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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 19, 1995)
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[LOGO]
$210,602,000
ACCESS FINANCIAL MORTGAGE LOAN TRUST 1996-2
MORTGAGE LOAN PASS-THROUGH CERTIFICATES, SERIES 1996-2
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$58,456,000 Class A-1 Group I Certificates, Variable Pass-Through Rate
$38,768,000 Class A-2 Group I Certificates, 6.925% Pass-Through Rate
$16,525,000 Class A-3 Group I Certificates, 7.300% Pass-Through Rate
$14,713,000 Class A-4 Group I Certificates, 7.625% Pass-Through Rate
$13,796,000 Class A-5 Group I Certificates, 7.925% Pass-Through Rate
$68,344,000 Class A-6 Group II Certificates, Variable Pass-Through Rate
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ACCESS FINANCIAL LENDING CORP.
SELLER AND MASTER SERVICER
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The Access Financial Mortgage Loan Pass-Through Certificates, Series 1996-2 (the
'Certificates') will consist of six classes of offered certificates, the Class
A-1 Group I Certificates, the Class A-2 Group I Certificates, the Class A-3
Group I Certificates, the Class A-4 Group I Certificates, the Class A-5 Group I
Certificates (collectively, the 'Class A Group I Certificates') and the Class
A-6 Group II Certificates, (together with the Class A Group I Certificates, the
'Class A Certificates') which represent beneficial ownership interests in Access
Financial Mortgage Loan Trust 1996-2 (the 'Trust'). The assets of the Trust
consist primarily of a pool (the 'Pool') of fixed and adjustable rate,
amortizing mortgage loans which are secured by first or second liens on
residential properties (the 'Mortgage Loans') and the Certificate Insurance
Policy (as defined below) covering the Class A Certificates.
The Seller has obtained a financial guaranty insurance policy (the 'Certificate
Insurance Policy') from Financial Guaranty Insurance Company (the 'Certificate
Insurer') which will unconditionally and irrevocably guarantee payment of
certain amounts due to the Owners of the Class A Certificates to the extent
described herein.
[Logo]
FINANCIAL GUARANTY INSURANCE COMPANY
FGIC is a registered service mark used by Financial Guaranty Insurance Company,
a private company not affiliated with any U.S. Government agency.
(Cover continued on next page)
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FOR A DISCUSSION OF CERTAIN RISK FACTORS REGARDING AN INVESTMENT IN THE CLASS A
CERTIFICATES, SEE 'RISK FACTORS' HEREIN AND IN THE ACCOMPANYING PROSPECTUS.
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Prudential Securities Incorporated and J.P. Morgan Securities Inc. (the
'Underwriters') have agreed to purchase from the Trust the Class A-1 Group I
Certificates at an aggregate price of 99.75% of the principal amount thereof,
the Class A-2 Group I Certificates at an aggregate price of 99.72% of the
principal amount thereof, the Class A-3 Group I Certificates at an aggregate
price of 99.67% of the principal amount thereof, the Class A-4 Group I
Certificates at an aggregate price of 99.69% of the principal amount thereof,
the Class A-5 Group I Certificates at an aggregate price of 99.66% of the
principal amount thereof, and the Class A-6 Group II Certificates at an
aggregate price of 99.75% of the principal amount thereof, (representing
$210,028,340 aggregate proceeds to the Seller before deducting expenses payable
by the Seller, estimated at $500,000) plus accrued interest, if any, from May 2,
1996 for the Class A-2, A-3, A-4 and A-5 Group I Certificates subject to the
terms and conditions set forth in the Underwriting Agreement dated May 15, 1996
among the Underwriters, the Seller and Cargill Financial Services Corporation
(the 'Sponsor'). See 'Underwriting' in this Prospectus Supplement.
The Underwriters propose to offer the Class A Certificates from time to time for
sale in negotiated transactions or otherwise, at market prices prevailing at the
time of sale or at negotiated prices. For further information with respect to
the plan of distribution and any discounts, commissions or profits on resale
that may be deemed underwriting discounts or commissions, see 'Underwriting' in
this Prospectus Supplement.
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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 NOR 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.
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The Class A Certificates are offered hereby 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 Class A Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, CEDEL S.A. and
Euroclear on or about May 22, 1996 against payment in immediately available
funds.
PRUDENTIAL SECURITIES INCORPORATED J.P. MORGAN & CO.
May 15, 1996
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The Class A Group I Certificates will represent undivided ownership
interests in a group (the 'Group I') of Mortgage Loans in the Trust which bear
fixed rates of interest and the Class A-6 Group II Certificates will represent
undivided ownership interests in a group (the 'Group II') of Mortgage Loans in
the Trust which bear adjustable rates of interest. Group I and Group II are
collectively referred to herein as the 'Mortgage Loan Groups' and each
singularly, a 'Mortgage Loan Group'.
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of May 1, 1996 (the 'Pooling and Servicing Agreement') among
Cargill Financial Services Corporation (the 'Sponsor'), Access Financial Lending
Corp., as Seller (the 'Seller') and Master Servicer (the 'Master Servicer'), and
Norwest Bank Minnesota, National Association, as Trustee (the 'Trustee').
Pursuant to a Securitization Sponsorship Agreement dated as of May 1, 1996 (the
'Sponsorship Agreement') between the Seller and the Sponsor, the Sponsor will
cause the Trust to acquire the Mortgage Loans from the Seller. In addition to
the Class A Certificates the Trust will also issue a subordinate Class of
Certificates with respect to the Group I (the 'Class B Group I Certificates'), a
subordinate Class of Certificates with respect to the Group II (the 'Class B
Group II Certificates', together with the Class B Group I Certificates, the
'Class B Certificates') and one or more Classes of Residual Certificates. Only
the Class A Certificates are offered hereby. Distributions of interest on the
Class A Certificates are of an equal priority to the extent described herein,
and distributions on the Class B Certificates and on the Residual Certificates
are subordinate to distributions on the Class A Certificates to the extent
described herein.
All of the Mortgage Loans were originated under the Seller's Mortgage Loan
Program by Unaffiliated Originators (as defined in the accompanying Prospectus)
(the 'Originators'). Except for certain representations and warranties relating
to the Mortgage Loans and certain other matters, Access Financial Lending Corp.,
Cargill Financial Services Corporation, Norwest Bank Minnesota, National
Association, any Sub-Servicers and the Originators will have no obligations with
respect to the Certificates.
Distributions of principal and interest on the Class A Certificates will be
made to the extent funds are available therefor on the 18th day of each month
or, if such day is not a business day, on the next succeeding business day
commencing June 18, 1996 (each a 'Payment Date') to holders of record as of the
close of business on the first business day of the current calendar month (with
respect to the Class A Fixed Rate Certificates) or as of the close of business
on the business day immediately preceding such Payment Date (with respect to the
Class A-1 Group I Certificates and the Class A-6 Group II Certificates), except
in the case of the first Payment Date, on which distributions will be made to
holders of record as of the Closing Date (each such date being the applicable
'Record Date').
An ERISA Plan purchasing the Class A Certificates should consult with its
legal advisors concerning the impact of ERISA and the Code with respect to such
purchase. See 'Risk Factors' and 'ERISA Considerations' herein.
There is currently no secondary market for any Class of the Class A
Certificates. There can be no assurance that a secondary market for any of the
Class A Certificates will develop or, if one does develop, that it will
continue.
One or more elections will be made to treat certain assets and/or Accounts
of the Trust as 'real estate mortgage investment conduits' ('REMICs') pursuant
to the Internal Revenue Code of 1986, as amended (the 'Code'). Each Class of
Class A Certificates will be a 'regular interest' in a REMIC. See 'Certain
Federal Tax Aspects' herein.
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THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE
INFORMATION ABOUT THE OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS
CONTAINED IN THE PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SECURITIES
MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE CLASS A CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
THE CLASS A CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF CARGILL FINANCIAL SERVICES
CORPORATION, ACCESS FINANCIAL LENDING CORP., THE TRUSTEE, THE CERTIFICATE
INSURER, ANY SUB-SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES. THE CLASS A
CERTIFICATES AND THE MORTGAGE LOANS ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY, NOR HAS ANY GOVERNMENTAL AGENCY PASSED UPON THE ACCURACY OF
THE INFORMATION CONTAINED IN THIS PROSPECTUS.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the
Securities Act of 1933, as amended, (the "1933 Act") with the Securities and
Exchange Commission (the "Commission") on behalf of the Trust with respect to
the Class A Certificates offered pursuant to this Prospectus Supplement and the
related Prospectus. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Chicago, Illinois 60661. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
REPORTS TO THE HOLDERS
So long as the Class A Certificates are in book-entry form,
monthly and annual reports concerning such Certificates and the Trust will be
sent by the Trustee to Cede & Co. ("Cede"), as the nominee of The Depository
Trust Company ("DTC") and as registered holder of the Class A Certificates
pursuant to the Pooling and Servicing Agreement. DTC will forward such reports
to the Participants and indirect participants by mail for forwarding to the
Owner of any Class A Certificates (the "Owner" or "Certificateholder"). See
"Risk Factors" and "Description of the Certificates -- Reports to Owners". The
Trust will not provide any financial information to the Owners which has been
examined and reported upon, with an opinion expressed by, an independent public
accountant. The Sponsor, the Seller and the Master Servicer have determined that
their respective financial statements are not material to the offering made
hereby. The Trust will have no assets or obligations prior to issuance of the
Certificates and will engage in no activities other than those described herein.
Accordingly, no financial statements with respect to the Trust are included in
this Prospectus Supplement and the related Prospectus. The audited financial
statements of the Certificate Insurer are set forth in Appendix A hereto.
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SUMMARY
This summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Indices of Principal
Definitions for the location in either the Prospectus or this Prospectus
Supplement of the definitions of certain capitalized terms.
Issuer Access Financial Mortgage Loan Trust 1996-2 (the
"Trust").
Securities Offered $58,456,000 aggregate principal amount of Class A-1
Group I Certificates, Variable Pass-Through Rate;
$38,768,000 aggregate principal amount of Class A-2
Group I Certificates, 6.925% Pass-Through Rate;
$16,525,000 aggregate principal amount of Class A-3
Group I Certificates, 7.30% Pass-Through Rate;
$14,713,000 aggregate principal amount of Class A-4
Group I Certificates, 7.625% Pass-Through Rate;
$13,796,000 aggregate principal amount of Class A-5
Group I Certificates, 7.925% Pass-Through Rate; and
$68,344,000 aggregate principal amount of Class A-6
Group II Certificates.
Sponsor Cargill Financial Services Corporation, a Delaware
corporation (the "Sponsor").
Seller Access Financial Lending Corp., a Delaware corporation
("AFL") and a wholly-owned subsidiary of Access
Financial Holdings Corp., a wholly-owned subsidiary of
the Sponsor (the "Seller").
Master Servicer Access Financial Lending Corp. (the "Master
Servicer").
Trustee Norwest Bank Minnesota, National Association (the
"Trustee").
Originators of the
Mortgage Loans The Mortgage Loans to be acquired by the Trust
have been acquired by the Seller from the Originators,
in accordance with the Seller's underwriting criteria.
Original Pool Principal
Balance $210,603,621.04 as of the close of business on the
Cut-Off Date.
Original Group I
Pool Principal Balance $142,258,961.34 as of the close of business on the
Cut-Off Date.
Original Group II
Pool Principal Balance $68,344,659.70 as of the close of business on the
Cut-Off Date.
Closing Date May 22, 1996.
Cut-Off Date May 1, 1996.
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Description of the
Certificates The Certificates will be issued by the Trust pursuant
to a Pooling and Servicing Agreement to be dated as of
May 1, 1996 (the "Pooling and Servicing Agreement")
among the Sponsor, the Master Servicer, the Seller and
the Trustee. The $142,258,000.00 aggregate principal
amount of Class A Group I Certificates, comprised of
five "sequential pay" Classes (the "Class A Group I
Certificates") and the $68,344,000.00 aggregate
principal amount of Class A-6 Group II Certificates
(the "Class A-6 Group II Certificates") are senior
certificates as described herein.
The Trust will issue a subordinate Class of
Certificates with respect to Group I (the "Class B
Group I Certificates") and a subordinate Class of
Certificates with respect to Group II (the "Class B
Group II Certificates", and together with the Class B
Group I Certificates, the "Class B Certificates"),
which are subordinated to the Class A Group I
Certificates and the Class A-6 Group II Certificates,
respectively. The Class B Certificates are not being
offered hereby. 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 and
will initially be retained by the Seller or its
affiliates. The Class A Group I Certificates, the
Class A-6 Group II Certificates, the Class B Group I
Certificates, the Class B Group II Certificates and
the Residual Certificates are collectively referred to
as the "Certificates". The Class A Group I
Certificates and the Class A-6 Group II Certificates
are collectively referred to as the "Class A
Certificates".
A. Class A Group I
Certificates The Class A Group I Certificates represent senior
beneficial ownership interests in Group I. One hundred
percent (100%) of the Group I Insured Distribution
Amount (as described herein under "Description of the
Certificates") due to the Owners of the Class A Group
I Certificates on each Payment Date is guaranteed by
the Certificate Insurer. The final scheduled Payment
Date for the Class A-1 Group I Certificates is March
18, 2011, for the Class A-2 Group I Certificates is
March 18, 2011, for the Class A-3 Group I Certificates
is June 18, 2014, for the Class A-4 Group I
Certificates is September 18, 2021 and for the Class
A-5 Group I Certificates is June 18, 2027. Each Class
of Class A Group I Certificates is issuable in
original principal amounts of $1,000 and integral
multiples thereof except that one certificate for each
Class of Class A Group I Certificates may be issued in
a different amount.
B. Class A-6 Group
II Certificates The Class A-6 Group II Certificates represent senior
beneficial ownership interests in Group II. One
hundred percent (100%) of the Group II Insured
Distribution Amount (as described herein under
"Description of the Certificates") due to the Owners
of the Class A-6 Group II Certificates on each Payment
Date is guaranteed by the Certificate Insurer. The
final scheduled Payment Date for the Class A-6 Group
II Certificates is June 18, 2027. The Class A-6 Group
II Certificates are issuable in original principal
amounts of $1,000 and integral multiples thereof
except that one certificate may be issued in a
different amount.
The Mortgage Loan Pool The statistical information concerning the Pool of
Mortgage Loans is based upon Pool information as
of the close of business on May 1, 1996 (the
"Cut-Off Date").
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The Pool of Mortgage Loans consists of Notes secured
by mortgages, deeds of trust or other instruments
creating liens or estates in fee simple interests
("Mortgages") on one- to four-family residential
properties, including investment properties. The
Mortgage Loans will not be insured by primary mortgage
insurance policies, nor will any pool insurance insure
the Mortgage Loans. The Mortgage Loans are not
guaranteed by the Sponsor, the Seller, the Master
Servicer, the Sub-Servicers, the Trustee or any of
their respective affiliates. The Mortgage Loans will
be serviced by the Master Servicer on a
"scheduled/actual" basis (i.e., "scheduled" interest
and "actual" principal receipts are required to be
remitted by the Master Servicer to the Trustee each
month).
Each Mortgage Loan in the Trust will be assigned to
one of two mortgage loan groups ("Group I" or the
"Group II", each, a "Mortgage Loan Group") comprised
of Mortgage Loans which bear fixed-interest rates only
in the case of Group I, and Mortgage Loans which bear
adjustable interest rates only in the case of Group
II. As of the Cut-Off Date, the Mortgage Loans in
Group I had an aggregate principal balance of
approximately $142,258,961.34 (the "Original Group I
Pool Principal Balance"), and the Mortgage Loans in
the Group II had an aggregate principal balance of
approximately $68,344,659.70 (the "Original Group II
Pool Principal Balance"). The sum of the Original
Group I Pool Principal Balance and the Original Group
II Pool Principal Balance is equal to the "Original
Pool Principal Balance".
The Pool of Mortgage Loans in Group I consists of
approximately 2,221 Mortgages secured by Mortgaged
Properties located in 44 states and the District of
Columbia. The Pool of Mortgage Loans in Group I
consists as of the Cut-Off Date and as a percentage of
the Original Group I Pool Principal Balance, of
approximately 95.70% of loans secured by first liens
on the related Mortgaged Properties and approximately
4.30% of loans secured by second liens on the related
Mortgaged Properties. The Pool of Mortgage Loans in
Group I consists of approximately 93.46% of loans
secured by primary residences. 50.26% of the Mortgage
Loans in Group I will be fully amortizing and 49.74%
of the Mortgage Loans in Group I are "balloon loans"
("Balloon Loans"). The weighted average Combined
Loan-to-Value Ratio (with property values calculated
as of the time of origination of the related Mortgage
Loan) of the Pool of Mortgage Loans in Group I is
approximately 74.37% with a range from approximately
9.00% to approximately 90.00% the weighted average
remaining term to maturity is approximately 229
months, with a range from 22 months to 360 months; the
weighted average number of months since origination is
approximately 2; the average principal balance of the
Mortgage Loans in Group I is approximately $64,051.76
the highest principal balance is approximately
$450,000.00 and the lowest principal balance is
approximately $9,492.06; the Coupon Rates (the "Coupon
Rates") of the Mortgage Loans in Group I range from
7.75% per annum to 18.25% per annum, with a weighted
average Coupon Rate of approximately 11.11% per annum.
The Pool of Mortgage Loans in Group II consists of 684
Mortgages secured by Mortgaged Properties located in
41 states and the District of Columbia. The Pool of
Mortgage Loans in Group II consists as of the Cut-Off
Date and as a percentage of the Original Group II Pool
Principal Balance, of 100% of loans secured by first
liens on the related Mortgaged Properties. The Pool
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of Mortgage Loans in Group II consists of
approximately 94.26% of loans secured by primary
residences. 98.82% of the Mortgage Loans in Group II
will be fully amortizing and 1.18% of the Mortgage
Loans in Group II are Balloon Loans. The weighted
average Combined Loan-to-Value Ratio (with property
values calculated as of the time of origination of the
related Mortgage Loan) of the Pool of Mortgage Loans
in Group II is approximately 75.33% with a range from
approximately 16.00% to approximately 90.00%; the
weighted average remaining term to maturity is
approximately 354 months, with a range from 118 months
to 360 months; the weighted average number of months
since origination is approximately 1; the average
principal balance of the Mortgage Loans in Group II is
approximately $99,919.09, the highest principal
balance is approximately $542,126.70 and the lowest
principal balance is approximately $10,000.00; the
Coupon Rates of the Mortgage Loans in Group II range
from 6.70% per annum to 14.25% per annum, with a
weighted average Coupon Rate of approximately 9.44%
per annum; the margins of the Mortgage Loans in Group
II range from 3.375% to 10.225% with a weighted
average margin of approximately 6.089% per annum. The
Coupon Rates of Mortgage Loans in Group II bear
interest rates that adjust semi-annually based on
six-month LIBOR. In general the interest rates on the
Mortgage Loans in Group II are subject to periodic
interest rate caps and interest rate ceilings.
Class A-1 Pass-
Through Rate On each Payment Date, the "Class A-1 Pass-Through
Rate" will be equal to the least of (i) the London
interbank offered rate for one-month United States
dollar deposits ("LIBOR") (calculated as described
under "Description of the Certificates -- Calculation
of LIBOR") as of the second to last business day prior
to the immediately preceding Payment Date (or as of
the second to the last business day prior to the
Closing Date in the case of the first Payment Date)
plus 0.125% per annum, (ii) the weighted average net
coupon rate (i.e., the weighted average coupon rate
less 0.66% for Servicing Fees, Trustee fees and
Certificate Insurer premiums) for Group I for such
Payment Date, and (iii) 10% per annum.
Class A-2 Pass-
Through Rate 6.925% per annum.
Class A-3 Pass-
Through Rate 7.30% per annum.
Class A-4 Pass-
Through Rate 7.625% per annum.
Class A-5 Pass-
Through Rate 7.925% per annum.
Class A-6 Pass-
Through Rate On each Payment Date, the "Class A-6 Pass-Through
Rate" will be equal to the lesser of (i) LIBOR as of
the second to last business day prior to the
immediately preceding Payment Date (or as of the
second to the last business day prior to the Closing
Date in the case of the first Payment Date) plus 0.33%
per annum, and (ii) the weighted average net coupon
rate (i.e., the weighted average coupon rate less
Servicing Fees, Trustee fees and
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Certificate Insurer premiums) for Group II for such
Payment Date (the "Class A-6 Available Funds
Pass-Through Rate").
The "Class A-6 Formula Pass-Through Rate" for a
Payment Date is the rate described in clause (i) of
the definition of "Class A-6 Group II Pass-Through
Rate" on such Payment Date. The excess, if any, of (x)
the interest due on the Class A-6 Certificates on any
Payment Date calculated at the Class A-6 Formula
Pass-Through Rate over (y) the interest due on the
Class A-6 Certificates calculated at the Class A-6
Available Funds Pass-Through Rate is the "Supplemental
Interest Amount" for such Payment Date.
If, on any Payment Date, there is a Supplemental
Interest Amount calculated for any Payment Date, the
Owners of certain of the Class R Certificates have
agreed to pay such amount. If the full amount of the
Supplemental Interest Amount is not paid on a Payment
Date, then the amount not paid will accrue interest at
the Class A-6 Formula Pass-Through Rate until actual
payment.
