
Certain Federal Income Tax
Consequences....................... Securities of each series offered hereby will, for federal income tax
purposes, constitute either (i) interests ("Grantor Trust Securities")
in a Trust treated as a grantor trust under applicable provisions of the
Code, (ii) "regular interests" ("REMIC Regular Securities") or "residual
interests" ("REMIC Residual Securities") in a Trust treated as a REMIC
(or, in certain instances, containing one or more REMIC's) under
Sections 860A through 860G of the Code, (iii) debt issued by a Trust
("Debt Securities") or (iv) interests in a Trust which is treated as a
partnership ("Partnership Interests").
Investors are advised to consult their tax advisors and to review
"Certain Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
Registration of
Securities......................... Securities may be represented by global securities registered in the name of
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC"),
or another nominee as specified in the related Prospectus Supplement. In
such case, Securityholders will not be entitled to receive definitive
securities representing such Securityholders' interests, except in
certain circumstances described in the related Prospectus Supplement.
See "Description of the Securities--Form of Securities" herein.
Ratings.............................. Each class of Fixed-Income Securities offered pursuant to the related
Prospectus Supplement will be rated in one of the four highest rating
categories by one or more "national statistical rating organizations",
as
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defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and commonly referred to as "Rating Agencies". Such
ratings will address, in the opinion of such Rating Agencies, the
likelihood that the related Trust will be able to make timely payment of
all amounts due on the related Fixed-Income Securities in accordance
with the terms thereof. Such ratings will neither address any prepayment
or yield considerations applicable to any Securities nor constitute a
recommendation to buy, sell or hold any Securities.
Equity Securities generally will not be rated, but if such Securities
are rated, they likely will be rated below investment grade.
The ratings expected to be received with respect to any Securities will
be set forth in the related Prospectus Supplement.
</TABLE>
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market for
the Securities of any series or class will develop or, if it does develop, that
it will provide Securityholders with liquidity of investment or that it will
continue for the life of the Securities of any series. The Prospectus Supplement
for any series of Securities may indicate that an underwriter specified therein
intends to establish a secondary market in such Securities; however, no
underwriter will be obligated to do so. Unless otherwise specified in the
related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
Limited Obligations. The Securities will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Servicer, the Master Servicer, if any, any Originator or any person other
than the related Trust. The only obligations of the foregoing entities with
respect to the Securities or the Mortgage Loans will be the obligations (if any)
of the Sponsor, the related Originators, the Servicer and the Master Servicer,
if any, pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Sponsor, Servicer, applicable Sub-Servicer, or another party
in connection with a purchase obligation ("Purchase Obligation") or an agreement
to purchase or act as remarketing agent with respect to a Convertible Mortgage
Loan (as defined herein) upon conversion to a fixed rate. Notwithstanding the
foregoing, and as to be described in the related Prospectus Supplement, certain
types of Credit Enhancement, such as a financial guaranty insurance policy or a
letter of credit, may constitute a full recourse obligation of the issuer of
such Credit Enhancement. Except as described in the related Prospectus
Supplement, neither the Securities nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Sponsor, the Trustee, the Servicer, the Master Servicer, if any, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Estate for each series of Securities (including the Mortgage Loans
and any form of Credit Enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Sponsor or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Equity Securities, subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among Mortgage Assets and/or overcollateralization. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of Credit
Enhancement provided, the coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. To the extent not
set forth herein, the amount and types of coverage, the identification of any
entity providing the coverage, the terms of any subordination and related
information will be set forth in the Prospectus Supplement relating to a series
of Securities. See "Description of Credit Enhancement" and "Subordination."
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Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the Mortgage
Loans will be secured by junior liens subordinate to the rights of the mortgagee
or beneficiary under each related senior mortgage or deed of trust. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims, if any, of each such senior mortgagee or beneficiary are
satisfied in full, including any related foreclosure costs. In addition, a
mortgagee secured by a junior lien may not foreclose on the related mortgaged
property 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. In servicing junior lien loans, a Servicer generally
would satisfy each such senior mortgage at or prior to the foreclosure sale only
to the extent that it determines any amounts so paid will be recoverable from
future payments and collections on such junior lien 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
Mortgage Loans and Related Matters--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. 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
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Securities of the series evidencing interests in
the related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Sponsor's and Originators' underwriting standards
consider, among other things, a mortgagor's credit history, repayment ability
and debt service-to-income ratio, as well as the value of the property; however,
the Sponsor's Mortgage Loan Program (as hereinafter defined) generally provides
for the origination of Mortgage Loans relating to non-conforming credits.
Certain of the types of loans that may be included in the Mortgage Pools may
involve additional uncertainties not present in traditional types of loans. For
example, certain of the Mortgage Loans may provide for escalating or variable
payments by the borrower under the Mortgage Loan (the "Mortgagor"), as to which
the Mortgagor is generally qualified on the basis of the initial payment amount.
In some instances the Mortgagors' income may not be sufficient to enable them to
continue to make their loan payments as such payments increase and thus the
likelihood of default will increase. For a more detailed discussion, see
"Mortgage Loan Program."
Risk of Losses Associated with Balloon Loans. 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. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that 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 Mortgagor's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be
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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, 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 Sponsor,
the Originators, the Servicer, the Master Servicer, if any, any Sub-Servicer or
the Trustee will be obligated to provide funds to refinance any Mortgage Loan,
including Balloon Loans.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of Mortgagors to repay
Mortgage Loans. Loss of earnings, illness and other similar factors also may
lead to an increase in delinquencies and bankruptcy filings by Mortgagors. In
the event of personal 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
thereby 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.
Risk of Losses Associated with Foreclosure of Mortgaged Properties. 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,
rules and judicial decisions 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 Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The 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 ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, 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 any applicable Credit Enhancement, Securityholders 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 takes 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 less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, 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 the purportedly
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 Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Environmental Legislation."
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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 Mortgagor.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related Current Report on Form 8-K.
Legal Considerations
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of the Originators,
the Trustee, the Servicer and Sub-Servicers. 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 that 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 Servicer to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the Mortgagor to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X 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; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the Mortgagor's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
Mortgagor to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to the Securityholders. Furthermore, depending upon
whether damages and sanctions are assessed against the Servicer or the Sponsor,
such violations may materially impact the financial ability of the Servicer to
continue to act as Servicer or the ability of the Sponsor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Certain additional provisions under the Federal Truth-in-Lending Act
become effective on October 1, 1995. These provisions apply to certain types of
mortgage loans, generally as a result of such loan's coupon rate being 10% or
more greater than the yield on United States Treasury Securities of comparable
maturity, or if the "total points and fees" payable by the obligor exceed a
specified level. If the requirements are triggered, certain additional
disclosures are required to be made to the obligor and certain other
restrictions on the loan and its terms apply (e.g., restrictions relating to
prepayment penalties and balloon maturities.)
These provisions further require persons who sell or assign
mortgages which are subject to these requirements to furnish a notice to such
effect to the purchaser or assignee. Such purchasers or assignees may under
certain circumstances be liable for the failure of the originating lender to
provide the required disclosures or for the inclusion in the loan of any
prohibited terms.
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Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ("ARM Loans") to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans and the
price paid by Securityholders. Such yield may be adversely affected by a higher
or lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Securities or Securities purchased at premiums or
discounted to par will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield to maturity on certain other
types of classes of Securities, including Accrual Securities or certain other
classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
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 be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
moneys held in Pre-Funding Accounts, if any, voluntary early payments by
Mortgagors (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.
In addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain "due-on-sale" provisions, and the
Servicer will be required to enforce such provisions unless (i) the
"due-on-sale" clause, in the reasonable belief of the Servicer, is not
enforceable under applicable law or (ii) the Servicer reasonably believes that
to permit an assumption of the Mortgage Loan would not materially and adversely
affect the interests of the Securityholders or of the related Credit Enhancer,
if any. See "The Pooling and Servicing 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 Mortgagors.
Book-Entry Registration
Issuance of the Securities 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 definitive
physical securities representing such Securityholders' interests, except in
certain circumstances described in the related Prospectus Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder to pledge a Security 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 security representing the
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. See "Description of the Securities--Form of Securities."
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The Status of the Mortgage Loans in the Event of
Bankruptcy of a Sponsor or an Originator
In the event of the bankruptcy of the Sponsor or an Originator at a time
when it or any affiliate thereof holds an Equity Security, a trustee in
bankruptcy of the Sponsor, an Originator, or its creditors could attempt to
recharacterize the sale of the Mortgage Loans to the related Trust as a
borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
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 Servicer to collect full amounts of interest on
certain of the Mortgage Loans. In addition, the Relief Act imposes limitations
that would impair the ability of the 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 of the Servicer to realize upon the Mortgaged
Property in a timely fashion.
Security Rating
The rating of Securities credit enhanced through external Credit
Enhancement such as a letter of credit, financial guaranty insurance policy or
mortgage pool insurance will depend primarily on the creditworthiness of the
issuer of such external Credit Enhancement device (a "Credit Enhancer"). Any
reduction in the rating assigned to the claims-paying ability of the related
Credit Enhancer below the rating initially given to the Securities would likely
result in a reduction in the rating of the Securities. See "Ratings" in the
Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
conventional one-to-four-family residential mortgage loans ("Single Family
Loans"), (ii) multi-family residential Mortgage Loans ("Multi-family Loans"),
(iii) mixed use mortgage loans ("Mixed Use Loans"), (iv) cooperative apartment
loans secured by security interests in shares issued by a cooperative housing
corporation ("Cooperative Loans") (v) contracts for manufactured homes
("Contracts"), (vi) loans to make home improvements ("Home Improvement Loans")
or (vii) other loans or (B) certificates of interest or participation in the
items described in clause (A) or in pools of such items, in each case, as
specified in the related Prospectus Supplement, together with payments with
respect to such primary Mortgage Assets and certain other accounts, obligations
or agreements, in each case, as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e. the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
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The following is a brief description of the Mortgage Assets expected to
be included in the related Trusts. If specific information respecting the
primary Mortgage Assets is not known at the time the related series of
Securities initially is offered, 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 Pooling and Servicing 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 Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General
The real properties, interests in a Cooperative (as defined herein) and
Manufactured Homes (as defined herein), as the case may be, that secure
repayment of the Mortgage Loans (the "Mortgaged Properties") may be located in
any one of the fifty states, the District of Columbia, Puerto Rico or any other
Territories of the United States. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will be "Conventional Loans" (i.e.,
loans that are not insured or guaranteed by any governmental agency). Unless
otherwise specified in the related Prospectus Supplement, Mortgage Loans will
not be covered wholly or partially by primary mortgage insurance policies.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will be covered by standard hazard insurance policies (which may
be in the form of a blanket or forced placed hazard insurance policy). The
existence, extent and duration of any such coverage will be described in the
applicable Prospectus Supplement. Unless otherwise described in the related
Prospectus Supplement, the Mortgage Loans will not be guaranteed or insured by
any government agency or other insurer.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly ("monthly pay") or bi-weekly. 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 combination 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 period of time and under certain
circumstances 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 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. If provided for in the Prospectus Supplement, certain
Mortgage Loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan (the "Buydown
Period") will be less than the scheduled monthly payments on the
Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon,
being hereinafter referred to as "Buydown Funds") funded by the
originator of the Mortgage Loan or another source (including the
Servicer or the related Originator and the builder of the Mortgaged
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(b) Principal may be payable on a level debt service 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 Rate, or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity ("balloon" payments).
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
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(c) Monthly payments of principal and interest may be fixed for
the life of the Mortgage Loan, may increase over a specified period of
time ("graduated payments") or may change from period to period.
Mortgage Loans may include limits on periodic increases or decreases in
the amount of monthly payments and may include maximum or minimum
amounts of monthly payments. Mortgage Loans having graduated payment
provisions may provide for deferred payment of a portion of the
interest due monthly during a specified period, and recoup the deferred
interest through negative amortization during such period whereby the
difference between the interest paid during such period and interest
accrued during such period is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
"growing equity" mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee,
if allowed by state or applicable law, 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 therewith. 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 related Originator.
Except as otherwise described in the related Prospectus Supplement or in
the related Current Report on Form 8-K, interest will be calculated on each
Mortgage Loan pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that interest is
charged to the Mortgagor at the applicable Mortgage Rate on the outstanding
principal balance of such Note and calculated based on the number of days
elapsed between receipt of the Mortgagor's last payment through receipt of the
Mortgagor's most current payment. Such interest is deducted from the Mortgagor's
payment amount and the remainder, if any, of the payment is applied as a
reduction to the outstanding principal balance of such Note. Although the
Mortgagor is required to remit equal monthly payments on a specified monthly
payment date that would reduce the outstanding principal balance of such Note to
zero at such Note's maturity date, payments that are made by the Mortgagor after
the due date therefor would cause the outstanding principal balance of such Note
not to be reduced to zero. In such a case, the Mortgagor would be required to
make an additional principal payment at the maturity date for such Note. On the
other hand, if a Mortgagor makes a payment (other than a prepayment) before the
due date therefor, the reduction in the outstanding principal balance of such
Note would occur over a shorter period of time than it would have occurred had
it been based on the original amortization schedule of such Note.
Actuarial Loans. Actuarial Loans provide that interest is charged to the
Mortgagor thereunder, and payments are due from such Mortgagor, as of a
scheduled day of each month which is fixed at the time of origination. Scheduled
monthly payments made by the Mortgagors on the Actuarial Loans either earlier or
later than the scheduled due dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the payment by the
related Mortgagor of a specified total amount of payments, payable in equal
monthly installments on each due date, which total represents the principal
amount financed and add-on interest in an amount calculated on the basis of the
stated Mortgage Rate for the term of the Loan. The rate at which such amount of
add-on interest is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal are calculated in
accordance with the "Rule of 78's". Under a Rule of 78's Loan, the amount of a
payment allocable to interest is determined by multiplying the total amount of
add-on interest payable over the term of the loan by a fraction derived as
described below.
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The fraction used in the calculation of add-on interest earned each
month under a Rule of 78's Loan has as it denominator a number equal to the sum
of a series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the fraction for the first payment is
12/78, for the second payment 11/78, for the third party 10/78, and so on
through the final payment, for which the fraction is 1/78. The applicable
fraction is then multiplied by the total add-on interest payable over the entire
term of the loan, and the resulting amount is the amount of add-on interest
"earned" that month. The difference between the amount of the monthly payment by
the obligor and the amount of earned add-on interest calculated for the month is
applied to principal reduction. Rule of 78's Loans are non-level yield
instruments. The yield in the initial months of a Rule of 78's Loans is somewhat
higher than the stated Mortgage Rate (computed on an actuarial basis) and the
yield in the later months of the loan is somewhat less than such stated Mortgage
Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool; such
information, insofar as it may relate to statistical information relating to
such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") which may also be the related cut-off date (the "Cut-Off
Date"). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, Manufactured Homes, multifamily apartments or
other real property), (iv) the original terms to stated maturity of the Mortgage
Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans
and the range of the remaining terms to maturity; (vi) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vii) the weighted
average CLTV and the range of CLTV's of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the "APR") and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) a description of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided
with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the
geographical distribution of the Mortgage Loans on a state-by-state basis. In
addition, preliminary or more general information of the nature described above
may be provided in the Prospectus Supplement, and specific or final information
may be set forth in a Current Report on Form 8-K, together with the related
Pooling and Servicing Agreement, which will be filed with the Securities and
Exchange Commission and will be made available to holders of the related series
of Securities within fifteen days after the initial issuance of such Securities.
The loan-to-value ratio (the "LTV") of a Mortgage Loan is equal to the
ratio (expressed as a percentage) of the original principal balance of such
Mortgage Loan to appraised value of the related Mortgaged Property (unless
otherwise disclosed in the related Prospectus Supplement or in the related
Current Report on Form 8-K, less the amount, if any, of the premium for any
credit life insurance) at the time of origination of the Mortgage Loan or, in
the case where the Mortgage represents a purchase money instrument, the lesser
of (a) the appraised value or (b) the purchase price. The combined loan-to-value
ratio (the "CLTV") of a Mortgage Loan at any given time is the ratio, expressed
as a percentage, determined by dividing (x) the sum of the original principal
balance of such Mortgage Loan (unless otherwise disclosed in the related
Prospectus Supplement or in the related Current Report on Form 8-K, less the
amount,if any, of the premium for any credit life insurance) plus the
then-current principal balance of all mortgage loans (each, a "Senior Lien")
secured by liens on the related Mortgaged Property having priorities senior to
that of the lien which secures such Mortgage Loan, by (y) the value of the
related Mortgaged Property, based upon the appraisal or valuation (which may in
certain instances include estimated
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increases in value as a result of certain home improvements to be financed with
the proceeds of such Mortgage Loan) made at the time of origination of the
Mortgage Loan. If the related Mortgagor will use the proceeds of the Mortgage
Loan to refinance an existing Mortgage Loan which is being serviced directly or
indirectly by the Servicer, the requirement of an appraisal or other valuation
at the time the new Mortgage Loan is made may be waived. Unless otherwise
specified in the related Prospectus Supplement, for purposes of calculating the
CLTV of a Contract relating to a new Manufactured Home, the value of such
Manufactured Home 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. Unless otherwise
specified in the related Prospectus Supplement, the value of a used Manufactured
Home will be the least of the sales price, appraised value, and National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home will be based
upon the age and condition of the manufactured housing unit and the quality and
condition of the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential 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 non-conforming credit mortgage lending industry. 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,
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 non-conforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ("Junior Lien
Loans") subordinate to the rights of the mortgagee under any related Senior
Liens. The proceeds from any liquidation, insurance or condemnation of Mortgaged
Properties relating to Junior Lien Loans in a Mortgage Pool will be available to
satisfy the principal balance of such Junior Lien Loans only to the extent that
the claims, if any, of all related senior mortgagees, including any related
foreclosure costs, are satisfied in full. In addition, the Servicer may not
foreclose on a Mortgaged Property relating to a Junior Lien 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 Lien in the event of default thereunder. Generally,
in servicing Junior Lien Loans, it is standard practice for a Servicer to
satisfy each Senior Lien at or prior to a foreclosure sale only to the extent
that it determines 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 Mortgage Loans and Related
Matters-Foreclosure."
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 losses
on the Mortgage Loans are not covered by Credit Enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage 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. The Servicer
will service the Mortgage Loans, either directly or through Sub-Servicers,
pursuant to the Pooling and Servicing Agreement and will receive a fee for such
services. See "Mortgage Loan Program" and
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"The Pooling and Servicing Agreement." With respect to Mortgage Loans serviced
through a Sub-Servicer, the Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Servicer
alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Sponsor and the Originators with respect to a series of
Securities will be to provide (or, where the Sponsor 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 such Sponsor's or Originator's rights
with respect to such representations and warranties. See "The Pooling and
Servicing Agreement." The obligations of the Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing obligations
under the related Pooling and Servicing Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Originators as more fully
described herein under "Mortgage Loan Program--Qualifications of Originators"
and "The Pooling and Servicing Agreement") and its obligation, as described in
the related Prospectus Supplement, to make certain cash advances in the event of
delinquencies in payments on, or prepayments received with respect to, the
Mortgage Loans in the amounts described herein under "Description of the
Securities--Advances." The obligations of a Servicer to make advances may be
subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
Single Family and Mixed Use Loans
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first or junior liens on oneto
four-family properties. 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 condominium developments, individual units in planned unit developments, and
certain other dwelling units. Such Mortgage Properties may include
owner-occupied (which includes vacation and second homes) and non-owner occupied
investment properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments.
Unless otherwise specified in the Prospectus Supplement, Mixed Use Loans
will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first or junior liens on mixed use
properties.
Multi-family and Cooperative Loans
Multi-family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
liens on rental apartment buildings or projects containing five or more
residential units.
Unless otherwise specified, Cooperative Loans will be secured by
security interests in or similar liens on stock, shares or membership
certificates issued by private cooperative housing corporations ("Cooperative")
in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in such Cooperatives' buildings.
Mortgaged Properties that secure Multi-family Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multi-family 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 that 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
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mortgage loan, 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 Multi-family Loan, as well as all other
operating expenses, will be dependent in large part on the receipt of
maintenance payments from the tenantstockholders, 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.
Home Improvement Loans
Unless otherwise specified in the Prospectus Supplement, Home
Improvement Loans may be secured by first or junior liens on conventional one-to
four-family residential properties and multi-family residential properties. Home
Improvement Loans generally will be conventional, or if specified in the related
Prospectus Supplement, may be partially insured by the Federal Housing
Administration ("FHA") or another federal or state agency. The loan proceeds
from such Home Improvement Loans are typically disbursed to an escrow agent
which, according to Equicon's Guidelines, Approved Guidelines or Bulk
Guidelines, releases such proceeds to the contractor upon completion of the
improvements or in draws as the work on the improvements progresses. Costs
incurred by the Mortgagor for loan origination including origination points and
appraisal, legal and title fees, are often included in the amount financed. In
addition, Home Improvement Loans generally provide additional security to a
first or junior mortgage loan because home improvements typically retain or
increase the value of a property.
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 partially by the FHA
or partially guaranteed by the Veterans Administration, 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.
Unless otherwise specified in the related Prospectus Supplement, 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 Statistic
Calculation 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.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) Mortgage Loans, minus any stripped
portion of the interest payments due under the related Mortgage Note that may
have been retained by any Originator or broker ("Originator's Retained Yield"),
or any other interest retained by the Sponsor evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages or deeds of trust or other similar
security instruments creating a lien on, or security interest in, (a) one- to
four-family residential properties, (b) multi-family residential properties, (c)
mixed use properties, (d) apartment units in a Cooperative or (e) Manufactured
Homes or (ii) certificates of interest or participations in such Mortgage Notes.
The Mortgaged Properties will consist primarily of attached or detached
one-family dwelling units, two- to four-family dwelling units, condominiums,
townhouses, row houses, individual units in planned-unit developments, mixed use
properties and certain other dwelling units, and the fee, leasehold or other
interests in the underlying real property. The Mortgaged Properties may also
consist of apartment units in Cooperatives and Manufactured Homes. The Mortgaged
Properties may be owner-occupied (which includes second and vacation homes) and
non-owner occupied investment properties. If specified in the related Prospectus
Supplement relating to a series of Securities, a Mortgage Pool may contain
Cooperative Loans evidenced by promissory notes ("Cooperative Notes") secured by
security interests in shares issued by Cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings. As used herein, unless the
context indicates otherwise, "Mortgage Loans" include Cooperative Loans,
"Mortgaged Properties" include shares in the related cooperative and the related
proprietary leases or occupancy agreements securing Cooperative Notes, "Mortgage
Notes" include Cooperative Notes and "Mortgages" include security agreements
with respect to Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by one or more Affiliated
Originators or from Unaffiliated Originators, including banks, savings and loan
associations, mortgage bankers, mortgage brokers, investment banking firms, the
RTC, the FDIC and other mortgage loan originators or purchasers not affiliated
with the Sponsor, all as described below under "Mortgage Loan Program." The
characteristics of the Mortgage Loans will be described in the related
Prospectus Supplement. Other mortgage loans available for acquisition by a Trust
may have characteristics that would make them eligible for inclusion in a
Mortgage Pool but may not be selected by the Sponsor for inclusion in such
Mortgage Pool.
Each Security will evidence an interest in only the related Mortgage
Pool and corresponding Trust Estate, and not in any other Mortgage Pool or any
other Trust Estate (unless otherwise specified in the related Prospectus
Supplement in those situations whereby certain collections on any Mortgage Loans
in a related Mortgage Pool in excess of amounts needed to pay the related
securities may be deposited in a common, master reserve account that provides
Credit Enhancement for more than one series of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus
Supplement, all of the Mortgage Loans in a Mortgage Pool will (i) have payments
that are due monthly or bi-weekly, (ii) be secured by Mortgaged Properties
located in any of the fifty states, the District of Columbia, Puerto Rico or any
other Territories of the United States and (iii) consist of one or more of the
following types of mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of generally not
more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that
adjusts periodically, at the intervals described in the related
Prospectus Supplement (which may have adjustments in the amount of
monthly payments at periodic
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intervals) over the term of the mortgage loan to equal the sum of a
fixed percentage set forth in the related Mortgage Note (the "Note
Margin") and an index (the "Index") to be specified in the related
Prospectus Supplement, such as, by way of example: (i) U.S. Treasury
securities of a specified constant maturity, (ii) weekly auction average
investment yield of U.S. Treasury bills of specified maturities, (iii)
the daily Bank Prime Loan rate made available by the Federal Reserve
Board or as quoted by one or more specified lending institutions, (iv)
the cost of funds of member institutions for the Federal Home Loan Bank
of San Francisco, or (v) the interbank offered rates for U.S. dollar
deposits in the London Markets, each calculated as of a date prior to
each scheduled interest rate adjustment date that will be specified in
the related Prospectus Supplement. The related Prospectus Supplement
will set forth the relevant Index, and the related Prospectus Supplement
or the related Current Report on Form 8-K will indicate the highest,
lowest and weighted-average Note Margin with respect to the ARM Loans in
the related Mortgage Pool. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
some point during the term of such ARM Loan subsequent to the initial
payment date;
(3) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments during the first year calculated on the
basis of an assumed interest rate that will be lower than the Mortgage
Rate applicable to such mortgage loan in subsequent years. Deferred
Interest, if any, will be added to the principal balance of such
mortgage loans;
(4) Balloon mortgage loans ("Balloon Loans"), which are
mortgage loans having original or modified terms to maturity of
generally 5 to 15 years as described in the related Prospectus
Supplement, which may have level monthly payments of principal and
interest based generally on a 10- to 30-year amortization schedule. The
amount of the monthly payment may remain constant until the maturity
date, upon which date the full outstanding principal balance on such
Balloon Loan will be due and payable (such amount, the "Balloon
Amount");
(5) Modified mortgage loans ("Modified Loans"), which are fixed
or adjustable-rate mortgage loans providing for terms at the time of
modification of generally not more than 30 years. Modified Loans may be
mortgage loans which have been consolidated and/or have had various
terms changed, mortgage loans which have been converted from adjustable
rate mortgage loans to fixed rate mortgage loans, or construction loans
which have been converted to permanent mortgage loans; or
(6) Another type of mortgage loan described in the related
Prospectus Supplement.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"). If
specified in the related Prospectus Supplement, upon any conversion, the Sponsor
will repurchase or the Servicer, the applicable Sub-Servicer, Originator, or a
third party will purchase the converted Mortgage Loan as and to the extent set
forth in the related Prospectus Supplement. Alternatively, if specified in the
related Prospectus Supplement, the Sponsor or the Servicer (or another party
specified therein) may agree to act as remarketing agent with respect to such
converted Mortgage Loans and, in such capacity, to use its best efforts to
arrange for the sale of converted Mortgage Loans under specific conditions. Upon
the failure of any party so obligated to purchase any such converted Mortgage
Loan, the inability of any remarketing agent to so arrange for the sale of the
converted Mortgage Loan and the unwillingness of the remarketing agent to
exercise any election to purchase the converted Mortgage Loan for its own
account, the related Mortgage Pool will thereafter include both fixed rate and
adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the
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Servicer or the related Originator) and placed in the Buydown Account and (ii)
if the Buydown Funds are contributed on a present value basis, investment
earnings on such Buydown Funds. See "Description of the Securities--Payments on
Mortgage Loans; Deposits to Distribution Account." The terms of the Buydown
Mortgage Loans, if such loans are included in a Trust, will be as set forth in
the related Prospectus Supplement.