The Certificate Insurer does not guarantee the payment
of, nor do the ratings assigned to the Class A-6
Certificates address the likelihood of the payment of,
any Supplemental Interest Amount.
Payment Dates, Record
Dates and Accrual Periods On the 18th day of each month, or, if such day is not
a business day, then the next succeeding business
day, commencing June 18, 1996 (each such day being a
"Payment Date"), the Trustee will be required to
distribute to the Owners of record of the
Certificates as of the close of business on the first
business day of the current calendar month (with
respect to the Class A Fixed Rate Certificates) or as
of the close of business on the business day
immediately preceding such Payment Date (with respect
to the Class A-1 Group I Certificates and the Class
A-6 Group II Certificates), except in the case of the
first Payment Date, on which distributions will be
made to holders of record as of the Closing Date
(each such date being the applicable "Record Date")
such Owners' Percentage Interests in the amounts
required to be distributed to the Owners of each
Class of Certificates on such Payment Date.
Interest will accrue on each Class A-2, A-3, A-4 and
A-5 Group I Certificate during the period from and
including the second day of the month preceding the
month in which a Payment Date occurs through and
including the first day of the month in which such
Payment Date occurs and on each Class A-1 Group I
Certificate and Class A-6 Group II Certificate from
and including each Payment Date (or the Closing Date,
with respect to the initial Payment Date) to and
including the day preceding the current Payment Date.
Each period referred to in the immediately preceding
sentence relating to the accrual of interest is the
"Accrual Period" for the related Class of
Certificates. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months
for the Class A-2, A-3, A-4 and A-5 Group I
Certificates. Interest for the Class A-1 Group I
Certificates and the Class A-6 Group II Certificates
will be calculated based upon the actual number of
days in the related Accrual Period, divided by 360.
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Distributions on the
Certificates
A. Priority of
Distributions As more fully described herein, each Class of
Certificates has a specified priority to the
collections on the Pool of Mortgage Loans which
comprise the related Mortgage Loan Group, subject to
the credit enhancement and cross- collateralization
provisions hereinafter described. In addition,
Financial Guaranty Insurance Company, as Certificate
Insurer, is required pursuant to the Certificate
Insurance Policy to make available to the Trustee on
each Payment Date 100% of the related Class A Insured
Distribution Amount for the related Mortgage Loan
Group to the extent that available funds remaining
after payment of the Certificate Insurer's premium and
the Trustee's fee are insufficient to cover such
amount.
The Owners of the Class A Group I Certificates and the
Class A-6 Group II Certificates will receive certain
monthly distributions of principal on each Payment
Date which generally reflect collections of principal
during the prior Remittance Period with respect to the
related Mortgage Loan Group. The Certificate Insurance
Policy only guarantees the amount by which the sum of
the related Interest Distribution Amount and the
related Subordination Deficit, if any, exceeds Total
Available Funds.
B. Distributions on
the Class A
Certificates
1. Interest
Distributions Interest will accrue on each Class of Class A
Certificates at the related Pass-Through Rate during
each Accrual Period for such Class of Certificates,
and will be distributed, to the extent of the Total
Available Funds for the related Mortgage Loan Group
plus the proceeds of any Insured Payments, on each
Payment Date. Interest accruing during the related
Accrual Period at the related Class A Pass-Through
Rate on the related Class A Principal Balance
immediately preceding such Payment Date is referred
to herein as the "Class A Interest Distribution
Amount" for the related Class of Class A
Certificates. The "Class A Interest Distribution
Amount" does not include the amounts, if any, of the
Supplemental Interest Amount applicable to the Class
A-6 Group II Certificates. See "Description of the
Certificates -- Flow of Funds and Distributions on
the Class A Certificates" herein.
2. Principal
Distributions The Holders of the Class A Certificates issued with
respect to each Mortgage Loan Group will be entitled
to receive on each Payment Date a distribution
allocable to principal (the "Class A Principal
Distribution Amount" for such Mortgage Loan Group and
Payment Date) which will be equal to the lesser of:
(a) the Total Available Funds for the related
Mortgage Loan Group plus any related
Insured Payment minus the interest then due
on account of the related Class A
Certificates; and
(b) (i) the sum, without duplication, of:
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(x) for the Mortgage Loans in the related
Mortgage Loan Group, the sum of (i) the
principal portion of all scheduled and
unscheduled payments received on the
Mortgage Loans during the related
Remittance Period, including (a) any full
or partial principal prepayments of any
Mortgage Loans ("Prepayments") received
during the related Remittance Period, (b)
the proceeds received on any insurance
policy relating to a Mortgage Loan, a
Mortgaged Property or a REO Property, net
of proceeds to be applied to the repair of
the Mortgaged Property or released to the
Mortgagor (as defined herein) and net of
expenses reimbursable therefrom ("Insurance
Proceeds"), (c) proceeds received in
connection with the liquidation of any
defaulted Mortgage Loans, whether by
trustee's sale, foreclosure sale or
otherwise ("Liquidation Proceeds"), net of
fees and advances reimbursable therefrom
("Net Liquidation Proceeds") and (d)
proceeds received in connection with a
taking of a Mortgaged Property by
condemnation or the exercise of eminent
domain or in connection with a release of
part of the Mortgaged Property from the
related lien ("Released Mortgaged Property
Proceeds"), (ii) the principal portion of
all amounts deposited into the Principal
and Interest Account on the related
Remittance Date in connection with the
repurchase of, or the substitution of a
substantially similar mortgage loan for, a
Mortgage as to which there is defective
documentation or a breach of a
representation or warranty contained in the
Pooling and Servicing Agreement, and (iii)
the proceeds received by the Trustee in
connection with any termination of the
Trust, to the extent that such proceeds
relate to principal; and
(y) the amount of any Subordination Deficit
with respect to the related Mortgage Loan
Group for such Payment Date; and
(z) the amount of any Subordination Increase
Amount with respect to the related Mortgage
Loan Group for such Payment Date, to the
extent of the Class B Interest available to
be applied for such purpose for such
Payment Date;
minus
(ii) the amount of any Subordination Reduction
Amount with respect to the related Mortgage
Loan Group for such Payment Date.
The amount of any Subordination Deficit or
Subordination Increase Amount to be paid to the
Holders of the Class A Certificates will be paid to
the Holders of the Class A Certificates then entitled
to receive distributions of principal. Similarly, the
amount of any Subordination Reduction Amount to be
deducted from the Class A Principal Distribution
Amount for the Class A Certificates will be deducted
from such amounts otherwise due to the Holders of the
Class A Certificates then entitled to receive
distributions of principal.
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The amount of any loss on a Liquidated Mortgage Loan
in the related Mortgage Loan Group (i.e., a Realized
Loss) may or may not be allocated to the Owners of
the Class A Certificates issued with respect to such
Mortgage Loan Group on the Payment Date which
immediately follows the event of loss. However, the
Owners of each Class of the Class A Certificates are
entitled to receive ultimate recovery of 100% of the
original principal balance for such Class.
The Class A Group I Certificates have been tranched
into five "sequential pay" Classes, such that the
Class A-5 Group I Certificates are entitled to
receive no principal distributions until the Class
A-4 Certificate Principal Balance has been reduced to
zero, the Class A-4 Group I Certificates are entitled
to receive no principal distributions until the Class
A-3 Certificate Principal Balance has been reduced to
zero, the Class A-3 Group I Certificates are entitled
to receive no principal distributions until the Class
A-2 Certificate Principal Balance has been reduced to
zero, and the Class A- 2 Group I Certificates are
entitled to receive no principal distributions until
the Class A-1 Certificate Principal Balance has been
reduced to zero.
As of any Payment Date, the "Class A Certificate
Principal Balance" for a Class of Class A
Certificates, prior to any distribution on such
Payment Date, will equal the original Class A
Certificate Principal Balance of such Class less the
sum of all amounts previously distributed to the
Owners of the related Class of Class A Certificates
on account of principal. "Class A Group I Certificate
Principal Balance" refers to the Class A Group I
Certificates, and the "Class A Group II Certificate
Principal Balance" refers to the Class A-6 Group II
Certificates.
C. Class A
Distribution Amounts
and Class A Insured The "Class A Distribution Amount" with respect to
Distribution Amounts each Class of Class A Certificates and Payment Date
is the sum, without duplication, of (x) the Class A
Interest Distribution Amount with respect to such
Class and Payment Date, (y) the Class A Principal
Distribution Amount, if any, with respect to such
Class and Payment Date and (z) the Class A
Carry-Forward Amount, if any, with respect to such
Class and Payment Date.
The "Class A Carry-Forward Amount" means, with
respect to each Class of Class A Certificates and
Payment Date, the sum, without duplication, of (a)
the amount, if any, by which (x) the Class A
Distribution Amount for the related Class of Class A
Certificates as of the immediately preceding Payment
Date exceeded (y) the amount of the actual
distribution, exclusive of any portion thereof
representing the proceeds of an Insured Payment, to
the Owners of the related Class of Class A
Certificates on such immediately preceding Payment
Date and (b) interest on the amount, if any,
described in clause (a) at the related Class A
Pass-Through Rate from such immediately preceding
Payment Date.
The "Class A Insured Distribution Amount" with
respect to each Class of Class A Certificates and
Payment Date is the sum, without duplication, of (x)
the Class A Interest Distribution Amount with respect
to such Class and Payment Date, (y) the amount of any
Subordination Deficit with respect to
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such Class and Payment Date and (z) the Class A
Carry-Forward Amount, if any, with respect to such
class and Payment Date.
To the extent that the Certificate Insurer pays
Insured Payments the Certificate Insurer, as
subrogee, will be entitled to receive the Class A
Carry-Forward Amount.
The Pooling and Servicing Agreement provides that to
the extent any portion of a Class A Carry-Forward
Amount relates to principal such portion shall be
treated as a distribution of principal, with any
portion which relates to interest being treated as a
distribution of interest.
Registration of the The Class A Certificates will initially be issued in
Class A Certificates book-entry form. Persons acquiring beneficial
ownership interests in such Class A Certificates
("Beneficial Certificate Owners") may elect to hold
their interests through The Depository Trust Company
("DTC"), in the United States, or Centrale de
Livraison de Valeurs Mobiliers, S.A. ("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 Class A Certificates are book-entry
certificates, such Class A Certificates will be
evidenced by one or more Class A 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 Class A Certificates will initially be registered
in the name of Cede. The interests of the Owners of
such Class A Certificates 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 in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references herein to any Class
A 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 Class A
Certificates are held by DTC. See "Special
Considerations" and "Description of the Certificates
-- Book-Entry Registration of the Class A
Certificates" herein.
Servicing of the The Master Servicer has agreed to service the
Mortgage Loans Mortgage Loans in accordance with the Pooling and
Servicing Agreement. In certain limited
circumstances, the Master Servicer may be removed as
Master Servicer under the Pooling and Servicing
Agreement. In the event that AFL is removed as Master
Servicer under the Pooling and Servicing Agreement, a
successor Master Servicer will be appointed
thereunder.
The Master Servicer has entered into certain
Sub-Servicing Agreements with respect to the Mortgage
Loans. See "The Seller and the Master Servicer."
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Monthly Servicing Fee The Master Servicer will retain fees not in excess of
0.50% per annum (the "Servicing Fee"), payable
monthly at one-twelfth the annual rate, of the then
outstanding principal amount of each Mortgage Loan
serviced by it as of the close of business on the
first day of the preceding calendar month.
Subordination of Class B The Class B Certificates are subordinated to the
Certificates Class A Certificates. Such subordination is intended
to enhance the likelihood that the Owners of the
Class A Certificates will receive full and timely
receipt of all amounts due to them. See "Description
of the Certificates -- Subordination of Class B
Certificates" herein.
Certificate Financial Guaranty Insurance Company, a New York
Insurer stock insurance company.
Certificate The Seller will obtain the Certificate Insurance
Insurance Policy Policy, which is non-cancelable, in favor of the
Trustee on behalf of the Owners of the Class A
Certificates. On each Payment Date, the Certificate
Insurer is required to make available to the Trustee
the amount of any insufficiency in Total Available
Funds for the related Mortgage Loan Group as of such
Payment Date necessary to distribute the Class A
Insured Distribution Amount with respect to the
related Mortgage Loan Group. The Certificate
Insurance Policy does not guarantee any specified
rate of Prepayments. See "The Certificate Insurance
Policy and the Certificate Insurer" and "Description
of the Certificates -- Subordination of Class B
Certificates" herein.
The Trustee or paying agent will (i) receive as
attorney-in-fact of each Owner of the Class A
Certificates, any Insured Payment from the
Certificate Insurer and (ii) disburse the same to
each Owner of the related Class A Certificates in
accordance with the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will provide that
to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying
through the Trustee or a paying agent), to the Owners
of any Class A Certificates, the Certificate Insurer
will be subrogated to the rights of such Owners of
such Class A Certificates with respect to such
Insured Payments. The Certificate Insurer will
receive reimbursement for such Insured Payments, but
only from the sources and in the manner provided in
the Pooling and Servicing Agreement. Such subrogation
and reimbursement will have no effect on the
Certificate Insurer's obligations under the
Certificate Insurance Policy.
Optional The Seller will have the right to purchase all the
Termination Mortgage Loans on any Payment Date when the aggregate
principal balances of the Mortgage Loans has declined
to ten percent or less of the Original Pool Principal
Balance (the "Seller Optional Termination Date"). See
"Description of the Certificates -- Optional
Termination by the Seller" herein.
Auction Sale The Pooling and Servicing Agreement requires that,
within ninety days following the Seller Optional
Termination Date, if the Seller has not exercised its
optional termination right by such date, the Trustee
shall solicit bids for the purchase of all Mortgage
Loans remaining in the Trust. In the event that
satisfactory bids are received as described in the
Pooling and Servicing Agreement, the net sale
proceeds will be distributed to Certificateholders,
in the same order of priority as collections received
in respect of the Mortgage Loans. If satisfactory
bids are not received, the
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Trustee shall decline to sell the Mortgage Loans and
shall not be under any obligation to solicit any
further bids or otherwise negotiate any further sale
of the Mortgage Loans. 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.
Ratings It is a condition of the original issuance of the
Class A Certificates that the Class A Certificates
receive ratings of AAA or Aaa by S&P and Moody's,
respectively. 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 entity.
Such ratings address credit risk, but do not purport
to address any prepayment risk associated with the
Class A Certificates, nor do such ratings cover the
payment of the Supplemental Interest Amounts.
Federal Tax REMIC Elections. For federal income tax purposes, one
Aspects or more elections will be made to treat certain of
the assets and/or accounts of the Trust as "real
estate mortgage investment conduits" (the "REMICs").
Each class of Class A Certificates will be designated
as a "regular interest" in a REMIC.
Tax Status of Class A Certificates. The Class A
Certificates will be treated as debt instruments for
federal income tax purposes. Owners of the Class A
Certificates, including Owners that generally report
income on the cash method of accounting, will be
required to include interest on the Class A
Certificates, as applicable, in income in accordance
with the accrual method of accounting. The Class A-6
Group II Certificates and the right to receive the
Supplemental Interest Amount, will have the
characteristics described herein.
General Tax Treatment. In general, the Class A
Certificates will be treated as "qualifying real
property loans" under Section 593(d) of the Code,
"regular . . . interest(s) in a REMIC" under Section
7701(a)(19)(C) of the Code and "real estate assets"
under Section 856(c) of the Code in the same
proportion that the assets in the REMIC consist of
qualifying assets under such Sections. In addition,
interest on the Class A Certificates will be treated
as "interest on obligations secured by mortgages on
real property" under Section 856(c) of the Code to
the extent that such Class A Certificates are treated
as "real estate assets" under Section 856(c) of the
Code. For further information regarding the federal
income tax consequences of investing in the Class A
Certificates, see "Certain Federal Tax Aspects"
herein and "Certain Federal Tax Consequences" in the
accompanying Prospectus.
ERISA As described under "ERISA Considerations" herein, the
Considerations Class A Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or by individual retirement accounts or
Keogh plans covering only a sole proprietor or
partner which are not subject to ERISA but are
subject to Section 4975 of the Code ("Plans"),
pursuant to Prohibited Transaction Exemption 90-32
(the "Exemption") which provides an exemption for
certain transactions involving the creation,
maintenance and termination of certain
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residential mortgage pools and holding of certain
residential mortgage pool pass-through certificates
by Plans. Any Plan fiduciary considering whether to
purchase any Class A Certificate on behalf of a Plan
should consult with its counsel regarding the
applicability of the Exemption and the provisions of
ERISA and the Code.
Legal Investment The Class A Certificates will not constitute
Considerations "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Accordingly, many institutions may not be
legally authorized to invest in the Class A
Certificates.
Special For a discussion of certain factors that should be
Considerations considered by prospective investors in the Class A
Certificates, see "Risk Factors" herein and in the
accompanying Prospectus.
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RISK FACTORS
Prospective investors should consider, among other things, the
following factors (as well as the factors set forth under "Special
Considerations" in the accompanying Prospectus) in connection with the purchase
of the Class A Certificates.
Maturity and Prepayment Considerations. All of the Mortgage
Loans are prepayable in full or in part at any time. The rate of Prepayments on
the Mortgage Loans may be influenced by a variety of economic, social and other
factors, including interest rates, the availability of alternative financing and
homeowner mobility. Although there is little significant data available on the
effects of interest rates on prepayment rates for non-purchase money,
non-conforming credit mortgage loans, a number of factors suggest that the
prepayment behavior of a pool of such mortgage loans may be significantly
different from that of a pool of purchase money, conforming-credit mortgage
loans. One such factor is the typically smaller principal balance of the average
non-purchase money mortgage loan than that of the average purchase money
mortgage conventional loan in the typical pool. A smaller principal balance is
easier for a borrower to prepay than a larger balance and therefore a higher
prepayment rate may result for a non-purchase money mortgage loan pool than for
a pool of purchase money mortgage loans, irrespective of the relative average
interest rates in the two pools and the general interest rate environment. A
small principal balance, however, also may make refinancing a non-purchase money
mortgage loan at a lower loan rate less attractive to the borrower relative to
refinancing a larger principal balance non-purchase money mortgage loan, as the
perceived impact to the borrower of lower interest rates on the size of the
monthly payment on a mortgage loan is much less than for a larger principal
balance non-purchase money mortgage loan. Other factors that might be expected
to affect the prepayment rate of a pool of mortgage loans include the amounts
of, and interest rates on, the related senior mortgage loans, if one exists, and
the use of the first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including debt consolidation, home improvement, education expenses and purchases
of consumer durables such as automobiles. See "Special Considerations -- Yield
and Prepayment Considerations" in the accompanying Prospectus.
The weighted average life of a pool of loans is the average
amount of time for which each dollar of principal on such loans is outstanding.
Because it is expected that there will be payments of principal of Mortgage
Loans in advance of the scheduled due date for the payments of such principal
(the "Prepayments") and defaults on the Mortgage Loans, the actual weighted
average life of the Mortgage Loans is expected to vary substantially from the
weighted average life of the Mortgage Loans based upon their amortization
schedules. Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related first
mortgage loans or the Mortgage Loan itself), the sale of Properties subject to
due-on-sale clauses, and liquidations due to default, as well as the receipt of
proceeds from physical damage insurance policies. In addition, repurchases of
Mortgage Loans from the Trust will have the same effect as Prepayments of the
related Mortgage Loans. Substantially all of the Mortgage Loans contain
"due-on-sale" provisions, and the Pooling and Servicing Agreement generally
requires the Master Servicer to enforce such provisions unless such enforcement
is not permitted by applicable law. See "Description of the Certificates -- Flow
of Funds and Distributions on the Class A Certificates", " -- General Servicing
Procedures", " -- Termination of the Trust", "Legal Investment Considerations",
and "Maturity, Prepayment and Yield Considerations" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon
Payments. 49.74% of the Original Group I Pool Principal Balance of the Mortgage
Loans in the Group I and 1.18% of the Original Group II Pool Principal Balance
of the Mortgage Loans in the Group II are Balloon Loans. See "Special
Considerations -- Risk of Losses Associated with Balloon Loans" in the
accompanying Prospectus.
Geographic Concentration of Mortgage Loans. Approximately
44.92% of the Original Group I Pool Principal Balance represents Mortgage Loans
relating to Mortgaged Properties located in five states: Michigan 15.06%,
Florida 9.61%, California 7.96%, Ohio 6.71%, and Georgia 5.58% Approximately
54.21% of the
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Original Group II Pool Principal Balance represents Mortgage Loans relating to
Mortgaged Properties located in five states: California 25.81%, Michigan 11.91%,
Utah 6.05%, Washington 5.92% and Maryland 4.52%. See "Special
Considerations--Geographic Concentration."
Risk of Higher Default Rates for Junior Lien Loans. 4.30% of
the Original Group I Pool Principal Balance of the Mortgage Loans relates to
Mortgage Loans secured by liens which are in a second position. See "Special
Considerations -- Risk of Losses Associated with Junior Liens" in the
Prospectus.
Risk of Potential Termination of Trust. The Trust may be
terminated when the aggregate principal balances of the Mortgage Loans has
declined to ten percent or less of the Original Pool Principal Balance, either
by the Seller, exercising its optional termination right, or pursuant to the
Auction Sale. See "Description of Certificates -- Optional Termination by the
Seller" and "Description of the Certificates -- Auction Sale". Such a
termination would be the equivalent of a prepayment of all the Mortgage Loans.
The Owners of the Class A Certificates would receive from the proceeds resulting
from any such termination, any interest accrued and unpaid, together with any
distribution of principal owed and unpaid, in the order of priority set forth
under "Description of Certificates -- Distributions on the Class A
Certificates". Any such termination of the Trust will reduce the yield to
maturity on Class A Certificates purchased at a premium. See "Description of the
Certificates -- Termination of the Trust" herein.
Effect of Mortgage Loan Yield on Class A-1 and Class A-6
Pass-Through Rate. The Class A-1 Pass- Through Rate is based upon the value of
an adjustable index (one-month LIBOR), while the Coupon Rates on the Group I
Mortgage Loans are fixed. Consequently, the interest which becomes due on such
Mortgage Loans in Group I (net of the Servicing Fees, the Trustee fees and the
Certificate Insurer premiums) during any Remittance Period may be less than the
amount of interest that would accrue at one-month LIBOR plus the margin on the
Class A-1 Group I Certificates, during the related Accrual Period, and will be
limited to such lower amount. The Class A-1 Group I Certificates do not contain
any "carry-forward" or "catch-up" feature if the amount of interest paid is so
limited.
The Class A-6 Group II Pass-Through Rate is based upon the
value of an index (one-month LIBOR) which is different from the value of the
indices applicable to the Mortgage Loans in Group II, as described under "The
Mortgage Pool -- Group II" (either as a result of the use of a different index,
rate determination date, rate adjustment date or rate cap or floor). The
Mortgage Loans in Group II primarily adjust semi-annually or yearly based upon a
six-month LIBOR index whereas the Class A-6 Group II Pass-Through Rate adjusts
monthly based on a one-month LIBOR index and is limited by the Class A-6
Available Funds Pass-Through Rate, unless Supplemental Interest Amounts (the
payment of which is not insured by the Certificate Insurer and which is not
rated) are funded in full. Consequently the actual Class A-6 Pass-Through Rate
for such Payment Date may not equal the Class A-6 Formula Pass-Through Rate for
such Payment Date. In particular, the interest rates on the Mortgage Loans in
Group II adjust less frequently, with the result that the actual Class A-6 Pass-
Through Rate may be lower than the Class A-6 Formula Pass-Through Rate for
extended periods in a rising interest rate environment. In addition, one-month
LIBOR and six-month LIBOR may respond to different economic and market factors,
and there is not necessarily any correlation between them. Thus, it is possible,
for example, that one-month LIBOR may rise during periods in which one or more
Indices are falling or that, even if both one-month LIBOR and Indices rise
during the same period, one-month LIBOR may rise much more rapidly than
six-month LIBOR. See "Class A-6 Pass-Through Rate" in the Summary for this
Prospectus Supplement.
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USE OF PROCEEDS
The Sponsor will cause the Trust to acquire the Mortgage Loans
from the Seller concurrently with the sale of the Certificates and the net
proceeds from the sale of the Certificates will be paid to the Seller. Such net
proceeds (together with the Residual Certificates retained by the Seller or its
affiliates) will, in effect, represent the purchase price paid by the Trust to
the Seller for the Mortgage Loans. The net proceeds, after funding transaction
costs, to be received from the sale of the Mortgage Loans will be added to the
Seller's general funds and will be available for general corporate purposes.
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 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 its 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.
THE SELLER AND MASTER SERVICER
Access Financial Lending Corp. ("AFL"), formerly Equicon
Corporation, a Delaware corporation, is a wholly-owned subsidiary of Access
Financial Holdings Corp. Equicon Corporation was formed in January 1992 for the
purpose of serving as a private secondary mortgage market conduit. Equicon
Corporation changed its name to Access Financial Lending Corp. in January 1996.
AFL purchases newly originated mortgages and seasoned mortgages. As described
herein, AFL will be obligated to repurchase certain Mortgage Loans pursuant to
certain representations and warranties made with respect to the Mortgage Loans.
See "The Mortgage Loan Pool -- Mortgage Loan Program -- Underwriting Standards;
Representations" herein and "Mortgage Loan Program" in the accompanying
Prospectus.
As Master Servicer, AFL will be obligated to service the
Mortgage Loans pursuant to the Pooling and Servicing Agreement. AFL has entered
into sub-servicing agreements with Electronic Data Systems Corporation ("EDS")
and LSI Financial Group ("LSI") which provide for servicing and administration
of the Mortgage Loans. Notwithstanding such sub-servicing agreements, AFL shall
be obligated to the same extent and under the same terms and conditions under
the Pooling and Servicing Agreement as if it alone were servicing and
administering the Mortgage Loans. See "Description of the Certificates --
General Servicing Procedures" herein.
The Sub-Servicers
The Consumer Asset Management Division of EDS is primarily
engaged in the business of servicing consumer loans for banks, savings and loans
and other financial services companies. EDS is a leading servicer of consumer
loans and leases with a servicing portfolio of approximately 311,900 accounts
representing
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approximately 3,265,700,000 in total loans and leases committed and outstanding.
EDS is currently servicing approximately 11,600 closed-end home equity loans
with approximately 489,639,000 outstanding and approximately 28,900 open-ended
home equity accounts with approximately 606,567,000 outstanding. EDS is not a
servicer for the Federal National Mortgage Association. EDS is a wholly-owned,
indirect subsidiary of General Motors Corporation ("GM"). The GM Board of
Directors has approved a split-off ("Split-Off") of EDS to the holders of GM
Class E Common Stock. The Split-Off will be submitted for approval by the common
stockholders of GM and, if approved, is expected to be consummated in the second
quarter of 1996. In connection with the Split-Off, EDS will reincorporate in
Delaware.
LSI is an approved HUD Title I and Title II servicer. LSI
services several securitized and whole loan portfolios comprised of single
family mortgage products. LSI's corporate offices are located at 415 North
McKinley Street, Suite 1250, Little Rock, Arkansas 72205. LSI commenced mortgage
servicing operations in 1990 and since then has managed and serviced sub-prime
conduit programs, distressed RTC portfolios, and third-party mortgage loan
portfolios.
THE MORTGAGE LOAN POOL
General
The statistical information concerning the Pool of Mortgage
Loans is based upon Pool information as of the close of business on May 1, 1996
(the "Cut-Off Date").
The Mortgage Loans consist of 2,905 mortgage loans evidenced
by promissory notes (the "Notes") secured by deeds of trust, security deeds or
mortgages on the properties (the "Properties" or "Mortgaged Properties"), which
are located in 46 states and the District of Columbia. The Properties securing
the Mortgage Loans consist of one- to four-family residences (which may be
detached, part of a one- to four-family dwelling, a condominium unit, a
townhouse or a unit in a planned unit development). The Properties may be
owner-occupied (which includes second and vacation homes) and non-owner occupied
investment properties.
Each Mortgage Loan in the Trust will be assigned to one of two
mortgage loan groups: the "Group I" or the "Group II", (each a "Mortgage Loan
Group") comprised of Mortgage Loans which bear fixed interest rates only, in the
case of the Group I, and Mortgage Loans which bear adjustable interest rates
only, in the case of the Group II. The Class A Group I Certificates will be
issued in respect of Group I and the Class A-6 Group II Certificates will be
issued in respect of Group II.
The Mortgage Loans in the Group I consist of 50.26% of fully
amortizing mortgage loans and 49.74% of Balloon Loans; consist of approximately
95.70% of loans secured by first liens on the related Properties, with the
remainder representing second liens; consist of approximately 93.46% of loans
secured by primary residences. No Group I Mortgage Loan is more than 59 days
contractually delinquent as of the Cut-Off Date.
The Mortgage Loans in the Group II consist of 98.82% of fully
amortizing mortgage loans and 1.18% of Balloon Loans; consist of 100% of loans
secured by first liens on the related Properties; and consist of approximately
94.26% of Loans secured by primary residences. No Group II Mortgage Loan is more
than 59 days contractually delinquent as of the Cut-Off Date.
S-19
<PAGE>
<PAGE>
Delinquency Experience on the Seller's
Portfolio of Mortgage Loans(1)
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------------------------------
March December June 30, December June 30, December June 30,
31, 1996 31, 1995 1995 31, 1994 1994 31, 1993 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Mortgage Loans ..... 9,170 7,115 4,524 2,756 1,829 983 363
Dollar amount of Mortgage Loans $647,432,120 $506,475,487 $320,202,611 $220,664,420 $147,335,800 $71,604,504 $22,307,501
Delinquency Period
30-59 Days
% of number of loans (2) 2.91% 3.32% 2.52% 0.87% 1.86% 0.30% 1.65%
% of dollar amount of loans (3) 2.59% 2.88% 2.08% 0.79% 2.03% 0.31% 1.94%
60-89 days
% of number of loans (2) 0.77% 0.97% 1.33% 0.07% 0.16% 0.41% 0.55%
% of dollar amount of loans (3) 0.85% 0.89% 1.12% 0.05% 0.11% 0.42% 0.34%
90 days and over
% of number of loans (2) 2.09% 1.04% 0.42% 0.22% 0.38% 0.51% 0.28%
% of dollar amount of loans (3) 2.05% 1.02% 0.46% 0.20% 0.07% 0.26% 0.30%
Foreclosed Properties
% of number of loans (2) 1.04% 0.82% 0.69% 0.65% 0.27% 0.00% 0.00%
% of dollar amount of loans (3) 1.13% 0.79% 0.64% 0.74% 0.38% 0.00% 0.00%
</TABLE>
- -------------------
(1) The Mortgage Loans comprising the Seller's portfolio were
originated beginning in April 1992. The variable rate program
commenced in April 1994.
(2) The number of delinquent Mortgage Loans or the number of
foreclosed properties as a percentage of the total "Number of
Mortgage Loans" as of the date indicated.
(3) The dollar amount of delinquent Mortgage Loans or the dollar
amount of foreclosed properties as a percentage of the total
"Dollar amount of Mortgage Loans" as of the date indicated.
S-20
<PAGE>
<PAGE>
LOAN LOSS EXPERIENCE ON THE SELLER'S
PORTFOLIO OF MORTGAGE LOANS
Prior to June 14, 1995, the Seller experienced no losses since
the Seller's program began.
<TABLE>
<CAPTION>
For the Twelve Months Ended For the 3 Months Ended
December 31, 1995 March 31, 1996
-------------------------------------------------------
<S> <C> <C>
Average amount outstanding(1) ........................... $336,701,220 $595,399,419
Gross losses(2) ......................................... 920,001 0
Recoveries(3) ........................................... 753,109 0
Net losses(4) ........................................... 166,892 0
Net losses as a percentage of average
amount outstanding .................................... .05% 0%
</TABLE>
(1) "Average Amount Outstanding" during the period is the
arithmetic average of the principal balances of the mortgage
loans outstanding on the last business day of each month
during the period.
(2) "Gross Losses" are the principal amounts of the mortgage loans
for each respective period which have been determined to be
uncollectible.
(3) "Recoveries" represent the excess of (x) the sum of recoveries
from liquidation proceeds and deficiency judgments over (y)
the sum of expenses and accrued interest.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
While the above delinquency and loan loss experience
represents the recent experience of the Seller's portfolio of Mortgage Loans,
there can be no assurance that the future delinquency and loan loss experience
on the Mortgage Loans included in the Pool will be similar. The Seller can
neither quantify the impact of any recent property value declines on the
Mortgage Loans nor predict whether, to what extent or how long such declines may
continue. In a period of such decline, the rates of delinquencies, foreclosures
and losses on the Mortgage Loans could be higher than those heretofore
experienced in the mortgage lending industry in general. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses.
Group I
The Mortgage Loans in Group I consist of approximately 2,221
loans under which the related Mortgaged Properties are located in 44 states and
the District of Columbia as set forth herein. As of the CutOff Date, the
Mortgage Loans in Group I had an aggregate principal balance of $142,258,961.34,
the maximum principal balance of any of the Mortgage Loans in the Group I was
$450,000.00, the minimum principal balance thereof was $9,492.06, and the
principal balance of the Mortgage Loans in the Group I averaged $64,051.76. As
of the Cut-Off Date, Coupon Rates on the Mortgage Loans in the Group I ranged
from 7.75% to 18.25% per annum, and the weighted average Coupon Rate of the
Mortgage Loans in the Group I was 11.11% per annum. As of the Cut-Off Date, the
original term to stated maturity of the Mortgage Loans in the Group I ranged
from 60 months to 360 months, the remaining term to stated maturity ranged from
22 months to 360 months, the weighted average original term to stated maturity
was 231 months and the weighted average remaining term to stated maturity was
229 months. No Mortgage Loan in the Group I had a stated maturity later than May
1, 2026. 50.26% of the aggregate principal balance of the Mortgage Loans in the
Group I require monthly payments of principal that will fully amortize the
Mortgage Loans by their respective maturity dates, and 49.74% of the aggregate
principal balance of the Mortgage Loans in the Group I are Balloon Loans.
The sum of the percentage columns set forth in the following
tables may not equal 100% due to rounding.
S-21
<PAGE>
<PAGE>
Geographic Distribution
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
State Loans Cut-Off Date Principal Balance
- ----- --------- ------------------- ---------------
<S> <C> <C> <C>
Alabama 131 $6,652,411.46 4.68%
Arizona 20 1,535,529.31 1.08
Arkansas 1 85,491.93 .06
California 94 11,321,245.22 7.96
Colorado 37 1,836,504.16 1.29
Connecticut 5 379,888.10 .27
Delaware 6 323,513.48 .23
District of Columbia 4 383,844.86 .27
Florida 221 13,669,693.35 9.61
Georgia 139 7,941,193.04 5.58
Hawaii 3 598,436.20 .42
Idaho 23 1,563,403.03 1.10
Illinois 83 5,912,574.49 4.16
Indiana 90 4,085,042.78 2.87
Iowa 4 202,514.92 .14
Kansas 34 2,359,613.19 1.66
Kentucky 16 856,638.51 .60
Louisiana 2 87,892.70 .06
Maryland 22 1,945,696.36 1.37
Massachusetts 33 2,980,275.18 2.09
Michigan 378 21,428,521.95 15.06
Minnesota 67 4,711,365.17 3.31
Mississippi 13 676,107.22 .48
Missouri 59 3,762,393.54 2.64
Montana 1 220,396.40 .15
Nebraska 1 39,966.29 .03
Nevada 10 839,494.56 .59
New Hampshire 1 42,000.00 .03
New Jersey 39 3,699,720.49 2.60
New Mexico 14 1,014,193.03 .71
New York 28 3,243,982.56 2.28
North Carolina 55 3,211,352.13 2.26
Ohio 179 9,549,113.63 6.71
Oklahoma 5 505,532.97 .36
Oregon 24 1,834,252.90 1.29
Pennsylvania 40 2,529,642.62 1.78
Rhode Island 19 1,239,746.09 .87
South Carolina 94 4,503,376.29 3.17
Tennessee 72 3,825,552.32 2.69
Texas 46 3,969,616.37 2.79
Utah 39 2,438,215.20 1.71
Virginia 11 756,294.96 .53
Washington 30 1,983,883.05 1.39
Wisconsin 27 1,496,839.33 1.05
Wyoming 1 16,000.00 .01
- --------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
=============================================================================================
</TABLE>
The combined loan-to-value ratio of a Mortgage Loan is equal
to the ratio (expressed as a percentage) of (x) the sum of the (i) original
principal balance of such Mortgage Loan and (ii) the outstanding principal
balances of any senior mortgage loans (computed at the date of origination of
such Mortgage Loan) and (y) the appraised value of the related Mortgaged
Property at the time of origination or in the case of a purchase money mortgage
loan the lesser of the purchase price or the appraised value at the time of
origination (the "Combined Loan-to-Value Ratio"). The Combined Loan-to-Value
Ratios are distributed as follows:
S-22
<PAGE>
<PAGE>
Combined Loan-To-Value Ratio Distribution
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Range of Combined Mortgage as of the Aggregate
Loan-to-Value Ratios Loans Cut-Off Date Principal Balance
- -------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
5.01 to 10.00 1 $ 31,370.15 .02%
10.01 to 15.00 3 49,967.71 .04
15.01 to 20.00 7 105,251.75 .07
20.01 to 25.00 15 307,428.03 .22
25.01 to 30.00 17 500,999.32 .35
30.01 to 35.00 25 758,844.33 .53
35.01 to 40.00 34 1,118,115.75 .79
40.01 to 45.00 44 1,891,091.38 1.33
45.01 to 50.00 65 2,063,760.60 1.45
50.01 to 55.00 66 3,315,751.09 2.33
55.01 to 60.00 121 5,576,604.31 3.92
60.01 to 65.00 169 9,906,601.88 6.96
65.01 to 70.00 262 15,273,886.72 10.74
70.01 to 75.00 354 21,922,297.70 15.41
75.01 to 80.00 744 53,697,522.83 37.75
80.01 to 85.00 211 17,738,201.95 12.47
85.01 to 90.00 83 8,001,265.84 5.62
- -----------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
===============================================================================================
</TABLE>
The Combined Loan-to-Value Ratios shown above were calculated
based upon the appraised values of the Properties at the time of origination of
the Mortgage Loans or in the case of a purchase money mortgage loan the lesser
of the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the 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 unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-23
<PAGE>
<PAGE>
Coupon Rate Distribution
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Range of Mortgage as of the Aggregate
Coupon Rates (%) Loans Cut-Off Date Principal Balance
- ---------------- -------- ----------------- ------------------
<S> <C> <C> <C>
7.51 to 8.00% 4 $ 201,466.30 .14%
8.01 to 8.50 21 1,600,265.50 1.12
8.51 to 9.00 70 4,809,190.57 3.38
9.01 to 9.50 118 9,337,042.62 6.56
9.51 to 10.00 263 20,023,529.77 14.08
10.01 to 10.50 239 15,874,373.01 11.16
10.51 to 11.00 358 24,768,719.52 17.41
11.01 to 11.50 254 15,817,680.81 11.12
11.51 to 12.00 280 18,135,028.96 12.75
12.01 to 12.50 190 10,713,622.08 7.53
12.51 to 13.00 189 9,669,852.60 6.80
13.01 to 13.50 84 4,351,077.65 3.06
13.51 to 14.00 69 3,733,583.05 2.62
14.01 to 14.50 38 1,307,763.97 .92
14.51 to 15.00 30 1,393,320.66 .98
15.01 to 15.50 4 178,701.40 .13
15.51 to 16.00 2 61,495.98 .04
16.01 to 16.50 3 87,021.81 .06
16.51 to 17.00 3 160,225.08 .11
17.51 to 18.00 1 20,000.00 .01
18.01 to 18.50 1 15,000.00 .01
- ---------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
==============================================================================================
</TABLE>
S-24
<PAGE>
<PAGE>
Distribution of Unpaid Principal Balances as of the Cut-Off Date
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Range of Unpaid Mortgage as of the Aggregate
Principal Balances ($) Loans Cut-Off Date Principal Balance
- ---------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
0.00 to $ 50,000.00 1,072 $ 35,881,641.17 25.22%
$ 50,000.01 to 100,000.00 816 56,893,495.55 39.99
100,000.01 to 150,000.00 223 27,061,105.95 19.02
150,000.01 to 200,000.00 65 11,278,771.15 7.93
200,000.01 to 250,000.00 30 6,714,402.72 4.72
250,000.01 to 300,000.00 12 3,346,591.70 2.35
300,000.01 to 350,000.00 2 632,953.10 .44
400,000.01 to 450,000.00 1 450,000.00 .32
- -----------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
================================================================================================
</TABLE>
Lien Status and Occupancy Status
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Lien Status and Mortgage as of the Aggregate
Occupancy Status Loans Cut-Off Date Principal Balance
- ---------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
First Lien Owner Occupied 1,856 $127,172,704.71 89.40%
Non-Owner Occupied 172 8,971,939.47 6.31
Second Lien Owner Occupied 182 5,782,469.54 4.06
Non-Owner Occupied 11 331,847.62 .23
- ------------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
================================================================================================
</TABLE>
Distribution of Age (in months) from Origination to the Cut-Off Date
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Months Elapsed Mortgage as of the Aggregate
Since Origination Loans Cut-Off Date Principal Balance
- ---------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
0 < Age <= 6 2,188 $140,057,101.69 98.45%
6 < Age <= 12 21 921,518.24 .65
12 < Age <= 18 1 40,230.49 .03
18 < Age <= 24 3 359,001.57 .25
24 < Age <= 30 4 642,655.96 .45
30 < Age <= 36 2 187,991.72 .13
36 < Age <= 42 1 21,820.41 .02
156 < Age <= 168 1 28,641.26 .02
- ----------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
==============================================================================================
</TABLE>
S-25
<PAGE>
<PAGE>
Property Type
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
Property Type Loans Cut-Off Date Principal Balance
- ---------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
Single-family 2,012 $129,758,674.35 91.21%
Modular Housing 10 451,935.41 .32
Manufactured Housing 42 2,019,065.49 1.42
FUD 8 655,039.82 .46
SF Row House 16 1,170,457.66 .82
Townhouse 16 1,058,202.95 .74
Duplex 67 4,389,683.81 3.09
Condominium 40 2,066,794.56 1.45
2-4 family 10 689,107.29 .48
- ----------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
==============================================================================================
</TABLE>
Distribution of Remaining Term to Maturity
(in months) as of the Cut-Off Date
Group I
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Months Remaining Mortgage as of the Aggregate
to Maturity Loans Cut-Off Date Principal Balance
- ---------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
12 < Rem Term <= 24 1 $21,820.41 .02%
24 < Rem Term <= 36 1 24,790.26 .02
48 < Rem Term <= 60 4 105,831.43 .07
72 < Rem Term <= 84 2 29,562.21 .02
84 < Rem Term <= 96 2 31,406.36 .02
108 < Rem Term <= 120 51 1,324,008.98 .93
144 < Rem Term <= 156 4 597,804.94 .42
156 < Rem Term <= 168 3 319,646.92 .22
168 < Rem Term <= 180 1,402 90,789,390.65 63.82
192 < Rem Term <= 204 1 28,641.26 .02
204 < Rem Term <= 216 1 45,704.65 .03
228 < Rem Term <= 240 227 12,087,550.89 8.50
324 < Rem Term <= 336 1 241,932.97 .17
348 < Rem Term <= 360 521 36,610,869.41 25.74
- ----------------------------------------------------------------------------------------------
TOTAL 2,221 $142,258,961.34 100.00%
==============================================================================================
</TABLE>
Group II
The Mortgage Loans in Group II consist of approximately 684
loans under which the related Mortgaged Properties are located in 41 states and
the District of Columbia as set forth herein. As of the CutOff Date, the
Mortgage Loans in Group II had an aggregate principal balance of $68,344,659.70,
the maximum principal balance of any of the Mortgage Loans in Group II was
$542,126.70, the minimum principal balance thereof was $10,000.00 and the
principal balance of the Mortgage Loans in the Group II averaged $99,919.09. As
of the Cut-Off Date, Coupon Rates of the Mortgage Loans in the Group II ranged
from 6.70% per annum to 14.25% per annum. As of the Cut-Off Date, the weighted
average Coupon Rate of the Mortgage Loans in Group II was 9.44%. As of the
Cut-Off Date, margins of the Mortgage Loans in the Group II ranged from 3.375%
per annum to 10.225% per annum, and the weighted average margin was 6.089%. As
of the Cut-Off Date, the maximum coupons of the Mortgage Loans in Group II
ranged from 13.50% per annum to 20.75% per annum, and the weighted average
maximum coupon was 16.068%. 60.83% of the aggregate principal balance of the
Mortgage Loans in Group II had a periodic interest rate cap of 1%, and 25.68% of
the aggregate
S-26
<PAGE>
<PAGE>
principal balance of the Mortgage Loans in Group II had a periodic interest rate
cap of 1.5%, 11.65% of the aggregate principal balance of the Mortgage Loans in
Group II were fixed rate loans that, in 2 years from origination, will be
converted into variable rate loans with an interest rate cap of 3% on the date
of such conversion and with a periodic interest rate cap of 1% thereafter, and
1.85% of the aggregate principal balance of the Mortgage Loans in Group II were
fixed rate loans that, in 3 years from origination, will be converted into
variable rate loans with an interest rate cap of 3% on the date of such
conversion and with a periodic interest rate cap of 1% thereafter.