The Sponsor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned to the Trustee named in the related Prospectus Supplement,
for the benefit of the holders of all of the Securities of a series and will
receive a fee for such services. The Servicer named in the related Prospectus
Supplement will service the Mortgage Loans, either directly or through other
mortgage servicing institutions (Sub-Servicers), pursuant to a Pooling and
Servicing Agreement and will receive a fee for such services. See "Mortgage Loan
Program" and "Description of the Securities." With respect to those Mortgage
Loans serviced by the Servicer through a Sub-Servicer, the Servicer will remain
liable for its servicing obligations under the related Pooling and Servicing
Agreement as if the Servicer alone were servicing such Mortgage Loans, unless
otherwise described in the related Prospectus Supplement.
As described in the related Prospectus Supplement, the Sponsor and/or
certain Originators may make certain representations and warranties regarding
the Mortgage Loans, but their assignment of the Mortgage Loans to the Trustee
will be without recourse. See "Description of the Securities--Assignment of
Mortgage Loans." The Servicer's obligations with respect to the Mortgage Loans
will consist principally of its contractual servicing obligations under the
related Pooling and Servicing Agreement (including its obligation to enforce
certain purchase and other obligations of Sub-Servicers and of Originators, as
more fully described herein under "Mortgage Loan Program--Representations by
Originators," "--Sub-Servicing by Originators" and "Description of the
Securities--Assignment of Mortgage Loans," and its obligation, if any, to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Mortgage Loans and interest shortfalls due to prepayment of
Mortgage Loans, in amounts described herein under "Description of the
Securities--Advances"). Generally, unless otherwise specified in the Prospectus
Supplement, the obligation of the Servicer to make delinquency advances will be
limited to amounts which the Servicer believes ultimately would be reimbursable
out of the proceeds of liquidation of the Mortgage Loans. See "Description of
the Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Sponsor's Mortgage Loan Program will consist of
purchasing Mortgage Loans relating to non-conforming credit from Originators
(the "Sponsor's Mortgage Loan Program"). For purposes hereof, "nonconforming
credit" means a mortgage loan which, based upon standard underwriting
guidelines, may be ineligible for purchase by The Federal National Mortgage
Association ("FNMA") due to credit characteristics that do not meet FNMA
guidelines. However, certain of the Mortgage Loans may relate to FNMA conforming
credits.
As more fully described below and as may also be described in greater
detail in the related Prospectus Supplement, under the Sponsor's Mortgage Loan
Program, the Sponsor will purchase Mortgage Loans from Originators: (1) in
accordance with its mortgage loan program (the "Equicon Mortgage Loan Program")
described in the Equicon Corporation Seller's Guide, as modified from time to
time ("Equicon's Seller's Guide"), (2) on a "spot" or negotiated basis
("Negotiated Transactions"), and (3) as bulk acquisitions ("Bulk Acquisitions").
The Equicon Mortgage Loan Program, Negotiated Transactions, Bulk Acquisitions
and the respective underwriting guidelines relating thereto are described below.
EQUICON MORTGAGE LOAN PROGRAM
General. Equicon is a wholly-owned subsidiary of the Sponsor. Equicon
was formed in January, 1992 for the purpose of serving as a private secondary
mortgage market conduit. Equicon purchases Mortgage Loans on a servicing
released basis from Unaffiliated Originators pursuant to the Equicon Mortgage
Loan Program.
Equicon's Underwriting Guidelines. The underwriting guidelines used in
the Equicon Mortgage Loan Program ("Equicon's Guidelines") are set forth in
Equicon's Seller's Guide. Equicon's Guidelines are revised
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from time to time based on opportunities and prevailing conditions in the
nonconforming credit residential mortgage market, as well as the expected market
for the resulting Securities.
Mortgage Loans originated or purchased by Unaffiliated Originators and
acquired by Equicon generally will have been originated in accordance with
Equicon's Guidelines as set forth in Equicon's Seller's Guide. Management
permits deviations from the specific criteria of Equicon's Guidelines to reflect
local economic trends, real estate valuations, and credit factors specific to
each Mortgage Loan. Equicon generally will review or cause to be reviewed all of
the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated
Originators for conformity with Equicon's Seller's Guide. See "Quality Control."
The following is a brief description of Equicon's Guidelines set forth
in Equicon's Seller's Guide and currently employed by Equicon. Equicon believes
that these standards are consistent with those generally used by lenders in the
business of making mortgage loans based on non-conforming credits. The
underwriting process is intended to assess both the borrower's willingness and
ability to repay its debts and the adequacy of the real property as collateral
for the Mortgage Loan.
Equicon's Guidelines permit the origination and purchase of mortgage
loans with multitiered credit characteristics tailored to individual credit
profiles. In general, Equicon's Guidelines require an analysis of the equity in
the collateral, the payment history and debt-to-income ratio of the borrower,
the property type and the characteristics of the underlying first mortgage, if
any. A lower maximum CLTV is required for lower gradations of credit quality and
higher property values.
Equicon's Guidelines permit the origination or purchase of fixed or
adjustable rate Mortgage Loans that either fully amortize over a period
generally not to exceed 30 years or, in the case of a balloon mortgage,
generally amortize based on a 30-year or less amortization schedule with a due
date and a "balloon" payment at the end of 15 years. The loan amounts generally
range from a minimum of $15,000 to a maximum of $500,000.
The Mortgaged Properties used for collateral to secure the Mortgage
Loans may be either owner occupied (which includes second and vacation homes) or
non-owner occupied investor properties which, in either case are residential
properties (which may be detached, part of a two-to four-family dwelling, a
condominium unit, a unit in a planned unit development or manufactured housing).
Each Mortgaged Property generally has a minimum appraised fair market value of
$40,000. Cooperatives, commercial properties or agricultural land are not
accepted as collateral.
Equicon's Guidelines require that the CLTV of a Mortgage Loan generally
may not exceed 85%. If a senior mortgage exists, the Originator must first
review the senior mortgage documentation. If it contains open end advance or
negative amortization provisions, the maximum potential senior mortgage balance
is used in calculating the CLTV which determines the maximum loan amount.
Equicon's Guidelines generally do not permit the origination or purchase of
Mortgage Loans where the senior mortgage contains a provision pursuant to which
the senior mortgagee may share in any appreciation of the Mortgaged Property,
where the senior mortgage is privately held or where the senior mortgage has a
"balloon" payment due at any time prior to twelve months following the due date
of the Mortgage Loan.
The value of each property proposed as security for a Mortgage Loan is
required to be appraised by licensed appraisers, if state or applicable law so
requires, and shall have been performed in accordance with industry standards in
the appraising industry in the area where the Mortgaged Property is located.
Equicon's Guidelines provide that each borrower is required to provide,
and the Originator is required to verify, personal financial information. The
borrower's total monthly obligations (including principal and interest on each
mortgage, tax assessments, other loans, charge accounts and all other scheduled
indebtedness) should not exceed 60% of the borrower's monthly income. Borrowers
who are salaried employees must provide current employment information, in
addition to recent employment history. The Originator verifies this information
for salaried borrowers based on a current pay stub and either (i) a written
verification of income signed by their employer or (ii) two years' W-2 forms. A
self-employed applicant is required to be successfully
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self-employed in the same field for a minimum of two years. A self-employed
borrower is required to provide financial statements and signed copies of
federal income tax returns (including schedules) filed for the most recent two
years. The borrower's debt-to-income ratio is calculated based on income as
verified by the Originator and must be reasonable.
The Mortgage Loans are underwritten pursuant to Equicon's "Full
Documentation Program," "Alternative Income Documentation Program" and "Stated
Income Program," as set forth in Equicon's Guidelines. Under each of the
programs, the Originator reviews the loan applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's ability
to repay the loan, reviews the type and use of the property being financed and
reviews the property for compliance with its standards. In determining the
ability of the applicant to repay a Variable Rate Mortgage Loan, the Originators
use a rate that generally is a rate equal to the fully-indexed Mortgage interest
rate for such ARM Loan. Equicon's Guidelines are applied in a standardized
procedure that complies with applicable federal and state laws and regulations.
Under the Full Documentation Program, the income of each applicant and
the source of funds (if any) required to be deposited by an applicant into
escrow will be verified by the Originators. Applicants are generally required to
submit a current pay stub and either (i) a written verification of income signed
by their employer of (ii) two years' W-2 forms. Under the Alternative Income
Documentation Program, a self-employed applicant is required to provide the
applicant's business' profit and loss statement, and bank account statements
supporting such statement for the prior calendar year and any completed calendar
quarter of the current year and a current copy of a business license. Both the
Alternative Income Program and the Stated Income Program generally require (i)
that the applicant's income be reasonable for its business/profession, (ii) that
the business has been in existence for three years or more and (iii) that the
loan-to-value ratio be reduced. In addition, the Mortgage Loan will generally
improve the applicant's cash flow. Verification of the source of funds (if any)
required to be deposited by the applicant into escrow is generally required
under all documentation programs in the form of a standard verification of
deposit or two months' consecutive bank statements or other acceptable
documentation. Twelve months' mortgage payment or rental history is generally
required to be verified by the applicant's current lender or landlord. If
appropriate compensating factors exist, the Originators and Equicon may waive
certain documentation requirements for individual applicants.
A credit report by an independent, nationally recognized credit
reporting agency is required reflecting the applicant's complete credit history.
The credit report should reflect all repossessions, judgments, foreclosures,
garnishments, bankruptcies and similar instances of adverse credit that can be
discovered by a search of public records. Verification is required to be
obtained of the senior mortgage balance, if any, the status and whether local
taxes, interest, insurance and assessments are included in the applicant's
monthly payment. All taxes and assessments not included in the payment are
required to be verified as current.
Certain laws protect borrowers obtaining certain types of Mortgage Loans
by requiring a time-frame after loan documents are signed, termed the rescission
period, during which the borrower has the right to rescind or cancel the
Mortgage Loan. The rescission period must have expired prior to the purchase of
a Mortgage Loan by Equicon and may not be waived by the borrower except as
specifically provided by applicable law.
Equicon's Guidelines generally require title insurance coverage issued
by an insurance company that is qualified to do business in the jurisdiction
where the Mortgaged Property is located on each Mortgage Loan it purchases.
Equicon, the related Originator and/or their assignees generally are named as
the insured. Title insurance policies indicate the lien position of the Mortgage
Loan and protect the insured against loss if the title or lien position is not
as indicated.
Equicon's Guidelines generally require flood insurance coverage,
to the extent required by the Flood Disaster Protection Act of 1973, as amended,
issued by an insurance company that is qualified to do business in the
jurisdiction where the Mortgaged Property is located. Equicon, the related
Originator and/or their assignees are generally named as the insured.
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Equicon's Guidelines generally require property hazard insurance in an
amount sufficient to cover the new loan and any prior mortgage. If the sum of
the outstanding first mortgage, if any, and the related Mortgage Loan exceeds
replacement value (the cost of rebuilding the subject property, which generally
does not include land value), insurance equal to replacement value may be
accepted. Equicon, the related Originator and/or their assignees generally are
named as the insured.
NEGOTIATED TRANSACTIONS
The Sponsor may acquire or may cause a Trust to acquire Mortgage Loans
from Originators on a "spot" basis or in Negotiated Transactions, and such
Negotiated Transactions may be governed by agreements ("Master Commitments")
relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from
Originators who will represent that the Mortgage Loans have been originated in
accordance with underwriting guidelines agreed to by the Sponsor. Certain other
Mortgage Loans will be acquired from Originators that will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept
a certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence of a Mortgage
Loan conforming to applicable underwriting standards. Such certifications likely
will have been issued before the purchase of the Mortgage Loan by the Sponsor.
The Sponsor only will perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
The underwriting standards utilized in Negotiated Transactions and the
underwriting standards of insurance companies may vary substantially from
Equicon's Guidelines described above. All of the underwriting guidelines will
provide an underwriter with information to evaluate either the security for the
related Mortgage Loan, which security consists primarily of the borrower's
repayment ability or the adequacy of the Mortgaged Property as collateral, or a
combination of both. Due to the variety of underwriting guidelines and review
procedures that may be applicable to the Mortgage Loans included in any Mortgage
Pool, the related Prospectus Supplement will not distinguish among the various
underwriting guidelines applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting guidelines performed by the Sponsor.
Moreover, there can be no assurance that every Mortgage Loan was originated in
conformity with the underwriting guidelines related thereto in all material
respects, or that the quality or performance of Mortgage Loans underwritten
pursuant to varying guidelines as described above will be equivalent under all
circumstances.
BULK ACQUISITIONS
Bulk portfolios of Mortgage Loans may be originated by a variety of
Originators under several different underwriting guidelines. Mortgage Loans that
conform to the related underwriting guidelines of the Unaffiliated Originator of
the portfolio of such Mortgage Loan acquired by the Sponsor in a Bulk
Acquisition may not conform to the requirements of Equicon's Guidelines. For
example, the Sponsor may purchase Mortgage Loans in bulk portfolios with
Combined Loan-to-Value Ratios in excess of 85%, without title insurance, or with
nonconforming appraisal methods such as tax assessments. Bulk Acquisition
portfolios may be purchased servicing released or retained. If servicing is
retained, the Sponsor may require the Originator to meet certain minimum
requirements with respect to the servicing of such Mortgage Loans. The Sponsor
generally will cause the Mortgage Loans acquired in a Bulk Acquisition to be
reunderwritten on a sample basis. Such reunderwriting may be performed by the
Sponsor or by a third party acting at the direction of the Sponsor.
QUALITY CONTROL
The Sponsor maintains a quality control department which generally will
review loans originated by all Originators. The quality control department
selects a random and adverse portion of the files for underwriting review. For
the random sample, employment and mortgage information is reverified and a full
review of legal documentation and reunderwriting is performed. The Sponsor also
may cause appraisal reviews to be performed on a random sample of loan
production.
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With respect to the Equicon Mortgage Loan Program, certain Bulk
Acquisitions, and certain Negotiated Transactions, the Sponsor will cause a
percentage of the Mortgage Loans acquired from Unaffiliated Originators to be
(i) reunderwritten for the purpose of determining whether such Mortgage Loans
were originated in accordance with the Equicon Guidelines, (ii) reappraised to
assess the accuracy of the appraised values, and (iii) audited to determine the
accuracy of the loan data in the loan files. Such process may consist of a
review of all such Mortgage Loans or may be performed on a sample basis. Such
reunderwriting may be performed by the Sponsor or a third party acting at the
direction of the Sponsor.
QUALIFICATIONS OF ORIGINATORS
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Sponsor for participation in the Sponsor's Mortgage Loan
Program. Certain Unaffiliated Originators ("Conduit Participants") may be
qualified to enter into agreements to sell Mortgage Loans to the Sponsor
pursuant to the Sponsor's Mortgage Loan Program which provides for the periodic
purchase and sale of loans meeting certain specified requirements. As part of
the qualification process, the Sponsor determines whether each Conduit
Participant has a specified minimum level of equity and experience in
originating non-conforming credit Mortgage Loans and assesses the Conduit
Participant's ability to meet certain origination volume requirements .
Notwithstanding this process, however, there can be no assurance that any
Conduit Participant presently meets such qualifications or will continue to meet
such qualifications at the time of inclusion of Mortgage Loans sold by it in the
Trust Estate for a series of Securities, or thereafter. In addition, the Sponsor
may waive or modify in an appropriate case any of the foregoing requirements for
Conduit Participants.
Loans acquired from Unaffiliated Originators other than Conduit
Participants will be acquired on a "spot" basis, or in connection with a
Negotiated Transaction or a Bulk Acquisition. Unless otherwise described in the
related Prospectus Supplement with respect to certain specified Unaffiliated
Originators (in which case any remedies for breach will lie only against such
Unaffiliated Originator), the Sponsor will make directly, or will guarantee
compliance with, any representations and warranties made by any Unaffiliated
Originator, with respect to the Mortgage Loans originated by it and acquired by
a Trust.
All Unaffiliated Originators must have received a satisfactory review by
the Sponsor of its operating procedures and have delinquency and foreclosure
rates acceptable to the Sponsor. All Unaffiliated Originators are required to
originate mortgage loans in accordance with the applicable underwriting
standards. However, with respect to any Originator, some of the generally
applicable underwriting standards described herein and in the Equicon's Seller's
Guide may be modified or waived with respect to certain Mortgage Loans
originated by such Originators.
The Resolution Trust Corporation (the "RTC") or the Federal Deposit
Insurance Corporation (the "FDIC") (either in their respective corporate
capacities or as receiver or conservator for a depository institution) may also
be an Originator of the Mortgage Loans. The RTC and the FDIC are together
referred to as the "Federal Corporations". The RTC was established pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which was enacted in response to the financial crisis of the thrift
industry and the Federal Savings and Loan Insurance Corporation. The purpose of
FIRREA is to restore the public's confidence in the savings and loan industry in
order to ensure a viable system of affordable housing finance as well as to
improve the supervision of savings associations and promote the independence of
the FDIC. The FDIC is an independent executive agency originally established by
the Banking Act of 1933 to insure the deposits of all banks entitled to federal
deposit insurance under the Federal Reserve Act and Federal Deposit Insurance
Act. The FDIC administers the system of nationwide deposit insurance (mutual
guaranty of deposits) for United States Banks and, together with the United
States Comptroller of the Currency, regulates in areas related to the
maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices.
The Sponsor will monitor Originators under the control of a Federal
Corporation, as well as those Originators that are insolvent or in receivership
or conservatorship or otherwise financially distressed. Such Originators may not
be able or permitted to repurchase Mortgage Loans for which there has been a
breach of
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representation and warranty. Moreover, any such Originator may make no
representations and warranties with respect to Mortgage Loans sold by it. The
Federal Corporations (either in their respective corporate capacities or as
receiver for a depository institution) may also originate Mortgage Loans, in
which event neither the related Federal Corporation nor the depository
institution for which such Federal Corporation is acting as receiver may make
representations and warranties with respect to the Mortgage Loans that such
Federal Corporation sells, or such Federal Corporation may make only limited
representations and warranties (for example, that the related legal documents
are enforceable). A Federal Corporation may have no obligation to repurchase any
Mortgage Loan for a breach of a representation and warranty. If as a result of a
breach of representation and warranty an Originator is required to repurchase a
Mortgage Loan but is not permitted or otherwise fails to do so or if
representations and warranties are not made by an Originator, to the extent that
neither the Sponsor nor any other entity has assumed the representations and
warranties or made representations and warranties, neither the Sponsor nor that
entity will be required to repurchase such Mortgage Loan and, consequently such
Mortgage Loan will remain in the related Mortgage Pool and any related losses
will be borne by the Securityholders or by the related Credit Enhancement, if
any. In addition, loans which are purchased either directly or indirectly from a
Federal Corporation may be subject to a contract right of such Federal
Corporation to repurchase such loans under certain limited circumstances.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the Schedule
of Mortgage Loans is true and correct as of the related settlement date; (ii)
all real estate appraisals have been performed in accordance with industry
standards; (iii) no Mortgage Loan is in violation of any applicable state or
federal law or regulation; (iv) each Mortgage Loan had, at the time of
origination, either an attorney's certification of title or a title search or
title policy; (v) as of the related settlement date each Mortgage Loan is
secured by a valid and subsisting lien of record on the Mortgaged Property
having the priority indicated in the related Mortgage Loan file subject in all
cases to exceptions to title set forth in the title insurance policy, if any,
with respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by
such Originator; and (vii) each Mortgage Loan was originated in accordance with
law and is the valid, legal and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement, all of
the representations and warranties of an Originator in respect of a Mortgage
Loan will be made as of the date on which such Originator sells the Mortgage
Loan to the Sponsor; the date as of which such representations and warranties
are made thus may be a date prior to the date of the issuance of the related
series of Securities. A substantial period of time may elapse between the date
as of which the representations and warranties are made and the later date of
issuance of the related series of Securities.
The Sponsor will assign to the Trustee for the benefit of the
Securityholders of the related series of Securities all of its right, title and
interest in each agreement by which it acquires a Mortgage Loan from an
Originator insofar as such agreement relates to the representations and
warranties made by an Originator in respect of such Mortgage Loan and any
remedies provided for breach of such representations and warranties. If an
Originator cannot cure a breach of any representation or warranty made by it in
respect of a Mortgage Loan that materially and adversely affects the interests
of the Securityholders in such Mortgage Loan within a time period specified in
the related Pooling and Servicing Agreement, such Originator and/or the Sponsor
will be obligated to purchase from the related Trust such Mortgage Loan at a
price (the "Loan Purchase Price") set forth in the related Pooling and Servicing
Agreement which Loan Purchase Price will be equal to the principal balance
thereof as of the date of purchase plus one month's interest at the Mortgage
Rate less the amount, expressed as a percentage per annum, payable in respect of
servicing compensation, Trustee compensation and REMIC reporting compensation,
as applicable, and the Originator's Retained Yield, if any, together with,
without duplication, the aggregate amount of all delinquent interest, if any.
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Unless otherwise described in the related Prospectus Supplement with
respect to Unaffiliated Originators (in which case any remedies for breach will
lie only against such Unaffiliated Originator), the Sponsor will make directly,
or will guarantee compliance with, certain representations and warranties made
by any Unaffiliated Originator with respect to the Mortgage Loans originated or
purchased by it and acquired by a Trust.
Unless otherwise specified in the related Prospectus Supplement, as to
any such Mortgage Loan required to be purchased by an Originator and/or the
Sponsor, as provided above, rather than repurchase the Mortgage Loan, the
Servicer may, at its sole option, remove such Mortgage Loan (a "Deleted Mortgage
Loan") from the related Trust and cause the Sponsor to substitute in its place
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage" as such
term is defined in the related Pooling and Servicing Agreement). With respect to
a Trust for which a REMIC election is to be made, except as otherwise provided
in the Prospectus Supplement relating to a series of Securities, such
substitution of a defective Mortgage Loan must be effected within two years of
the date of the initial issuance of the Securities, and may not be made if such
substitution would cause the Trust to not qualify as a REMIC or result in a
prohibited transaction tax under the Code. Unless otherwise specified in the
related Prospectus Supplement or Pooling and Servicing Agreement, an
Unaffiliated Originator generally will have no option to substitute for a
Mortgage Loan that it is obligated to repurchase in connection with a breach of
a representation and warranty.
The Servicer will be required under the applicable Pooling and Servicing
Agreement to enforce such purchase or substitution obligations for the benefit
of the Trustee and the Securityholders, following the practices it would employ
in its good faith business judgment if it were the owner of such Mortgage Loan;
provided, however, that this purchase or substitution obligation will in no
event become an obligation of the Servicer in the event the Originator fails to
honor such obligation. If the Originator fails to repurchase or substitute a
Mortgage Loan and no breach of the Sponsor's representations has occurred, the
Originator's purchase obligation will in no event become an obligation of the
Sponsor. Unless otherwise specified in the related Prospectus Supplement, the
foregoing will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by an Originator in its capacity as a
seller of Mortgage Loans to the Sponsor.
Notwithstanding the foregoing with respect to any Originator that
requests the Servicer's consent to the transfer of sub-servicing rights relating
to any Mortgage Loans to a successor servicer, the Servicer may release such
Originator from liability, under its representations and warranties described
above, upon the assumption by such successor servicer of the Originator's
liability for such representations and warranties as of the date they were made.
In that event, the Servicer's rights under the instrument by which such
successor servicer assumes the Originator's liability will be assigned to the
Trustee, and such successor servicer shall be deemed to be the "Originator" for
purposes of the foregoing provisions.
SUB-SERVICING BY ORIGINATORS
An Originator of a Mortgage Loan may act as the Sub-Servicer for such
Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is released
to the Servicer or has been transferred to a servicer approved by the Servicer.
The Servicer may, in turn, assign such sub-servicing to designated sub-servicers
that will be qualified Originators and may include affiliates of the Sponsor.