As of the Cut-Off Date, the original term to stated maturity
of the Mortgage Loans in Group II ranged from 120 months to 360 months, the
remaining term to stated maturity ranged from 118 months to 360 months, the
weighted average original term to stated maturity was 355 months and the
weighted average remaining term to stated maturity was 354 months. No Mortgage
Loan in Group II had a stated maturity later than May 1, 2026. 98.82% of the
aggregate principal balance of the Mortgage Loans in Group II require monthly
payments of principal that will fully amortize the Mortgage Loans by their
respective dates and 1.18% of the aggregate principal balance of the Mortgage
Loans in Group II are Balloon Loans.
The Coupon Rates of Mortgage Loans in Group II adjust
semi-annually based on six month LIBOR.
S-27
<PAGE>
<PAGE>
The sum of the percentage columns set forth on the following
tables may not equal 100% due to rounding.
Geographic Distribution
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
State Loans Cut-Off Date Principal Balance
- ----- -------- ------------------ -------------------
<S> <C> <C> <C>
Alabama 6 $ 360,376.98 .53%
Arizona 21 1,946,315.91 2.85
California 121 17,639,520.02 25.81
Colorado 8 967,271.00 1.42
Connecticut 6 504,072.69 .74
District of Columbia 4 253,709.47 .37
Florida 16 1,424,639.35 2.08
Georgia 2 118,300.00 .17
Hawaii 1 207,000.00 .30
Idaho 12 696,031.12 1.02
Illinois 8 1,020,497.33 1.49
Indiana 15 743,160.82 1.09
Iowa 2 184,800.00 .27
Kansas 1 76,000.00 .11
Kentucky 2 163,414.99 .24
Maryland 25 3,085,903.57 4.52
Massachusetts 19 2,320,982.93 3.40
Michigan 140 8,138,062.62 11.91
Minnesota 12 969,567.45 1.42
Missouri 1 35,993.93 .05
Montana 3 177,854.19 .26
Nebraska 1 140,000.00 .20
Nevada 8 1,047,787.50 1.53
New Hampshire 2 86,092.90 .13
New Jersey 15 2,032,488.24 2.97
New Mexico 5 464,422.45 .68
New York 5 712,980.80 1.04
North Carolina 1 208,250.00 .30
Ohio 8 642,269.95 .94
Oregon 27 2,954,046.60 4.32
Pennsylvania 9 914,770.38 1.34
Rhode Island 27 2,562,013.34 3.75
South Carolina 5 296,531.02 .43
South Dakota 4 201,720.00 .30
Tennessee 5 538,575.99 .79
Texas 22 2,929,257.77 4.29
Utah 42 4,133,088.41 6.05
Virginia 11 1,870,491.33 2.74
Washington 37 4,046,163.41 5.92
West Virginia 1 94,396.82 .14
Wisconsin 23 1,383,338.42 2.02
Wyoming 1 52,500.00 .08
- ------------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
======================================================================================================
</TABLE>
S-28
<PAGE>
<PAGE>
The combined loan-to-value ratio of a Mortgage Loan is equal
to the ratio (expressed as a percentage) of (x) the sum of the (i) original
principal balance of such Mortgage Loan and (ii) the outstanding principal
balances of any senior mortgage loans (computed at the date of origination of
such Mortgage Loan) and (y) the appraised value of the related Mortgaged
Property at the time of origination or in the case of a purchase money mortgage
loan the lesser of the purchase price or the appraised value at the time of
origination (the "Combined Loan-to-Value Ratio"). The Combined Loan-to-Value
Ratios are distributed as follows:
Combined Loan-To-Value Ratio Distribution
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Range of Combined Mortgage as of the Aggregate
Loan-to-Value Ratios Loans Cut-Off Date Principal Balance
- ---------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
15.01 to 20.00 3 $ 119,925.07 .18%
20.01 to 25.00 1 46,000.00 .07
25.01 to 30.00 5 162,450.78 .24
30.01 to 35.00 2 67,500.00 .10
35.01 to 40.00 3 108,500.00 .16
40.01 to 45.00 14 941,203.51 1.38
45.01 to 50.00 26 1,701,209.52 2.49
50.01 to 55.00 11 856,872.07 1.25
55.01 to 60.00 29 1,891,548.23 2.77
60.01 to 65.00 59 5,005,372.47 7.32
65.01 to 70.00 80 7,299,107.50 10.68
70.01 to 75.00 121 12,856,774.57 18.81
75.01 to 80.00 219 22,762,818.31 33.31
80.01 to 85.00 62 7,445,431.87 10.89
85.01 to 90.00 49 7,079,945.80 10.36
- ----------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
==============================================================================================
</TABLE>
The Combined Loan-to-Value Ratios shown above were calculated
based upon the appraised values of the Properties at the time of origination of
the Mortgage Loans or in the case of a purchase money mortgage loan the lesser
of the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-29
<PAGE>
<PAGE>
Distribution of Unpaid Principal Balances as of the Cut-Off Date
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid % of
of Principal Balance Aggregate
Range of Unpaid Mortgage as of the Principal
Principal Balances ($) Loans Cut-Off Date Balance
---------------------- -------- ------------------ ----------
<S> <C> <C> <C>
0 to $50,000.00 136 $ 4,919,344.38 7.20%
$ 50,000.01 to 100,000.00 289 21,749,301.63 31.82
100,000.01 to 150,000.00 148 17,974,079.79 26.30
150,000.01 to 200,000.00 59 10,067,743.00 14.73
200,000.01 to 250,000.00 32 7,128,617.90 10.43
250,000.01 to 300,000.00 11 3,055,609.60 4.47
300,000.01 to 350,000.00 4 1,318,165.80 1.93
350,000.01 to 400,000.00 2 720,670.90 1.05
400,000.01 to 450,000.00 2 869,000.00 1.27
500,000.01 to 550,000.00 1 542,126.70 .79
- -----------------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
===========================================================================================================
</TABLE>
Lien Status and Occupancy Status
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Lien Status and Mortgage as of the Aggregate
Occupancy Status Loans Cut-Off Date Principal Balance
- ---------------- -------- ------------------ ------------------
<S> <C> <C> <C>
First Lien Owner Occupied 639 $64,423,963.50 94.26%
Non-Owner Occupied 45 3,920,696.20 5.74
- ----------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
==============================================================================================
</TABLE>
Distribution of Age (in months) from Origination to the Cut-Off Date
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Months Elapsed Mortgage as of the Aggregate
Since Origination Loans Cut-Off Date Principal Balance
- ---------------- -------- ------------------ ------------------
<S> <C> <C> <C>
0 < Age <= 6 681 $68,047,885.14 99.57%
6 < Age <= 12 3 296,774.56 .43
- ---------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
=============================================================================================
</TABLE>
S-30
<PAGE>
<PAGE>
Property Type
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
Property Type Loans Cut-Off Date Principal Balance
- ------------- --------- ----------------- ------------------
<S> <C> <C> <C>
Single-family 607 $61,981,084.79 90.69%
Modular Housing 2 90,020.41 .13
Manufactured Housing 10 713,270.44 1.04
PUD 2 212,081.42 .31
SF Row House 5 743,402.24 1.09
Townhouse 14 1,248,093.76 1.83
Duplex 24 1,562,173.33 2.29
Condominium 19 1,741,333.31 2.55
2-4 Family 1 53,200.00 .08
- ----------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
==============================================================================================
</TABLE>
Distribution of Remaining Term to Maturity
(in months) as of the Cut-Off Date
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance % of
Months Remaining Mortgage as of the Aggregate
to Maturity Loans Cut-Of Date Principal Balance
---------------- -------- ----------------- -----------------
<S> <C> <C> <C>
108 < Rem Term <= 120 3 $ 61,248.09 .09%
168 < Rem Term <= 180 26 1,739,760.73 2.55
228 < Rem Term <= 240 2 84,430.15 .12
348 < Rem Term <= 360 653 66,459,220.73 97.24
- ----------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
==============================================================================================
</TABLE>
S-31
<PAGE>
<PAGE>
Distribution of Current Coupon Rates
as of the Cut Off Date
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance
Mortgage as of the % of Aggregate
Current Coupon Rates (%) Loans Cut-Off Date Principal Balance
- ------------------------ -------- ------------------- -----------------
<S> <C> <C> <C>
6.50% to 7.00% 1 $ 60,000.00 .09%
7.01 to 7.50 6 731,242.58 1.07
7.51 to 8.00 36 3,971,214.58 5.81
8.01 to 8.50 66 8,511,057.37 12.45
8.51 to 9.00 143 15,569,844.97 22.78
9.01 to 9.50 115 11,687,951.64 17.10
9.51 to 10.00 117 12,217,873.15 17.88
10.01 to 10.50 69 6,285,985.90 9.20
10.51 to 11.00 56 4,834,891.11 7.07
11.01 to 11.50 20 1,744,524.16 2.55
11.51 to 12.00 27 1,446,166.35 2.12
12.01 to 12.50 7 346,322.53 .51
12.51 to 13.00 10 451,074.93 .66
13.01 to 13.50 2 72,000.00 .11
13.51 to 14.00 8 385,082.85 .56
14.01 to 14.50 1 29,427.58 .04
- -----------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
=====================================================================================================
</TABLE>
Distribution of Maximum Coupon Rates
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance
Mortgage as of the % of Original Pool
Maximum Coupon Rates (%) Loans Cut-Off Date Principal Balance
- ------------------------ -------- ------------------- -----------------
<S> <C> <C> <C>
13.00% to 13.50% 2 $ 175,409.18 .26%
13.51 to 14.00 5 472,300.00 .69
14.01 to 14.50 22 2,851,423.95 4.17
14.51 to 15.00 85 8,922,404.34 13.06
15.01 to 15.50 87 9,999,953.13 14.63
15.51 to 16.00 144 15,496,016.45 22.67
16.01 to 16.50 112 10,795,836.10 15.80
16.51 to 17.00 93 8,929,093.93 13.06
17.01 to 17.50 45 4,459,887.63 6.53
17.51 to 18.00 46 3,640,557.99 5.33
18.01 to 18.50 16 1,097,606.99 1.61
18.51 to 19.00 15 931,659.58 1.36
19.01 to 19.50 2 72,000.00 .11
19.51 to 20.00 8 414,582.85 .61
20.01 to 20.50 1 29,427.58 .04
20.51 to 21.00 1 56,500.00 .08
- -----------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
=====================================================================================================
</TABLE>
S-32
<PAGE>
<PAGE>
Distribution of Margins
as of the Cut Off Date
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance
Mortgage as of the % of Aggregate
Margins (%) Loans Cut-Off Date Principal Balance
- ------------------------ -------- ------------------- -----------------
<S> <C> <C> <C>
3.25% < Margin <= 3.50% 1 $ 128,376.60 .19%
3.75 < Margin <= 4.00 12 1,546,268.23 2.26
4.00 < Margin <= 4.25 5 474,786.67 .69
4.25 < Margin <= 4.50 14 1,725,634.43 2.52
4.50 < Margin <= 4.75 22 2,889,648.20 4.23
4.75 < Margin <= 5.00 30 3,612,854.87 5.29
5.00 < Margin <= 5.25 38 3,612,254.27 5.29
5.25 < Margin <= 5.50 47 4,758,251.71 6.96
5.50 < Margin <= 5.75 64 7,338,819.66 10.74
5.75 < Margin <= 6.00 75 8,404,807.35 12.30
6.00 < Margin <= 6.25 65 6,815,340.88 9.97
6.25 < Margin <= 6.50 79 8,248,681.24 12.07
6.50 < Margin <= 6.75 50 4,566,260.63 6.68
6.75 < Margin <= 7.00 52 4,413,129.43 6.46
7.00 < Margin <= 7.25 35 3,156,348.93 4.62
7.25 < Margin <= 7.50 23 1,911,720.74 2.80
7.50 < Margin <= 7.75 20 1,461,377.27 2.14
7.75 < Margin <= 8.00 18 1,305,244.59 1.91
8.00 < Margin <= 8.25 11 564,112.60 .83
8.25 < Margin <= 8.50 7 702,468.20 1.03
8.50 < Margin <= 8.75 7 369,027.02 .54
8.75 < Margin <= 9.00 2 58,500.00 .09
9.00 < Margin <= 9.25 3 146,936.54 .21
9.25 < Margin <= 9.50 3 97,409.64 .14
10.00 < Margin <=10.25 1 36,400.00 .05
- ------------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
=====================================================================================================
</TABLE>
Next Interest Adjustment Date
Group II
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Principal Balance
Next Interest Mortgage as of the % of Aggregate
Adjustment Date Loans Cut-Off Date Principal Balance
- ------------------------ -------- ------------------- -----------------
<S> <C> <C> <C>
05/21/96 1 $ 94,610.65 .14%
06/01/96 17 1,487,509.86 2.18
07/01/96 79 8,222,664.41 12.03
08/01/96 147 14,741,030.37 21.57
09/01/96 118 10,379,992.66 15.19
10/01/96 162 16,367,394.70 23.95
11/01/96 89 7,826,044.96 11.45
10/01/97 1 97,641.11 .14
03/01/98 1 140,000.00 .20
04/01/98 40 5,123,753.90 7.50
05/01/98 17 2,599,150.00 3.80
03/01/99 3 260,864.29 .38
04/01/99 9 1,004,002.79 1.47
- -----------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
=====================================================================================================
</TABLE>
S-33
<PAGE>
<PAGE>
Distribution of Minimum
Coupon Rates
Group II
<TABLE>
<CAPTION>
Number Aggregate Unpaid
of Principal Balance
Minimum Mortgage as of the % of Aggregate
Coupon Rates (%) Loans Cut-Off Date Principal Balance
- -------------------- --------- ------------------ ------------------
<S> <C> <C> <C>
6.00% to 6.50% 3 $ 268,796.40 .39%
6.51 to 7.00 5 607,500.00 .89
7.01 to 7.50 8 1,085,809.68 1.59
7.51 to 8.00 39 4,192,264.58 6.13
8.01 to 8.50 69 8,501,688.24 12.44
8.51 to 9.00 143 15,594,440.71 22.82
9.01 to 9.50 109 11,245,918.68 16.45
9.51 to 10.00 115 11,992,027.41 17.55
10.01 to 10.50 68 6,071,165.42 8.88
10.51 to 11.00 52 4,407,281.11 6.45
11.01 to 11.50 18 1,647,693.23 2.41
11.51 to 12.00 27 1,446,166.35 2.12
12.01 to 12.50 7 346,322.53 .51
12.51 to 13.00 10 451,074.93 .66
13.01 to 13.50 2 72,000.00 .11
13.51 to 14.00 8 385,082.85 .56
14.01 to 14.50 1 29,427.58 .04
- ---------------------------------------------------------------------------------------------------
TOTAL 684 $68,344,659.70 100.00%
===================================================================================================
</TABLE>
The Mortgage Loan Program -- Underwriting Standards; Representations
The Mortgage Loans were acquired by the Seller from 97
Unaffiliated Originators. Not more than 11% of the Original Pool Principal
Balance represents Mortgage Loans purchased from any single Unaffiliated
Originator. All of the Mortgage Loans were originated or acquired by the
Originators generally in accordance with underwriting criteria satisfactory to
the Seller.
The Seller will make representations and warranties with
respect to the Mortgage Loans sold to the Trust as of the Closing Date pursuant
to the Securitization Sponsorship Agreement and the Pooling and Servicing
Agreement. The Seller may be obligated to repurchase the Mortgage Loans in
respect of which a breach of representation or warranty has occurred. See
"Mortgage Loan Program" in the accompanying Prospectus.
AFL's Guidelines, as identified in the Prospectus as the
Equicon Mortgage Loan Program, provide that each borrower is required to
provide, and the Originator is generally 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 generally required to be successfully
self-employed in the same field for a minimum of two years. A self-employed
borrower is generally 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
generally verified by the Originator and must be reasonable.
S-34
<PAGE>
<PAGE>
The Mortgage Loans were underwritten pursuant to the Seller's
"Full Documentation Program," "Alternative Income Documentation Program" and
"Stated Income Program," as set forth in AFL'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 an adjustable rate Mortgage Loan, the
Originators use a rate (the "Qualifying Rate") that generally is a rate equal to
the fully-indexed Mortgage interest rate for such adjustable rate Mortgage Loan.
AFL'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 a bank account 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 or (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 a
bank account 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 the
Seller may waive certain documentation requirements for individual applicants.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Class A Certificates
The weighted average life of, and, if purchased at other than
par, the yield to maturity on, a Class A Certificate will be directly related to
the rate of payment of principal of the Mortgage Loans in the related Mortgage
Loan Group, including for this purpose Prepayments, liquidations due to
defaults, casualties and condemnations, and repurchases of Mortgage Loans by the
Seller, or purchases of Mortgage Loans by the Master Servicer or a Sub-Servicer.
The Mortgage Loans in the related Mortgage Loan Group may be prepaid by the
related obligors on the Notes ("Mortgagors") at any time. The actual rate of
principal prepayments on pools of mortgage loans is influenced by a variety of
economic, tax, geographic, demographic, social, legal and other factors and has
fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of mortgage loans at any time because of
specific factors relating to the mortgage loans in the particular pool,
including, among other things, the age of the mortgage loans, the geographic
locations of the properties securing the loans, the extent of the mortgagors'
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and unemployment.
Generally, however, because the Mortgage Loans in the Group I
bear interest at fixed rates, and the rate of prepayment on fixed rate mortgage
loans is sensitive to prevailing interest rates, if prevailing interest rates
were to fall, the Mortgage Loans in Group I may be subject to higher prepayment
rates. Conversely, if prevailing interest rates were to rise, the rate of
prepayments on Mortgage Loans in the Group I would be likely to decrease.