While such a Sub-Servicing Agreement will be a contract solely between the
Servicer and the Sub-Servicer, the Pooling and Servicing Agreement pursuant to
which a series of Securities is issued will provide that, if for any reason the
Servicer for such series of Securities is no longer the servicer of the related
Mortgage Loans, the Trustee or any successor Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, with
the approval of the Servicer, a Sub-Servicer may delegate its servicing
obligations to third-party servicers, but such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer, including collection
of payments from Mortgagors and remittance of such collections to the Servicer;
maintenance of hazard insurance and flood insurance, if applicable, and filing
and settlement of claims thereunder, subject in certain cases to the right of
the Servicer to approve in advance any such settlement; maintenance of escrow or
impound accounts of Mortgagors for payment of taxes, insurance and
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other items required to be paid by the Mortgagor pursuant to the
Mortgage Loan; processing of assumptions or substitutions; attempting to cure
delinquencies; supervising foreclosures; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Mortgage Loans. A Sub-Servicer also may be obligated to make
advances to the Servicer in respect of delinquent installments of principal
and/or interest (net of any sub-servicing or other compensation) on Mortgage
Loans, as described more fully under "Description of the Securities--Advances,"
and in respect of certain taxes and insurance premiums not paid on a timely
basis by Mortgagors. A Sub-Servicer may also be obligated to deposit amounts in
respect of Compensating Interest to the related Principal and Interest Account
in connection with prepayments of principal received and applied to reduce the
outstanding principal balance of a Mortgage Loan. No assurance can be given that
the Sub-Servicers will carry out their advance or payment obligations, if any,
with respect to the Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, a Sub-Servicer may transfer its servicing obligations to
another entity that has been approved for participation in the Sponsor's
Mortgage Loan Program, but only with the prior written approval of the Servicer.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a Base Servicing Fee. The Sub-Servicer may also be entitled to
collect and retain, as part of its servicing compensation, any late charges or
prepayment penalties provided in the Mortgage Note or related instruments. The
Sub-Servicer will be entitled to reimbursement for certain expenditures that it
makes, generally to the same extent that the Servicer would be reimbursed under
the applicable Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield."
Each Sub-Servicer will be required to agree to indemnify the Servicer
for any liability or obligation sustained by the Servicer in connection with any
act or failure to act by the Sub-Servicer in its servicing capacity. Each
Sub-Servicer is required to maintain a fidelity bond and an errors and omission
policy with respect to its officers, employees and other persons acting on its
behalf or on behalf of the Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the SubServicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is terminated earlier by the
Servicer or unless servicing is released to the Servicer. The Servicer generally
may terminate a Sub-Servicing Agreement immediately upon the giving of notice
upon certain stated events, including the violation of such Sub-Servicing
Agreement by the Sub-Servicer, or following a specified period after notice to
the Sub-Servicer without cause upon payment of an amount equal to a specified
termination fee calculated as a specified percentage of the aggregate
outstanding principal balance of all mortgage loans, including the Mortgage
Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing Agreement and
certain transfer fees.
The Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may act
as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Servicer acts as servicer, it will not assume
liability for the representations and warranties of the Sub-Servicer that it
replaces. If the Servicer enters into a new SubServicing Agreement, each new
Sub-Servicer either must be an Originator, meet the standards for becoming an
Originator or have such servicing experience that is otherwise satisfactory to
the Servicer. The Servicer may make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur and, in any event, if the new Sub-Servicer is an affiliate of the
Servicer, the liability for such representations and warranties will not be
assumed by such new Sub-Servicer. In the event of such an assumption, the
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and warranties.
Any amendments to a Sub-Servicing Agreement or to a new Sub-Servicing Agreement
may contain provisions different from those described above that are in effect
in the original SubServicing Agreements. However, the Pooling and Servicing
Agreement for each Trust Estate will provide that any such amendment or new
agreement may not be inconsistent with such Pooling and Servicing Agreement to
the extent that it would materially and adversely affect the interests of the
Securityholders.
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MASTER SERVICER
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool in the Trust Estate will be
provided by the Servicer directly or through one or more Sub-Servicers subject
to supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Pooling and Servicing Agreement with the Master Servicer, (ii)
maintain a current data base with the payment histories of each Mortgagor, (iii)
review monthly servicing reports and data relating to the Mortgage Pool for
discrepancies and errors, and (iv) act as back-up Servicer during the term of
the transaction unless the Servicer is terminated or resigns, in such case the
Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement for any Series for which Mortgage Loans comprise the Trust Estate.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be required to be a FNMA-or FHLMC-approved seller/servicer and, in
the case of FHA Loans, approved by HUD as an FHA mortgagee. The Master Servicer
will be compensated for the performance of its services and duties under each
Pooling and Servicing Agreement as specified in the related Prospectus
Supplement.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under "The Pooling and Servicing Agreement" below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
FixedIncome Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a series may include two or more classes of Fixed-Income Securities
that differ as to timing, sequential order, priority of payment, Interest Rate
or amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or formula, or on
the basis of collections from designated portions of the related Mortgage Pool,
which series may include one or more classes of Fixed-Income Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
principal balance in the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as hereinafter defined and in the
manner described in the related Prospectus Supplement.
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If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest", "seller's interest" or the "general partnership interest", depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Sponsor. In addition, the Sponsor and its
affiliates may initially or permanently hold any Equity Securities issued by any
Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their Securities on
specified dates ("Payment Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or semi-annually, as described in the
related Prospectus Supplement; Payment Dates with respect to Equity Securities
will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date.
The related Prospectus Supplement and the Pooling and Servicing
Agreement will describe a period (a "Remittance Period") antecedent to each
Payment Date (for example, in the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment Date occurs or such other specified
period). Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans during a
Remittance Period will be required to be remitted by the Servicer to the related
Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather than
used to distribute payments of principal to Securityholders during such period)
with the result that the related Securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to distribute payments of principal to
Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or
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to attempt to match the amortization rate of the related Securities to an
amortization schedule established at the time such Securities are issued. Any
such feature applicable to any Securities may terminate upon the occurrence of
events to be described in the related Prospectus Supplement, resulting in the
current funding of principal payments to the related Securityholders and an
acceleration of the amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality or the Sponsor, the Servicer, the
Master Servicer, if any, any Sub-Servicer, any Originator or any of their
affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interest in a
separate Trust Estate created pursuant to such Pooling and Servicing Agreement.
A Trust Estate will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage
documents) or certificates of interest or participations therein underlying a
particular series of Securities as from time to time are subject to the Pooling
and Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of their affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation,
payments and collections in respect of the Mortgage Loans due, accrued or
received, as described in the related Prospectus Supplement, on and after the
related Cut-Off Date, as from time to time are identified as deposited in
respect thereof in the Principal and Interest Account and in the related
Distribution Account; (iii) property acquired by foreclosure of the Mortgage
Loans or deed in lieu of foreclosure; (iv) hazard and flood insurance policies
and primary mortgage insurance policies, if any, and certain proceeds thereof;
and (v) any combination, as specified in the related Prospectus Supplement, of a
letter of credit, financial guaranty insurance policy, purchase obligation,
mortgage pool insurance policy, special hazard insurance policy, bankruptcy
bond, reserve fund or other type of Credit Enhancement as described under
"Description of Credit Enhancement." To the extent that any Trust Estate
includes certificates of interest or participations in Mortgage Loans, the
related Prospectus Supplement will describe the material terms and conditions of
such certificates or participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ("Physical
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar of the Securities (the "Security
Registrar") named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and 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, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities 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 from the Trustee through DTC and its
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Participants. Under a book-entry format, Securityholders will receive payments
after the related Payment Date because, while payments are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such
payments to its Participants, which thereafter will be required to forward such
payments to Indirect Participants or Securityholders. Unless and until Physical
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 Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such 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 will be able to transfer their interests.
Unless and until Physical Certificates 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 a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
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 Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Certificates"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for re-registration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
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 Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
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ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will
cause the Mortgage Loans being included in the related Trust Estate to be
assigned to the Trustee together with, unless otherwise specified in the related
Prospectus Supplement, all payments and collections in respect of the Mortgage
Loans due, accrued or received, as described in the related Prospectus
Supplement on or after the related Cut-Off Date. If specified in the related
Prospectus Supplement, the Sponsor or any of its affiliates may retain the
Originator's Retained Yield, if any, for itself or transfer the same to others.
The Trustee will, concurrently with such assignment, deliver a series of
Securities to the Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the related Pooling
and Servicing Agreement. Such schedule will include, among other things,
information as to the principal balance of each Mortgage Loan as of the CutOff
Date, as well as information regarding the Mortgage Rate, the currently
scheduled monthly payment of principal and interest and the maturity of the
Mortgage Note.
A typical provision relating to document delivery requirements would
provide that the Sponsor deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed by the Originator thereof
in blank or to the order of the holder, (ii) originals of all intervening
assignments, showing a complete chain of title from origination to the
applicable Originators, if any, including warehousing assignments, with evidence
of recording thereon, (iii) originals of all assumption and modification
agreements, if any, and, unless such Mortgage Loan is covered by a counsel's
opinion as described in the next paragraph, (iv) either: (a) the original
Mortgage, with evidence of recording thereon, (b) a true and accurate copy of
the Mortgage where the original has been transmitted for recording, until such
time as the original is returned by the public recording office or (c) a copy of
the Mortgage certified by the public recording office in those instances where
the original recorded Mortgage has been lost. To the extent that such a file
containing all or a portion of such items has been delivered to the Trustee, the
Trustee will generally be required, for the benefit of the Securityholders, to
review each such file within a specified period, generally not exceeding 90
days, to ascertain that all required documents (or certified copies of
documents) have been executed and received.
Generally, transfer documentation from the Originators to the Sponsor
will have been prepared and filed prior to the execution and delivery of the
Pooling and Servicing Agreement. A typical provision relating to the preparation
and filing of transfer documentation will require the Sponsor to cause to be
prepared and recorded, within a specified period, generally not exceeding 75
business days of the execution and delivery of the applicable Pooling and
Servicing Agreement (or, if original recording information is unavailable,
within such later period as is permitted by the Pooling and Servicing Agreement)
assignments of the Mortgages from the Sponsor to the Trustee, in the appropriate
jurisdictions in which such recordation is necessary to perfect the lien thereof
as against creditors of or purchasers from the Sponsor, to the Trustee;
provided, however, that if the Sponsor furnishes to the Trustee an opinion of
counsel to the effect that no such recording is necessary to perfect the
Trustee's interests in the Mortgages with respect to one or more jurisdictions,
then such recording will not be required with respect to such jurisdictions.
Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall promptly so notify the Sponsor, which may
notify the related Sub-Servicer or Originator, as the case may be. If the
Sponsor or the Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Sponsor or Originator, as the case may be, the Sponsor or such Originator will
be obligated to purchase on the next succeeding Remittance Date the related
Mortgage Loan from the Trustee at its Loan Purchase Price (or, if specified in
the related Prospectus Supplement, will be permitted to substitute for such
Mortgage Loan under the conditions specified in the related Prospectus
Supplement). The Servicer will be obligated to enforce this obligation of the
Originator, as the case may be, to the extent described above under "Mortgage
Loan Program--Representations by Originators." Unless otherwise specified in the
related Prospectus Supplement, neither the Servicer nor the Sponsor will,
however, be obligated to purchase or substitute for such Mortgage Loan if the
Originator defaults on its obligation to do so, and there can be no assurance
that an Originator, as the case may be, will carry out any such obligation.
Unless otherwise specified in the related
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Prospectus Supplement, such purchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized at any time to appoint a custodian
pursuant to a custodial agreement to maintain possession of and, if applicable,
to review the documents relating to the Mortgage Loans as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Securities will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, the Servicer, either
directly or through SubServicers, will service and administer the Mortgage Loans
assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a "Forward Purchase
Agreement") with the Sponsor whereby the Sponsor will agree to transfer
additional Mortgage Loans to such Trust following the date on which such Trust
is established and the related Securities are issued. The Trust may enter into
Forward Purchase Agreements to permit the acquisition of additional Mortgage
Loans (the "Subsequent Mortgage Loans") that could not be delivered by the
Sponsor or have not formally completed the origination process, in each case
prior to the date on which the Securities are delivered to the Securityholders
(the "Closing Date"). Any Forward Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Forward Purchase Agreement, this Prospectus and the related Prospectus
Supplement. In addition, the Forward Purchase Agreement will state that the
Sponsor shall only transfer the Subsequent Mortgage Loans upon the satisfaction
of certain conditions, including that the Sponsor shall have delivered opinions
of counsel (including bankruptcy, corporate and tax opinions) with respect to
the transfer of the Subsequent Mortgage Loans to the Certificate Insurer, the
Rating Agencies and the Trustee.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "PreFunding Account") up to
100% of the net proceeds received by the Trustee in connection with the sale of
one or more classes of Securities of the related series; the additional Mortgage
Loans will be transferred to the related Trust in exchange for money released to
the Sponsor from the related Pre-Funding Account. Each Forward Purchase
Agreement will set a specified period (the "Funding Period") during which any
such transfers must occur; for a Trust which elects federal income treatment as
a REMIC or as a grantor trust, the related Funding Period will be limited to
three months from the date such Trust is established; for a Trust which is
treated as a mere security device for federal income tax purposes, the related
Funding Period will be limited to nine months from the date such Trust is
established. The Forward Purchase Agreement or the related Pooling and Servicing
Agreement will require that if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of the related Funding Period,
then any remaining moneys will be applied as a mandatory prepayment of the
related class or classes of Securities as specified in the related Prospectus
Supplement.
During the Funding Period, the moneys deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in
cash-equivalent investments that are rated in one of the four highest rating
categories by at least one nationally recognized statistical rating organization
and that will either mature prior to the end of the Funding Period, or will be
drawable on demand and in any event, will not constitute the type of investment
that would require registration of the related Trust as an "investment company"
under the Investment Company Act of 1940, as amended. On payment dates that
occur during the Funding Period, the Trustee will transfer any earnings on the
moneys in the Pre-Funding Account to the Certificate Account for distribution to
the Securityholders.
The Pre-Funding Account will be maintained by a Trustee, which must be a
bank having combined capital and surplus, generally, of a least $100,000,000,
long-term, unsecured debt rated at least investment grade and a long-term
deposit rating of at least investment grade.
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PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the "Sub-Servicing Account")
that is acceptable to the Servicer. A Sub-Servicing Account must be established
with a Federal Home Loan Bank or with a depository institution (including the
Sub-Servicer itself) whose accounts are insured by the National Credit Union
Share Insurance Fund or the FDIC. Except as otherwise permitted by the
applicable Rating Agencies, a Sub-Servicing Account must be segregated and may
not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on
a daily basis all amounts described above under "Mortgage Loan
Program--Sub-Servicing by Originators" that are received by it in respect of the
Mortgage Loans, less its servicing or other compensation. On or before the date
specified in the Sub-Servicing Agreement (which date may be no later than the
business day prior to the Determination Date referred to below or, if such day
is not a business day, the preceding business day), the Sub-Servicer must remit
or cause to be remitted to the Servicer all funds held in the Sub-Servicing
Account with respect to Mortgage Loans that are required to be so remitted. A
Sub-Servicer may also be required to make such Servicing Advances and
Delinquency Advances and to pay Compensating Interest as set forth in the
related SubServicing Agreement.
The Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due, accrued or received, as described in the related Prospectus Supplement on
or after to the Cut-Off Date, as specifically set forth in the related Pooling
and Servicing Agreement, such as the following except as otherwise provided
therein:
(i) all payments on account of principal, including principal
payments received in advance of the date on which the related monthly
payment is due (the "Due Date") ("Principal Prepayments"), on the
Mortgage Loans comprising a Trust Estate;
(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment thereof
retained by the Sub-Servicer, if any, as its servicing or other
compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed advances made, by the
related Sub-Servicer) received and retained, if any, in connection with
the liquidation of any defaulted Mortgage Loan, by foreclosure, deed in
lieu of foreclosure or otherwise ("Liquidation Proceeds"), including all
proceeds of any special hazard insurance policy, bankruptcy bond,
mortgage pool insurance policy, financial guaranty insurance policy and
any title, hazard or other insurance policy covering any Mortgage Loan
in such Mortgage Pool (together with any payments under any letter of
credit, "Insurance Proceeds") or proceeds from any alternative
arrangements established in lieu of any such insurance and described in
the applicable Prospectus Supplement, other than proceeds to be applied
to the restoration of the related property or released to the Mortgagor
in accordance with the Servicer's normal servicing procedures (such
amounts, net of related unreimbursed expenses and advances of the
Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Estate
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Servicer, the Sponsor, any
Sub-Servicer or Originator or any other person pursuant to the terms of
the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Representations by Originators," "--Assignment of Mortgage
Loans" above;
(vi) any amounts required to be deposited by the Servicer in
connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
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(vii) any amounts required to be deposited in connection with the
liquidation of the related Trust; and
(viii) any amounts required to be transferred from the
Distribution Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Sponsor shall
cause to be established and the Trustee will maintain, at the corporate trust
office of the Trustee, in the name of the Trust for the benefit of the holders
of each series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the "Distribution
Account"). The Principal and Interest Account and the Distribution Account each
must be maintained with a Designated Depository Institution. A "Designated
Depository Institution" is an institution whose deposits are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, the
long-term deposits of which have a rating satisfactory to the Rating Agencies
and the related Credit Enhancer, if any, and which is any of the following: (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the related
Credit Enhancer, if any, each Rating Agency and, in each case acting or
designated by the Servicer as the depository institution for the Principal and
Interest Account; provided, however, that any such institution or association
will generally be required to have combined capital, surplus and undivided
profits of at least $100,000,000. Notwithstanding the foregoing, the Principal
and Interest Account may be held by an institution otherwise meeting the
preceding requirements except that the only applicable rating requirement shall
be that the unsecured and uncollateralized debt obligations thereof shall be
rated at a level satisfactory to one or more Rating Agencies if such institution
has trust powers and the Principal and Interest Account is held by such
institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account and other accounts
described in the related Prospectus Supplement are collectively referred to as
"Accounts." All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the Securityholders and the related
Credit Enhancer, if any, as directed by the Servicer, in certain defined
obligations set forth in the related Pooling and Servicing Agreement ("Eligible
Investments"). The Principal and Interest Account may contain funds relating to
more than one series of Securities as well as payments received on other
mortgage loans serviced or master serviced by it that have been deposited into
the Principal and Interest Account. All funds in the Principal and Interest
Account will be required to be held (i) uninvested, up to limits insured by the
FDIC or (ii) invested in Eligible Investments. The Servicer will be entitled to
any interest or other income or gain realized with respect to the funds on
deposit in the Principal and Interest Account.
To the extent that the ratings, if any, then assigned to the unsecured
debt of the Servicer or of the Servicer's corporate parent and satisfactory to
the Rating Agencies, the Servicer may be permitted to co-mingle Mortgage Loan
payments and collections with the Servicer's general funds rather than required
to deposit such amounts into a segregated Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, on the
day seven days preceding each Payment Date (the "Remittance Date"), the Servicer
will withdraw from the Principal and Interest Account and remit to the Trustee
for deposit in the applicable Distribution Account, in immediately available
funds, the amount to be distributed therefrom to Securityholders on such Payment
Date. The Servicer will remit to the Trustee for deposit into the Distribution
Account the amount of any advances made by the Servicer as described herein
under "--Advances," any amounts required to be transferred to the Distribution
Account from a Reserve Fund, as described under "Credit Enhancement" below, any
amounts required to be paid by the Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the
Servicer to cover hazard losses on the Mortgage Loans as described under "Hazard
Insurance; Claims Thereunder--Hazard Insurance Policies" below and any other
amounts as specifically set forth in the related Pooling and Servicing
Agreement. The Trustee will cause all payments received by it from any Credit
Enhancer to be deposited in the Distribution Account not later than the related
Payment Date.
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Unless otherwise specified in the related Prospectus Supplement, the
portion of any payment received by the Servicer in respect of a Mortgage Loan
that is allocable to the Originator's Retained Yield generally will not be
deposited into the Principal and Interest Account, but will not be paid over to
the parties entitled thereto as provided in the related Pooling and Servicing
Agreement.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Servicer. Funds on deposit in the related Distribution
Account may be invested in Eligible Investments maturing, in general, no later
than the business day preceding the next Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will
deposit the related Buydown Funds provided to it in a Buydown Account that will
comply with the requirements set forth herein with respect to a Sub-Servicing
Account. Unless otherwise specified in the related Prospectus Supplement, the
terms of all Buydown Mortgage Loans provide for the contribution of Buydown
Funds in an amount equal to or exceeding either (i) the total payments to be
made from such funds pursuant to the related buydown plan or (ii) if such
Buydown Funds are to be deposited on a discounted basis, that amount of Buydown
Funds which, together with investment earnings thereon at a rate as set forth by
the Sponsor from time to time, will support the scheduled level of payments due
under the Buydown Mortgage Loan. Neither the Servicer nor the Sponsor will be
obligated to add to any such discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any such insufficiency is not recoverable from the
Mortgagor or, in an appropriate case, from the related Originator or the related
SubServicer, distributions to Securityholders may be affected. With respect to
each Buydown Mortgage Loan, the Sub-Servicer will withdraw from the Buydown
Account and remit to the Servicer on or before the date specified in the
Sub-Servicing Agreement described above the amount, if any, of the Buydown Funds
(and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan
that, when added to the amount due from the Mortgagor on such Buydown Mortgage
Loan, equals the full monthly payment which would be due on the Buydown Mortgage
Loan if it were not subject to the buydown plan.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Sub-Servicer will withdraw from
the Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown Mortgage
Loan, the Sub-Servicer will generally be required to withdraw from the Buydown
Account and remit to the Servicer the Buydown Funds and investment earnings
thereon, if any, which together with such prepayment will result in a prepayment
in full; provided that Buydown Funds may not be available to cover a prepayment
under certain Mortgage Loan programs. Any Buydown Funds so remitted to the
Servicer in connection with a prepayment described in the preceding sentence
will be deemed to reduce the amount that would be required to be paid by the
Mortgagor to repay fully the related Mortgage Loan if the Mortgage Loan were not
subject to the buydown plan. Any investment earnings remaining in the Buydown
Account after prepayment or after termination of the Buydown Period will be
remitted to the related Mortgagor or such other designated party pursuant to the
agreement relating to each Buydown Mortgage Loan (the "Buydown Agreement"). If
the Mortgagor defaults during the Buydown Period with respect to a Buydown
Mortgage Loan and the property securing such Buydown Mortgage Loan is sold in
liquidation (either by the Servicer, the Primary Insurer, the insurer under the
mortgage pool insurance policy (the "Pool Insurer") or any other insurer), the
Sub-Servicer will be required to withdraw from the Buydown Account the Buydown
Funds and all investment earnings thereon, if any, and remit the same to the
Servicer or, if instructed by the Servicer, pay the same to the primary insurer
or the Pool Insurer, as the case may be, if the Mortgaged Property is
transferred to such insurer and such insurer pays all of the loss incurred in
respect of such default.
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WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Servicer may, from time to time, make withdrawals from the Principal
and Interest Account for certain purposes, as specifically set forth in the
related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to
the Distribution Account in the amounts and in the manner provided in
the Pooling and Servicing Agreement and described in "-Payments on
Mortgage Loans; Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency
Advances and Servicing Advances as to any Mortgaged Property, out of
late payments or collections on the related Mortgage Loan with respect
to which such Delinquency Advances or Servicing Advances were made;
(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to pay the Sponsor or their assignees all amounts allocable
to the Originator's Retained Yield out of collections or payments which
represent interest on each Mortgage Loan (including any Mortgage Loan as
to which title to the underlying Mortgaged Property was acquired);
(v) to withdraw amounts that have been deposited in the Principal
and Interest Account in error;
(vi) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the
Pooling and Servicing Agreement, as described in "The Pooling and
Servicing Agreement--Termination, Retirement of Securities;" and
(vii) to invest in Eligible Investments.
DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semiannually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided percentage
interest (the "Percentage Interest") represented by a Security of a particular
class will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of such Security by the aggregate initial amount or
notional balance of all the Securities of such class. Distributions will be made
in immediately available funds (by wire transfer or otherwise) to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or the Paying
Agent, as the case may be, and the applicable Pooling and Servicing Agreement
provides for such form of payment, or by check mailed to the address of the
person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (other than
any Book-Entry Securities) will be made only upon presentation and surrender of
the Securities at the office or agency of the Trustee specified in the notice to
Securityholders of such final distribution.
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PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related Prospectus
Supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different interest rate (the "Pass-Through
Rate"), which may be a fixed or adjustable Pass-Through Rate. The related
Prospectus Supplement will specify the Pass-Through Rate for each class, or in
the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and
the method for determining the Pass-Through Rate. Unless otherwise specified in
the related Prospectus Supplement, interest on the Securities will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes
of Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit Enhancer, if any,
and the Trustee) of the month of distribution (the "Determination Date"), the
Trustee will determine the amounts of principal and interest which will be
passed through to Securityholders on the immediately succeeding Payment Date. If
the amount in the Distribution Account is insufficient to cover the amount to be
passed through to Securityholders, the Trustee will be required to notify the
related Credit Enhancer, if any, pursuant to the related Pooling and Servicing
Agreement for the purpose of funding such deficiency.
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ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be required, not later than each Remittance Date, to deposit into
the Principal and Interest Account an amount equal to the sum of the interest
portions (net of the Servicing Fees and the Originators' Retained Yield) due,
but not collected, with respect to delinquent Mortgage Loans directly serviced
by the Servicer during the prior Remittance Period, but only if, in its good
faith business judgment, the Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. As may be described in the related
Prospectus Supplement, the Servicer may also be required to advance delinquent
payments of principal. Any such amounts so advanced are "Delinquency Advances".
The Servicer will be permitted to fund its payment of Delinquency Advances on
any Remittance Date from collections on any Mortgage Loan deposited to the
Principal and Interest Account subsequent to the related Remittance Period, and
will be required to deposit into the Principal and Interest Account with respect
thereto (i) collections from the Mortgagor whose delinquency gave rise to the
shortfall which resulted in such Delinquency Advance and (ii) Net Liquidation
Proceeds recovered on account of the related Mortgage Loan to the extent of the
amount of aggregate Delinquency Advances related thereto. A SubServicer will be
permitted to fund its payment of Delinquency Advances as set forth in the
related SubServicing Agreement.
A Mortgage Loan is "delinquent" if any payment due thereon is not made
by the close of business on the day such payment is scheduled to be due.
Unless otherwise specified in the related Prospectus Supplement, on or
prior to each Remittance Date, the Servicer will be required to deposit in the
Principal and Interest Account with respect to any full prepayment received on a
Mortgage Loan directly serviced by the Servicer during the related Remittance
Period out of its own funds without any right of reimbursement therefor, an
amount equal to the difference between (x) 30 days' interest at the Mortgage
Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators'
Retained Yield, if any) on the principal balance of such Mortgage Loan as of the
first day of the related Remittance Period and (y) to the extent not previously
advanced, the interest (less the Servicing Fee and the Originators' Retained
Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by the Servicer, "Compensating
Interest"). The Servicer shall not be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by the Servicer with respect to all Mortgage Loans
directly serviced by such Servicer for such Remittance Period.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that the Servicer reasonably believes that such amounts will increase
Net Liquidation Proceeds on the related Mortgage Loan. Each such amount so paid
will constitute a "Servicing Advance". The Servicer may 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 realized upon the liquidation of the related Mortgage
Loan or, in certain cases, from excess cash flow otherwise payable to the
holders of the related Equity Securities.
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described under "The Pooling
and Servicing Agreement--Termination; Retirement of Securities" below, the
Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Servicer's
obligation to make advances may be supported by Credit Enhancement as described
in the related Pooling and Servicing Agreement. In the event that the provider
of such support is downgraded by a Rating Agency rating the related Securities
or if the collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Securities may also be downgraded.
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REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage Loans
after giving effect to the distribution of principal on such Payment
Date;
(v) with respect to a series consisting of two or more classes,
the outstanding principal balance or notional amount of each class after
giving effect to the distribution of principal on such Payment Date;
(vi) the amount of coverage under any letter of credit, mortgage
pool insurance policy or other form of Credit Enhancement covering
default risk as of the close of business on the applicable Determination
Date and a description of any Credit Enhancement substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan Purchase
Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor")
computed by dividing the principal balance of all Securities in such
class (after giving effect to any distribution of principal to be made
on such Payment Date) by the original principal balance of the
Securities of such class on the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
In addition, on each Payment Date the Trustee will forward or cause to
be forwarded additional information, as of the close of business on the last day
of the prior calendar month, as more specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate principal
balances thereof, together with the number, percentage (based on the
then-outstanding principal balances) and aggregate principal balances of
Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days delinquent and
(c) 90 or more days delinquent;
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(ii) the number, percentage (based on the then-outstanding
principal balances), aggregate Mortgage Loan balances and status of all
Mortgage Loans in foreclosure proceedings (and whether any such Mortgage
Loans are also included in any of the statistics described in the
foregoing clause (i));
(iii) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all Mortgage
Loans relating to Mortgagors in bankruptcy proceedings (and whether any
such Mortgage Loans are also included in any of the statistics described
in the foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all Mortgage
Loans relating to the status of any Mortgaged Properties as to which
title has been taken in the name of, or on behalf of the Trustee (and
whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i)); and
(v) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure.
COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Servicer, is required to service
and administer the Mortgage Loans in accordance with the Pooling and Servicing
Agreement and with reasonable care, and using that degree of skill and attention
that the Servicer exercises with respect to comparable mortgage loans that it
services for itself or others.
The duties of the Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances to the extent described in the
related Prospectus Supplement. The Servicer is required to follow its customary
standards, policies and procedures in performing its duties as Servicer.
The Servicer (i) is authorized and empowered to execute and deliver, on
behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the related Mortgaged Properties; (ii) may consent to
any modification of the terms of any Note not expressly prohibited by the
Pooling and Servicing Agreement if the effect of any such modification (x) will
not materially and adversely affect the security afforded by the related
Mortgaged Property or the timing of receipt of any payments required thereunder
(in each case other than as permitted by the related Pooling and Servicing
Agreement); and (y) will not cause a Trust which is a REMIC to fail to qualify
as a REMIC.
The related Pooling and Servicing Agreement will require the Servicer to
follow such collection procedures as it follows from time to time with respect
to mortgage loans in its servicing portfolio that are comparable to the Mortgage
Loans; provided that the Servicer is required always at least to follow
collection procedures that are consistent with or better than standard industry
practices. The Servicer may in its discretion (i) waive any assumption fees,
late payment charges, charges for checks returned for insufficient funds, if
any, or the fees which may be collected in the ordinary course of servicing the
Mortgage Loans, (ii) if a Mortgagor is in default or about to be in default
because of a Mortgagor's financial condition, arrange with the Mortgagor a
schedule for the payment of delinquent payments due on the related Mortgage
Loan; provided, however, the Servicer shall generally not be permitted to
reschedule the payment of delinquent payments more than one time in any twelve
consecutive months with respect to any Mortgagor or (iii) modify payments of
monthly principal and interest on any Mortgage Loan becoming subject to the
terms of the Relief Act in accordance with the Servicer's general policies of
the comparable mortgage loans subject to such Relief Act.
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When a Mortgaged Property (other than Manufactured Housing or Mortgaged
Property subject to an ARM Loan) has been or is about to be conveyed by the
Mortgagor, the Servicer will be required, to the extent it has knowledge of such
conveyance or prospective conveyance, to exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Note; provided, however, that the Servicer will not
be required to exercise any such right if (i) the "due-on-sale" clause, in the
reasonable belief of the Servicer, is not enforceable under applicable law or
(ii) the Servicer reasonably believes that to permit an assumption of the
Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the related Credit Enhancer or jeopardize coverage under any
primary insurance policy or applicable Credit Enhancement arrangements. In such
event, the Servicer will be required to enter into an assumption and
modification agreement with the person to whom such Mortgaged 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 related
documents, the Mortgagor remains liable thereon. If the foregoing is not
permitted under applicable law, the Servicer will be authorized 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. The assumed loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable
and if, in the reasonable judgment of the Servicer or the Sub-Servicer, the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the loan and the security for such ARM Loan would not be impaired by the
assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM
Loan without consent, such ARM Loan may be declared due and payable. Any fee
collected by the Servicer or Sub-Servicer for entering into an assumption or
substitution of liability agreement will be retained by the Servicer or
Sub-Servicer as additional servicing compensation unless otherwise set forth in
the related Prospectus Supplement. See "Certain Legal Aspects of Mortgage Loans
and Related Matters--Enforceability of Certain Provisions" herein.
The Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the credit profile of the related
Mortgage Loan after any release is consistent with the underwriting guidelines
then applicable to such Mortgage Loan; and (iii) the lien priority of the
related Mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer shall foreclose upon or otherwise comparably effect the
ownership of Mortgaged Properties relating to defaulted Mortgage Loans as to
which no satisfactory arrangements can be made for collection of delinquent
payments and which the Servicer has not purchased pursuant to the related
Pooling and Servicing Agreement (such Mortgage Loans, "REO Property"). In
connection with such foreclosure or other conversion, the Servicer shall
exercise such of the rights and powers vested in it, and use the same degree of
care and skill in their exercise or use, as prudent mortgage lenders would
exercise or use under the circumstances in the conduct of their own affairs,
including, but not limited to, making Servicing Advances for the payment of
taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless
otherwise provided in the related Prospectus Supplement, the Servicer shall sell
any REO Property within 23 months of its acquisition by the Trust. The Pooling
and Servicing Agreements generally will permit the Servicer to cease further
collection and foreclosure activity if the Servicer reasonably determines that
such further activity would not increase collections or recoveries to be
received by the related Trust with respect to the related Mortgage Loan. In
addition, any required advancing may be permitted to cease at this point.
Notwithstanding the generality of the foregoing provisions, the Servicer
will be required to manage, conserve, protect and operate each REO Property for
the Securityholders solely for the purpose of its prompt disposition and sale as
"foreclosure property" within the meaning of Section 860G(a)(8) of the Code or
result in the receipt by the Trust of any "income from non-permitted assets"
within the meaning of Section 860F(a)(2)(B) of the Code or any "net income from
foreclosure property" which is subject to taxation under the REMIC
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Provisions. Pursuant to its efforts to sell such REO Property, the Servicer
shall either itself or through an agent selected by the Servicer protect and
conserve such REO Property in the same manner and to such extent as is customary
in the locality where such REO Property is located and may, incident to its
conservation and protection of the interests of the Securityholders, rent the
same, or any part thereof, as the Servicer deems to be in the best interest of
the Securityholders for the period prior to the sale of such REO Property. The
Servicer shall take into account the existence of any hazardous substances,
hazardous wastes or solid wastes, as such terms are defined in the Comprehensive
Environmental Response Compensation and Liability Act, the Resource Conservation
and Recovery Act of 1976, or other federal, state or local environmental
legislation, on a Mortgaged Property in determining whether to foreclose upon or
otherwise comparably convert the ownership of such Mortgaged Property.
The Servicer shall determine, with respect to each defaulted Mortgage
Loan, when it has recovered, whether through trustee's sale, foreclosure sale or
otherwise, all amounts it expects to recover from or on account of such
defaulted Mortgage Loan, whereupon such Mortgage Loan shall become a Liquidated
Mortgage Loan. A Mortgage Loan which is "charged-off", i.e., as to which the
Servicer ceases further collection and/or foreclosure activity as a result of a
determination that such further actions will not increase collections or
recoveries to be received by the related Trust is also a "Liquidated Mortgage
Loan".
If a loss is realized on a defaulted Mortgage Loan or REO Property upon
the final liquidation thereof that is not covered by any applicable form of
Credit Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Mortgagor, the Servicer will
be entitled to retain such gain as additional servicing compensation unless the
related Prospectus Supplement provides otherwise. For a description of the
Servicer's obligations to maintain and make claims under applicable forms of
Credit Enhancement and insurance relating to the Mortgage Loans, see
"Description of Credit Enhancement" and "Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies."
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby. Subordination of the Subordinate Securities of any Senior/Subordinate
Series of Securities will be effected by the following method, unless an
alternative method is specified in the related Prospectus Supplement. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities, as specified in the related
Prospectus Supplement, in which case the following discussion is qualified in
its entirety by reference to the related Prospectus Supplement with respect to
the various priorities and other rights as among the various classes of Senior
Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage Loans
not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, "charged-off" or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a "Realized Loss"), will equal the
portion of the stated principal balance remaining, after
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application of all amounts recovered (net of amounts reimbursable to the
Servicer for related advances and expenses) towards interest and principal owing
on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage
to Mortgaged Properties that are generally of the same type as are covered under
a special hazard insurance policy, the amount thereof that may be allocated to
the Subordinate Securities of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement-Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to a
Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
comprised of one or more of the following components. Each component will have a
monetary limit and will provide coverage with respect to Realized Losses that
are (i) attributable to the Mortgagor's failure to make any payment of principal
or interest as required under the Mortgage Note, but not including Special
Hazard Losses, Extraordinary Losses or other losses resulting from damage to a
Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such loss, a
"Defaulted Mortgage Loss"); (ii) of a type generally covered by a special hazard
insurance policy (as defined below) (any such loss, a "Special Hazard
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Loss"); (iii) attributable to certain actions which may be taken by a bankruptcy
court in connection with a Mortgage Loan, including a reduction by a bankruptcy
court of the principal balance of or the Mortgage Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss"). Losses
occasioned by war, civil insurrection, certain governmental actions, nuclear
reaction and certain other risks ("Extraordinary Losses") will not be covered
unless otherwise specified. To the extent that the Credit Enhancement for any
series of Securities is exhausted, the Securityholders will bear all further
risks of loss not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, 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 Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of Credit Enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any 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 that exceed the amount covered by Credit Enhancement or
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 the classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit
If any component of Credit Enhancement as to any series of Securities is
to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
related Securities or, if specified in the related Prospectus Supplement,
support the Sponsor' or any other person's obligation pursuant to a Purchase
Obligation to make certain payments to the Trustee with respect to one or more
components of Credit Enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
Credit Enhancement, will be specified in the applicable Prospectus Supplement.
The Letter of Credit will expire on the expiration date set forth in the related
Prospectus Supplement, unless earlier terminated or extended in accordance with
its terms. On or before each Payment Date, either the Letter of Credit Bank or
the Trustee (or other obligor under a Purchase Obligation) will be required to
make the payments specified in the related Prospectus Supplement after
notification from the Trustee, to be deposited in the related Distribution
Account, if and to the extent covered, under the applicable Letter of Credit.
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Mortgage Pool Insurance Policies
Any mortgage pool insurance policy ("Mortgage Pool Insurance Policy")
obtained by the Sponsor for each related Trust Estate will be issued by the Pool
Insurer named in the related Prospectus Supplement. Each Mortgage Pool Insurance
Policy will, subject to limitations specified in the related Prospectus
Supplement described below, cover Defaulted Mortgage Losses in an amount equal
to a percentage specified in the related Prospectus Supplement (or in a Current
Report on Form 8-K) of the aggregate principal balance of the Mortgage Loans on
the Cut-Off Date. As set forth under "Maintenance of Credit Enhancement," the
Servicer will use reasonable efforts to maintain the Mortgage Pool Insurance
Policy and to present claims thereunder to the Pool Insurer on behalf of itself,
the Trustee and the Securityholders. The Mortgage Pool Insurance Policies,
however, are not blanket policies against loss (typically, such policies do not
cover Special Hazard Losses, Fraud Losses and Bankruptcy Losses), since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below due to a
failure to pay irrespective of the reason therefor.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Sponsor for a Trust Estate will be issued by
the insurer named in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described in the related
Prospectus Supplement, protect holders of the related series of Securities from
(i) losses due to direct physical damage to a Mortgaged Property other than any
loss of a type covered by a hazard insurance policy or a flood insurance policy,
if applicable, and (ii) losses from partial damage caused by reason of the
application of the co-insurance clauses contained in hazard insurance policies.
See "Hazard Insurance; Claims Thereunder." A Special Hazard Insurance Policy
will not cover Extraordinary Losses. Aggregate claims under a Special Hazard
Insurance Policy will be limited to a maximum amount of coverage, as set forth
in the related Prospectus Supplement or in a Current Report on Form 8-K. A
Special Hazard Insurance Policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the Mortgaged Property securing
the Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Servicer.
Subject to the foregoing limitations, in general a Special Hazard
Insurance Policy will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the Mortgagor or the
Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the cost of
repair or replacement of such property or (ii) upon transfer of the property to
the insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the Mortgage Rate to the date of claim settlement and
certain expenses incurred by the Servicer or the Sub-Servicer with respect to
such property. If the property is transferred to a third party in a sale
approved by the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer"), the amount that the Special Hazard Insurer will pay will be
the amount under (ii) above reduced by the net proceeds of the sale of the
property.
As indicated under "Description of the Securities--Assignment of
Mortgage Loans" above and to the extent set forth in the related Prospectus
Supplement, coverage in respect of Special Hazard Losses for a series of
Securities may be provided, in whole or in part by a type of special hazard
instrument other than a Special Hazard Insurance Policy or by means of the
special hazard representation of the Sponsor.
Bankruptcy Bonds
In the event of a personal bankruptcy of a Mortgagor, it is possible
that the bankruptcy court may establish the value of the Mortgaged Property of
such Mortgagor at an amount less than the then-outstanding, principal balance of
the Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation").
The amount of the secured debt then could be reduced to such value, and, thus,
the holder of such Mortgage Loan would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan
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exceeds the value assigned to the Mortgaged Property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including a reduction in the amount of the monthly
payment on the related Mortgage Loan or a reduction in the mortgage interest
rate (a "Debt Service Reduction"; Debt Service Reductions and Deficient
Valuations, collectively referred to herein as "Bankruptcy Losses"). See
"Certain Legal Aspects of Mortgage Loans and Related Matters-Anti-Deficiency
Legislation and Other Limitations on Lenders." Any bankruptcy bond ("Bankruptcy
Bond") to provide coverage for Bankruptcy Losses for proceedings under the
federal Bankruptcy Code obtained by the Sponsor for a Trust Estate will be
issued by an insurer named in the related Prospectus Supplement. The level of
coverage under each Bankruptcy Bond will be set forth in the applicable
Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds
If so provided in the related Prospectus Supplement, the Sponsor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Eligible Investments in specified amounts, amounts otherwise distributable to
Subordinate Securityholders or the owners of any Originator's Retained Yield, or
any other instrument satisfactory to the Rating Agency or Agencies, which will
be applied and maintained in the manner and under the conditions specified in
such Prospectus Supplement. In the alternate or in addition to such deposit to
the extent described in the related Prospectus Supplement, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
Credit Enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Mortgage
Assets.
Financial Guaranty Insurance Policies
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy or surety bond ("Financial Guaranty Insurance Policy")
may be obtained and maintained for each class or series of Securities. The
issuer of any Financial Guaranty Insurance Policy (a "Financial Guaranty
Insurer") will be described in the related Prospectus Supplement. A copy of any
such Financial Guaranty Insurance Policy will be attached as an exhibit to the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial 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 be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
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Subject to the terms of the related Pooling and Servicing Agreement, the
Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements
If specified in the related Prospectus Supplement, a Trust may include
in lieu of some or all of the foregoing or in addition thereto third party
guarantees, and other arrangements for maintaining timely payments or providing
additional protection against losses on all or any specified portion of 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 contract providing
limited protection against interest rate risks.
Cross Support
If specified in the 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 one class of Securities may be made from excess amounts
available from other asset groups within the same Trust which support other
classes of Securities. The Prospectus Supplement for a series that includes a
cross-support feature will describe the manner and conditions for applying such
cross-support feature.
If specified in the 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.
Overcollateralization
If specified in the Prospectus Supplement, subordination provisions of a
Trust may be used to accelerate to a limited extent the amortization of one or
more classes of Securities relative to the amortization of the related Mortgage
Loans. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, with respect to the Mortgage
Loans or groups thereof, overcollateralization which results from the excess of
the aggregate principal balance of the related Mortgage Loans, or a group
thereof, over the principal balance of the related class of Securities. Such
acceleration may continue for the life of the related Security, or may be
limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related Prospectus Supplement, such limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
Maintenance of Credit Enhancement
To the extent that the applicable Prospectus Supplement does not
expressly provide for Credit Enhancement arrangements in lieu of some or all of
the arrangements mentioned below, the following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Sponsor will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
"Reduction or Substitution of Credit Enhancement."
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In lieu of the Sponsor's obligation to maintain a particular form of
Credit Enhancement, the Sponsor may obtain a substitute or alternate form of
Credit Enhancement. If the Servicer obtains such a substitute form of Credit
Enhancement, it will maintain and keep such form of Credit Enhancement in full
force and effect as provided herein. Prior to its obtaining any substitute or
alternate form of Credit Enhancement, the Sponsor will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then- current ratings
assigned to such Securities by such Rating Agency or Agencies.
The Servicer, on behalf of itself, the Trustee and Securityholders, will
provide the Trustee information required for the Trustee to draw under a Letter
of Credit or Financial Guaranty Insurance Policy, will present claims to each
Pool Insurer, to the issuer of each Special Hazard Insurance Policy or other
special hazard instrument, to the issuer of each Bankruptcy Bond and will take
such reasonable steps as are necessary to permit recovery under such Letter of
Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance
policies or comparable coverage respecting defaulted Mortgage Loans or Mortgage
Loans which are the subject of a bankruptcy proceeding. Additionally, the
Servicer will present such claims and take such steps as are reasonably
necessary to provide for the performance by another party of its Purchase
Obligation. As set forth above, all collections by the Servicer under any
Purchase Obligation, any Mortgage Pool Insurance Policy, or any Bankruptcy Bond
and, where the related property has not been restored, any Special Hazard
Insurance Policy, are to be deposited initially in the Principal and Interest
Account and ultimately in the Distribution Account, subject to withdrawal as
described above. All draws under any Letter of Credit or Financial Guaranty
Insurance Policy will be deposited directly in the Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Servicer is not required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to one or more classes of Securityholders on liquidation of the
Mortgage Loan after reimbursement of the Servicer for its expenses and (ii) that
such expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds. If recovery under any applicable form of Credit Enhancement
is not available because the Servicer has been unable to make the above
determinations, has made such determinations incorrectly or recovery is not
available for any other reason, the Servicer is nevertheless obligated to follow
such normal practices and procedures (subject to the preceding sentence) as it
deems necessary or advisable to realize upon the defaulted Mortgage Loan and in
the event such determination has been incorrectly made, is entitled to
reimbursement of its expenses in connection with such restoration.
Reduction or Substitution of Credit Enhancement
Unless otherwise specified in the related Prospectus Supplement, the
amount of credit support provided pursuant to any of the Credit Enhancements
(including, without limitation, a Mortgage Pool Insurance Policy, Financial
Guaranty Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond,
Letter of Credit, or any alterative form of Credit Enhancement) may be reduced
under certain specified circumstances. In addition, if so described in the
related Prospectus Supplement, any formula used in calculating the amount or
degree of Credit Enhancement may be changed without the consent of the
Securityholders upon written confirmation from each Rating Agency then rating
the Securities that such change will not adversely affect the then-current
rating or ratings assigned to the Securities. In most cases, the amount
available pursuant to any Credit Enhancement will be subject to periodic
reduction in accordance with a schedule or formula on a nondiscretionary basis
pursuant to the terms of the related Pooling and Servicing Agreement as the
aggregate outstanding principal balance of the Mortgage Loans declines.
Additionally, in certain cases, such credit support (and any replacements
therefor) may be replaced, reduced or terminated upon the written assurance from
each applicable Rating Agency that the then current rating of the related series
of Securities will not be adversely affected. Furthermore, in the event that the
credit rating of any obligor under any applicable Credit Enhancement is
downgraded, the credit rating of the related Securities may be downgraded to a
corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, the Sponsor thereafter will not be obligated to obtain replacement
credit support in order to restore the rating of the Securities, and also will
be permitted to replace such credit support with other
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Credit Enhancement instruments issued by obligors whose credit ratings are
equivalent to such downgraded level and in lower amounts which would satisfy
such downgraded level, provided that the then-current, albeit downgraded, rating
of the related series of Securities is maintained. Where the credit support is
in the form of a Reserve Fund, a permitted reduction in the amount of Credit
Enhancement will result in a release of all or a portion of the assets in the
Reserve Fund to the Sponsor, the Servicer, one or more Originators or such other
person that is entitled thereto. Any assets so released will not be available to
fund distribution obligations in future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Trustee upon request.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for the Mortgage Loan. Additionally, the Pooling and
Servicing Agreement will require the Servicer to cause to be maintained with
respect to each Mortgage Loan a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan, (ii) the minimum amount required to
compensate for damage or loss on a replacement cost basis or (iii) the full
insurable value of the premises.
If a Mortgage Loan relates to a Mortgaged Property in an area identified
in the Federal Register by the Federal Emergency Management Agency as having
special flood hazards, the Servicer will be required or cause to be required to
maintain with respect thereto a flood insurance policy in a form meeting the
requirements of the then-current guidelines of the Federal Insurance
Administration with a generally acceptable carrier in an amount representing
coverage, and which provides for recovery by the Servicer on behalf of the Trust
of insurance proceeds relating to such Mortgage Loan of not less than the least
of (i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis,
(iii) the maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973, as amended. Pursuant to the related Pooling and
Servicing Agreement, the Servicer will be required to indemnify the Trust out of
the Servicer's own funds for any loss to the Trust resulting from the Servicer's
failure to maintain such flood insurance.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire with extended coverage and against flood hazards on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as loss
payee and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance, and otherwise complies with
the requirements of the Pooling and Servicing Agreement, the Servicer shall be
deemed conclusively to have satisfied its obligations with respect to fire and
hazard insurance coverage under the Pooling and Servicing Agreement. Such
blanket policy may contain a deductible clause, in which case the Servicer will
be required, in the event that there shall not have been maintained on the
related Mortgaged Property a policy complying with the Pooling and Servicing
Agreement, and there shall have been a loss that would have been covered by such
policy, to deposit in the Principal and Interest Account from the Servicer's own
funds the difference, if any, between the amount that would have been payable
under a policy complying with the Pooling and Servicing Agreement and the amount
paid under such blanket policy.
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While the Servicer does not actively monitor the maintenance of hazard
insurance by borrowers (other than borrowers for Manufactured Housing), it
responds to the notices of cancellation or expiration as joint-loss payee by
requiring verification of replacement coverage.
THE SPONSOR
Cargill Financial Services Corporation ("CFSC"), a Delaware corporation,
is a wholly-owned financial services subsidiary of Cargill, Incorporated
("Cargill"), a privately-held Delaware corporation. CFSC's operations consist of
global proprietary trading activities as well as other specialized financial
services. CFSC was formed in 1984 and currently manages over $6 billion in
assets. CFSC is headquartered in Minneapolis and has over 650 employees
worldwide. CFSC is the financial services arm of Cargill. Established in 1865,
Cargill began as a grain trading company. Since then, Cargill has grown to
become a major international provider of basic goods and services. Cargill
operates in 65 countries, with 72,000 employees and more $50 billion in annual
sales.
The Sponsor maintains its principal offices at 6000 Clearwater Drive,
Minnetonka, Minnesota 55343-9497.
THE SERVICER
The Servicer for each series of Securities will be specified in the
related Prospectus Supplement.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
Each servicer, whether the Servicer, any Sub-Servicer and any Master
Servicer (either the Servicer or any Sub-Servicer or any Master Servicer being a
"Servicer"), will retain a fee in connection with its servicing activities for
each series of Securities equal to the percentage per annum specified in the
related Prospectus Supplement or Current Report on Form 8-K (the "Base Servicing
Fee"), generally payable monthly with respect to each Mortgage Loan directly
serviced by such Servicer at one-twelfth the annual rate, of the
then-outstanding principal amount of each such Mortgage Loan as of the first day
of each calendar month. The Master Servicer acting as master servicer with
respect to Mortgage Loans being serviced directly by a Sub-Servicer will retain
a fee equal to the percentage per annum specified in the related Prospectus
Supplement or Current Report on Form 8-K ("Master Servicing Fee"), generally
payable monthly on one-twelfth the annual rate, of the then-outstanding
principal amount of each such Mortgage Loan as of the first day of each calendar
month. The Base Servicing Fees and the Master Servicing Fee are collectively
referred to as the "Servicing Fee."