If purchased at other than par, the yield to maturity on a
Class A Certificate will be affected by the rate of the payment of principal of
the Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower than
the rate anticipated by
S-35
<PAGE>
<PAGE>
an investor who purchases a Class A Certificate at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Mortgage Loans in the related Mortgage Loan Group
is faster than the rate anticipated by an investor who purchases a Class A
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
All of the Mortgage Loans in the Group II are adjustable rate
mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage Mortgagors to refinance their adjustable rate
mortgage loans to "lock in" a lower fixed interest rate. However, no assurance
can be given by the Sponsor or the Seller as to the level of prepayments that
the Group II Mortgage Loans will experience.
The final scheduled Payment Date for the A-1 Group I
Certificates is March 18, 2011, for the Class A-2 Group I Certificates is March
18, 2011, for the Class A-3 Group I Certificates is June 18, 2014, for the A-4
Group I Certificates is September 18, 2021, for the Class A-5 Group I
Certificates is June 18, 2027, and for the Class A-6 Group II Certificates is
June 18, 2027. Such dates are the dates on which the related Class A Certificate
Principal Balance would be reduced to zero, assuming, among other things that
with respect to the Class A-1 Group I Certificates, the Class A-2 Group I
Certificates, the Class A-3 Group I Certificates and the Class A-4 Group I
Certificates (i) no Prepayments are received on any of the Mortgage Loans, (ii)
distributions of principal and interest on each of the Mortgage Loans is timely
received, (iii) Class B Interest will be used to make accelerated payments of
principal (i.e. Subordination Increase Amounts) to the Holders of the Class A
Certificates and (iv) the Mortgage Loans in each Mortgage Loan Group have the
applicable characteristics set forth in the "Weighted Average Lives of Class A
Certificates" section herein. The final scheduled Payment Date for the Class A-5
Group I Certificates and the Class A-6 Group II Certificates is the Payment Date
in the calendar month in which the stated maturity of the Mortgage Loan in the
related Mortgage Loan Group having the latest stated maturity occurs. The
weighted average life of the Class A Certificates of each Class is likely to be
shorter than would be the case if payments actually made on the Mortgage Loans
in the related Mortgage Loan Group conformed to the foregoing assumptions, and
the final Payment Dates with respect to the Class A Certificates of each Class
could occur significantly earlier than such final scheduled Payment Dates
because (i) Prepayments are likely to occur, (ii) the Seller may repurchase
Mortgage Loans in the related Mortgage Loan Group in the event of breaches of
representations and warranties and (iii) the Seller may cause, and the Trustee
may, pursuant to the Auction Call, cause a termination of the Trust when the
Pool Principal Balance has declined to ten percent or less of the Original Pool
Principal Balance.
"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 lives of the
Classes of Class A Certificates will be influenced by the rate at which
principal payments (including scheduled payments and prepayments) on the
Mortgage Loans in the related Mortgage Loan Group are made. Principal payments
on Mortgage Loans may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments and liquidations
due to a default or other dispositions of the Mortgage Loans). The weighted
average lives of the Class A Certificates will also be influenced by delays
associated with realizing on defaulted Mortgage Loans in the related Mortgage
Loan Group. The model used in this Prospectus Supplement (the "Home Equity
Prepayment" Model or "HEP") assumes that, (i) with respect to Group I, the pool
of loans prepays in the first month at a constant prepayment rate of 2.3% and
increases by an additional 2.3% each month thereafter until the tenth month,
where it remains at a constant prepayment rate equal to 23% and (ii) with
respect to Group II, the pool of loans prepays in the first month at a constant
prepayment rate of 2.4% and increases by an additional 2.4%, each month
thereafter until the tenth month, where it remains at a constant prepayment rate
equal to 24%, (the "Prepayment Assumption"). HEP represents an assumed
annualized rate of prepayment relative to the then outstanding principal balance
on a pool of new mortgage loans.
S-36
<PAGE>
<PAGE>
Weighted Average Lives of Class A Certificates
For the purpose of the tables below, it is assumed that: (i)
the Mortgage Loans of each Mortgage Loan Group consist of pools of loans with
level-pay and balloon amortization methodologies, Cut-Off Date principal
balances, gross coupon rates, net coupon rates, original and remaining terms to
maturity, and original amortization terms as applicable, as set forth below,
(ii) the Closing Date for the Certificates occurs on May 22, 1996, (iii)
distributions on the Certificates are made on the 18th day of each month
regardless of the day on which the Payment Date actually occurs, commencing in
June 1996 in accordance with the priorities described herein, (iv) the
difference between the gross coupon rate and the net coupon rate is sufficient
to pay Servicer Fees, Trustee fees and Certificate Insurer premiums, (v) the
Mortgage Loans' prepayment rates are a multiple of the Prepayment Assumption,
(vi) prepayments include 30 days' interest thereon, (vii) no optional
termination or mandatory termination is exercised, (viii) the Specified
Subordinated Amount for each Mortgage Loan Group is set initially as specified
in the Insurance Agreement and thereafter changes in accordance with the
provisions of the Insurance Agreement, (ix) no delinquencies in the payment by
Mortgagors of principal and interest on the Mortgage Loans are experienced, (x)
no Mortgage Loan is repurchased for breach of a representation and warranty or
otherwise, (xi) the Coupon Rate for each Mortgage Loan in Group II is adjusted
on its next rate adjustment date (and on subsequent rate adjustment dates, if
necessary) to equal the sum of (a) an assumed level of the applicable index
(5.598%) and (b) the respective gross margin (such sum being subject to the
applicable periodic adjustment cap and maximum interest rate) and (xii) the
Class A-6 Group II Pass-Through Rate remains constant at 5.582%.
S-37
<PAGE>
<PAGE>
GROUP I CHARACTERISTICS
<TABLE>
<CAPTION>
Original Remaining Original
Term to Term to Amortization
Pool Principal Gross Coupon Net Coupon Maturity Maturity Term Amortization
Number Balance Rate Rate (in months) (in months) (in months) Method
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $22,483,205.64 11.073% 10.623% 176 174 176 LEVEL
2 12,133,255.54 10.899 10.439 240 238 240 LEVEL
3 36,881,443.64 10.860 10.410 360 358 360 LEVEL
4 70,761,056.52 11.285 10.835 180 178 360 BALLOON
</TABLE>
GROUP II CHARACTERISTICS
<TABLE>
<CAPTION>
Original Remaining Original
Gross Net Months Maximum Term to Term to Amortization
Pool Principal Coupon Coupon to Rate Interest Maturity Maturity Term Period Amortization
Number Balance Rate Rate Change Margin Rate (in months) (in months) (in months) Cap Method
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,582,120.51 9.358% 8.908% 1 5.937% 15.619% 347 343 347 1.228 LEVEL
2 8,222,664.41 9.583 9.133 2 6.166 15.882 359 356 359 1.289 LEVEL
3 14,564,774.88 9.395 8.945 3 6.032 15.758 355 353 355 1.235 LEVEL
4 10,329,992.66 9.637 9.187 4 6.223 15.762 356 355 356 1.094 LEVEL
5 16,032,044.70 9.334 8.884 5 6.137 15.531 358 358 358 1.080 LEVEL
6 7,579,964.92 9.377 8.927 6 6.472 15.696 357 356 357 1.039 LEVEL
7 7,960,545.01 9.367 8.917 23 5.520 15.032 360 360 360 1.000(1) LEVEL
8 1,264,867.08 9.870 9.420 35 5.944 15.732 360 360 360 1.000(2) LEVEL
9 807,685.49 9.053 8.603 5 6.201 15.158 180 179 360 1.067 BALLOON
</TABLE>
(1) The aggregate principal balance of the Mortgage Loans are
fixed rate loans that, in 2 years from origination, will be
converted into variable rate loans with an interest rate cap
of 3% on the date of such conversion and with a periodic
interest rate cap of 1% thereafter.
(2) The aggregate principal balance of the Mortgage Loans are
fixed rate loans that, in 3 years from origination, will be
converted into variable rate loans with an interest rate cap
of 3% on the date of such conversion and with a periodic
interest rate cap of 1% thereafter.
The model used for the Mortgage Loan Groups in this Prospectus
Supplement is the prepayment assumption (the "Prepayment Assumption") which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of Mortgage Loans for the life of such
Mortgage Loans. A 100% Prepayment Assumption with respect to Group I assumes
constant prepayment rates of 2.3% per annum of the then outstanding principal
balance of such Mortgage Loans in the first month of the life of the Mortgage
Loans and an additional 2.3% in each month thereafter until the tenth month.
Beginning in the tenth month and in each month thereafter during the life of the
Mortgage Loans, 100% Prepayment Assumption assumes a constant prepayment rate of
23% per annum each month. A 100% Prepayment Assumption with respect to Group II
assumes constant prepayment rates of 2.4% per annum of the then outstanding
principal balance of such Mortgage Loans in the first month of the life of the
Mortgage Loans and an additional 2.4% in each month thereafter until the tenth
month. Beginning in the tenth month and in each
S-38
<PAGE>
<PAGE>
month thereafter during the life of the Mortgage Loans, 100% Prepayment
Assumption with respect to the Group II assumes a constant prepayment rate of
24% per annum each month.
With respect to the Mortgage Loan Groups as used in the tables
below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of the
Prepayment Assumption, i.e., no prepayments. Correspondingly, 100% Prepayment
Assumption assumes prepayment rates equal to 100% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Seller believes that no existing statistics of which it is aware provide a
reliable basis for holders of Class A Certificates to predict the amount or the
timing of receipt of prepayments on the related Mortgage Loans.
Since the tables were prepared on the basis of the assumptions
in the above paragraphs, there are discrepancies between the characteristics of
the actual Mortgage Loans and the characteristics of the Mortgage Loans assumed
in preparing the tables. Any such discrepancy may have an effect upon the
percentages of the related Class A Certificate Principal Balances outstanding
and weighted average lives of the Class A Certificates set forth in the tables.
In addition, since the actual Mortgage Loans in the Trust have characteristics
which differ from those assumed in preparing the tables set forth below, the
Class A Principal Distribution Amount may be made earlier or later than as
indicated in the tables.
The following tables set forth the percentages of the initial
principal amount of the Class A Certificates that would be outstanding after
each of the dates shown, based on a rate equal to varying percentages of the
Prepayment Assumption (as defined above).
S-39
<PAGE>
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-1 Group I Certificates Class A-2 Group I Certificates Class A-3 Group I Certificates
Payment Date 0% 13% 18% 21% 23% 28% 0% 13% 18% 21% 23% 28% 0% 13% 18% 21% 23% 28%
-- --- --- --- --- --- -- --- --- --- --- --- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percent 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1997 91.3 67.1 57.7 52.1 48.3 38.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1998 88.7 36.9 18.6 8.0 1.1 0.0 100.0 100.0 100.0 100.0 100.0 76.7 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1999 85.9 10.7 0.0 0.0 0.0 0.0 100.0 100.0 79.9 59.9 47.8 20.3 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 2000 82.8 0.0 0.0 0.0 0.0 0.0 100.0 81.9 41.5 20.9 8.4 0.0 100.0 100.0 100.0 100.0 100.0 55.0
May 18, 2001 79.2 0.0 0.0 0.0 0.0 0.0 100.0 52.4 11.1 0.0 0.0 0.0 100.0 100.0 100.0 77.7 49.1 0.0
May 18, 2002 75.3 0.0 0.0 0.0 0.0 0.0 100.0 28.0 0.0 0.0 0.0 0.0 100.0 100.0 68.1 21.8 0.0 0.0
May 18, 2003 70.9 0.0 0.0 0.0 0.0 0.0 100.0 6.8 0.0 0.0 0.0 0.0 100.0 100.0 21.0 0.0 0.0 0.0
May 18, 2004 66.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 72.9 0.0 0.0 0.0 0.0
May 18, 2005 60.5 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 35.5 0.0 0.0 0.0 0.0
May 18, 2006 54.4 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 3.2 0.0 0.0 0.0 0.0
May 18, 2007 47.5 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2008 39.9 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2009 31.4 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2010 21.9 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2011 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 35.4 0.0 0.0 0.0 0.0 0.0
May 18, 2012 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25.0 0.0 0.0 0.0 0.0 0.0
May 18, 2013 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 13.4 0.0 0.0 0.0 0.0 0.0
May 18, 2014 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 0.0
May 18, 2015 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2016 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2017 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2018 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2019 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2020 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2021 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2022 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2023 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2024 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2025 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2026 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted
Average
Life (Years)(1) 9.5 1.7 1.3 1.1 1.0 0.9 14.8 5.2 3.9 3.3 3.0 2.5 15.5 8.7 6.4 5.5 5.0 4.1
</TABLE>
(1) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the Closing Date to the related Payment Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal
Balance for such Class of Class A Certificate.
S-40
<PAGE>
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-4 Group I Certificates Class A-5 Group I Certificates Class A-6 Group II Certificates
Payment Date 0% 13% 18% 21% 23% 28% 0% 13% 18% 21% 23% 28% 0% 15% 20% 23% 24% 30%
-- --- --- --- --- --- -- --- --- --- --- --- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percent 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1997 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 96.5 86.0 82.4 80.3 79.5 75.2
May 18, 1998 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 96.0 72.2 65.0 60.8 59.4 51.5
May 18, 1999 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 95.5 60.6 51.1 45.9 44.4 35.7
May 18, 2000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 94.9 50.8 40.5 35.2 33.5 24.8
May 18, 2001 100.0 100.0 100.0 100.0 100.0 87.4 100.0 100.0 100.0 100.0 100.0 100.0 94.2 42.7 32.1 26.9 25.3 17.3
May 18, 2002 100.0 100.0 100.0 100.0 94.6 34.0 100.0 100.0 100.0 100.0 100.0 100.0 93.5 36.0 25.5 20.6 19.1 12.0
May 18, 2003 100.0 100.0 100.0 75.3 48.4 0.0 100.0 100.0 100.0 100.0 100.0 93.8 92.7 30.3 20.2 15.7 14.4 8.1
May 18, 2004 100.0 100.0 80.5 36.5 11.7 0.0 100.0 100.0 100.0 100.0 100.0 63.6 91.8 25.5 16.0 11.9 10.7 5.3
May 18, 2005 100.0 100.0 45.5 4.7 0.0 0.0 100.0 100.0 100.0 100.0 82.3 42.2 90.8 21.5 12.7 8.9 7.9 3.5
May 18, 2006 100.0 100.0 15.7 0.0 0.0 0.0 100.0 100.0 100.0 78.7 59.5 27.0 89.6 18.0 9.9 6.6 5.7 2.1
May 18, 2007 100.0 72.2 0.0 0.0 0.0 0.0 100.0 100.0 90.8 58.2 42.2 16.3 88.3 15.1 7.6 4.8 4.1 1.2
May 18, 2008 100.0 45.0 0.0 0.0 0.0 0.0 100.0 100.0 69.9 42.2 29.1 8.8 86.9 12.6 5.8 3.5 2.9 0.6
May 18, 2009 100.0 20.4 0.0 0.0 0.0 0.0 100.0 100.0 52.9 29.8 19.3 3.5 85.2 10.4 4.4 2.4 1.9 0.2
May 18, 2010 100.0 0.0 0.0 0.0 0.0 0.0 100.0 98.9 39.3 20.3 11.8 0.0 83.4 8.6 3.3 1.6 1.2 0.0
May 18, 2011 100.0 0.0 0.0 0.0 0.0 0.0 100.0 25.5 5.9 0.0 0.0 0.0 80.3 6.9 2.4 1.0 0.7 0.0
May 18, 2012 100.0 0.0 0.0 0.0 0.0 0.0 100.0 19.7 2.8 0.0 0.0 0.0 78.0 5.5 1.7 0.6 0.3 0.0
May 18, 2013 100.0 0.0 0.0 0.0 0.0 0.0 100.0 14.7 0.3 0.0 0.0 0.0 75.5 4.4 1.1 0.2 0.0 0.0
May 18, 2014 100.0 0.0 0.0 0.0 0.0 0.0 100.0 10.3 0.0 0.0 0.0 0.0 72.6 3.5 0.7 0.0 0.0 0.0
May 18, 2015 84.4 0.0 0.0 0.0 0.0 0.0 100.0 6.6 0.0 0.0 0.0 0.0 69.4 2.7 0.3 0.0 0.0 0.0
May 18, 2016 68.1 0.0 0.0 0.0 0.0 0.0 100.0 3.5 0.0 0.0 0.0 0.0 65.7 2.0 0.1 0.0 0.0 0.0
May 18, 2017 58.3 0.0 0.0 0.0 0.0 0.0 100.0 1.4 0.0 0.0 0.0 0.0 61.6 1.5 0.0 0.0 0.0 0.0
May 18, 2018 47.5 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 57.1 1.0 0.0 0.0 0.0 0.0
May 18, 2019 34.9 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 51.9 0.6 0.0 0.0 0.0 0.0
May 18, 2020 20.7 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 46.2 0.3 0.0 0.0 0.0 0.0
May 18, 2021 4.8 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 40.1 0.0 0.0 0.0 0.0 0.0
May 18, 2022 0.0 0.0 0.0 0.0 0.0 0.0 86.3 0.0 0.0 0.0 0.0 0.0 33.2 0.0 0.0 0.0 0.0 0.0
May 18, 2023 0.0 0.0 0.0 0.0 0.0 65.3 0.0 0.0 0.0 0.0 0.0 25.5 0.0 0.0 0.0 0.0 0.0
May 18, 2024 0.0 0.0 0.0 0.0 0.0 41.9 0.0 0.0 0.0 0.0 0.0 16.8 0.0 0.0 0.0 0.0 0.0
May 18, 2025 0.0 0.0 0.0 0.0 0.0 15.8 0.0 0.0 0.0 0.0 0.0 6.9 0.0 0.0 0.0 0.0 0.0
May 18, 2026 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted
Average
Life (Years)(1) 21.7 11.9 9.0 7.7 7.0 5.7 27.6 15.5 13.2 11.9 11.0 9.1 21.1 5.7 4.3 3.8 3.6 2.9
</TABLE>
(1) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the Closing Date to the related Payment Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal
Balance for such Class of Class A Certificate.
S-41
<PAGE>
<PAGE>
The Mortgage Loans will not have the characteristics assumed
above, and there can be no assurance that (i) the Mortgage Loans will prepay at
any of the rates shown in the table or at any other particular rate or will
prepay proportionately or (ii) the weighted average lives of the Class A Group I
Certificates of each Class or the weighted average life of the Class A-6 Group
II Certificates will be as calculated above. Because the rate of distributions
of principal of the Class A Certificates will be a result of the actual
amortization (including prepayments) of the Mortgage Loans in the related
Mortgage Loan Group, which will include Mortgage Loans that have remaining terms
to stated maturity shorter or longer than those assumed and Coupon Rates higher
or lower than those assumed, the weighted average lives of the Class A Group I
Certificates and the Class A-6 Group II Certificates will differ from those set
forth above, even if all of the Mortgage Loans in the related Mortgage Loan
Group prepay at the indicated constant prepayment rates.
Payment Delay Feature of Class A-2, A-3, A-4 and A-5 Group I Certificates
The effective yield to the Owners of the Class A-2, A-3, A-4
and A-5 Group I Certificates will be lower than the yield which would otherwise
apply because distributions will not be payable to such Owners until at least
the 18th day of the month in which the related Accrual Period ends, without any
additional distribution of interest or earnings thereon in respect of such
delay.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued in classes (each, a "Class")
pursuant to a Pooling and Servicing Agreement to be dated as of May 1, 1996 (the
"Pooling and Servicing Agreement") among the Sponsor, the Master Servicer, the
Seller and the Trustee. The Trustee will make available for inspection a copy of
the Pooling and Servicing Agreement (without exhibits or schedules) to the
Owners of the Certificates on written request. The following summary describes
certain terms of the Pooling and Servicing Agreement, but does not purport to be
complete and is qualified in its entirety by reference to the Pooling and
Servicing Agreement.
The $58,456,000 aggregate principal amount of Class A-1 Group
I Certificates, Variable Pass-Through Rate (the "Class A-1 Group I
Certificates"), the $38,768,000 aggregate principal amount of Class A-2 Group I
Certificates, 6.925% Pass-Through Rate (the "Class A-2 Group I Certificates"),
the $16,525,000 aggregate principal amount of Class A-3 Group I Certificates,
7.30% Pass-Through Rate (the "Class A-3 Group I Certificates"), the $14,713,000
aggregate principal amount of Class A-4 Group I Certificates, 7.625%
Pass-Through Rate (the "Class A-4 Group I Certificates") and the $13,796,000
aggregate principal amount of Class A-5 Group I Certificates, 7.925%
Pass-Through Rate (the "Class A-5 Group I Certificates", and, collectively with
the Class A-1 Group I Certificates, the Class A-2 Group I Certificates, the
Class A-3 Group I Certificates, Class A-4 Group I Certificates, the "Class A
Group I Certificates"), and the $68,344,000 aggregate principal amount of Class
A-6 Group II Certificates (the "Class A-6 Group II Certificates") are senior
certificates as described herein (together, the "Class A Certificates"). The
Class B Certificates are not being offered hereby. Each Class of Class A
Certificates will be issued in original principal amounts of $1,000 and integral
multiples thereof, except that one certificate for each class of Class A
Certificates may be issued in a different amount. 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
or its affiliates. The Class A Certificates, the Class B Certificates and the
Residual Certificates are collectively referred to as the "Certificates".