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing agreement, and similar items.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay or cause to be paid certain ongoing expenses associated
with each Trust Estate and incurred by it in connection with its
responsibilities under the Pooling and Servicing Agreement, including, without
limitation, payment of any fee or other amount payable in respect of any
alternative Credit Enhancement arrangements, payment of the fees and
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disbursements of the Master Servicer, the Trustee or accountant, any custodian
appointed by the Trustee, the Security Registrar and any Paying Agent, and
payment of expenses incurred in enforcing the obligations of Sub-Servicers and
Originators. The Master Servicer may be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Originators under
certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Mortgage Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if
there will be any Originator's Retained Yield retained. Any such Originator's
Retained Yield will be a specified portion of the interest payable on each
Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be
established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of a
Mortgage Loan will represent a specified portion of the interest payable thereon
and will not be part of the related Trust Estate. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Originator's Retained Yield and the holders of classes of Securities
entitled to payments of interest as provided in the Prospectus Supplement and
the applicable Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will require the Servicer to
deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Servicer during such preceding year and of performance under
the related Pooling and Servicing Agreement has been made under such officers'
supervision, and (ii) to the best of such officers' knowledge, based on such
review, the Servicer has fulfilled all its obligations under the related Pooling
and Servicing Agreement for such year, or, if there has been a default in the
fulfillment of any such obligations, specifying each such default known to such
officers and the nature and status thereof including the steps being taken by
the Servicer to remedy such defaults.
Each Pooling and Servicing Agreement will require the Servicer to cause
to be delivered to the Trustee and any Credit Enhancer a letter or letters of a
firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Credit Enhancer, if applicable, stating that such
firm has, with respect to the Servicer's overall servicing operations (i)
performed applicable tests in accordance with the compliance testing procedures
as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees or (ii) examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and in
either case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Servicer may be obtained by Securityholders without charge upon
written request to the Servicer.
REMOVAL AND RESIGNATION OF THE SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or subject to the consent of the Master Servicer and the Trustee. No
such resignation will become effective until the Trustee, the Master Servicer or
a Successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. The Trustee, the Master Servicer, the
Securityholders or a Credit Enhancer, if applicable, will have the right,
pursuant to the related Pooling and Servicing Agreement, to remove the Servicer
upon the occurrence of any of (a) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations; (b) the failure of the Servicer
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to perform any one or more of its material obligations under the Pooling and
Servicing Agreement as to which the Servicer shall continue in default with
respect thereto for a specified period, generally of sixty (60) days, after
notice by the Trustee, the Master Servicer or any Credit Enhancer (if required
by the Pooling and Servicing Agreement) of said failure; or (c) the failure of
the Servicer to cure any breach of any of its representations and warranties set
forth in the Pooling and Servicing Agreement which materially and adversely
affects the interests of the Securityholders or any Credit Enhancer, for a
specified period, generally of thirty (30) days after the Servicer's discovery
or receipt of notice thereof.
The Pooling and Servicing Agreement may also provide that the Sponsor or
the related Credit Enhancer may remove the Servicer upon the occurrence of any
of certain events including:
(i) with respect to any Payment Date, if the total available funds
with respect to the Mortgage Loans Group will be less than the related
distribution amount on the class of credit-enhanced securities in
respect of such Payment Date; provided, however, that the Credit
Enhancer generally will have no right to remove the Servicer pursuant to
the provision described in this clause (i) if the Servicer can
demonstrate to the reasonable satisfaction of the Credit Enhancer that
such event was due to circumstances beyond the control of the Servicer;
(ii) the failure by the Servicer to make any required Servicing
Advance;
(iii) the failure of the Servicer to perform one or more of its
material obligations under the Pooling and Servicing Agreement;
(iv) the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest; or
(v) without cause on the part of the Servicer; provided that the
Certificate Insurer consent to such removal;
provided, however, that prior to any removal of the Servicer by the Sponsor, or
the related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the
Servicer shall first have been given by the Sponsor or the related Credit
Enhancer notice of the occurrence of one or more of the events set forth in
clauses (i) or (ii) above and the Servicer shall not have remedied, or shall not
have taken action satisfactory to the Sponsor or such Credit Enhancer to remedy,
such event or events within a specified period, generally 30 days (60 days with
respect to clause (iii)) after the Servicer's receipt of such notice; and
provided, further that in the event of the refusal or inability of the Servicer
to make any required Delinquency Advance or to pay any Compensating Interest as
described in clause (iv) above, such removal shall be effective (without the
requirement of any action on the part of the Sponsor or such Credit Enhancer or
of the Trustee) not later than a shorter specified period, generally not in
excess of five business days, following the day on which the Trustee notifies an
authorized officer of the Servicer that a required Delinquency Advance or to pay
any Compensating Interest has not been received by the Trustee.
RESIGNATION OF THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement provides that the Master Servicer, if any, may
not resign from its obligations and duties thereunder, unless such duties and
obligations are no longer permissible under applicable law. No such resignation
is acceptable until a successor Master Servicer assumes such duties and
obligations.
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AMENDMENTS
The Sponsor, the Servicer, the Master Servicer and the Trustee may at
any time and from time to time, with the prior approval of the related Credit
Enhancer, if required, but without the giving of notice to or the receipt of the
consent of the Securityholders, amend a Pooling and Servicing Agreement, and the
Trustee will be required to consent to such amendment, for the purposes of (x)
(i) curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; provided, however,
that such action shall not, as evidenced by an opinion of counsel delivered to
the Trustee, materially and adversely affect the interests of any Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor,
the Servicer and the Master Servicer at any time and from time to time, with the
prior written approval of the related Credit Enhancer, if required, and not less
than a majority of the Percentage Interest represented by each related class of
Securities then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Securityholders thereunder; provided, however, that no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, the
related Credit Enhancement of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate or (b) the disposition of all property acquired in respect
of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a
Qualified Liquidation (as defined in the Code) of the Trust Estate (if the
related Trust is a REMIC) is effected. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the Servicer, the Sponsor or, if applicable, the holder of the REMIC Residual
Securities at the price specified in the related Prospectus Supplement. The
exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Servicer, the Sponsor or, if
applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
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earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. Each Pooling and Servicing Agreement will
provide that the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Securityholders, unless such Securityholders
shall have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance with
such request or direction.
The Trustee may execute any of the trusts or powers granted by each
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee will not be responsible
for any misconduct or negligence on the part of any agent or attorney appointed
and supervised with due care by it thereunder.
Pursuant to each Pooling and Servicing Agreement, the Trustee will not
be liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
Unless otherwise described in the related Prospectus Supplement, each
Pooling and Servicing Agreement will permit the removal of the Trustee upon the
occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the Securityholders
entitled thereto on any Payment Date amounts available for distribution
in accordance with the terms of the Pooling and Servicing Agreement; or
(2) the Trustee shall default in the performance of, or breach,
any covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in
the Pooling and Servicing Agreement or in any certificate or other
writing delivered pursuant thereto or in connection therewith shall
prove to be incorrect in any material respect as of the time when the
same shall have been made, and such default or breach shall continue or
not be cured for the period then specified in the related Pooling and
Servicing Agreement after the Trustee shall have received notice
specifying such default or breach and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been entered
against the Trustee, and such decree or order shall have remained in
force undischarged or unstayed for the period then specified in the
related Pooling and Servicing Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Trustee or relating to all or
substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit
of its creditors, voluntarily suspend payment of its obligations, or
take corporate action for the purpose of any of the foregoing.
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If an event described above occurs and is continuing, then, and in every
such case (i) the Sponsor, (ii) the Securityholders (on the terms set forth in
the related Pooling and Servicing Agreement), or (iii) if there is a Credit
Enhancer, such Credit Enhancer may, whether or not the Trustee has resigned,
immediately, concurrently with the giving of notice to the Trustee, and without
delay, appoint a successor Trustee pursuant to the terms of the Pooling and
Servicing Agreement.
No Securityholder will have any right to institute any proceeding,
judicial or otherwise, with respect to a Pooling and Servicing Agreement or any
Credit Enhancement, if applicable, or for the appointment of a receiver or
trustee, or for any other remedy under the Pooling and Servicing Agreement,
unless:
(1) such Securityholder has previously given written notice to the
Sponsor and the Trustee of such Securityholder's intention to institute
such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders have offered to the
Trustee reasonable indemnity, against the costs, expenses and
liabilities to be incurred in compliance with such request;
(4) the Trustee for the period specified in the related Pooling
and Servicing Agreement, generally not in excess of 60 days after
receipt of such notice, request and offer of indemnity, has failed to
institute such proceeding;
(5) as long as such action affects any credit-enhanced class of
Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has been
given to the Trustee during such specified period by the Securityholders
of a majority of the Percentage Interests represented by certain
specified classes of Securities;
No one or more Securityholders will have any right in any manner whatever by
virtue of, or by availing themselves of, any provision of the Pooling and
Servicing Agreement to affect, disturb or prejudice the rights of any other
Securityholder of the same class or to obtain or to seek to obtain priority or
preference over any other Securityholder of the same class or to enforce any
right under the Pooling and Servicing Agreement, except in the manner provided
in the Pooling and Servicing Agreement and for the equal and ratable benefit of
all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests
and indemnity from two or more groups of Securityholders, each representing less
than a majority of the applicable class of Securities, the Trustee in its sole
discretion may determine what action, if any, shall be taken, notwithstanding
any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing
Agreement, the Securityholder of any Security has the right, which is absolute
and unconditional, to receive distributions to the extent provided in the
Pooling and Servicing Agreement with respect to such Security or to institute
suit for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage Interests
represented by certain specified classes of Securities then outstanding or (ii)
if there is a Credit Enhancer, such Credit Enhancer may direct the time, method
and place of conducting any proceeding for any remedy available to the Sponsor
with respect to the Certificates or exercising any trust or power conferred on
the Trustee with respect to such Certificates; provided that:
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(1) such direction shall not be in conflict with any rule of law
or with a Pooling and Servicing Agreement;
(2) the Sponsor or the Trustee, as the case may be, shall have
been provided with indemnity satisfactory to them; and
(3) the Sponsor or the Trustee, as the case may be, may take any
other action deemed proper by the Trustee which is not inconsistent with
such direction; provided, however, that the Sponsor or the Trustee, as
the case may be, need not take any action which they determine might
involve them in liability or may be unjustly prejudicial to the
Securityholders not so directing.
The Trustee will be liable under the Pooling and Servicing Agreement
only to the extent of the obligations specifically imposed upon and undertaken
by the Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Sponsor, the Servicer, the Master Servicer or
any Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
holder for such Security, the Pass-Through Rate on any such Security entitled to
payments of interest (which Pass-Through Rate may vary if so specified in the
related Prospectus Supplement) and the rate of payment of principal on such
Security (or the rate at which the notional amount thereof is reduced if such
Security is not entitled to payments of principal) and other factors.
Each month the interest payable on an actuarial type of Mortgage Loan
will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by
the principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class' specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made once a month on the date set forth in
the related Prospectus Supplement (the "Interest Payment Date") or, in the case
of quarterly-pay Securities, on the Interest Payment Date of every third month
or, in the case of semi-annual-pay Securities, on the Interest Payment Date of
every sixth month following the month or months of accrual.
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A class of Securities may be entitled to payments of interest at a fixed
Pass-Through Rate specified in the related Prospectus Supplement, a variable
Pass-Through Rate or adjustable Pass-Through Rate calculated based on the
weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the aggregate
payments of interest on a class of Securities, and the yield to maturity
thereon, will be effected by the rate of payment of principal on the Securities
(or the rate of reduction in the notional balance of Securities entitled only to
payments of interest) and, in the case of Securities evidencing interests in ARM
Loans, by changes in the Net Mortgage Rates on the ARM Loans. See "Maturity and
Prepayment Considerations" below. The yield on the Securities also will be
effected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans required by the Pooling and Servicing Agreement in
the event of breaches of representations made in respect of such Mortgage Loans
by the Sponsor, the Originators, the Servicer and others, or repurchases due to
conversions of ARM Loans to a fixed interest rate. See "Mortgage Loan
Program--Representations by Originators" and "Descriptions of the
Securities--Assignment of Mortgage Loans" above. In general, if a class of
Securities is purchased at initial issuance at a premium and payments of
principal on the related Mortgage Loans occur at a rate faster than anticipated
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a class of Securities
is purchased at initial issuance at a discount and payments of principal on the
related Mortgage Loans occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated. The effect of principal prepayments, liquidations and
purchases on yield will be particularly significant in the case of a series of
Securities having a class entitled to payments of interest only or to payments
of interest that are disproportionately high relative to the principal payments
to which such class is entitled. Such a class likely will be sold at a
substantial premium to its principal balance, if any, and any faster than
anticipated rate of prepayments will adversely affect the yield to holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such holders to recoup their original investment. In addition, the yield to
maturity on certain other types of classes of Securities, including Accrual
Securities or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The Mortgage Rates on certain ARM Loans subject to negative amortization
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates as well as immediately after origination
(initial Mortgage Rates are generally lower than the sum of the Indices
applicable at origination and the related Note Margins) the amount of interest
accruing on the principal balance of such Mortgage Loans may exceed the amount
of the minimum scheduled monthly payment thereon. As a result, a portion of the
accrued interest on negatively amortizing Mortgage Loans may become Deferred
Interest that will be added to the principal balance thereof and will bear
interest at the applicable Mortgage Rate. The addition of any such Deferred
Interest to the principal balance will lengthen the weighted average life of the
Securities evidencing interests in such Mortgage Loans and may adversely affect
yield to holders thereof depending upon the price at which such Securities were
purchased. In addition, with respect to certain ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on such a Mortgage Loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce such principal balance,
the
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weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof depending upon the price at which such
Securities were purchased.
For each Mortgage Pool, if all necessary advances are made and if there
is no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer
is not in default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six month's interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Mortgage Loan. "Description of the Securities--Principal and Interest on
the Securities."
With respect to certain of the ARM Loans, the Mortgage Rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under typical underwriting
standards, the Mortgagor under each Mortgage Loan will be qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of any such
Mortgage Loan may thus be dependent on the ability of the Mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool. The
prepayment experience with respect to the Mortgage Loans in a Mortgage Pool will
affect the maturity, average life and yield of the related series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Servicer, the Master Servicer, nor any of their affiliates will be obligated
to refinance or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans will
generally contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the Mortgage Loan upon sale or certain transfers by the
Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus
Supplement indicates otherwise, the Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Servicer will not take any
action in relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance policy.
Certain ARM Loans may be assumable under certain conditions if the proposed
transferee of the related Mortgaged Property establishes its ability to repay
the Mortgage Loan and, in the reasonable judgment of the Servicer, the Master
Servicer or the related Sub-Servicer, the security for the ARM Loan would not be
impaired or might be improved by the assumption. The extent to which ARM Loans
are assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the related series of Securities.
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See "Description of the Securities--Collection and Other Servicing Procedures"
and "Certain Legal Aspects of the Mortgage Loans and Related
Matters--Enforceability of Certain Provisions" for a description of certain
provisions of the Pooling and Servicing Agreement and certain legal developments
that may affect the prepayment experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate mortgage loans. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on ARM Loans that the rate of
prepayment may increase as a result of refinancings. There can be no certainty
as to the rate of prepayments on the Mortgage Loans during any period or over
the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Servicer, the Sponsor or, if specified
in the related Prospectus Supplement, the holders of the REMIC Residual
Securities or the Credit Enhancer may have the option to purchase the Mortgage
Loans in a Trust Estate. See "The Pooling and Servicing Agreement--Termination;
Retirement of Securities."
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
Any particular legal matters related to specific types of Mortgage Loans will be
set forth in the related Prospectus Supplement.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Mortgage Loan is located. In some states, a
mortgage creates a lien upon the real property encumbered by the mortgage. In
other states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower-homeowner 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. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the
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holder of a land lease. If the cooperative is unable to meet the payment
obligations (i) arising under a blanket mortgage, the mortgagee holding a
blanket mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements or (ii) arising under its land
lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a 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 final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alterative, to purchase the land could lead to termination of the
cooperative's interest in the property and termination of all proprietary leases
and occupancy agreements. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease 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 the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary leases or occupancy
agreements that 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 occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally 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. See "Foreclosure on Shares of
Cooperatives" below.
FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the non-judicial remedy, a deed of trust may be judicially foreclosed. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and within a certain period
of time send a copy to the borrower trustor and to any person who has recorded a
request for a copy of notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified period, 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 local 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 of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
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encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser to purchase the subject property at the sale. Rather, it is common for
the lender to purchase the property from the trustee or referee for a credit bid
less than or equal to the unpaid principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' fees, which may be recovered by a lender. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens 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 and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement
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 by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled 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. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, 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 usually
will 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 notice of and 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 a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the 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 amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally 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.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
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In New York, foreclosure on the cooperative shares is accomplished by
public 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 sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. 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 corporation 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.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties 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 subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that 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. A
deficiency judgment is a personal judgment against the former borrower equal in
most cases to the difference between the amount due to the lender and the net
amount realized upon the public sale of the real property. In the case of a
Mortgage Loan secured by a property owned by a trust where the Mortgage Note is
executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust, even if obtainable under
applicable law, may be of little value to the mortgagee or beneficiary if there
are no trust assets against which such deficiency judgment may be executed.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states the lender, following judgment on such personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, in those states permitting such election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower. Finally, in certain other
states, statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure to the excess of the outstanding debt over the
fair value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere
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with or affect the ability of the secured mortgage lender to realize upon
collateral or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, a court with federal bankruptcy jurisdiction may permit
a debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure
a monetary default in respect of a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court (provided
no sale of the residence had yet occurred) prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and fail to comply with
the provisions of the law. In some cases, this liability may affect assignees of
the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien will not
have priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
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 lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust Estate was acquired by the Trust and cleanup costs were incurred
in respect of the Mortgaged Property, the holders of the related series of
Securities might realize a loss if such costs were required to be paid by the
Trust.
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ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of
the Mortgage Loans contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers or
conveys the property. The enforceability of these clauses has been the subject
of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. 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, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, and, as a
result thereof, the beneficiary's security is impaired, the beneficiary under
the underlying first deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same
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to the indebtedness secured by the first deed of trust. Proceeds in excess of
the amount of indebtedness secured by a first deed of trust will, in most cases,
be applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the deed
of trust, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
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. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects 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 or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alterative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), 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. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be effected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that the Relief Act
or similar legislation or regulations applies to any Mortgage Loan which goes
into default, there may be delays in payment and losses on the related
Securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the Mortgage Loans resulting from similar legislation
or regulations may result in delays in payments or losses to Securityholders of
the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Securities offered hereunder. This discussion is directed solely to
Securityholders that hold the Securities as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a tax
return, even where the anticipated tax treatment has been discussed herein.
Securityholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("Grantor Trust Securities") representing interests in a Trust
Estate ("Grantor Trust Estate") which the Sponsor will covenant not to elect to
have treated as a real estate mortgage investment conduit ("REMIC"), and (ii)
certificates ("REMIC Securities") representing interests in a Trust Estate, or a
portion thereof, which the Sponsor will covenant to elect to have treated as a
REMIC under Sections 860A through 860G (the "REMIC Provisions") of the Code.
This Prospectus does not address the tax treatment of partnership interests.
Such a discussion will be set forth in the applicable Prospectus Supplement for
any Trust issuing securities characterized as partnership interests. The
discussion that follows the disclosure relating to Grantor Trust Securities and
REMIC Securities, addresses tax concerns with respect to Debt Securities. The
Prospectus Supplement for each series of Securities will indicate whether such a
REMIC election (or elections) will be made for the related Trust Estate and, if
a REMIC election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this discussion, references
to a "Securityholder" or a "holder" are to the beneficial owner of a Security.
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The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1273 and
1275 of the Code and in Treasury regulations issued January 27, 1994 under the
original issue discount provisions of the Code (the "OID Regulations"), and the
Treasury regulations issued under the provisions of the Code related to REMICs
(the "REMIC Regulations"). The OID Regulations generally apply to debt
instruments issued on or after April 4, 1994, although Taxpayers may rely on
them for debt instruments issued prior to that date and after December 21, 1992.
Generally the REMIC Regulations apply to any REMIC the "settlement date" of
which is on or after November 12, 1991.
GRANTOR TRUST ESTATES
CLASSIFICATION OF GRANTOR TRUST ESTATES
With respect to each series of Grantor Trust Securities, it is expected
that tax counsel to the Sponsor will deliver its opinion to the effect that the
related Grantor Trust Estate will be classified as a grantor trust under subpart
E, Part I of subchapter J of the Code and not as a partnership or an association
taxable as a corporation. Accordingly, each holder of a Grantor Trust Security
will generally be treated as the owner of an interest in the Mortgage Loans
included in the Grantor Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate (net of normal
administration fees and any Originator's Retained Yield) and interest paid to
the holders of Grantor Trust Fractional Interest Securities issued with respect
to such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST SECURITIES
Grantor Trust Fractional Interest Securities
In the case of Grantor Trust Fractional Interest Securities, unless
otherwise disclosed in the applicable Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, it is expected that tax
counsel to the Sponsor will deliver an opinion that Grantor Trust Fractional
Interest Securities will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code; (ii) "loans . . .
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; (iii) "obligation[s] (including any participation
or certificate of beneficial ownership therein) which . . . [are] principally
secured by an interest in real "property" within the meaning of Section
860G(a)(3)(A) of the Code; and (iv) "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. In addition, it is expected that tax counsel
to the Sponsor will deliver an opinion that interest on Grantor Trust Fractional
Interest Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Estates may include
Buydown Mortgage Loans. The characterization of an investment in Buydown
Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement, but to the extent that such Buydown Mortgage Loans are secured by a
bank account or other personal property, they may not be treated in their
entirety as assets described in the foregoing sections of the Code. No directly
applicable precedents exist with respect to the federal income tax treatment or
the characterization of investments in Buydown Mortgage Loans. Accordingly,
holders of Grantor Trust Securities should consult their own tax advisors with
respect to the characterization of investments in Grantor Trust Securities
representing an interest in a Grantor Trust Estate that includes Buydown
Mortgage Loans.
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Grantor Trust Strip Securities
Even if Grantor Trust Strip Securities evidence an interest in a
Grantor Trust Estate consisting of Mortgage Loans that are "loans . . . secured
by an interest in real property" within the meaning of Section 7701(a)(19)(C)(v)
of the Code, "qualifying real property loans" within the meaning of Section
593(d) of the Code, and "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code, and the interest on which is "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, it is unclear whether the Grantor Trust Strip
Securities, and the income therefrom, will be so characterized. Counsel to the
Sponsor will not deliver any opinion on these questions. Prospective purchasers
to which such characterization of an investment in Grantor Trust Strip
Securities is material should consult their tax advisors regarding whether the
Grantor Trust Strip Securities, and the income therefrom, will be so
characterized.
The Grantor Trust Strip Securities will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF HOLDERS OF GRANTOR TRUST FRACTIONAL INTEREST SECURITIES
Holders of a particular series of Grantor Trust Fractional Interest
Securities generally will be required to report on their federal income tax
returns their respective shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includable in income on account of a Grantor
Trust Fractional Interest Security may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. An
individual, estate or trust holding a Grantor Trust Fractional Interest Security
directly or through certain pass-through entities will be allowed a deduction
for such reasonable servicing fees and expenses only to the extent that the
aggregate of such holder's miscellaneous itemized deductions exceeds two percent
of such holder's adjusted gross income. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. Although it is not entirely clear, it appears that in
transactions in which multiple classes of Grantor Trust Securities (including
Grantor Trust Strip Securities) are issued, such fees and expenses should be
allocated among the classes of Grantor Trust Securities using a method that
recognizes that each such class benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, it is currently intended to base information returns or reports to the
Internal Revenue Service (the "IRS") and Securityholders on a method that
allocates such expenses among classes of Grantor Trust Securities with respect
to each month based on the distributions made to each such class during that
month.
The federal income tax treatment of Grantor Trust Fractional Interest
Securities of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Securities will be subject to those rules if (i) a class of Grantor
Trust Strip Securities is issued as part of the same series of Securities or
(ii) the Sponsor or any of its affiliates retain (for their own accounts or for
purposes of resale) a right to receive any Originator's Retained Yield. Any such
Originator's Retained Yield will be described in the applicable Prospectus
Supplement. Further, the IRS has announced that an unreasonably high servicing
fee retained by a seller or servicer will be treated as a retained ownership
interest in mortgages that constitutes a stripped coupon. Although the IRS has
established certain "safe harbors" for purposes of determining what constitutes
reasonable servicing for various types of mortgages, it is not clear that such
amounts paid with respect to the Mortgage Loans qualify for such treatment and
thereby constitute reasonable servicing compensation. The applicable Prospectus
Supplement will include information regarding servicing fees paid to the
Servicer, any Master Servicer, any sub-servicer or their respective affiliates
necessary to determine whether the preceding "safe harbor" rules apply.
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If Stripped Bond Rules Apply
If the stripped bond rules apply, each Grantor Trust Fractional
Interest Security will be treated as having been issued with "original issue
discount" within the meaning of Section 1273(a) of the Code, subject, however,
to the discussion below regarding the treatment of certain stripped bonds as
market discount bonds and the discussion regarding de minimis market discount.