Payment Dates and Distributions
On the 18th day of each month, or, if such day is not a
business day then the next succeeding business day, commencing June 18, 1996
(each such day being a "Payment Date"), the Trustee will be required to
distribute to the Owners of record of the Certificates as of the related Record
Date, such Owners' Percentage Interest in the amounts required to be distributed
to the Owners of each Class of Certificates on
S-42
<PAGE>
<PAGE>
such Payment Date. For so long as any Class A Certificate is in book-entry form
with DTC, the only "Owner" of such Class A Certificates will be Cede. See " --
Book-Entry Registration of the Class A Certificates" herein.
Each Owner of record of a Certificate as of each Record Date
will be entitled to receive such Owner's Percentage Interest in the amounts due
on the related Payment Date to the Owners of the related Class of Certificates.
The "Percentage Interest" of each Class A Certificate as of any date of
determination will be equal to the percentage obtained by dividing the principal
balance of such Class A Certificate as of the Cut-Off Date by the related Class
A Certificate Principal Balance as of the Cut-Off Date.
Flow of Funds and Distributions on the Class A Certificates
The Principal and Interest Account. The Pooling and Servicing
Agreement requires the Master Servicer to establish a custodial account (the
"Principal and Interest Account") on behalf of the Trustee at a depository
institution meeting the requirements set forth in the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement requires the Master Servicer to
deposit all collections (other than amounts escrowed for taxes and insurance)
related to the Mortgage Loans to the Principal and Interest Account on a daily
basis (but no later than the first business day after receipt). All funds in the
Principal and Interest Account can only be invested in Eligible Investments.
Investment earnings on funds held in the Principal and Interest Account are for
the account of the Master Servicer, and the Master Servicer will be responsible
for any losses.
The Master Servicer is required pursuant to the Pooling and
Servicing Agreement on the thirteenth day or, if such day is not a business day,
on the next following business day (the "Remittance Date") of each month to
remit to the Trustee the following amounts with respect to the Mortgage Loans in
each Mortgage Loan Group: (i) an amount equal to the sum, without duplication,
of (x) the aggregate portions of the interest payments (whether or not
collected) becoming due on the Mortgage Loans during the immediately preceding
Remittance Period, and (y) any Compensating Interest calculated at the Coupon
Rate on the related Mortgage Loan, less the Servicing Fee with respect to the
Mortgage Loans serviced by the Master Servicer due with respect to such Mortgage
Loans with respect to the immediately preceding Remittance Period (the amount
described in this clause (i) for the Mortgage Loans in the Group I being the
"Group I Interest Remittance Amount" and the amount in this clause (i) for the
Mortgage Loans in the Group II being the "Group II Interest Remittance Amount"),
(ii) an amount equal to the sum, without duplication, of (x) the aggregate
portions of the scheduled principal payments, but only to the extent collected,
on the Mortgage Loans during the immediately preceding Remittance Period, (y)
any Prepayments, Insurance Proceeds and Net Liquidation Proceeds (but only to
the extent that such Net Liquidation Proceeds do not exceed the principal
balance of the related Mortgage Loan) and Released Mortgaged Property Proceeds,
in each case only to the extent collected on the Mortgage Loans during the
preceding Remittance Period and (z) all Loan Purchase Prices and Substitution
Amounts with respect to the related Mortgage Loans at such Remittance Date paid
or received by the Master Servicer for deposit to the Principal and Interest
Account (the amount described in this clause (ii) for the Mortgage Loans in the
Group I being the "Group I Principal Remittance Amount" and the amount described
in this clause (ii) for the Mortgage Loans in Group II being the "Group II
Principal Remittance Amount"). For any Remittance Date the Group I Interest
Remittance Amount and the Group I Principal Remittance Amount are together
referred to as the "Group I Monthly Remittance" for such Remittance Date, and
the Group II Interest Remittance Amount and the Group II Principal Remittance
Amount are together referred to as the "Group II Monthly Remittance" for such
Remittance Date. The sum of the Group I Interest Remittance Amount and the Group
II Interest Remittance Amount is equal to the "Interest Remittance Amount". The
sum of Group I Principal Remittance Amount and the Group II Principal Remittance
Amount is equal to the "Principal Remittance Amount". For any Remittance Date
the Interest Remittance Amount and the Principal Remittance Amount are together
referred to as the "Monthly Remittance" for such Remittance Date.
A "Remittance Period" is the period commencing at the opening
of business on the second day of each month and ending at the close of business
on the first day of the following month.
S-43
<PAGE>
<PAGE>
Delinquency Advances. The Pooling and Servicing Agreement
requires that if, on any Remittance Date, the amount then on deposit in the
Principal and Interest Account from Mortgage Loan collections and relating to
interest is less than the Interest Remittance Amount applicable to such
Remittance Period, then the Master Servicer is required to deposit into the
Principal and Interest Account a sufficient amount of its own funds
("Delinquency Advances") to make such amount equal to such Interest Remittance
Amount. The Master Servicer is not required to make a Delinquency Advance if it
believes that such Delinquency Advance will not be recoverable from the related
Mortgage Loan. The Trustee, as successor Master Servicer, will not be required
to make a Delinquency Advance if it believes that such Delinquency Advance will
not be recoverable from the related Mortgage Loan.
The Certificate Account. The Pooling and Servicing Agreement
provides that the Trustee shall create and maintain one or more accounts for the
purpose of funding distributions to the Owners (collectively, the "Certificate
Account"). The Pooling and Servicing Agreement provides that the Trustee shall
deposit to the Certificate Account (i) monthly, the Monthly Remittance received
from the Master Servicer on the related Remittance Date and (ii) all Insured
Payments received from the Certificate Insurer.
On the second business day prior to each Payment Date, in
preparation of making distributions on such Payment Date, if the Trustee
determines with respect to either Mortgage Loan Group that the Total Available
Funds to be on deposit in the Certificate Account with respect to such Mortgage
Loan Group will be insufficient to pay the full amount of the related Insured
Distribution Amount and the fees of the Trustee and Certificate Insurer for such
Payment Date, the Trustee will then be required to make a draw on the related
Certificate Insurance Policy for the deficiency (the amount of any such
deficiency being the amount of the "Insured Payment" required to be made) and to
deposit the amount received with respect to such draw into the Certificate
Account.
The Pooling and Servicing Agreement also establishes an
account, the "Supplemental Interest Account," which is held in trust by the
Trustee, but does not constitute a part of the Trust. The Supplemental Interest
Account will hold certain amounts and other property relating to the funding of
Supplemental Interest Amounts, if any, to the Owners of the Class A-6 Group II
Certificates. "Supplemental Interest Amounts" are payments due on any Payment
Date which result from any shortfall between Class A-6 Group II Certificate
interest calculated at the Class A-6 Formula Pass-Through Rate, and such
interest calculated at the Class A-6 Available Funds Pass-Through Rate.
Distributions on the Class A Certificates. On each Payment
Date, the Trustee shall be required to make the following disbursements and
transfers from the Certificate Account in the following order of priority, and
each such transfer and disbursement shall be treated as having occurred only
after all preceding transfers and disbursements have occurred:
(i) first, the Trustee shall pay first, to
itself the Trustee's fees then due;
(ii) second, the Trustee shall pay to the
Certificate Insurer the premium amount
then due;
(iii) third, the Trustee shall pay, pari passu,
to the Owners of each of the Class A
Certificates, the related Class A
Distribution Amount for such Class and
such Payment Date;
(iv) fourth, the Trustee shall distribute any
remaining amount in the Certificate
Account to the Owners of the related Class
B Certificates and as otherwise required
by the Pooling and Servicing Agreement.
The Class A Group I Certificates have been tranched into five
"sequential pay" Classes, such that the Class A-5 Group I Certificates are
entitled to receive no principal distributions until the Class A-4 Certificate
Principal Balance has been reduced to zero, the Class A-4 Group I Certificates
are entitled to receive no principal distributions until the Class A-3
Certificate Principal Balance has been reduced to zero, the Class A-3
S-44
<PAGE>
<PAGE>
Group I Certificates are entitled to receive no principal distributions until
the Class A-2 Certificate Principal Balance has been reduced to zero, and the
Class A-2 Group I Certificates are entitled to receive no principal
distributions until the Class A-1 Certificate Principal Balance has been reduced
to zero.
The Pooling and Servicing Agreement provides that to the
extent the Certificate Insurer makes Insured Payments, the Certificate Insurer
will be subrogated to the rights of the Owners of the related Class A
Certificates with respect to such Insured Payments and shall be deemed, to the
extent of the payments so made, to be a registered Owner of Class A Certificates
and shall be entitled to reimbursement for such Insured Payments, as provided in
the Pooling and Servicing Agreement.
Calculation of LIBOR
On the second business day preceding each Payment Date or, in
the case of the first Payment Date, on the second business day preceding the
Closing Date (each such date, an "Interest Determination Date"), the Trustee
will determine the London interbank offered rate for one-month U.S. dollar
deposits ("LIBOR") for the next Accrual Period for the Class A-1 Group I
Certificates and Class A-6 Group II Certificates on the basis of the offered
rates of the Reference Banks for one-month U.S. dollar deposits, as such rates
appear on the Reuters Screen LIBO Page, as of 11:00 a.m. (London time) on such
Interest Determination Date. As used in this section, "business day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Reuters Screen LIBO Page" means the display designated as
page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar deposits
in the international Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters Screen LIBO Page
on the Interest Determination Date in question, (iii) which have been designated
as such by the Trustee and (iv) not controlling, controlled by, or be under
common control with, the Sponsor, the Seller or the Trustee.
On each Interest Determination Date, LIBOR for the related
Accrual Period for the Class A-6 Group II Certificates will be established by
the Trustee as follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, LIBOR for the related Accrual
Period for the Class A-1 Group I and the Class A-6 Group II Certificates shall
be the arithmetic mean of such offered quotations (rounded upwards if necessary
to the nearest whole multiple of 1/16%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, LIBOR for the related Accrual
Period for the Class A-1 Group I and the Class A-6 Group II Certificates shall
be the higher of (x) LIBOR as determined on the previous Interest Determination
Date and (y) the Reserve Interest Rate. The "Reserve Interest Rate" shall be the
rate per annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 1/16%) of the
one-month U.S. dollar lending rates which New York City banks selected by the
Trustee are quoting on the relevant Interest Determination Date to the principal
London offices of leading banks in the London interbank market or, in the event
that the Trustee can determine no such arithmetic mean, (ii) the lowest
one-month U.S. dollar lending rate which New York City banks selected by the
Trustee are quoting on such Interest Determination Date to leading European
banks.
The establishment of LIBOR on each Interest Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Class A-1 Group I and the Class A-6 Group II Certificates for the related
Accrual Period shall (in the absence of manifest error) be final and binding.
Each such rate of interest may be obtained by telephoning the Trustee at (612)
667-8085.
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Subordination of Class B Certificates
The Class B Certificates are subordinated to the Class A
Certificates. Such subordination is intended to enhance the likelihood that the
Owners of the Class A Certificates will receive full and timely receipt of all
amounts due to them.
The Pooling and Servicing Agreement requires that the excess
of the aggregate principal balance of the Mortgage Loans in Group I over the
Class A Certificate Principal Balance for all Classes of the Class A Group I
Certificates be maintained at a certain amount (which amount may vary over time)
over the life of the transaction, which amount is specified by the Certificate
Insurer. The actual amount of this excess is the "Subordinated Amount" for Group
I, and the specified target amount of the excess at a point in time is the
"Specified Subordinated Amount" for Group I.
Similarly, the Pooling and Servicing Agreement requires that
the excess of Group II's Pool Principal Balance over the Class A Certificate
Principal Balance for the Class A-6 Group II Certificates be maintained at a
certain amount (which amount may vary over time) over the life of the
transaction, which amount is specified by the Certificate Insurer. The actual
amount of this excess is the "Subordinated Amount" for Group II, and the
specified target amount of the excess at a point in time is the "Specified
Subordinated Amount" for Group II.
The Certificate Insurer may permit the reduction of the
Specified Subordinated Amount without the consent of, or the giving of notice
to, the Owners of the related Class A Certificates; provided, that the
Certificate Insurer is not then in default; and provided, further, that such
reduction would not change materially the weighted average life of the related
Class A Certificates or the current rating thereof.
The Pooling and Servicing Agreement generally provides that
the Owners of the Class B Certificates will only receive distributions of
principal to the extent that the actual related Subordinated Amount exceeds the
then related Specified Subordinated Amount; i.e., to the extent that there is a
level of subordination greater than that required by the Certificate Insurer, as
will be the case when the Specified Subordinated Amount decreases or "steps
down" in accordance with its terms. Consequently, unless there exists on any
particular Payment Date such related excess subordination, the Owners of the
related Class A Certificates will be entitled to receive 100% of the principal
to be distributed on such Payment Date with respect to the related Mortgage Loan
Group.
The Class B Certificates are also entitled to receive all
excess interest available on any Payment Date for the related Mortgage Loan
Group, i.e., the interest remitted by the Master Servicer to the Trustee
relating to the prior Remittance Period (which interest remittance is itself net
of the aggregate monthly Servicing Fees) less the interest due and payable to
the Owners of the related Class A Certificates, together with the fees and
premium due and payable to the Trustee and the Certificate Insurer (such
interest to which the related Class B Certificates are entitled, the "Class B
Interest" for the related Mortgage Loan Group).
On each Payment Date the Class B Interest will be used, to the
extent available, to fund any shortfalls in amounts due to the Owners of the
Class A Certificates on such Payment Date. In addition, to the extent that the
related Specified Subordinated Amount increases or "steps up" due to the effect
of the triggers set forth in the definition thereof, or if, due to Realized
Losses, the related Subordinated Amount has been reduced below the related
Specified Subordinated Amount, the Pooling and Servicing Agreement requires that
Class B Interest be used to make payments of principal to the Owners of the
Class A Group I Certificates and the Class A-6 Group II Certificates for the
purposes of accelerating the amortization thereof relative to the amortization
of the Mortgage Loans in the related Mortgage Loan Group. Such accelerated
payments of principal will be made to the extent necessary to increase the
related Subordinated Amount to its then-applicable Specified Subordinated
Amount. To the extent that, on any Payment Date, the actual related Subordinated
Amount is less than the related Specified Subordinated Amount, a "Subordination
Deficiency" will exist. The Insurance Agreement defines a "Group I Subordination
Deficit" with respect to a Payment Date to be the amount, if any,
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by which (x) the aggregate Certificate Principal Balance of the Class A Group I
Certificates as of such Payment Date, and following the making of all
distributions to be made on such Payment Date (except for any payment to be made
as to principal from proceeds of the related Certificate Insurance Policy),
exceeds (y) an amount equal to the aggregate principal balances of the Mortgage
Loans in the Group I as of the close of business on the last day of the
preceding Remittance Period; a "Group II Subordination Deficit" with respect to
a Payment Date is the amount, if any, by which (x) the aggregate Certificate
Principal Balance of the Class A-6 Group II Certificates as of such Payment
Date, and following the making of all distributions to be made on such Payment
Date (except for any payment to be made as to principal from proceeds of the
related Certificate Insurance Policy) exceeds (y) the aggregate principal
balances of the Mortgage Loans in the Group II as of the close of business on
the last day of the preceding Remittance Period.
"Subordination Increase Amount" means, as of any Payment Date
and with respect to the related Mortgage Loan Group, the lesser of (i) the
Subordination Deficiency applicable to such Mortgage Loan Group as of such
Payment Date and (ii) the actual amount available to pay the Class B Interest on
such Payment Date.
"Subordination Reduction Amount" means, with respect to any
Payment Date and with respect to the related Mortgage Loan Group, an amount
equal to the lesser of (x) the excess of the actual Subordinated Amount
applicable to such Mortgage Loan Group over the Specified Subordinated Amount
for such Payment Date and (y) the amount described in clause (b)(i)(x) of the
definition of Class A Principal Distribution Amount for such Payment Date.
Overcollateralization and the Certificate Insurance Policy.
The Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the related Certificate Insurance Policy not later than
the second business day prior to any Payment Date as to which the Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Owners of
the Class A Group I Certificates or Class A-6 Group II Certificates, as the case
may be, on such Payment Date. The Certificate Insurance Policy is thus similar
to the subordination provisions described above insofar as the Certificate
Insurance Policy guarantees ultimate, rather than current, payment of the
amounts of any Realized Losses to the Holders of the related Class A Group I
Certificates and Class A-6 Group II Certificates. Investors in the Class A Group
I Certificates of each Class and the Class A-6 Group II Certificates should
realize that, under extreme loss or delinquency scenarios applicable to the
related Mortgage Loan Pool, they may temporarily receive no distributions of
principal.
Crosscollateralization Provisions
The Pooling and Servicing Agreement further provides that the
Class B Interest generated by the Group I may be used to fund certain shortfalls
with respect to the Group II and vice versa, provided that such Class B Interest
must first be applied to fund certain required payments with respect to the
related Mortgage Loan Group. Specifically, the Class B Interest generated by one
Mortgage Loan Group is to be applied in the following order of priority: (i)
first, to fund a Subordination Increase Amount payment in response to a
Subordination Deficit in the related Mortgage Loan Group; (ii) second, to fund a
Subordination Increase Amount payment in response to a Subordination Deficit or
interest shortfall in the other Mortgage Loan Group; (iii) third, to fund a
Subordination Increase Amount payment in response to a Subordination Deficiency
in the related Mortgage Loan Group; and (iv) fourth, to fund a Subordination
Increase Amount payment in response to a Subordination Deficiency with respect
to the other Mortgage Loan Group.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination
provisions and by the Certificate Insurance Policy is protection for credit risk
and not for prepayment risk. The subordination provisions may not be adjusted,
nor may a claim be made under the Certificate Insurance Policy to guarantee or
insure that any particular rate of prepayment is experienced by either of the
two Mortgage Loan Groups.
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Class A Certificate Distributions and Insured Payments
No later than the second business day prior to each Payment
Date the Trustee will be required to determine the amounts to be on deposit in
the Certificate Account on such Payment Date and following the application of
the cross-collateralization provisions described above with respect to each of
the two Mortgage Loan Groups, such amounts being the "Group I Total Available
Funds", and the "Group II Total Available Funds", respectively, or,
collectively, the "Total Available Funds". If the aggregate Class A Insured
Distribution Amount related to the Class A Group I Certificates for any Payment
Date exceeds the Group I Total Available Funds for such Payment Date, the
Trustee will be required to draw the amount of such insufficiency from the
Certificate Insurer under the Certificate Insurance Policy. Similarly, if on any
Payment Date the Class A Insured Distribution Amount related to the Class A-6
Group II Certificates exceeds the Group II Total Available Funds for such
Payment Date, the Trustee will be required to draw the amount of such
insufficiency from the Certificate Insurer under the Certificate Insurance
Policy. The Trustee will be required to deposit to the Certificate Account the
amount of any Insured Payment made by the Certificate Insurer. The Pooling and
Servicing Agreement provides that amounts which cannot be distributed to the
Owners of the Certificates as a result of final, non-appealable proceedings
under the United States Bankruptcy Code or similar insolvency laws will not be
considered in determining the amount of Total Available Funds with respect to
any Payment Date.
Book-Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry certificates (the
"Book-Entry Certificates"). The Beneficial Certificate Owners may elect to hold
their Class A 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
Class A Certificates which in the aggregate equal the principal balance of such
Class A 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 depositories which in turn
will hold such positions in customers' securities accounts in the depositories'
names on the books of DTC. Citibank will act as depository for CEDEL and Morgan
will act as depository for Euroclear (in such capacities, individually the
"Relevant Depository" and collectively the "European Depositories"). 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 (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Owner" of such Class A Certificates will be Cede, as nominee of DTC. Beneficial
Certificate Owners will not be Owners as that term is used in the Pooling and
Servicing 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, or, if the Beneficial Certificate Owner's Financial Intermediary
is not a DTC Participant, then on the records of CEDEL or Euroclear, as
appropriate).
Beneficial Certificate Owners will receive all distributions
of principal of, and interest on, the Class A Certificates from the Trustee
through DTC and DTC Participants. While such Class A Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to such Class A Certificates and is required
to receive and transmit distributions of principal of, and interest on, such
Class A Certificates. Participants and indirect
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participants with whom Beneficial Certificate Owners have accounts with respect
to Class A Certificates are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective 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 Class A
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 Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing 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 be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depository; 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 Depository 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 Depositories.
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.
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CEDEL is incorporated under the laws of Luxembourg as a
professional depository. 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 depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and 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
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 Payment 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.
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Distributions with respect to Class A 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 Depository. 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 Master
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 and Servicing 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 and
Servicing 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 Depository to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive 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 Class A 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.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the Trustee will be required to notify all
Beneficial Certificate Owners of the occurrence of such event and the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate or certificates representing the Book-Entry Certificates
and instructions for re-registration, the Trustee will issue Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Owners under the Pooling and Servicing Agreement.
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 Activities
The Trust has not and will not: (i) issue securities (except
for the Certificates); (ii) borrow money; (iii) make loans; (iv) invest in
securities for the purpose of exercising control; (v) underwrite securities;
(vi) except as provided in the Pooling and Servicing Agreement, engage in the
purchase and sale (or turnover) of investments; (vii) offer securities (except
the Certificates) in exchange for property; or (viii) repurchase or
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otherwise reacquire its securities. See "Reports to the Holders" for information
regarding reports to the Certificateholders.