See "Taxation of Grantor Trust Fractional Interest Securities --Market
Discount." Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Security (whether a cash or accrual method taxpayer) will be
required to report all interest income from its Grantor Trust Fractional
Interest Security for each month in an amount equal to the income that accrues
on such Security in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Security will be the excess of such Security's stated redemption price over its
issue price. The issue price of a Grantor Trust Fractional Interest Security as
to any purchaser will be equal to the price paid by such purchaser for the
Grantor Trust Fractional Interest Security. The stated redemption price of a
Grantor Trust Fractional Interest Security will be the sum of all payments to be
made on such Security, other than "qualified stated interest," if any, and other
than Security's share of reasonable servicing fees and other expenses. See
"REMIC-Taxation of Owners of REMIC Regular Securities." In general, the amount
of such income that accrues in any month would equal the product of such
holder's adjusted basis in such Grantor Trust Fractional Interest Security at
the beginning of such month (see "Sales of Grantor Trust Securities") and the
yield of such Grantor Trust Fractional Interest Security to such holder. Such
yield would be computed at the rate (assuming monthly compounding) that, if used
to discount the holder's share of future payments on the Mortgage Loans, would
cause the present value of those future payments to equal the price at which the
holder purchased such Security. In computing yield under the stripped bond
rules, a Securityholder's share of future payments on the Mortgage Loans will
not include any payments made in respect of any Originator's Retained Yield or
any other ownership interest in the Mortgage Loans retained by the Sponsor, the
Servicer, the Master Servicer, any sub-servicer or their respective affiliates,
but will include such Securityholder's share of any reasonable servicing fees
and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption (the "Prepayment Assumption") in accruing original issue
discount and (ii) adjustments in the accrual of original issue discount when
prepayments do not conform to the prepayment assumption, with respect to certain
categories of debt instruments, and regulations could be adopted applying those
provisions to the Grantor Trust Fractional Interest Securities. It is unclear
whether those provisions would be applicable to the Grantor Trust Fractional
Interest Securities in the absence of such regulations or whether use of a
Prepayment Assumption may be required or permitted without reliance on these
rules. It is also uncertain, if a Prepayment Assumption is used, whether the
assumed prepayment rate would be determined based on conditions at the time of
the first sale of the Grantor Trust Fractional Interest Security or, with
respect to any subsequent holder, at the time of purchase of the Grantor Trust
Fractional Interest Security by that holder. Securityholders are advised to
consult their own tax advisors concerning reporting original issue discount in
general and, in particular, whether a Prepayment Assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Securities.
In the case of a Grantor Trust Fractional Interest Security acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Security, the use of the Prepayment Assumption would not ordinarily have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Security acquired
at a discount or premium (that is, at a price less than or greater than such
principal amount, respectively), the use of the Prepayment Assumption would
increase or decrease such yield, and thus accelerate or decelerate,
respectively, the reporting of income.
If no Prepayment Assumption is used, when a Mortgage Loan prepays in
full, the holder of a Grantor Trust Fractional Interest Security acquired at a
discount or a 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 such Security and the portion of the adjusted
basis of such Security that is allocable to such Securityholder's interest in
the Mortgage Loan. If the Prepayment Assumption is used, it appears that no
separate
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item of income or loss should be recognized upon a prepayment. Instead, a
prepayment should be treated as a partial payment of the stated redemption price
of the Grantor Trust Fractional Interest Security and accounted for under a
method similar to that described for taking account of original issue discount
on REMIC Regular Interest Securities. See "Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Regular Securities --
Original Issue Discount." It is unclear whether any other adjustments would be
required to reflect differences between the Prepayment Assumption and the actual
rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Securityholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related Prospectus
Supplement and on a constant yield computed using a representative initial
offering price for each class of Securities. However, neither the Sponsor nor
the Servicer will make any representation that the Mortgage Loans will in fact
prepay at a rate conforming to the Prepayment Assumption or any other rate and
Securityholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Securityholders who bought at that price.
Under Treasury Regulation ss. 1.1286-1 certain stripped bonds are to be
treated as market discount bonds and, accordingly, any purchaser of such a bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the stripped bond is no
more than 100 basis points lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Security is
more than 100 basis points lower than the gross interest rate payable on the
Mortgage Loans, the applicable Prospectus Supplement will disclose that fact. If
the original issue discount or market discount on a Grantor Trust Fractional
Interest Security determined under the stripped bond rules is less than 0.25% of
the stated redemption price multiplied by the weighted average maturity of the
Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner described in
"Taxation of Grantor Trust Fractional Interest Securities -- Market Discount."
If Stripped Bond Rules Do Not Apply
Subject to the discussion below on original issue discount, if the
stripped bond rules do not apply to a Grantor Trust Fractional Interest
Security, the Securityholder will be required to report its share of the
interest income on the Mortgage Loans in accordance with such Securityholder's
normal method of accounting. The original issue discount rules will apply to a
Grantor Trust Fractional Interest Security to the extent it evidences an
interest in Mortgage Loans issued with original issue discount.
Original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of the Mortgage Loans and their
issue price. Under the Proposed OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest,". A "qualified stated interest" is any one of a
series of payments equal to the product of the outstanding principal balance of
the Mortgage Loan and a single fixed rate, or a variable rate based on an
objective interest index of market interest rates, of interest payable at
intervals of one year or less during the entire term of the Mortgage Loan. In
general, the issue price of a Mortgage Loan will be the amount received by the
borrower from the lender under the terms of the Mortgage Loan and the stated
redemption price of a Mortgage Loan will equal its principal amount, unless the
Mortgage Loan provides for an initial below-market rate of interest or the
deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, including loans with an initial below-market interest rate, the
determination of the total amount of original issue discount, if any, and the
timing of the inclusion thereof is not entirely clear. If the original issue
discount rules apply to Mortgage Loans bearing
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adjustable or variable interest rates, the related Prospectus Supplement will
describe the manner in which such rules will be applied with respect to those
Mortgage Loans by the Trustee in preparing information returns to the
Securityholders and the IRS.
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Loan. For this purpose, the
weighted average maturity of the Mortgage Loan will be computed as the sum of
the amounts determined by multiplying (i) the number of complete years (i.e.,
rounding down partial years) from the issue date until each payment is scheduled
to be made by (ii) a fraction, the numerator of which is the portion of each
payment representing stated redemption price and the denominator of which is the
stated redemption price of the Mortgage Loan. Original issue discount of only a
de minimis amount will be included in income in the same manner as market
discount of only a de minimis amount. See "Taxation of Grantor Trust Fractional
Interest Securities -- Market Discount."
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income in each month, based on a constant yield. The
Proposed OID Regulations suggest that no Prepayment Assumption is appropriate in
computing the yield on prepayable obligations issued with original issue
discount. In the absence of statutory or administrative clarification, it
currently is not intended to base information reports or returns to the IRS and
Securityholders on the use of a Prepayment Assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a Prepayment Assumption be used in computing yield with respect to
all mortgage-backed securities. Securityholders are advised to consult their own
tax advisors concerning whether a Prepayment Assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Securities. Securityholders should refer to the Prospectus Supplement
with respect to each series of Securities to determine whether and in what
manner the original issue discount rules will apply to Mortgage Loans in such
series.
A purchaser of a Grantor Trust Fractional Interest Security that
purchases such Grantor Trust Fractional Interest Security at a cost less than
such Security's allocable portion of the aggregate remaining stated redemption
price of the Mortgage Loans held in the related Trust Estate will also be
required to include in gross income such Security's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Security to such purchaser is in excess of such Security's allocable
portion of the aggregate issue price of the Mortgage Loans held in the related
Trust Estate, approximately in proportion to the ratio such excess bears to such
Security's allocable portion of the aggregate original issue discount remaining
to be accrued on such Mortgage Loans. The adjusted issue price of a Mortgage
Loan at the beginning of any accrual period will equal the issue price of such
Mortgage Loan, increased by the aggregate amount of original issue discount with
respect to such Mortgage Loan that accrued in prior accrual periods, and reduced
by the amount of any payments made on such Mortgage Loan in prior accrual
periods of amounts included in its stated redemption price.
The Trustee will provide to any holder of a Grantor Trust Fractional
Interest Security such information as such holder may reasonably request from
time to time with respect to original issue discount accruing on Grantor Trust
Fractional Interest Securities. See "Grantor Trust Reporting" below.
MARKET DISCOUNT
A Securityholder may be subject to the market discount rules of
Sections 1276 through 1278 of the Code to the extent an interest in a Mortgage
Loan is considered to have been purchased at a "market discount," that is, in
the case of a Mortgage Loan issued without original issue discount, at a
purchase price less than its remaining stated principal amount, or in the case
of a Mortgage Loan issued with original issue discount, at a purchase price less
than its issue price. If market discount is in excess of a de minimis amount (as
described below), the holder will generally be required to include in income in
each month the amount of market discount that has accrued through such month
that has not previously been included in income, but limited, in the case of the
portion of such discount that is allocable to any Mortgage Loan, to the payment
of stated redemption price
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on such Mortgage Loan that is received by (or, in the case of accrual basis
Securityholders, due to be received by) the Trust Estate in that month. A
Securityholder may elect to include market discount in income currently as it
accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Securityholder during or after the first taxable year to which
such election applies.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, market discount on the Mortgage Loans in each accrual period should
accrue, at the holder's option: (i) on the basis of a constant yield method,
(ii) in the case of a Mortgage Loan issued without original issue discount, in
an amount that bears the same ratio to the total remaining market discount as
the stated interest paid in the accrual period bears to the total stated
interest remaining to be paid on the Mortgage Loan as of the beginning of the
accrual period, or (iii) in the case of a Mortgage Loan issued with original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual period
bears to the total original issue discount remaining at the beginning of the
accrual period. The Prepayment Assumption, if any, used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. The effect of using a Prepayment Assumption could be to
accelerate the reporting of such discount income. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
Mortgage Loan purchased at a discount in the secondary market.
Because the Mortgage Loans will provide for monthly payments of stated
redemption price, 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 would
be included in income if it were original issue discount.
In the case of market discount of only a de minimis amount (as defined
below), the holder generally will be required to allocate the portion of such
discount that is allocable to a Mortgage Loan among the payments of stated
redemption price on the Mortgage Loan and to include the discount allocable to
each payment of stated redemption price in ordinary income at the time such
payment of stated redemption price is made (or, for a Securityholder using the
accrual method of accounting, when such payment of stated redemption price is
due). Such treatment would result in discount being included in income at a
slower rate than discount would be required to be included in income using the
method described above.
Market discount with respect to a Mortgage Loan will be considered to
exceed a de minimis amount if it is greater than or equal to 0.25% of the stated
redemption price of the Mortgage Loan multiplied by the number of complete years
to maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the Proposed OID Regulations refer to the weighted average
maturity of obligations, and it is likely that the same rule will be applied
with respect to market discount, presumably taking into account the Prepayment
Assumption.
Further, under the rules described in "Taxation of Owners of REMIC
Regular Securities-Market Discount," below, any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includable in income, unless an election has been made to report market discount
currently as it accrues.
PREMIUM
If a Securityholder is treated as acquiring Mortgage Loans at a
premium, that is, at a price in excess of their remaining stated redemption
price, such holder may elect under Section 171 of the Code to amortize such
premium using a constant yield method. Amortizable premium is treated as an
offset to interest income on the related Mortgage Loans, rather than as a
separate interest deduction. Premium allocable to a Mortgage Loan for which an
election to amortize is not made should be allocated among the payments on the
Mortgage Loan
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representing stated redemption price and be allowed as an ordinary deduction as
such payments are made (or, for a Securityholder using the accrual method of
accounting, when such payments are due).
It is unclear whether a Prepayment Assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a Prepayment Assumption, the holder
of a Grantor Trust Fractional Interest Security acquired at a premium should
recognize a loss, if a Mortgage Loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Security and the portion of the adjusted basis of the Security
that is allocable to the Mortgage Loan. If a Prepayment Assumption is used to
amortize such premium, it appears that such a loss would be unavailable.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Security and accounted
for under a method similar to that described for taking account of original
issue discount on REMIC Regular Interest Securities. See "Certain Federal Income
Tax Consequences -- REMICs -- Taxation of Owners of REMIC Regular Securities --
Original Issue Discount." It is unclear whether any other adjustments would be
required to reflect differences between the Prepayment Assumption and the actual
rate of prepayments.
TAXATION OF HOLDERS OF GRANTOR TRUST STRIP SECURITIES
The "stripped coupon" rules of Section 1286 of the Code will apply to
the Grantor Trust Strip Securities. No regulations or published rulings under
Section 1286 of the Code have been issued (other than Treasury Regulation ss.
1.1286-1 relating to the treatment of certain stripped bonds as market discount
bonds, see "Taxation of Grantor Trust Fractional Interest Securities -- If
Stripped Bond Rules Apply.") and some uncertainty exists as to how it will be
applied to securities such as the Grantor Trust Strip Securities. Accordingly,
holders of Grantor Trust Strip Securities should consult their own tax advisers
concerning the method to be used in reporting income or loss with respect to
such Securities.
The OID Regulations do not include rules relating specifically to
"stripped coupons," although they provide guidance as to how the original issue
discount sections of the Code will generally be applied. The discussion below is
subject to the discussion under "Possible Application of Proposed Contingent
Payment Rules" and assumes that the holder of a Grantor Trust Strip Security
will not own any Grantor Trust Fractional Interest Securities.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Securities based on a constant yield method. In effect, each holder of Grantor
Trust Strip Securities would include as interest income in each month an amount
equal to the product of such holder's adjusted basis in such Grantor Trust Strip
Security at the beginning of such month and the yield of such Grantor Trust
Strip Security to such holder. Such yield would be calculated based on the price
paid for that Grantor Trust Strip Security by its holder and the payments
remaining to be made thereon at the time of the purchase, plus an allocable
portion of the servicing fees and expenses to be paid with respect to the
Mortgage Loans. See "Taxation of Owners of Grantor Trust Fractional Interest
Securities."
As noted above, Section 1272(a)(6) requires that a Prepayment
Assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments must be
made in the amount and rate of accrual of such discount when prepayments do not
conform to such Prepayment Assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Securities. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Securities in
the absence of such regulations or whether use of a Prepayment Assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a Prepayment Assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Security or, with respect to any subsequent holder, at the time of
purchase of the Grantor Trust Strip Security by that holder.
The accrual of income on the Grantor Trust Strip Securities will be
significantly slower if a Prepayment Assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of
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statutory or administrative clarification, it is currently intended to base
information returns or reports to the IRS and Securityholders on a Prepayment
Assumption that will be disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Securities. However, neither the Sponsor nor the Servicer will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Securityholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial Securityholders
who bought at that price. Prospective purchasers of the Grantor Trust Strip
Securities should consult their own tax advisors regarding the use of a
Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Security. If a Grantor Trust Strip Security is treated as a single instrument
(rather than an interest in discrete Mortgage Loans) and the effect of
prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Security, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Security is
treated as an interest in discrete Mortgage Loans, or if no Prepayment
Assumption is used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Security should be able to recognize a loss equal to the
portion of such holder's adjusted basis in the Grantor Trust Strip Security that
is allocable to such Mortgage Loan.
SALES OF GRANTOR TRUST SECURITIES
Any gain or loss, equal to the difference between the amount realized
on the sale and the adjusted basis of such Grantor Trust Security, recognized on
the sale of a Grantor Trust Security, will be capital gain or loss, except to
the extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Security.
GRANTOR TRUST REPORTING
The Trustee will furnish to each holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Servicer, the Trustee will furnish to each Securityholder during
such year such customary factual information as the Servicer deems necessary or
desirable to enable holders of Grantor Trust Securities to prepare their tax
returns and will furnish comparable information to the IRS as and when required
by law to do so. Because the rules for accruing discount and amortizing premium
with respect to the Grantor Trust Securities are uncertain in various respects,
there is no assurance the IRS will agree with the Trustee's information reports
of such items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Securityholders.
BACKUP WITHHOLDING
In general, the rules described in "REMICS -- Backup Withholding with
Respect to REMIC Securities" will also apply to Grantor Trust Securities.
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FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Securities in
"REMICS -- Foreign Investors in REMIC Securities -- REMIC Regular Securities"
applies to Grantor Trust Securities.
To the extent that interest on a Grantor Trust Security would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Security is not held in connection with a holder's
trade or business in the United States, such Grantor Trust Security will not be
subject to United States estate taxes in the estate of a nonresident alien
individual.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Securities, tax counsel to
the Sponsor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust Estate (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Securities offered with respect thereto will be considered
to evidence ownership of "regular interests" ("REMIC Regular Securities") or
"residual interests" ("REMIC Residual Securities") in that REMIC within the
meaning of the REMIC Provisions.
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. If an entity electing to be treated as a REMIC fails to comply,
however, with one or more of the ongoing requirements of the Code for such
status during any taxable year, the Code provides that the entity will not be
treated as a REMIC for such year and thereafter. In that event, such entity may
be taxable as a separate corporation under Treasury Regulations, and the REMIC
Securities issued by such entity may not be accorded the status or given the tax
treatment described below. Although the Code authorizes the Treasury Department
to issue regulations providing relief in the event of an inadvertent termination
of status as a REMIC, no such regulations have been issued. Any such relief,
moreover, may be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the REMIC's income for the period in which the
requirements for such status are not satisfied. The Pooling and Servicing
Agreement with respect to each REMIC will include provisions designed to
maintain the Trust Estate's status as a REMIC under the REMIC Provisions. It is
not anticipated that the Trust Estate's status as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be "qualifying real property
loans" within the meaning of Section 593(d) of the Code, "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC underlying such Securities would be so treated. Moreover, if 95% or more
of the assets of the REMIC qualify for any of the foregoing treatments at all
times during a calendar year, the REMIC Securities will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Securities and income
allocated to the class of REMIC Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Securities are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Securities will be "obligation[s] ...
which ... [are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3)(C) of the Code. The determination as to the
percentage of the REMIC's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The REMIC will report those
determinations to Securityholders in the manner and at the times required by
applicable Treasury regulations.
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The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether payments held pending distribution,
property acquired by foreclosure held pending sale and amounts in reserve
accounts (to the extent not invested in assets described in the foregoing
sections) would be considered to be part of the Mortgage Loans, or whether such
assets otherwise would receive the same treatment as the Mortgage Loans for
purposes of all of the foregoing sections. In addition, in some instances the
Mortgage Loans may not be treated entirely as assets described in the foregoing
sections. If so, the applicable Prospectus Supplement will describe the Mortgage
Loans that may be so treated. The REMIC Regulations do provide, however, that
payments on Mortgage Loans held pending distribution are considered part of the
Mortgage Loans for purposes of Section 593(d) of the Code and Section
856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of Securities, two or more separate elections may be
made to treat designated portions of the related Trust Estate as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Securities, tax counsel to the Sponsor will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Securities issued by the Tiered REMICs, respectively, will be considered
to evidence ownership of REMIC Regular Securities or REMIC Residual Securities
in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and assets
described in Section 7701(a)(19)(C) of the Code, and whether the income on such
Securities is interest described in Section 856(c)(3)(B) of the Code, the Tiered
REMICs will be treated as one REMIC.
TAXATION OF HOLDERS OF REMIC REGULAR SECURITIES
General
Except as otherwise stated in this discussion, REMIC Regular Securities
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Securities that otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Securities under an accrual method.
Original Issue Discount
Certain REMIC Regular Securities may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Securities having original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Securities and certain other
debt instruments having original issue discount. Regulations have not been
issued under that section.
The Servicer will supply, at the time and in the manner required by the
IRS to holders of REMIC Regular Securities, brokers and middlemen information
with respect to the original issue discount accruing on the REMIC Regular
Securities. Section 1272(a)(6)(B)(ii) of the Code requires that a Prepayment
Assumption be used with respect to Mortgage Loans held by a REMIC in computing
the accrual of original issue discount on REMIC Regular Securities issued by
that REMIC, and that adjustments must be made in the amount and rate of accrual
of such discount to reflect differences between the actual prepayment rate and
the Prepayment Assumption. The Prepayment Assumption is to be determined in the
manner prescribed in Treasury regulations;
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as noted above, those regulations have not been issued. The legislative history
of this Code provision indicates that the regulations will provide that the
Prepayment Assumption used with respect to a series of REMIC Regular Securities
must be the same as that used in pricing the initial offering of such series of
REMIC Regular Securities. The Prepayment Assumption used by the Servicer in
reporting original issue discount for each series will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Sponsor nor the Servicer will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Security will
be the excess of its stated redemption price over its issue price at maturity.
The issue price of a particular class of REMIC Regular Securities offered
hereunder will be the initial offering price at which a substantial amount of
REMIC Regular Securities of that class are first sold to the public (excluding
bond houses and brokers). Under the OID Regulations, the stated redemption price
at maturity of a REMIC Regular Security that is a "notional" or "principal only"
Security or that is or may be an accrual Security is equal to the sum of all
distributions to be made under such REMIC Regular Security. The stated
redemption price at maturity of any other REMIC Regular Security is its stated
principal amount, plus an amount equal to the excess (if any) of the interest
payable on the first Distribution Date over the interest that accrues for the
period from the Closing Date to the first Distribution Date.
Section 1272(a)(6) of the Code contains special original issue discount
rules applicable to the REMIC Regular Securities. Under these rules, (i) it is
anticipated that the amount and rate of accrual of original issue discount on
each REMIC Regular Security will be based on (x) the Prepayment Assumption, and
(y) in the case of a REMIC Regular Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains the same over the entire life of such Security, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
In addition, if the accrued interest to be paid on the first Payment
Date will be computed with respect to a period that begins prior to the Closing
Date, a portion of the purchase price paid for a REMIC Regular Security will
reflect such accrued interest. If applicable, information returns to the
Securityholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Security (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Payment Date) and the portion of the
interest paid on the first Payment Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Payment Date should be included in the stated redemption price of such
REMIC Regular Security.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Security will be considered to be de
minimis if such original issue discount is less than 0.25% of the stated
redemption price at maturity of the REMIC Regular Security multiplied by its
weighted average life. The weighted average life of a REMIC Regular Security is
apparently computed for this purpose as the sum, for all distributions included
in the stated redemption price at maturity of the Security, of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Closing Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the applicable Prospectus Supplement (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
Security's stated redemption price at maturity. Original issue discount of only
a de minimis amount will be included in income in the same manner as market
discount of only a de minimis amount. See "Taxation of Owners of REMIC Regular
Securities -- Market Discount."
If original issue discount on a REMIC Regular Security is in excess of
a de minimis amount, the holder of such Security must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Security including
the purchase date
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but excluding the disposition date. In the case of an original holder of a REMIC
Regular Security, the daily portions of original issue discount will be
determined as follows.
As to each "accrual period," that is, each period that ends on a date
that corresponds to a Payment Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
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 remaining to be made on the REMIC
Regular Security, if any, in future periods and (B) the distributions made on
such REMIC Regular Security during the accrual period of amounts included in the
stated redemption price at maturity, over (ii) the adjusted issue price of such
REMIC Regular Security at the beginning of the accrual period. The present value
of the remaining distributions referred to in the preceding sentence will be
calculated based on (i) the yield to maturity of the REMIC Regular Security,
calculated as of the Closing Date, giving effect to the Prepayment Assumption,
(ii) events (including actual prepayments) that have occurred prior to the end
of the accrual period, (iii) the Prepayment Assumption, and (iv) in the case of
a REMIC Regular Security calling for a variable rate of interest, an assumption
that the value of the index upon which such variable rate is based remains the
same as its value on the Closing Date over the entire life of such Security. The
adjusted issue price of a REMIC Regular Security at any time will equal the
issue price of such Security, increased by the aggregate amount of previously
accrued original issue discount with respect to such Security, and reduced by
the amount of any distributions made on such Security as of that time of amounts
included in the stated redemption price at maturity. The original issue discount
accruing during any accrual period will then be allocated ratably to each day
during the period to determine the daily portion of original issue discount.
A subsequent purchaser of a REMIC Regular Security that purchases such
REMIC Regular Security at a cost less than its remaining stated redemption price
at maturity will also be required to include in gross income the daily portions
of any original issue discount with respect to such REMIC Regular Security.
However, each such daily portion will be reduced, if the cost of such REMIC
Regular Security to such subsequent purchaser is in excess of its adjusted issue
price, in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Security.
Market Discount
A Securityholder that purchases a REMIC Regular Security at a market
discount, that is, in the case of a REMIC Regular Security issued without
original issue discount, at a purchase price less than its remaining stated
redemption price, or in the case of a REMIC Regular Security issued with
original issue discount, at a purchase price less than its adjusted issue price,
will recognize gain upon receipt of the portion of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code, such a holder will generally be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Securityholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Securityholder on or after the first day of the
first taxable year to which such election applies.
However, market discount with respect to a REMIC Regular Security will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Security multiplied by its Weighted Average Remaining Life.
Weighted average remaining life presumably would be calculated in a manner
similar to weighted average life, taking into account payments (including
prepayments) prior to the date of acquisition of the REMIC Regular Security by
the subsequent purchaser. In interpreting a similar rule with respect to
original issue discount on obligations payable in installments, the Proposed OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the Prepayment Assumption. If market discount is
treated as de minimis under this rule, the actual discount would be allocated
among the portion of each scheduled distribution representing the stated
redemption
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price of such REMIC Regular Security, and that portion of the discount allocable
to such distribution would be reported as income when such distribution occurs
or is due. Such treatment would result in discount being included in income at a
slower rate than discount would be required to be included in income using the
method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment, and until such time as regulations are issued by the Treasury
Department, the legislative history of this Code Section indicates that in each
accrual period market discount on REMIC Regular Securities should accrue, at the
Securityholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a REMIC Regular Security issued without original issue discount, in
an amount that bears the same ratio to the total remaining market discount as
the stated interest paid in the accrual period bears to the total amount of
stated interest remaining to be paid on the REMIC Regular Security as of the
beginning of the accrual period, or (iii) in the case of a REMIC Regular
Security issued with original issue discount, in an amount that bears the same
ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining on the REMIC Regular Security at the beginning of the accrual period.
Moreover, the Prepayment Assumption used in calculating the accrual of original
issue discount is to be used in calculating the accrual of market discount. The
effect of using a Prepayment Assumption could be to accelerate the reporting of
such discount income. Because the regulations referred to in this paragraph have
not been issued, it is not possible to predict what effect such regulations
might have on the tax treatment of a REMIC Regular Security purchased at a
discount in the secondary market.
To the extent that REMIC Regular Securities provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includable in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a purchaser generally will
be required to treat a portion of any gain on sale or exchange of a REMIC
Regular Security as ordinary income to the extent of the market discount accrued
to the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income.
Further, under Section 1277 of the Code, a purchaser may be required to
defer a portion of its interest deductions for the taxable year attributable to
any indebtedness incurred or continued to purchase or carry a REMIC Regular
Security purchased with market discount. For these purposes, the de minimis rule
referred to above applies. Any such deferred interest expense would not exceed
the market discount that accrues during such taxable year and is, in general,
allowed as a deduction not later than the year in which such market discount is
includable in income. If such holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter, the interest deferral rule described
above will not apply.
Premium
A REMIC Regular Security purchased at a cost greater than its
remaining, stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Security may elect under Section 171
of the Code to amortize such premium under the constant yield method over the
life of the Security. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Security, rather than as a separate
interest deduction.
It is unclear whether a Prepayment Assumption should be used in
computing amortization of premium allowable under Section 171 of the Code.
However, the Legislative History of the Tax Reform Act of 1986 states that the
same rules that apply to accrual of market discount (which rules will require
use of a Prepayment Assumption in accruing market discount with respect to REMIC
Securities without regard to whether such Securities have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
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Some REMIC Regular Securities may provide for only nominal
distributions of principal in comparison to the distributions of interest
thereon. It is possible that the IRS or the Treasury Department may issue
guidance excluding such Securities from the rules generally applicable to debt
instruments issued at a premium. In particular, it is possible that such a REMIC
Security will be treated as having original issue discount equal to the excess
of the total payments to be received thereon over its issue price. In such
event, section 1272 (a) (6) of the Code would govern the accrual of such
original issue discount, but a Regular Securityholder would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2) of the Code. Unless and until the
Treasury Department or the IRS publishes specific guidance relating to the tax
treatment of such Securities, the Servicer intends to furnish tax information to
holders of such Securities in accordance with the rules described in the
preceding paragraph.
TAXATION OF HOLDERS OF REMIC RESIDUAL SECURITIES
General
As residual interests, the REMIC Residual Securities will be subject to
tax rules, described below, that differ from those that would apply if the REMIC
Residual Securities were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
An original owner of a REMIC Residual Security (singularly a "Residual
Owner," or collectively, the "Residual Owners") generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the Residual Owner owned such REMIC Residual Security. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably based on a 90 days per quarter counting
convention. The amount so allocated will then be allocated among the Residual
Owners in proportion to their respective ownership interests on such day. Any
amount included in the gross income or allowed as a loss of any Residual Owner
by virtue of this paragraph will be treated as ordinary income or loss. The
taxable income of the REMIC will be determined under the rules described below
in "Taxable Income of the REMIC" and will be taxable to the Residual Owners
without regard to the timing or amount of cash distributions by the REMIC.
Ordinary income derived from REMIC Residual Securities will be "portfolio
income" for purposes of the taxation of taxpayers subject to limitations under
Section 469 of the Code on the deductibility of "passive losses."
A subsequent owner of a REMIC Residual Security (a "Subsequent Residual
Owner") also will be required to report on its federal income tax return amounts
representing its daily portion of the taxable income (or net loss) of the REMIC
for each day that it holds such REMIC Residual Security. Those daily portions
generally would equal the amounts that would have been reported for the same
days by an original Residual Owner, as described above.
The amount of income Residual Owners and Subsequent Residual Owners
(collectively, "Residual Securityholders") will be required to report (or the
tax liability associated with such income) may exceed the amount of cash
distributions received from the REMIC for the corresponding period.
Consequently, Residual Securityholders should have other sources of funds
sufficient to pay any federal income taxes due as a result of their ownership of
REMIC Residual Securities or unrelated deductions against which income may be
offset, subject to the rules relating to "excess inclusions", residual interests
without "significant value" and "noneconomic" residual interests discussed
below. The fact that the tax liability associated with the income allocated to
Residual Securityholders may exceed the cash distributions received by such
Residual Securityholders for the corresponding period may significantly
adversely affect such Residual Securityholders' after-tax rate of return.
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Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC less the deductions allowed to the REMIC for
interest (including original issue discount) on the REMIC Regular Securities
(and any other class of REMIC Securities constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans
and, except as described below, for servicing, administrative and other
expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Servicer
intends to treat the fair market value of the Mortgage Loans as being equal to
the aggregate issue prices of the REMIC Regular Securities and REMIC Residual
Securities (or, if a class of REMIC Securities is not sold initially, their fair
market values). Such aggregate basis will be allocated among the individual
Mortgage Loans and other assets of the REMIC in proportion to their respective
fair market values. The issue price of any REMIC Securities offered hereby will
be determined in the manner described above under "Taxation of Owners of REMIC
Regular Securities -- Original Issue Discount." The issue price of any REMIC
Security in a class that is not publicly offered will equal the price paid by
the first purchaser of such REMIC Security or, in the case of a REMIC Security
received in exchange for an interest in the Mortgage Loans or other property,
the fair market value of such interests in the Mortgage Loans or other property.
Accordingly, if one or more classes of REMIC Securities are retained initially
rather than sold, the Servicer may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price at maturity. Any such discount will be includable in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Securities. The REMIC expects to
elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method presumably taking into account a
Prepayment Assumption.
The REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Securities (including any other class of
REMIC Securities constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Securities (including any other class of REMIC Securities constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "Taxation of Owners of REMIC Regular Securities --
Original Issue Discount," except that the .25% de minimis rule and the
adjustments for subsequent holders of REMIC Regular Securities (including any
other class of Securities constituting "regular interests" in the REMIC not
offered hereby) described therein will not apply.
If a class of REMIC Regular Securities is issued at a price in excess
of the stated redemption price at maturity of such class (such excess, "Issue
Premium"), the net amount of interest deductions that are allowed the REMIC in
each taxable year with respect to the REMIC Regular Securities of such class
will be reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "Taxation of REMIC Regular Securities --
Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined
in the same manner as if the REMIC were an individual having the calendar year
as its taxable year and using the accrual method of accounting. However, no item
of income, gain, loss or deduction allocable to a prohibited transaction (see
"Prohibited Transactions and Other Possible REMIC Taxes") will be taken into
account. Further, the limitation
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on miscellaneous itemized deductions imposed on individuals by Section 67 of the
Code (which allows such deductions only to the extent they exceed in the
aggregate two percent of the individual taxpayer's adjusted gross income) will
not be applied at the REMIC level so that the REMIC will be allowed deductions
for servicing, administrative and other non-interest expenses in determining its
taxable income. All such expenses will be allocated as a separate item to the
holders of REMIC Securities, subject to the limitation of Section 67 of the
Code. See "Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
such excess will be the net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Security will be equal to the
amount paid for such REMIC Residual Security, increased by amounts included in
the income of the Residual Securityholder and decreased (but not below zero) by
distributions made, and by net losses allocated, to such Residual
Securityholder.
A Residual Securityholder is not allowed to take into account any net
loss for any calendar quarter to the extent such net loss exceeds such Residual
Securityholder's adjusted basis in its REMIC Residual Security as of the close
of such calendar quarter (determined without regard to such net loss). Any loss
that is not currently deductible by reason of this limitation may be carried
forward indefinitely to future calendar quarters and, subject to the same
limitation, may be used only to offset income from the REMIC Residual Security.
The ability of Residual Securityholders to deduct net losses may be subject to
additional limitations under the Code, as to which Residual Securityholders
should consult their tax advisors.
Any distribution on a REMIC Residual Security will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Security. To the extent a distribution on
a REMIC Residual Security exceeds such adjusted basis, it will be treated as
gain from the sale of such REMIC Residual Security.
The effect of these rules is that a Residual Securityholder may not
amortize its basis in a REMIC Residual Security, but may only recover its basis
through distributions, through the deduction of its share of any net losses of
the REMIC or upon the sale of its REMIC Residual Security. See "Sales of REMIC
Securities."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Security will,
with an exception discussed below for certain REMIC Residual Securities held by
thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusion" with respect to a REMIC Residual
Security for any calendar quarter will be the excess, if any, of (i) the sum of
the daily portions of REMIC taxable income allocable to such REMIC Residual
Security over (ii) the sum of the "daily accruals" (as defined below) for each
day during such quarter that such REMIC Residual Security was held by such
Residual Securityholder. The daily accruals of a Residual Securityholder will be
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Security at the beginning of the calendar quarter and 120% of the "Federal
long-term rate" in effect on the Closing Date. For this purpose, the adjusted
issue price of a REMIC Residual Security as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Security,
increased by the sum of the daily accruals for all prior quarters and decreased
(but not below zero) by any distributions made with respect to such REMIC
Residual Security before the beginning of such quarter. The issue price of a
REMIC Residual Security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial amount of the REMIC Residual
Securities were sold. The Federal long-term rate is an average of current yields
on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
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For Residual Securityholders, an excess inclusion (i) will not be
permitted to be offset by losses or loss carryovers from other activities,
except generally in the case of taxpayers that are thrift institutions described
in Section 593 of the Code, (ii) will be treated as "unrelated business taxable
income" ("UBTI") to an otherwise tax-exempt organization and (iii) will not be
eligible for any rate reduction or exemption under any applicable tax treaty
with respect to the 30% United States withholding tax imposed on distributions
to Residual Securityholders that are foreign investors. See "Foreign Investors
in REMIC Securities." The above-described exception for thrift institutions
applies only to those residual interests held directly by such institutions (and
not by other members of an affiliated group of corporations filing a
consolidated income tax return) or certain wholly owned direct subsidiaries of
such institutions formed and operated exclusively in connection with the
organization and operation of one or more REMICS.
For REMIC Residual Securityholders that are thrift institutions
described in section 593 of the Code, income from a REMIC Residual Security
generally may be offset by losses from other activities. Under the REMIC
Regulations, such an organization is treated as having applied its allowable
deductions for the year first to offset income that is not an excess inclusion
and then to offset that portion of its income that is an excess inclusion. For
other REMIC Residual Securityholders, any excess inclusions cannot be offset by
losses from other activities. For REMIC Residual Securityholders that are
subject to tax only on unrelated business taxable income (as defined in section
511 of the Code), an excess inclusion of such REMIC Residual Securityholder is
treated as unrelated business taxable income. With respect to variable contracts
(within the meaning of section 817 of the Code), a life insurance company cannot
adjust its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a REMIC Residual
Securityholder is a member of any affiliated group filing a consolidated income
tax return, the taxable income of the affiliated group cannot be less than the
sum of the excess inclusions attributable to all residual interests in REMICs
held by members of the affiliated group. For a discussion of the effect of
excess inclusions on certain foreign investors that own REMIC Residual
Securities, see "Foreign Investors in REMIC Securities" below.
The REMIC Regulations provide that an organization to which section 593
of the Code applies and which is the holder of a REMIC Residual Security may not
use its allowable deductions to offset any excess inclusions with respect to
such Security if such Security does not have "significant value." For this
purpose, a REMIC Residual security has significant value under the REMIC
Regulations if (i) its issue price is at least 2% of the aggregate of the issue
prices of all the REMIC Regular and Residual Securities in that REMIC Trust and
(ii) its "anticipated weighted average life" is at least 20% of the "anticipated
weighted average life" of such REMIC Trust Estate.
In determining whether a REMIC Residual security has significant value, the
anticipated weighted average life of such Security is based on the Prepayment
Assumption and is determined as described herein, except that all anticipated
payments on such Security are taken into account, regardless of their
designation as principal or interest. The anticipated weighted average life of a
REMIC Trust is the weighted average of the anticipated weighted average lives of
the Securities. Such weighted average is determined under the formula described
herein, with two distinctions. First, the formula is applied by treating all
payments taken into account in computing the anticipated weighted average lives
of the REMIC Regular and Residual Securities in the REMIC Trust as principal
payments on a single REMIC Regular Security. Second, for any REMIC Residual
Security or for a REMIC Regular Security that is an "interest only" Class or for
which the issue price of the REMIC Regular security is greater than 125% of its
specified principal amount, all anticipated payments on that REMIC Residual or
Regular Security, regardless of their designation as principal or interest, are
taken into account in computing the anticipated weighted average life of the
Security.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions should be calculated as
discussed above. The applicable Prospectus Supplement will disclose whether
offered REMIC Residual Securities may be considered to have "significant value"
under the
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REMIC Regulations, provided, however, that any disclosure that a REMIC Residual
Security will have "significant value" will be based upon certain assumptions,
and the Sponsor will make no representation that a REMIC Residual Security will
have "significant value" for purposes of the above-described rules.
In the case of any REMIC Residual Securities held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities, reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of Section 857(b)(2) of the Code,
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Noneconomic REMIC Residual Securities
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Securities will be disregarded for all federal income tax purposes unless "no
significant purpose of the transfer was to impede the assessment or collection
of tax." If such transfer is disregarded, the purported transferor will continue
to remain liable for any taxes due with respect to the income on such
"noneconomic" REMIC Residual Security. The REMIC Regulations provide that a
REMIC Residual Security is noneconomic unless, based on the prepayment
assumption (1) the present value of the expected distributions (discounted using
the applicable Federal rate) on the REMIC Residual Security equals at least the
present value of the expected tax on the excess inclusions, and (2) the
transferor reasonably expects that the transferee will receive distributions
with respect to the REMIC Residual Security at or after the time the taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. The REMIC Regulations provide that a significant purpose to
impede the assessment or collection of tax exists if, at the time of the
transfer, a transferor or a REMIC Residual Security has "improper knowledge"
(i.e., either knew, or should have known, that the transferee would be unwilling
or unable to pay taxes due on its share of the taxable income of the REMIC
Trust). A transferor is presumed not to have improper knowledge if (i) the
transferor conducts, at the time of a 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
come 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 makes certain representations to the transferor in the transferee
affidavit, a form of which is attached to the Pooling and Security Agreement as
an exhibit thereto. Transferors of a REMIC Residual Security should consult with
their own tax advisors for further information regarding such transfers.
The applicable Prospectus Supplement will disclose whether offered
REMIC Residual Securities may be considered "noneconomic" residual interests
under the Proposed REMIC Regulations; provided, however, that any disclosure
that a REMIC Residual Security will not be considered "noneconomic" will be
based upon certain assumptions, and the Sponsor will make no representation that
a REMIC Residual Security will not be considered "noneconomic" for purposes of
the above-described rules. See "Foreign Investors in REMIC Securities -- REMIC
Residual Securities" below for additional restrictions applicable to transfers
of certain REMIC Residual Securities to foreign persons.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders
of the related REMIC Residual Securities. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Securities. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Securities in their entirety and not to
the holders of the related REMIC Regular Securities.
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With respect to REMIC Residual Securities or REMIC Regular Securities
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussions, if any holder thereof is an individual, estate
or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of a
taxpayer's adjusted gross income. In determining the alternative minimum taxable
income of a holder of such a REMIC Security who is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Securities may not be appropriate investments for individuals, estates, or
trusts, or pass-through entities beneficially owned by one or more individuals,
estates or trusts. Such prospective investors should carefully consult with
their own tax advisors prior to making an investment in such Securities.
SALES OF REMIC SECURITIES
If a REMIC Security is sold, the Selling Securityholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its adjusted basis in the REMIC Security. The adjusted basis of a REMIC Regular
Security generally will equal the cost of such REMIC Regular Security to such
Securityholder, increased by income reported by such Securityholder with respect
to such REMIC Regular Security (including original issue discount and market
discount income) and reduced (but not below zero) by distributions on such REMIC
Regular Security received by such Securityholder and by any amortized premium.
The adjusted basis of a REMIC Residual Security will be determined as described
under "Taxation of Owners of REMIC Residual Securities - Basis Rules, Net Losses
and Distributions." Except as provided in the following paragraph or under
section 582(c) of the Code, any such gain or loss will be capital gain or loss,
provided such Security in held as a "capital asset" (generally, proxy held for
investment) within the meaning of section 1221 of the Code. Except as provided
in the following two paragraphs, any such gain or loss will be capital gain or
loss.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includable in
the seller's income with respect to such REMIC Regular Security assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" as defined under Section 1274(d) of the Code (generally, an average of
current yields on Treasury securities of comparable maturity), determined as of
the date of purchase of such REMIC Regular Security, over (ii) the amount
actually includable in the seller's income. In addition, gain from the sale of a
REMIC Regular Security by a seller who purchased such REMIC Regular Security at
a market discount will be taxable as ordinary income in an amount not exceeding
the portion of such discount that accrued during the period such REMIC Regular
Security was held by such holder, reduced by any market discount included in
income under the rules described above under "Taxation of Owners of REMIC
Regular Securities - Market Discount."
REMIC Securities will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Security by a bank or thrift institution to which such section
applies will be ordinary income or loss.
Except as may be provided in Treasury regulations to be issued, if the
seller of a REMIC Residual Security reacquires a REMIC Residual Security, any
other residual interest in a REMIC or any similar interest 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 REMIC Residual Securityholder on the
sale will not be deductible, but instead will be added to such REMIC Residual
Securityholder's adjusted basis in the newly-acquired asset.
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PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" ("Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction means
the disposition of a qualified mortgage, the receipt of income from a source
other than a Mortgage Loan or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset purchased
with the payments on the qualified mortgage for temporary investment pending
distribution on the REMIC Securities. It is not anticipated that the REMIC will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property
("Contributions Tax"). No REMIC in which interests are offered hereunder will
accept contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property. The terms "foreclosure property"
(which includes property acquired by deed in lieu of foreclosure) and "net
income from foreclosure property" are defined by reference to the rules
applicable to real estate investment trusts. Generally, foreclosure property
would be treated as such for a period of two years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
It is not anticipated that any material state or local income or
franchise tax will be imposed on the REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable law, any Prohibited Transactions Tax,
Contributions Tax, tax on net income from foreclosure property or state or local
income or franchise tax that may be imposed on the REMIC will become payable by
the related Servicer or Trustee in either case out of its own funds, provided
that the Servicer or the Trustee, as the case may be, has sufficient assets to
do so, and provided further that such tax arises out of a breach of the
Servicer's or the Trustee's obligations, as the case may be, under the related
Pooling and Servicing Agreement and in respect of compliance with then
applicable law. Any such tax not borne by the Servicer or the Trustee will be
payable out of the related Trust Estate resulting in a reduction in amounts
payable to holders of REMIC Securities.
TAX ON TRANSFERS OF REMIC RESIDUAL SECURITIES TO CERTAIN ORGANIZATIONS
If a REMIC Residual Security is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount determined
under the REMIC Regulations equal to the product of (i) the present value
(discounted using the applicable Federal rate) of the total anticipated excess
inclusions with respect to such REMIC Residual Security for periods after the
transfer and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date the REMIC Residual Security is transferred and must be based on events that
have occurred up to the time of such transfer. Such a tax would generally be
imposed on the transferor of the REMIC Residual Security, except that where such
transfer is through an agent for a disqualified organization, the tax would
instead be imposed on such agent. However, a transferor of a REMIC Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnishes to the transferor an affidavit that the transferee is
not a disqualified organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false.
Moreover, an entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that (i) residual interests in such entity are
not held by disqualified organizations and (ii) information necessary for the
application of the tax described herein will be made available. Restrictions on
the transfer of the REMIC Residual Security and certain other provisions that
are intended to meet this requirement are described in the Pooling and Servicing
Agreement, and will be discussed more fully in any Prospectus Supplement
relating to the offering of any REMIC Residual Security.
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In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Security, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Security that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
the record holder of such interest furnishes to such pass-through entity an
affidavit that such record holder is not a disqualified organization and, during
such period, the pass-through entity does not have actual knowledge that such
affidavit is false.
For these purposes a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. Except as provided in the
regulations, a person holding an interest in a pass-through entity as a nominee
for another person shall, with respect to such interest, be treated as a
pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Payment Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or a
sale of the REMIC's assets following the adoption by the REMIC of a plan of
complete liquidation. The last distribution on a REMIC Regular Security will be
treated as a payment in retirement of a debt instrument. In the case of a REMIC
Residual Security, if the last distribution on such REMIC Residual Security is
less than the Residual Securityholder's adjusted basis in such REMIC Residual
Security although the matter is not entirely free from doubt, such Residual
Securityholder should be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and Residual Securityholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, either the Servicer or the Trustee, will file REMIC federal income
tax returns on behalf of the related REMIC, and will be designated as and will
act as the "tax matters person" with respect to the REMIC in all respects.
As tax matters person, the Servicer or the Trustee will, subject to
certain notice requirements and various restrictions and limitations, generally
have the authority to act on behalf of the REMIC and the Residual
Securityholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. Residual Securityholders will generally be required to report
such REMIC items consistent with their treatment on the REMIC's tax return and
may in some circumstances be bound by a settlement agreement between the
Servicer, as tax matters person, and the IRS concerning any such REMIC item.
Adjustments made to the REMIC tax return may require a Residual Securityholder
to make corresponding adjustments on its return, and an audit of the REMIC's tax
return, or the adjustments resulting from such an audit, could result in an
audit of a Residual Securityholder's return. No REMIC will be registered as a
tax shelter pursuant to Section 6111 of the Code because it is not anticipated
that any REMIC will have a net loss for any of the first five taxable years of
its existence. Any person that holds a REMIC Residual Security as a nominee for
another person may be required to finish the REMIC, in a manner to be provided
in Treasury regulations, with the name and address of such person and other
information.
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Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Securities is required annually, and may be
required more frequently under Treasury regulations. These information reports
are generally required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Securities that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the regulations. The information must be provided by the
later of 30 days after the end of the quarter for which the information was
requested, or two weeks after the receipt of the request. The REMIC must also
comply with rules requiring a REMIC Regular Security issued with original issue
discount to disclose on its face certain information including the amount of
original issue discount and the issue date, and requiring such information to be
reported to the IRS.
The REMIC Regular Security information reports will include a statement
of the adjusted issue price of the REMIC Regular Security at the beginning of
each accrual period. In addition, the reports will include information required
by Treasury regulations with respect to computing the accrual of any market
discount. Because exact computation of the accrual of market discount on a
constant yield method requires information relating to the holder's purchase
price that the Servicer or the Trustee will not have, such regulations only
require that information pertaining to the appropriate proportionate method of
accruing market discount be supplied. See "Taxation of Owners of REMIC Regular
Securities -- Market Discount." The responsibility for complying with the
foregoing reporting rules will be done by the Servicer.
Backup Withholding With Respect to REMIC Securities
Payments of interest and principal, as well as payments of proceeds
from the sale of REMIC Securities, may be subject to the "backup withholding
tax" under Section 3406 of the Code at a rate of 31% if recipients of such
payments fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC SECURITIES
REMIC Regular Securities
A REMIC Regular Securityholder that 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 in addition to its ownership
of a REMIC Regular Security will not be subject to United States federal income
or withholding tax in respect of a distribution on a REMIC Regular Security,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Securityholder under penalties of perjury, certifying that such Securityholder
is not a United States person and providing the name and address of such
Securityholder). For these purposes, "United States Person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate or trust whose income from sources
without the United States is includable in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Security held by a Residual Securityholder that owns directly or
indirectly a 10% or greater interest in the REMIC Residual Securities. If the
holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
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Further, it appears that a REMIC Regular Security would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Securityholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Residual Securities
Unless otherwise stated in the related Prospectus Supplement, investors
that are not United States Persons should assume that distributions of income on
the REMIC Residual Securities they hold will be subject to a 30% withholding tax
(or such lesser rate as may be provided under any applicable tax treaty). In the
case of any income on a REMIC Residual Security that is an excess inclusion,
however, the rate of withholding will not be subject to reduction under any
applicable tax treaties. (See "Taxation of Owners of REMIC Residual Securities
- --Excess Inclusions," above.) Further, it appears that any REMIC Residual
Security included in the estate of a non-resident alien individual will be
subject to United States estate taxes.
Certain restrictions relating to transfers of REMIC Residual Securities
to and by investors who are not "United States Persons" (as defined above) are
also imposed by the Proposed REMIC Regulations. First, transfers of REMIC
Residual Securities to a non-United States Person that have "tax avoidance
potential" are disregarded for all federal income tax purposes. If such transfer
is disregarded, the purported transferor of such a REMIC Residual Security to a
non-United States Person would continue to remain liable for any taxes due with
respect to the income on such REMIC Residual Security. A transfer of a REMIC
Residual Security has tax avoidance potential unless (1) the expected future
distributions on the REMIC Residual Security are at least equal to 30 percent of
the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive sufficient distributions at or after the time
the excess inclusions accrue to satisfy any tax and withholding liability
thereon. This rule does not apply to transfers if the income from the REMIC
Residual Security is taxed in the hands of the transferee as income effectively
connected with the conduct of a U.S. trade or business. Second, if a non-United
States Person transfers a REMIC Residual Security to a United States Person, and
the transfer has the effect of allowing the transferor to avoid tax on accrued
excess inclusions, that transfer is disregarded for all federal income tax
purposes and the purported non-United States transferor continues to be treated
as the owner of the REMIC Residual Security. Thus, the REMIC's liability to
withhold 30 percent of the accrued excess inclusions is not terminated even
though the REMIC Residual Security is no longer held by a non-United States
Person.
In light of the foregoing, all transfers of REMIC Residual Securities
to non-United States Persons will be subject to certain restrictions under the
terms of the related Pooling and Servicing Agreement that are intended to reduce
the possibility of any such transfer being disregarded. Such restrictions will
require each prospective transferor and transferee of a REMIC Residual Security
to receive the written permission of the Trustee and Servicer to transfer and to
hold, respectively, such REMIC Residual Security and will require that each
transferor and transferee provide an affidavit stating, among other things, that
such transfer does not have "tax avoidance potential." In addition, the
transferee will be required to acknowledge that it will be subject to United
States federal income tax on "excess inclusions," that such tax may be withheld
from distributions that would otherwise be made to such transferee and that, to
the extent such taxes have not been previously withheld, such taxes will be
imposed at the time of any disposition of such REMIC Residual Securities.
Moreover, in the absence of satisfactory written evidence that such taxes have
been paid, the Trustee is authorized and directed to withhold federal income
taxes from future distributions on the REMIC Residual Securities to subsequent
transferees until such tax liability is satisfied in full, which could result in
a zero after-tax rate of return on the REMIC Residual Securities. Prior to
purchasing a REMIC Residual Security, prospective purchasers are advised to
review the transferor and transferee affidavits that are required to be
delivered upon a transfer of the REMIC Residual Securities (forms of which are
attached to the Pooling and Servicing Agreement as exhibits thereto) and should
consider the possibility that a purported transfer of such REMIC Residual
Securities by such purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules, which would result in
the retention of tax liability by such purchaser and the possibility that an
amount equal to the total distributions on such REMIC Residual Securities will
be withheld to satisfy any United States federal income tax liability thereon.