General Servicing Procedures
Acting directly or through one or more sub-servicers, AFL (the
"Master Servicer") is required to service and administer the Mortgage Loans in
accordance with the Pooling and Servicing Agreement.
The Master Servicer in its own name or in the name of a
sub-servicer is authorized and empowered pursuant to the Pooling and Servicing
Agreement (i) to execute and deliver 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
Properties, (ii) to institute foreclosure proceedings or obtain a deed in lieu
of foreclosure so as to effect ownership of any Property in its own name on
behalf of the Trustee, and (iii) to hold title in the name of the Trust to any
Property upon such foreclosure or deed in lieu of foreclosure on behalf of the
Trustee; provided, however, that to the extent any instrument described in
clause (i) would be delivered by the Master Servicer outside of its ordinary
procedures for mortgage loans held for its own account, the Master Servicer is
required, prior to executing and delivering such instrument, to obtain the prior
written consent of the Certificate Insurer.
The Master Servicer, in its own name or in the name of a
Sub-Servicer, has the right to approve requests of Mortgagors for consent to (i)
partial releases of Mortgages, (ii) alterations, and (iii) removal, demolition
or division of Properties subject to Mortgages. The Pooling and Servicing
Agreement provides that no such request shall be approved by the Master Servicer
unless: (i) (x) the provisions of the related Note and Mortgage have been
complied with, (y) the Combined Loan-to-Value Ratio (which may, for this
purpose, be determined at the time of any such action in a manner reasonably
acceptable to the Certificate Insurer) after any release does not exceed the
Combined Loan-to-Value Ratio set forth for such Mortgage Loan in the Schedule of
Mortgage Loans, and (z) the lien priority of the related Mortgage is not
affected; or (ii) the Certificate Insurer shall have approved the granting of
such request.
On the tenth day of each month (or the immediately following
business day if the tenth day does not fall on a business day), the Master
Servicer or Sub-Servicer shall send to the Trustee a report detailing the
payments on the Mortgage Loans serviced by it in each of the two Mortgage Loan
Groups during the prior Remittance Period.
Collection of Certain Mortgage Loan Payments
The Master Servicer is required generally to service the
Mortgage Loan Pool in a prudent manner consistent with its general servicing
standards for similar mortgage loans and to make reasonable efforts to collect
all payments called for under the terms and provisions of the Mortgage Loans,
and shall, to the extent such procedures shall be consistent with the provisions
of the Pooling and Servicing Agreement, follow collection procedures for all
Mortgage Loans at least as rigorous as those the Master Servicer would take in
servicing loans and in collecting payments thereunder for its own account.
Consistent with the foregoing, the Master Servicer, in its own
name or in the name of a Sub-Servicer, may (i) in its discretion waive or permit
to be waived any late payment charge or assumption fee or any other fee or
charge which the Master Servicer would be entitled to retain as servicing
compensation, (ii) extend the due date for payments due on a Note for a period
(with respect to each payment as to which the due date is extended) not greater
than 125 days after the initially scheduled due date for such payment, and (iii)
amend any Note to extend the maturity thereof, provided that no maturity shall
be extended beyond the maturity date of the Mortgage Loan with the latest
maturity date and that no more than 1.0% of the Original Pool Balance of the
Mortgage Loans shall have a maturity date which has been extended beyond the
maturity date thereof at the Cut-Off Date; provided that such action does not
violate applicable REMIC provisions. In the event the Master Servicer, in its
own name or in the name of a Sub-Servicer, consents to the deferment of the due
dates
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for payments due on a Note, the Master Servicer or Sub-Servicer is nonetheless
required to make payment of any required Delinquency Advance with respect to the
payments so extended to the same extent as if such installment were due, owing
and delinquent and had not been deferred.
Generally the Class A Certificate Owners would prefer that
"due-on-sale" clauses be waived in the event of a sale of the underlying
Mortgaged Property, that extensions and accommodations be made with delinquent
Mortgagors, and that liquidations of Mortgage Loans be deferred, since upon
prepayment due to sale or upon liquidation such Owners will receive a payment of
principal in connection with such prepayment or liquidation. If attractive
re-investment opportunities are available at the time, Class A Certificate
Owners may prefer that "due-on-sale" clauses not be waived and that no such
extensions, accommodations or deferments be made, thus hastening the return of
principal to such Owners.
Owners do not have the right under the Pooling and Servicing
Agreement to make decisions with respect to Mortgagor accounts. Such decisions
are in the nature of mortgage servicing and the Master Servicer generally has
the right to make such decisions without the requirement of consent of the
Owners, the Trustee or the Certificate Insurer. The Master Servicer will
generally be required under the Pooling and Servicing Agreement to enforce
"due-on-sale" clauses, and will make decisions with respect to liquidations in
accordance with the Pooling and Servicing Agreement.
Under certain limited circumstances the Pooling and Servicing
Agreement may require the Master Servicer to obtain the consent of the
Certificate Insurer before taking certain actions with respect to defaulted
Mortgage Loans and in connection with the waiver of "due-on-sale" clauses. Since
the Certificate Insurer's exposure increases, to the extent of interest accrued,
the longer the liquidation process, it is likely to be the case that the
Certificate Insurer will favor quick liquidations in those situations in which
its consent is required. Similarly, the Certificate Insurer would favor the
enforcement of a "due-on-sale" clause, since a prepayment in the event of a sale
also reduces its exposure by limiting the accrual of interest.
Sub-Servicing Agreements Between the Master Servicer and Sub-Servicers
The Master Servicer has entered into sub-servicing agreements
with EDS and LSI for the servicing and administration of Mortgage Loans. The
Master Servicer will not be relieved of its obligations under the Pooling and
Servicing Agreement notwithstanding any sub-servicing agreement, and the Master
Servicer shall be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
Principal and Interest Account
The Master Servicer, in its own name or in the name of a
Sub-Servicer, is required to deposit to the Principal and Interest Account all
collections on the Mortgage Loans, certain proceeds received by the Master
Servicer in connection with the termination of the Trust, Loan Purchase Prices
and Substitution Amounts received or paid by the Master Servicer, insurance and
condemnation proceeds received by the Master Servicer, other amounts related to
the Mortgage Loans received by the Master Servicer, including any income from
REO Properties (net of Servicing Advances made with respect to such REO
Properties), and Delinquency Advances together with any amounts which are
reimbursable from the Principal and Interest Account, but net of the Servicing
Fee with respect to each Mortgage Loan serviced by the Master Servicer and other
servicing compensation to the Master Servicer as permitted by the Pooling and
Servicing Agreement.
The Master Servicer or Sub-Servicer may make withdrawals from
the Principal and Interest Account only for the following purposes: (a) to
effect the timely remittance to the Trustee of the Monthly Remittance due on the
Remittance Date; (b) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account; (c) to withdraw amounts that have been
deposited to the Principal and Interest Account in error; (d) to pay certain
miscellaneous amounts over to the Seller and (e) to clear and terminate the
Principal and Interest Account.
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On each Remittance Date the Master Servicer and any
Sub-Servicer is required to remit the Monthly Remittance amount inclusive of all
Delinquency Advances and Compensating Interest to the Trustee by wire transfer,
or otherwise make funds available in immediately available funds.
Servicing Advances
The Pooling and Servicing Agreement obligates the Master
Servicer to pay all reasonable and customary "out-of-pocket" costs and expenses
(including reasonable legal fees) incurred in the performance of its servicing
obligations including, but not limited to, the cost of (i) preservation
expenses, (ii) any enforcement or judicial proceedings, including foreclosures,
(iii) the management and liquidation of REO Property (including, without
limitation, realtors' commissions) and (iv) advances made for taxes, insurance
and other charges against a Property. Each such expenditure will constitute a
"Servicing Advance". The Master Servicer may recover Servicing Advances from the
Mortgagors 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. In no case may the Master Servicer recover Servicing Advances from the
principal and interest payments on any Mortgage Loan or from any amounts
relating to any other Mortgage Loan. The Master Servicer is not required to make
a Servicing Advance if it believes that such Servicing Advance will not be
recoverable from the related Mortgage Loan.
Compensating Interest
A full month's interest on each Mortgage Loan, calculated at a
rate equal to such Mortgage Loan's Coupon Rate less the Servicing Fee is due to
the Trustee on the outstanding principal balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment of a Mortgage Loan occurs
during any calendar month, any difference between the interest collected from
the Mortgagor during such calendar month and the full month's interest at such
rate ("Compensating Interest") that is due is required to be deposited by the
Master Servicer to the Principal and Interest Account (without any right of
reimbursement therefor) and shall be included in the Monthly Remittance and made
available to the Trustee on the next succeeding Remittance Date.
Maintenance of Insurance
The Master Servicer is required to cause to be maintained with
respect to each Mortgage Loan that it services and related Property a hazard
insurance policy with a carrier licensed in the state in which such Property is
located that provides for fire and extended coverage, and which provides for a
recovery by the Trust of insurance proceeds relating to such Mortgage Loan in an
amount not less than the least of (i) the outstanding principal balance of the
Mortgage Loan (together in the case of a Junior Mortgage, with the outstanding
principal balance of the senior lien), or (ii) the minimum amount required to
compensate for loss or damage on a replacement cost basis, or (iii) the full
insurable value of the premises.
If a Mortgage Loan at the time of origination 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 Master
Servicer, in its own name or in the name of a Sub-Servicer, will 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 Master Servicer or a
Sub-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, or (ii) the minimum amount required to compensate
for damage or loss on a replacement cost basis, or (iii) the maximum amount of
insurance that is available under the Flood Disaster Protection Act of 1973, as
amended.
In the event that the Master Servicer or a Sub-Servicer
obtains and maintains a blanket policy insuring against fire with extended
coverage and against flood hazards on all of the Mortgage Loans that it
services,
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then, to the extent such policy names the Master Servicer or a Sub-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
Master 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 Master 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 Master 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.
Pursuant to the Pooling and Servicing Agreement, the Master
Servicer will be required to indemnify the Trust out of its own funds for any
loss to the Trust resulting from the Master Servicer's failure to maintain any
required insurance.
Due-on-Sale Clauses
When a Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer or a Sub- Servicer, to the extent it has
knowledge of such conveyance or prospective conveyance, is required 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 Master Servicer will not be required to exercise any such
right if the "due-on-sale" clause, in the reasonable belief of the Master
Servicer, is not enforceable under applicable law; and provided further, that
the Master Servicer may refrain from exercising any such right if the
Certificate Insurer gives its prior consent to such non-enforcement.
Realization Upon Defaulted Mortgage Loans
The Master Servicer, in its own name or in the name of a
Sub-Servicer, is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Trust, on behalf of the Trustee, of Properties
relating to defaulted Mortgage Loans that it services as to which no
satisfactory arrangements can be made for collection of delinquent payments and
which the Master Servicer has not purchased pursuant to its purchase option
described below, unless the Master Servicer reasonably believes that Net
Liquidation Proceeds with respect to such Mortgage Loan would not be increased
as a result of such foreclosure or other action, in which case such Mortgage
Loan will be charged off and will become a Liquidated Mortgage Loan. In
connection with such foreclosure or other conversion, the Master Servicer is
required to exercise or use foreclosure procedures with the same degree of care
and skill as it would exercise or use under the circumstances in the conduct of
its own affairs. Any amounts advanced in connection with such foreclosure or
other action shall constitute "Servicing Advances".
The Master Servicer, in its own name or in the name of a
Sub-Servicer, is required to sell any REO Property within 23 months of its
acquisition by the Trustee, unless the Master Servicer obtains for the Trustee
an opinion of counsel experienced in federal income tax matters, addressed to
the Trustee and the Master Servicer, to the effect that the holding by the Trust
of such REO Property for a greater specified period will not result in the
imposition of taxes on "prohibited transactions" of the Trust as defined in
Section 860F of the Code or cause the Trust to fail to qualify as a REMIC.
In accordance with the Pooling and Servicing Agreement, if the
Master Servicer has actual knowledge that a Property which it is contemplating
acquiring in foreclosure or by deed in lieu of foreclosure contains
environmental or hazardous waste risks known to it, the Master Servicer shall
notify the Certificate Insurer and the Trustee prior to acquiring the Property.
The Master Servicer is not permitted to take any action with respect to such a
Property without the prior written approval of the Certificate Insurer.
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The Master Servicer is required to determine, with respect to
each defaulted Mortgage Loan that it services, when it has recovered, whether
through trustee's sale, foreclosure sale or otherwise, all amounts, if any, it
expects to recover from or on account of such defaulted Mortgage Loan, whereupon
such Mortgage Loan shall become a "Liquidated Mortgage Loan".
Servicing Compensation
As compensation for its servicing activities under the Pooling
and Servicing Agreement, the Master Servicer shall be entitled to retain the
amount of the Servicing Fee with respect to each Mortgage Loan that it services.
Additional servicing compensation in the form of release fees, bad check
charges, assumption fees, late payment charges, and any other servicing-related
fees, and similar items may, to the extent collected from Mortgagors, be
retained by the Master Servicer.
Annual Statement as to Compliance
The Master Servicer is required to deliver, on its own behalf,
to the Trustee, the Seller and the Certificate Insurer, on or before the last
day of April of each year, commencing in 1997, an Officer's Certificate stating,
as to each signer thereof, that (i) a review of the activities of the Master
Servicer during such preceding calendar year and of performance under the
Pooling and Servicing Agreement has been made under such officer's supervision,
and (ii) to the best of such officer's knowledge, based on such review, the
Master Servicer has fulfilled all its obligations under the Pooling and
Servicing Agreement for such year, or, if there has been a default in the
fulfillment of all such obligations, specifying each such default known to such
officer and the nature and status thereof including the steps being taken by the
Master Servicer to remedy such default.
Annual Independent Certified Public Accountants' Reports
On or before the last day of April of each year, commencing in
1997, the Master Servicer is required to cause to be delivered, on its own
behalf, to the Trustee and the Certificate Insurer a letter or letters of a firm
of independent, nationally recognized certified public accountants reasonably
acceptable to the Certificate Insurer stating that such firm has, with respect
to the Master 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 stating such
firm's conclusions relating thereto.
Assignment of Agreement
The Master Servicer may not assign its obligations under the
Pooling and Servicing Agreement, in whole or in part, unless it shall have first
obtained the written consent of the Seller, the Trustee and the Certificate
Insurer; provided, however, that any assignee must meet the eligibility
requirements set forth in the Pooling and Servicing Agreement for a successor
Master Servicer.
Removal and Resignation of the Master Servicer; Events of Default
The Certificate Insurer, or with the consent of the
Certificate Insurer, the Seller or the Owners of Class A Certificates owning a
majority in Percentage Interest in the Class A Certificates may remove the
Master Servicer upon the occurrence of any of the following events (each, an
"Event of Default"):
(i) The Master Servicer shall (I) apply
for or consent to the appointment of a receiver, trustee,
liquidator or custodian or similar entity with respect to
itself or its property, (II) admit in writing its inability to
pay its debts generally as they become due, (III) make a
general assignment for the benefit of creditors, (IV) be
adjudicated bankrupt or insolvent, (V) commence a voluntary
case under the federal bankruptcy laws of the United States of
America or file a voluntary petition or
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answer seeking reorganization, an arrangement with creditors
or an order for relief or seeking to take advantage of any
insolvency law or file an answer admitting the material
allegations of a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding or (VI) cause
corporate action to be taken by it for the purpose of
effecting any of the foregoing; or
(ii) If without the application, approval
or consent of the Master Servicer, a proceeding shall be
instituted in any court of competent jurisdiction, under any
law relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking in respect of the Master Servicer
an order for relief or an adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a
composition or arrangement with creditors, a readjustment of
debts, the appointment of a trustee, receiver, liquidator or
custodian or similar entity with respect to the Master
Servicer or of all or any substantial part of its assets, or
other like relief in respect thereof under any bankruptcy or
insolvency law, and, if such proceeding is being contested by
the Master Servicer in good faith, the same shall (A) result
in the entry of an order for relief or any such adjudication
or appointment or (B) continue undismissed or pending and
unstayed for any period of sixty (60) consecutive days; or
(iii) The Master Servicer shall fail to
perform any one or more of its obligations under the Pooling
and Servicing Agreement (other than its obligations referenced
in clauses (vi) and (vii) below) and shall continue in default
thereof for a period of thirty (30) days after the earlier to
occur of (x) the date on which an authorized officer of the
Master Servicer knows or reasonably should know of such
failure or (y) receipt by the Master Servicer of a written
notice by the Trustee, any Owner, the Seller or the
Certificate Insurer of said failure; or
(iv) The Master Servicer shall fail 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 Owners
or Certificate Insurer for a period of thirty (30) days after
the earlier of (x) the date on which an authorized officer of
the Master Servicer knows or reasonably should know of such
breach or (y) receipt by the Master Servicer of a written
notice from the Trustee, any Owner, the Seller or the
Certificate Insurer of such breach;
(v) If the Certificate Insurer pays out
any money under the Certificate Insurance Policy, or if the
Certificate Insurer otherwise funds any shortfall with its own
money, because the amounts available to the Trustee (other
than from the Certificate Insurer) are insufficient to make
required distributions on the Class A Certificates;
(vi) The failure by the Master Servicer to
make any required Servicing Advance for a period of 30 days
following the earlier of (x) the date on which an authorized
officer of the Master Servicer knows or reasonably should know
of such failure or (y) receipt by the Master Servicer of a
written notice from the Trustee, any Owner, the Seller or the
Certificate Insurer of such failure;
(vii) The failure by the Master Servicer to
make any required Delinquency Advance or to pay any
Compensating Interest or to pay over the Monthly Remittance;
or
(viii) If the delinquency or loss levels
applicable to the Mortgage Loans serviced by the Master
Servicer exceed certain "trigger" levels set forth in the
Pooling and Servicing Agreement;
provided, however, that (x) prior to any removal of the Master Servicer pursuant
to clauses (ii) through (iv) and (vi) above, any applicable grace period granted
by any such clause shall have expired prior to the time such occurrence shall
have been remedied and (y) in the event of the refusal or inability of the
Master Servicer to comply with its obligations described in clause (vii) above,
such removal shall be effective (without the requirement of any action on the
part of the Sponsor, the Seller, the Trustee or the Certificate Insurer) at 4
p.m. (New York City time) on the second business day following the day on which
the Trustee notifies the Master Servicer that a required amount described in
clause (vii) above has not been received by the Trustee, unless
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the required amount described in clause (vii) above is paid by the Master
Servicer prior to such time. Upon the Trustee's determination that a required
amount described in clause (vii) above has not been made by the Master Servicer,
the Trustee shall so notify the Master Servicer, the Sponsor, the Seller and the
Certificate Insurer as soon as is reasonably practical.
The Master Servicer may not resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement, except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Master Servicer
so causing such a conflict being of a type and nature carried on by the Master
Servicer at the date of the Pooling and Servicing Agreement. Any such
determination permitting the resignation of the Master Servicer shall be
evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee, the Seller and the Certificate Insurer.
No removal or resignation of the Master Servicer shall become
effective until the Trustee or a successor servicer shall have assumed the
Master Servicer's responsibilities and obligations in accordance with the
Pooling and Servicing Agreement.
Successor Master Servicer
Upon removal or resignation of AFL as Master Servicer under
the Pooling and Servicing Agreement, the Trustee (x) may solicit bids for a
successor Master Servicer under the Pooling and Servicing Agreement, and (y)
pending the appointment of a successor Master Servicer under the Pooling and
Servicing Agreement, as a result of soliciting such bids, is required to serve
as Master Servicer under the Pooling and Servicing Agreement, unless AFL has
been removed without cause, in which event the Trustee prior to any such removal
must designate a successor Master Servicer under the Pooling and Servicing
Agreement acceptable to the Certificate Insurer. The Trustee, if it is unable to
obtain a qualifying bid and is prevented by law from acting as Master Servicer
under the Pooling and Servicing Agreement, may appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution which has been designated as an approved
seller-servicer by FNMA or FHLMC for first and second mortgage loans and having
equity of not less than $15,000,000, as determined in accordance with generally
accepted accounting principles, and acceptable to the Certificate Insurer.
The Trustee, or any other successor Master Servicer, upon
assuming the duties of the Master Servicer, is required immediately to make
payment of all Compensating Interest and all Delinquency Advances which the
Master Servicer has theretofore failed to remit with respect to the Mortgage
Loans; provided, however, that if the Trustee is acting as successor Master
Servicer, the Trustee is only required to make Delinquency Advances (including
the Delinquency Advances described in this sentence) if, in the Trustee's
reasonable good faith judgment, such Delinquency Advances will ultimately be
recoverable from the related Mortgage Loans.
Investment of Accounts
All or a portion of the Principal and Interest Account, the
Certificate Account and any other account which may be created by the Trustee,
may be invested and reinvested in one or more Eligible Investments bearing
interest or sold at a discount. The bank serving as Trustee or any affiliate
thereof, may be the obligor on any investment in any Account which otherwise
qualifies as an Eligible Investment. No investment in any Account held by the
Trustee may mature later than the business day immediately preceding the next
succeeding Payment Date; provided, however, that if the investment is an
investment of the bank serving as Trustee, then it may mature on the Payment
Date.