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DEBT SECURITIES
General
Debt Securities, if issued and as described in the related Prospectus
Supplement may be issued either as (i) non-recourse debt of the Sponsor secured
by the related Mortgage Loans, in which case the related Trust will constitute
only a security device which constitutes a collateral arrangement for the
issuance of secured debt and not an entity for federal income tax purposes or
(ii) debt of a partnership, in which case the related Trust will constitute a
partnership for federal income tax purposes. Regardless, Debt Securities,
hereinafter referred to as "Notes," will follow the federal income tax treatment
hereinafter described.
Original Issue Discount
Under the OID Regulations, it is likely that the Notes will be treated
as having been issued with "original issue discount" within the meaning of
section 1273(a) of the Code because interest payments on the Notes may, in the
event of certain shortfalls, be deferred for periods exceeding one year. As a
result, interest payments may not be considered "qualified stated interest"
payments within the meaning of Treasury Regulation 'SS' 1.1273-1(c).
In general, a holder of a Note having original issue discount must
include original issue discount in ordinary income as it accrues in advance of
receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Note is
the excess of its "stated redemption price at maturity" over its "issue price."
The issue price of a Note is the price at which a substantial amount of the
Notes are first sold to the public. Under the OID Regulations, the stated
redemption price at maturity of a Note is the total of all payments on the Note
other than qualified stated interest payments. Accordingly, assuming that
interest payments on the Notes will not constitute qualified stated interest,
all principal and interest payments to be received on the Notes will be included
in the stated redemption price at maturity.
A Noteholder generally must include in gross income for any taxable
year the sum of the "daily portions of the original issue discount that accrue
on the Note for each day during the Noteholder's taxable year on which the Note
is held. A calculation will be made of the portion of the original issue
discount that accrues on each Note during each "accrual period," which in
general is the period corresponding to the period between Payment Dates or other
interest compounding periods. The original issue discount accruing during any
accrual period is divided by the number of days in the period to determine the
daily portion of original issue discount for each day in the period.
For debt instruments like the Notes, which are subject to prepayments
on other debt obligations that secure the Notes, original issue discount
accruing in an accrual period is the excess, if any, of (i) the sum of (a) the
present value of the remaining payments to be made on the Note as of the end of
that accrual period and (b) the payments made on the Note during the accrual
period, that are included in the stated redemption price at maturity of the
Note, over (ii) the adjusted issue price of the Note at the beginning of the
accrual period. For this purpose, the present value of the remaining payments to
be made on a Note is calculated based on (i) a reasonably determined assumption
regarding the rate at which the Note will be prepaid (the "Prepayment
Assumption"), (ii) the yield to maturity of the Note, as of the closing date
(taking into account the Prepayment Assumption) and (iii) events (including
actual prepayments) that have occurred prior to the end of the accrual period.
The Prepayment Assumption to be used for purposes of computing original issue
discount will be disclosed in the related Prospectus Supplement. The setting
forth of a Prepayment Assumption, however, does not constitute a representation
that payments will be made with respect to the Notes at a rate based on the
Prepayment Assumption or at any other rate. The adjusted issue price of a Note
at the beginning of any accrual period equals the issue price of the Note
increased by the aggregate amount of original issue discount that accrued on the
Note in all prior such periods and reduced by the amount of payments included in
the stated redemption price at maturity of the Note in prior accrual periods. In
general, the daily portions of original issue discount required to be included
in income by the holder of a Note generally will increase if prepayments on the
Mortgage
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Loans exceed the Prepayment Assumption, and generally will decrease (but not
below zero for any period) if those prepayments are slower than the Prepayment
Assumption.
A holder of a Note that was issued with original issue discount who
purchases the Note at a price that exceeds the "adjusted issue price" of that
Note but is less than the unpaid stated redemption price at maturity also will
be required to include in gross income daily portions of original issue discount
on that Note but will be entitled to reduce the daily portions proportionately
by the amount of the excess. The adjusted issue price of a Note is the issue
price of the Note increased by the amount of original issue discount previously
includable in income by an original Noteholder who purchased the Note at its
issue price on the issue date.
If original issue discount on a Note is less than 0.25% of the stated
redemption price at maturity of the Note multiplied by the weighted averaged
maturity of the Note, then under a de minimis rule provided by the Code, the
Note will not be treated as having any original issue discount. The weighted
average maturity of a Note is the sum of the amounts determined by multiplying
the number of full years from the issue date until each payment included in the
stated redemption price at maturity of the Note is scheduled to be made by a
fraction whose numerator is the amount of the corresponding payment and whose
denominator is the stated redemption price at maturity of the Note. This de
minimis rule would not apply to the Notes if all of the interest on the Notes is
treated as part of the Notes stated redemption price at maturity.
Market Discount
A purchaser of a Note may be subject to the market discount rules of
sections 1276 through 1278 of the Code. In general, "market discount" is the
amount by which the stated redemption price at maturity (or, in the case of a
Note issued with original issue discount, the adjusted issue price) of the Note
exceeds the purchaser's basis in a Note. The holder of a Note that has market
discount generally will be required to include accrued market discount in
ordinary income to the extent payments includable in the stated redemption price
at maturity of such Note are received. The purchaser of a Note that has market
discount also will be required to treat a portion of any gain on a sale or
exchange of the Note as ordinary income to the extent of the market discount
that accrued to the date of disposition and was not previously included in
ordinary income. Unless otherwise provided in Treasury Regulations that have not
yet been issued, it is anticipated that market discount on a Note will accrue at
the holder's option (i) on the basis of a constant interest rate, (ii) ratably
based on the ratio of stated interest payable in the current period to all
interest remaining to be paid in the case of a Note issued without original
issue discount, or (iii) ratably based on the ratio of the amount of original
issue discount accrued in the current period to all remaining original issue
discount in the case of a Note issued with original issue discount, in each case
computed taking into account the Prepayment Assumption.
A purchaser of a Note that has market discount may be required to defer
recognition of a portion of interest expense attributable to any indebtedness
incurred or continued to purchase or carry the Note. The amount of this deferred
interest expense in any taxable year generally would not exceed the accrued
market discount for the year, and the deferred expense generally is allowed as a
deduction not later than the year in which the related market discount income is
recognized. Alternatively, a Noteholder may elect to include market discount in
income currently as it accrues on all market discount obligations that the
Noteholder acquires in that taxable year or thereafter, in which case the rules
described above relating to the treatment of market discount, as well as the
interest deferral rule, will not apply. A Note may be treated as having no
market discount under a de minimis rule that is similar to the de minimis rule
applied for purposes of determining whether a Note has original issue discount.
Premium
A Note purchased at a cost greater than its currently outstanding
stated redemption price at maturity amount is considered to be purchased at a
premium. A Noteholder who holds a Note as a "capital asset" within the meaning
of section 1221 of the Code may elect under section 171 of the Code to amortize
the premium under the constant interest method. That election will apply to all
premium obligations that the Noteholder acquires on or after the first day of
the taxable year for which the election is made, unless the IRS permits the
revocation
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of the election. In addition, it appears that the same rules that apply to the
accrual of market discount on installment obligations are intended to apply in
amortizing premium on installment obligations such as the Notes, although it is
unclear whether the alternatives to the constant interest method described above
under "Market Discount" are available. The portion of the premium deductible
pursuant to an election under section 171 of the Code and allocable to a
particular period will be treated as a reduction in interest payments on the
Note during that period. A Noteholder who neither has in place nor makes an
election to amortize bond premium could be required to allocate that premium
among the principal payments to be received on that instrument and recognize the
premium as a loss (which would be a capital loss if the Note is held as a
capital asset) as those principal payments are received.
Sale or Exchange of Notes
If a Noteholder sells or exchanges a Note, the Noteholder will
recognize gain or loss equal to the difference, if any, between the amount
received and the Noteholder's adjusted basis in the Note. The adjusted basis in
the Note generally will equal its initial cost, increased by any original issue
discount or market discount previously included in the seller's gross income
with respect to the Note and reduced by the payments previously received on the
Note, other than payments of qualified stated interest, and by any amortized
premium.
In general, except as described above with respect to market discount,
and except for certain financial institutions subject to section 582(c) of the
Code, any gain or loss on the sale or exchange of a Note recognized by an
investor who holds the Note as a capital asset (within the meaning of section
1221 of the Code), will be capital gain or loss and will be long-term or
short-term depending on whether the Note has been held for more than one year.
For corporate taxpayers, there is no preferential rate afforded to long-term
capital gains. For individual taxpayers, all net capital gains are currently
subject to a maximum nominal rate of tax of 28%.
TAXATION OF THE SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trust may issue Debt Securities in the form of
Notes, as described above, and may also issue Securities characterized as
partnership interests ("Partnership Interests") as discussed in the related
Prospectus Supplement.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code ("Qualified Retirement Plans") and on Individual Retirement Accounts
("IRAs") described in Section 408 of the Code (collectively, "Tax-Favored
Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any such plan that is a Qualified Retirement
Plan and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified
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Persons) that participate in a prohibited transaction may be subject to a
penalty (or an excise tax) imposed pursuant to Section 502(i) of ERISA or
Section 4975 of the Code, unless a statutory or administrative exemption is
available.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the Mortgage Loans included
in a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
"DOL") has promulgated regulations (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code may apply to a Trust Estate and cause the Sponsor, the
Servicer, any Master Servicer, any Sub-Servicer, the Trustee, the obligor under
any Credit Enhancement mechanism or certain affiliates thereof, to be considered
or become Parties in Interest or Disqualified Persons with respect to an
investing Plan. If so, the acquisition or holding of Securities by or on behalf
of the investing Plan could also give rise to a prohibited transaction under
ERISA and the Code, unless some statutory or administrative exemption is
available. Securities acquired by a Plan would be assets of that Plan. Under the
DOL Regulations, the Trust Estate, including the Mortgage Loans and the other
assets held in the Trust Estate, may also be deemed to be assets of each Plan
that acquires Securities. Special caution should be exercised before the assets
of a Plan are used to acquire a Security in such circumstances, especially if,
with respect to such assets, the Sponsor, the Servicer, any Master Servicer, any
Sub-Servicer, the Trustee, the obligor under any Credit Enhancement mechanism or
an affiliate thereof either (i) has investment discretion with respect to the
investment of Plan assets; or (ii) has authority or responsibility to give (or
regularly gives) investment advice with respect to Plan assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of "mortgage pools" (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 is not
available for mortgage pools that include Cooperative Loans and does not provide
an exemption for Subordinate Securities.
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PTCE 83-1 defines the term "mortgage pool" as "an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one- to four-family residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash." The Sponsor expect that each pool of Mortgage Loans (other
than pools including Cooperative Loans and Multi-Family Loans) will be a
"mortgage pool" within the meaning of PTCE 83-1.
PTCE 83-1 defines the term "mortgage pool pass-through certificate" as
a "certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass--through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." The Sponsor have been advised that, for purposes
of applying PTCE 83-1, the term "mortgage pool pass-through certificate" would
include (i) Securities representing interests in a Trust Estate consisting of
Mortgage Loans issued in a series consisting of only a single class of
Securities; and (ii) Senior Securities representing interests in a Trust Estate
consisting of Mortgage Loans issued in a series in which there is only one class
of Senior Securities; provided that the Securities described in clauses (i) and
(ii) evidence the beneficial ownership of a specified portion of both future
interest payments and future principal payments with respect to the Mortgage
Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be "mortgage pass--through certificates" for purposes of
applying PTCE 83-1, including, but not limited to, (a) a class of Securities
that evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of
one percent of the aggregate principal balance of all covered pooled mortgages,
or the principal balance of the largest covered mortgage, must be maintained;
and (3) the amount of the payment retained by the pool sponsor together with
other funds inuring to its benefit must be limited to not more than adequate
consideration for forming the mortgage pools plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also
imposes additional specific conditions for certain types of transactions
involving an investing Plan and for situations in which the Parties in Interest
or Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the
Trustee in respect of that series is affiliated with the Sponsor. If the Credit
Enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of one percent of the aggregate principal
balance of the Mortgage Loans or the principal balance of the largest Mortgage
Loan, then the Sponsor have been advised that the second general condition
referred to above will be satisfied. The Sponsor will not receive total
compensation for forming and providing services to the Mortgage Pools which will
be more than adequate consideration. Each Plan fiduciary responsible for making
the investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute "mortgage pool
pass-through certificates" for purposes of applying PTCE 83-1, (ii) the
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second and third general conditions will be satisfied, and (iii) the specific
conditions, not discussed herein, of PTCE 83-1 have been satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor,
the DOL did not have under its consideration interests in pools of the exact
nature described herein. There are other class and individual prohibited
transaction exemptions issued by the DOL that could apply to a Plan's
acquisition or holding of Securities. There can be no assurance that any of
those exemptions will apply with respect to any particular Plan that acquires or
holds Securities or, even if all of the conditions specified therein were
satisfied, that the exemption would apply to all transactions involving the
Trust Estate. The applicable Prospectus Supplement under "ERISA Considerations"
may contain additional information regarding the application of PTCE 83-1, or
other prohibited transaction exemptions that may be available, with respect to
the series offered thereby.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Security held by a Tax Exempt Investor will be considered UBTI and thus
will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Residual Securities--Excess
Inclusions."
CONSULTATION WITH COUNSEL
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related
Prospectus Supplement will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest rating category by any Rating
Agency, and as such may be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any State
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
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The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Sponsor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute legal investments under SMMEA or
are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Securities or will be used by the Sponsor for general corporate
purposes. The Sponsor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Sponsor, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting
and public re-offering by underwriters;
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2. By placements by the Sponsor with institutional investors
through dealers; and
3. By direct placements by the Sponsor with institutional
investors.
In addition, if specified in the related Prospectus Supplement, a
series of Securities may be offered in whole or in part in exchange for the
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Sponsor whose identities and relationships to
the Sponsor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Sponsor will indemnify the
several underwriters and the underwriters will indemnify the Sponsor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Sponsor and
purchasers of Securities of such series.
The Sponsor anticipates that the Securities offered hereby 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, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor by Dewey
Ballantine, New York, New York and by the office of the general counsel of the
Sponsor.
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ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each
series of Securities, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
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<S> <C>
Accounts .................................................................... 44
Accrual Securities .......................................................... 8
Affiliated Originators ...................................................... 6
Approved Guidelines ......................................................... 10
APR ......................................................................... 23
ARM Loans ................................................................... 19
Balloon Amount .............................................................. 28
Balloon Loans ............................................................... 16
Bankruptcy Bond ............................................................. 56
Bankruptcy Loss ............................................................. 54
Bankruptcy Loss Amount ...................................................... 53
Base Servicing Fee .......................................................... 60
Book-Entry Securities ....................................................... 39
Bulk Acquisitions ........................................................... 10
Bulk Guidelines ............................................................. 10
Buydown Account ............................................................. 21
Buydown Funds ............................................................... 21
Buydown Mortgage Loans ...................................................... 21
Buydown Period .............................................................. 21
Cargill ..................................................................... 60
Cede ........................................................................ 13
Certificates ................................................................ 6
CFSC ........................................................................ 60
Closing Date ................................................................ 42
CLTV (Combined Loan-to-Value Ratio) ......................................... 23
Code ........................................................................ 77
Company ..................................................................... 1
Compensating Interest ....................................................... 48
Conduit Participant ......................................................... 33
Contracts ................................................................... 20
Contributions Tax ........................................................... 97
Conventional Loans .......................................................... 21
Convertible Mortgage Loan ................................................... 28
Cooperative ................................................................. 25
Cooperative Loans ........................................................... 20
Cooperative Notes ........................................................... 27
Credit Enhancement .......................................................... 1
Credit Enhancer ............................................................. 20
Cut-Off Date ................................................................ 23
Debt Securities ............................................................. 13
Debt Service Reduction ...................................................... 56
Defaulted Mortgage Loss ..................................................... 53
Deferred Interest ........................................................... 16
Deficient Valuation ......................................................... 55
Deleted Mortgage Loan ....................................................... 35
Delinquency Advances ........................................................ 48
Designated Depository Institution ........................................... 44
Detailed Description ........................................................ 21
Determination Date .......................................................... 47
Direct or Indirect Participants ............................................. 19
</TABLE>
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<TABLE>
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<S> <C>
Disqualified Organization .................................................. 98
Disqualified Persons ....................................................... 103
Distribution Account ....................................................... 44
DOL ........................................................................ 104
DOL Regulations ............................................................ 104
DTC ........................................................................ 13
Due Date ................................................................... 43
Eligible Investments ....................................................... 44
Equicon .................................................................... 1
Equicon Mortgage Loan Program .............................................. 29
Equicon's Guidelines ....................................................... 10
Equicon's Seller Guide ..................................................... 29
Equity Securities .......................................................... 8
ERISA ...................................................................... 13
ERISA Plan(s) .............................................................. 103
Exchange Act ............................................................... 14
Extraordinary Losses ....................................................... 54
FDIC ....................................................................... 33
Federal Corporations ....................................................... 33
FHA ........................................................................ 26
Financial Guaranty Insurance Policy ........................................ 56
Financial Guaranty Insurer ................................................. 56
FIRREA ..................................................................... 33
Fixed-Income Securities .................................................... 7
FNMA ....................................................................... 29
Forward Purchase Agreement ................................................. 11
Fraud Loss ................................................................. 54
Fraud Loss Amount .......................................................... 53
Funding Period ............................................................. 42
Garn-St. Germain Act ....................................................... 75
Graduated Payments ......................................................... 22
Grantor Trust Estate ....................................................... 77
Grantor Trust Fractional Interest Security ................................. 78
Grantor Trust Securities ................................................... 13
Grantor Trust Strip Security ............................................... 78
Home Improvement Loans ..................................................... 20
Indenture .................................................................. 7
Indenture Trustee .......................................................... 7
Index ...................................................................... 28
Indirect Participant(s) .................................................... 39
Insurance Paying Agent ..................................................... 56
Insurance Proceeds ......................................................... 43
Insured Payment ............................................................ 56
Interest Payment Date ...................................................... 66
Interest Rate .............................................................. 8
Investment Company Act ..................................................... 10
IRAs ....................................................................... 103
IRS ........................................................................ 79
Issue Premium .............................................................. 92
Junior Lien Loans .......................................................... 24
Letter of Credit ........................................................... 54
Letter of Credit Bank ...................................................... 54
</TABLE>
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Liquidated Mortgage Loan ................................................... 17
Liquidation Proceeds ....................................................... 17
Loan Purchase Price ........................................................ 34
LTV ........................................................................ 23
Manufactured Homes ......................................................... 26
Manufacturer's Invoice Price ............................................... 24
Master Commitments ......................................................... 32
Master Servicer ............................................................ 6
Master Servicing Fee ....................................................... 60
Mixed Use Loans ............................................................ 20
Modified Loans ............................................................. 28
Mortgage Asset Schedule .................................................... 21
Mortgage Assets ............................................................ 20
Mortgage Loans ............................................................. 1
Mortgage Notes ............................................................. 27
Mortgage Pool .............................................................. 1
Mortgage Pool Insurance Policy ............................................. 55
Mortgage Rate .............................................................. 21
Mortgage(d) Properties ..................................................... 21
Mortgages .................................................................. 10
Mortgagor(s) ............................................................... 16
Multi-family Loans ......................................................... 20
Negotiated Transactions .................................................... 10
Net Liquidation Proceeds ................................................... 43
Net Mortgage Rate .......................................................... 67
Note Margin ................................................................ 28
Notes ...................................................................... 7
OID Regulations ............................................................ 78
Originator's Retained Yield ................................................ 27
Originators ................................................................ 1
Participants ............................................................... 39
Parties in Interest ........................................................ 103
Partnership Interests ...................................................... 13
Pass-Through Rate .......................................................... 47
Paying Agent ............................................................... 46
Payment Date ............................................................... 9
Percentage Interest ........................................................ 46
Physical Certificates ...................................................... 39
Plan(s) .................................................................... 13
Policy Statement ........................................................... 107
Pool Factor ................................................................ 49
Pool Insurer ............................................................... 45
Pooling and Servicing Agreement ............................................ 7
Pre-Funding Account ........................................................ 11
Prepayment Assumption ...................................................... 80
Principal Prepayments ...................................................... 43
Prohibited Transactions Tax ................................................ 97
PTCE 83-1 .................................................................. 104
Purchase Obligation ........................................................ 15
Qualified Replacement Mortgage ............................................. 35
Qualified Retirement Plans ................................................. 103
Qualified Stated Interest .................................................. 80
</TABLE>
112
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<TABLE>
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Rating Agencies ............................................................ 14
Realized Loss .............................................................. 52
Record Date ................................................................ 9
Relief Act ................................................................. 20
REMIC Provisions ........................................................... 77
REMIC Regular Securities ................................................... 13
REMIC Regulations .......................................................... 78
REMIC Residual Securities .................................................. 13
REMIC Securities ........................................................... 77
REMIC(s) ................................................................... 2
Remittance Date ............................................................ 44
Remittance Period .......................................................... 9
REO Property ............................................................... 51
Reserve Fund ............................................................... 56
Residual Owners ............................................................ 91
Residual Securityholders ................................................... 91
RTC ........................................................................ 33
Rule of 78's ............................................................... 22
Securities ................................................................. 1
Security Registrar ......................................................... 39
Securityholders ............................................................ 1
Senior Lien ................................................................ 23
Senior Securities .......................................................... 8
Servicer(s) ................................................................ 1
Servicing Advance(s) ....................................................... 48
Servicing Agreement ........................................................ 7
Servicing Fee .............................................................. 60
Single Family Loans ........................................................ 20
SMMEA ...................................................................... 13
Special Hazard Amount ...................................................... 53
Special Hazard Insurance Policy ............................................ 55
Special Hazard Insurer ..................................................... 55
Special Hazard Loss ........................................................ 53
Sponsor .................................................................... 1
Sponsor's Mortgage Loan Program ............................................ 29
Statistic Calculation Date ................................................. 23
Strip Securities ........................................................... 8
Sub-Servicers .............................................................. 1
Sub-Servicing Account ...................................................... 43
Sub-Servicing Agreement .................................................... 35
Subordinate Securities ..................................................... 8
Subordinate(d) Amount ...................................................... 53
Subsequent ................................................................. 42
Subsequent Mortgage Loans .................................................. 42
Subsequent Residual Owner .................................................. 91
Tax Exempt Investor ........................................................ 106
Tax Matters Person ......................................................... 98
Tax-Favored Plans .......................................................... 103
Tiered REMICs .............................................................. 87
Title V .................................................................... 76
Title VIII ................................................................. 76
Trust ...................................................................... 1
</TABLE>
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<TABLE>
<CAPTION>
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Trust Agreement ............................................................. 7
Trust Estate ................................................................ 1
Trustee ..................................................................... 6
UBTI ........................................................................ 94
UCC ......................................................................... 39
Unaffiliated Originators .................................................... 6
United States Person ........................................................ 99
</TABLE>
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NO DEALER, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SPONSOR OR BY THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN
ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE
THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary...................................................................................................................... S-3
Risk Factors................................................................................................................. S-24
The Contract Pool............................................................................................................ S-26
Prepayment and Yield Considerations.......................................................................................... S-32
The Sponsor.................................................................................................................. S-44
Access Financial Corp........................................................................................................ S-44
Description of the Certificates.............................................................................................. S-50
Certain Legal Aspects of the Contracts....................................................................................... S-71
Certain Federal Income Tax Consequences...................................................................................... S-76
ERISA Considerations......................................................................................................... S-76
Ratings...................................................................................................................... S-79
Plan of Distribution......................................................................................................... S-79
Use of Proceeds.............................................................................................................. S-80
Legal Matters................................................................................................................ S-80
Annex I...................................................................................................................... I-1
Index of Principal Definitions............................................................................................... i
PROSPECTUS
Incorporation of Certain Documents by Reference.............................................................................. 5
Summary of Prospectus........................................................................................................ 6
Risk Factors................................................................................................................. 15
The Trusts................................................................................................................... 20
The Mortgage Pools........................................................................................................... 27
Mortgage Loan Program........................................................................................................ 29
Description of the Securities................................................................................................ 37
Subordination................................................................................................................ 52
Description of Credit Enhancement............................................................................................ 53
Hazard Insurance: Claims Thereunder.......................................................................................... 59
The Sponsor.................................................................................................................. 60
The Servicer................................................................................................................. 60
The Pooling and Servicing Agreement.......................................................................................... 60
The Trustee.................................................................................................................. 64
Yield Considerations......................................................................................................... 66
Maturity and Prepayment Considerations....................................................................................... 68
Certain Legal Aspects of Mortgage Loans and Related Matters.................................................................. 70
Certain Federal Income Tax Consequences...................................................................................... 77
ERISA Considerations......................................................................................................... 103
Legal Investment Matters..................................................................................................... 106
Use of Proceeds.............................................................................................................. 107
Methods of Distribution...................................................................................................... 107
Legal Matters................................................................................................................ 108
Additional Information....................................................................................................... 109
Index of Principal Definitions............................................................................................... 110
</TABLE>
------------------
UNTIL 90 DAYS FOLLOWING THE SETTLEMENT DATE ALL DEALERS EFFECTING TRANSACTIONS
IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND 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.
ACCESS
FINANCIAL CORP.
SERVICER
$149,977,000 (APPROXIMATE)
MANUFACTURED HOUSING CONTRACT
SENIOR/SUBORDINATE PASS-THROUGH
CERTIFICATES,
SERIES 1996-1
------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
J.P. MORGAN & CO.
May 24, 1996
- --------------------------------------------------------------------------------
STATEMENT OF DIFFERANCES
The section symbol shall be expressed as .....................'SS'
<PAGE>