The Trustee will not in any way be held liable by reason of
any insufficiency in any Account resulting from any loss on any Eligible
Investment included therein (except to the extent that the bank serving as
Trustee is the obligor thereon).
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All income or other gain from investments in any Account will
be required to be deposited in such Account immediately upon receipt, and any
loss resulting from such investments will be required to be charged to such
Account.
Eligible Investments
The Pooling and Servicing Agreement defines the following as
Eligible Investments:
(a) Direct general obligations of the United
States or the obligations of any agency or instrumentality of
the United States, the timely payment or the guarantee of
which constitutes a full faith and credit obligation of the
United States.
(b) Federal Housing Administration
debentures, but excluding any such securities whose terms do
not provide for payment of a fixed dollar amount upon maturity
or call for redemption.
(c) FHLMC senior debt obligations, but
excluding any such securities whose terms do not provide for
payment of a fixed dollar amount upon maturity or call for
redemption.
(d) FNMA senior debt obligations, but
excluding any such securities whose terms do not provide for
payment of a fixed dollar amount upon maturity or call for
redemption.
(e) Federal funds, certificates of deposit,
time and demand deposits, and bankers' acceptances (having
original maturities of not more than 365 days) of any domestic
bank, the short-term debt obligations of which have been rated
A-1 or better by S&P and P-1 by Moody's.
(f) Deposits of any bank or savings and loan
association which has combined capital, surplus and undivided
profits of at least $50,000,000 which deposits are not in
excess of the applicable limits insured by the Bank Insurance
Fund or the Savings Association Insurance Fund of the FDIC,
provided that the long-term deposits of such bank or savings
and loan association are rated at least "BBB" by S&P and
"Baa3" by Moody's.
(g) Commercial paper (having original
maturities of not more than 270 days) rated A-1 or better by
S&P and P-1 by Moody's.
(h) Investments in money market funds rated
AAAm or AAAm-G by S&P and Aaa or P-1 by Moody's.
(i) Such other investments as have been
approved in writing by S&P, Moody's and the Certificate
Insurer.
provided that no instrument described above is permitted to
evidence either the right to receive (a) only interest with respect to
obligations underlying such instrument or (b) both principal and interest
payments derived from obligations underlying such instrument and the interest
and principal payments with respect to such instrument provided a yield to
maturity at par greater than 120% of the yield to maturity at par of the
underlying obligations; and provided, further, that no instrument described
above may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to stated
maturity.
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Amendments
The Trustee, the Master Servicer, the Seller and the Sponsor
may at any time and from time to time, with the prior written consent of the
Certificate Insurer but without the consent of the Owners, amend the Pooling and
Servicing Agreement, for the purposes of (a) curing any ambiguity, or correcting
or supplementing any provision of any such agreement which may be inconsistent
with any other provision of such agreement, (b) if accompanied by an approving
opinion of counsel experienced in federal income tax matters, removing the
restriction against the transfer of a Residual Certificate to a Disqualified
Organization (as such term is defined in the Code) or (c) complying with the
requirements of the Code; 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 Owner or materially and adversely affect
(without its written consent) the rights and interests of the Certificate
Insurer.
The Pooling and Servicing Agreement may also be amended by the
Trustee, the Master Servicer, the Seller and the Sponsor, as applicable, at any
time and from time to time, with the prior written approval of the Certificate
Insurer and of not less than 66 2/3% of the Percentage Interest represented by
each affected Class of Certificates then outstanding, for the purpose of adding
any provisions or changing in any manner or eliminating any of the provisions
thereof or of modifying in any manner the rights of the Owners 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 Owner without the consent of the Owner of such Certificate or (b) change
the aforesaid percentages of Percentage Interest which are required to consent
to any such amendments, without the consent of the Owners of all Certificates of
the Class or Classes affected then outstanding. Any such amendment must be
accompanied by an opinion of tax counsel as to REMIC matters.
The Trustee will be required to furnish a copy of any such
amendment to each Owner in the manner set forth in the Pooling and Servicing
Agreement.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust
will terminate upon the payment to the Owners of all Certificates from amounts
other than those available under the Certificate Insurance Policy all amounts
required to be paid to such Owners upon the final payment and other liquidation
(or any advance made with respect thereto) of the last Mortgage Loan.
Optional Termination By the Seller
At its option, the Seller may purchase from the Trust all (but
not fewer than all) remaining Mortgage Loans and other property, acquired by
foreclosure, deed in lieu of foreclosure, or otherwise, then constituting the
Trust Estate, and thereby effect early retirement of the Certificates, on any
Payment Date when the Pool Principal Balance has declined to ten percent or less
of the Original Pool Principal Balance.
The termination of the Trust by the preceding method is
equivalent to a prepayment of all the Mortgage Loans and a liquidation of the
Trust. The Owners of the Class A Certificates would receive from the proceeds of
such purchase any interest owed and the Owners of the Class A Certificates would
receive any principal not yet paid, in the order of priority set forth under
"Description of Certificates -- Distributions on Class A Certificates".
Consequently, a termination of the Trust pursuant to the preceding methods, if
purchased at a price in excess of par, reduces the yield to maturity on the
Class A Certificates.
Auction Sale
The Pooling and Servicing Agreement requires that, within
ninety days following the Seller Optional Termination Date, if the Seller has
not exercised its optional termination right by such date, the Trustee solicit
bids for the purchase of all Mortgage Loans remaining in the Trust. In the event
that satisfactory bids are
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received as described in the Pooling and Servicing Agreement, the net sale
proceeds will be distributed to Certificateholders, in the same order of
priority as collections received in respect of the Mortgage Loans. If
satisfactory bids are not received, the Trustee shall decline to sell the
Mortgage Loans and shall not be under any obligation to solicit any further bids
or otherwise negotiate any further sale of the Mortgage Loans. 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.
THE TRUSTEE
Pursuant to the Pooling and Servicing Agreement, Norwest Bank
Minnesota, National Association will serve as trustee of the Trust. The Pooling
and Servicing Agreement sets forth provisions regarding the Trustee, certain of
which are summarized below.
Certain Covenants of the Trustee
Withholding. The Trustee is required to comply with all
requirements of the Code or any applicable state or local law with respect to
the withholding from any distributions made by it to any Owner of any applicable
withholding taxes imposed thereon and with respect to any applicable reporting
requirements in connection therewith.
Unclaimed Moneys. Any money held by the Trustee in trust for
the payment of any amount due with respect to any Class A Certificate and
remaining unclaimed for the period then specified in the escheat laws of the
State of New York after such amount has become due and payable will be
discharged from such trust and be paid to the Seller, and the Owner of such
Class A Certificate shall thereafter, as an unsecured general creditor, look
only to the Seller for payment thereof (but only to the extent of the amounts so
paid to the Seller), and all liability of the Trustee with respect to such trust
money will thereupon cease; provided, however, that the Trustee, before being
required to make any such payment, may at the expense of the Seller cause to be
published once, in the eastern edition of The Wall Street Journal, notice that
such money remains unclaimed and that, after a date specified therein, which
shall be not less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be paid to the Seller. The Trustee may
also adopt and employ, at the expense of the Seller, any other reasonable means
of notification of such payment (including but not limited to mailing notice of
such payment to Owners whose right to or interest in moneys due and payable but
not claimed is determinable from the Register at the last address of record for
each such Owner).
Protection of Trust Estate. The trust estate (the "Trust
Estate") of the Trust primarily consists of (i) the Mortgage Loans, (ii) all
moneys held in the Accounts and (iii) the Certificate Insurance Policy. The
Trustee is required to hold the Trust Estate in Trust for the benefit of the
Owners and, upon request of and at the expense of the Sponsor and at the expense
of the requesting party, will from time to time execute and deliver all such
supplements and amendments to the Pooling and Servicing Agreement, instruments
of further assurance and other instruments, and will take such other action upon
such request as it deems reasonably necessary or advisable, to more effectively
hold in trust all or any portion of the Trust Estate.
The Trustee has the power to enforce, and is required to
enforce the obligations of the other parties to the Pooling and Servicing
Agreement by action, suit or proceeding at law or equity, and also has the power
to enjoin, by action or suit, any acts or occurrences which may be unlawful or
in violation of the rights of the Owners; provided, however, that nothing in the
Pooling and Servicing Agreement requires any action by the Trustee unless the
Trustee shall first (i) have been furnished indemnity satisfactory to it and
(ii) when required by the Pooling and Servicing Agreement, have been requested
to take such action by the Owners.
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Performance and Enforcement of Obligations. The Pooling and
Servicing Agreement provides that the Trustee is 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 Owners, unless such Owners 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 rights or powers granted by
the Pooling and Servicing Agreement or perform any duties thereunder either
directly or by or through agents or attorneys, and the Trustee is 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 the Pooling and Servicing Agreement, the Trustee
is not 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.
The Pooling and Servicing Agreement provides that no Owner has
any right to institute any proceeding, judicial or otherwise, with respect to
the Pooling and Servicing Agreement or the Certificate Insurance Policy, or for
the appointment of a receiver or trustee under the Pooling and Servicing
Agreement, unless:
(1) such Owner has previously given written
notice to the Sponsor, the Certificate Insurer and the Trustee
of such Owner's intention to institute such proceeding;
(2) the Owners of not less than 25% of the
Percentage Interests represented by any Class of Class A
Certificates then outstanding or, if there are no Class A
Certificates then outstanding, by such Percentage Interest
represented by the Class B Certificates then outstanding,
shall have made written request to the Trustee to institute
such proceeding in its own name as representative of the
Owners;
(3) such Owner or Owners 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 30 days after its
receipt of such notice, request and offer of indemnity, has
failed to institute such proceeding; and
(5) no direction inconsistent with such
written request has been given to the Trustee during such
60-day period by the Owners of a majority of the Percentage
Interests represented by each Class of Class A Certificates
then outstanding or, if there are no Class A Certificates then
outstanding, by a majority of the Percentage Interests
represented by the Class B Certificates then outstanding.
The Pooling and Servicing Agreement provides that no one or
more Owners shall 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 Owner of the same Class or
to obtain or to seek to obtain priority or preference over any other Owner of
the same Class or to enforce any right under the Pooling and Servicing
Agreement, except in the manner herein provided and for the equal and ratable
benefit of all the Owners of the same Class.
In the event the Trustee receives conflicting or inconsistent
requests and indemnity from two or more groups of Owners, each representing less
than a majority of the applicable Class of Certificates, the Trustee shall
follow the directions of the Certificate Insurer.
The Certificate Insurer or, with the consent of the
Certificate Insurer, the Owners of a majority of the Percentage Interests
represented by each Class of Class A Certificates then outstanding or, if there
are no Class A Certificates then outstanding, by such majority of the Percentage
Interests represented by the Class B
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Certificates then outstanding, may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee with respect
to the Certificates or exercising any trust or power conferred on the Trustee
with respect to the Certificates or the Trust Estate provided that: (1) such
direction is not in conflict with any rule of law or with the Pooling and
Servicing Agreement; (2) the Trustee has been provided with indemnity
satisfactory to it; and (3) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction; provided, however,
that the Trustee need not take any action which it determines might involve it
in liability or may be unjustly prejudicial to the Owners not so directing.
Disposition of Trust Estate. The Trustee covenants not to
permit the Trust to sell, transfer, exchange or otherwise dispose of any of the
Trust Estate except as expressly permitted by the Pooling and Servicing
Agreement.
Reporting Requirements. On each Payment Date the Trustee is
required to report in writing to each Owner: (i) the amount of the distribution
with respect to the Class A Certificates, the Class B Certificates and the
Residual Certificates; (ii) the amount of such distributions allocable to
principal, separately identifying the aggregate amount of any Prepayments or
other recoveries of principal included therein; (iii) the amount of such
distributions allocable to interest; (iv) the amount of such distributions
allocable to the Class A Carry-Forward Amount or the Class B Carry-Forward
Amount; (v) the amount of any Insured Payment made with respect to such Payment
Date; (vi) the Class A Principal Balance as of such Payment Date, together with
the principal amount of each Class A Certificate (based on a Certificate in the
original principal amount of $1,000) then outstanding, in each case after giving
effect to any payment of principal on such Payment Date; (vii) the Class B
Principal Balance as of such Payment Date, together with the principal amount of
each Class B Certificate (based on a Certificate in the original principal
amount of $1,000) then outstanding, in each case after giving effect to any
payment of principal on such Payment Date; (viii) the total of any Substitution
Amounts and any Loan Purchase Prices included in such distribution; (ix) the
amount of the Servicing Fee paid with respect to such Payment Date; and (x) the
Subordinated Amount as of such Payment Date.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) the Trustee shall fail to distribute to
the Owners 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 fail 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 failure or breach
shall continue or not be cured for a period of 30 days after,
there shall have been given, by registered or certified mail,
to the Trustee by the Sponsor or by the Certificate Insurer or
by the Owners of at least 25% of the aggregate Percentage
Interest represented by any Class of Class A Certificates then
outstanding, or, if there are no Class A Certificates then
outstanding, by such Percentage Interest represented by the
Class B Certificates then outstanding, a written notice
specifying such failure or breach and requiring it to be
remedied; or
(3) certain insolvency events related to the
Trustee.
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If any event described above occurs and is continuing, then
and in every such case (x) the Sponsor or the Certificate Insurer or (y) with
the consent of the Certificate Insurer, the Owners of a majority Percentage
Interest represented by any Class of Class A Certificates or, if there are no
Class A Certificates then outstanding, by such Percentage Interest represented
by the Class B Certificates then outstanding, may immediately appoint a
successor trustee.
Liability of the Trustee
The Trustee, prior to the occurrence of an Event of Default
and after the curing of all Events of Default which may have occurred,
undertakes to perform such duties and only such duties as are specifically set
forth in the Pooling and Servicing Agreement. If an Event of Default has
occurred and has not been cured or waived, the Trustee shall exercise such of
the rights and powers vested in it by the Pooling and Servicing Agreement, and
use the same degree of care and skill in its exercise as a prudent person would
exercise or use under the circumstances in the conduct of such person's own
affairs. Prior to the occurrence of an Event of Default, and after the curing of
all such Events of Default which may have occurred, the Trustee (i) undertakes
to perform such duties and only such duties as are specifically set forth in the
Pooling and Servicing Agreement, and no implied covenants or obligations shall
be read into the Pooling and Servicing Agreement against the Trustee and (ii) in
the absence of bad faith on its part, may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished pursuant to and conforming to the
requirements of the Pooling and Servicing Agreement; provided, however, that
such provisions do 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.
The Trustee and any director, officer, employee or agent of
the Trustee may rely and will be protected in acting or refraining from acting
in good faith in reliance on any certificate, notice or other document of any
kind prima facie properly executed and submitted by the authorized officer of
any person respecting any matters arising under the Pooling and Servicing
Agreement.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
General
Financial Guaranty Insurance Company, as the Certificate
Insurer, considers its role in providing insurance to be credit enhancement
rather than credit substitution. The Certificate Insurer only insures securities
that it considers to be of investment grade quality. With respect to each
category of obligations considered for insurance, the Certificate Insurer has
established and maintains its own underwriting standards that are based on those
aspects of credit quality that the Certificate Insurer deems important for the
category and that take into account criteria established for the category
typically used by rating agencies. Credit criteria for evaluating securities
include economic and social trends, debt management, financial management and
legal and administrative factors, the adequacy of anticipated cash flow,
including the historical and expected performance of assets pledged for payment
of securities under varying economic scenarios, underlying levels of protection
such as insurance or overcollateralization, and, particularly in the case of
long-term municipal securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and
reserves created by the financing documentation, as well as the financial and
other covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
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Insurance written by the Certificate Insurer insures the full
and timely payment of debt service on the insured debt securities and scheduled
payments due in respect of pass-through securities such as the Class A
Certificates. If the issuer of a security insured by the Certificate Insurer
defaults on its obligations to pay such debt service or, in the case of a
pass-through security, available funds are insufficient to pay the insured
amounts, the Certificate Insurer will make scheduled insured payments, without
regard to any acceleration of the securities which may have occurred, and will
be subrogated to the rights of security holders to the extent of its payments.
The claims paying ability of the Certificate Insurer is rated Aaa, AAA and AAA
by Moody's, S&P and Fitch, respectively.
In consideration for issuing its insurance, the Certificate
Insurer receives a premium which is generally paid in full upon issuance of the
policy or on an annual, semi-annual or monthly basis. The premium rates charged
depend principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
The Certificate Insurer, a New York stock insurance company,
is a monoline financial guaranty insurance company which, since January 1984,
has been a leading insurer of bonds issued by municipal governmental
subdivisions and agencies thereof. The Certificate Insurer also insures a
variety of non-municipal structured debt obligations. The Certificate Insurer is
authorized to write insurance in 50 states and the District of Columbia and is
also authorized to carry on general insurance business in the United Kingdom and
to write credit and guaranty insurance in France. The Certificate Insurer is
subject to regulation by the State of New York Insurance Department.
The Certificate Insurer is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company. FGIC Corporation is a subsidiary of
General Electric Capital Corporation ("GE Capital"). Neither FGIC Corporation
nor GE Capital is obligated to pay the debts of or the claims of the Certificate
Insurer.
The Certificate Insurer and its holding company, FGIC
Corporation, are subject to regulation by each jurisdiction in which the
Certificate Insurer is licensed to write insurance. These regulations vary from
jurisdiction to jurisdiction, but generally require insurance holding companies
and their insurance subsidiaries to register and file certain reports, including
information concerning their capital structure, ownership and financial
condition and require prior approval by the insurance department of their state
of domicile, of changes in control, of dividends and other intercorporate
transfers of assets and of transactions between insurance companies, their
parents and affiliates. The Certificate Insurer is required to file quarterly
and annual statutory financial statements and is subject to statutory
restrictions concerning the types and quality of investments, the use of policy
forms, premium rates and the size of risk that it may insure, subject to
reinsurance. Additionally, the Certificate Insurer is subject to triennial
audits by the State of New York Insurance Department.
As of December 31, 1995 and December 31, 1994, the Certificate
Insurer had written directly, or assumed through reinsurance, guaranties of
approximately $180.0 billion and $160.2 billion par value of securities,
respectively (of which approximately 88 percent constituted guaranties of
municipal bonds), for which it had collected gross premiums of approximately
$1.95 billion and $1.78 billion, respectively. As of December 31, 1995, the
Certificate Insurer had reinsured approximately 18 percent of the risks it had
written, 41 percent through quota share reinsurance and 59 percent through
facultative arrangements.
Capitalization
The following table sets forth the capitalization of the
Certificate Insurer as of December 31, 1994 and December 31, 1995, respectively,
on the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since
December 31, 1995.
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<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
------------ ------------
(in millions) (in millions)
<S> <C> <C>
Unearned Premiums .................................. $ 757 $ 728
Other Liabilities .................................. 261 304
Stockholder's Equity
Common Stock .................................... 15 15
Additional Paid-in Capital ...................... 334 334
Net Unrealized Gains/(Losses) ................... (42) 64
Foreign Currency Translation Adjustment ......... (1) (2)
Retained Earnings ............................... 974 1,137
------- -------
Total Stockholder's Equity ......................... 1,280 1,548
------- -------
Total Liabilities and Stockholder's Equity ......... $ 2,298 $ 2,580
======= =======
</TABLE>
For further financial information concerning the Certificate
Insurer, see the audited financial statements of the Certificate Insurer
included as Appendix A.
Copies of the Certificate Insurer's quarterly and annual
statutory statements filed by the Certificate Insurer with the New York
Insurance Department are available upon request to Financial Guaranty Insurance
Company, 115 Broadway, New York, New York 10006, Attention: Corporate
Communications Department. The Certificate Insurer's telephone number is (212)
312-3000.
The Certificate Insurer does not accept any responsibility for
the accuracy or completeness of this Prospectus or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the heading "The Certificate Insurance Policy and The
Certificate Insurer" and in Appendix A.
An indemnification agreement among the Certificate Insurer,
the Sponsor, the Seller and the Underwriters provides that each of the parties
to such agreement will indemnify each other for certain liabilities under the
1933 Act.
The Certificate Insurance Policy
The Seller will obtain the Certificate Insurance Policy,
issued by the Certificate Insurer, in favor of the Owners of the Class A
Certificates. The Certificate Insurance Policy provides for 100% coverage of the
related Insured Distribution Amount.
The Certificate Insurance Policy unconditionally guarantees
the payment of Insured Payments on the Class A Certificates. The Certificate
Insurer is required to make Insured Payments to the Trustee as paying agent on
the later of the Payment Date or on the business day next following the day on
which the Certificate Insurer shall have received telephonic or telegraphic
notice, subsequently confirmed in writing, or written notice by registered or
certified mail, from the Trustee that an Insured Payment is due.
The Pooling and Servicing Agreement will provide that the term
"Total Available Funds" does not include Insured Payments and does not include
any amounts that cannot be distributed to the Owners of any Class A Certificates
by the Trustee as a result of final, non-appealable proceedings under the United
States Bankruptcy Code.
Each Owner of a Class A Certificate which pays to the
bankruptcy court as a "voidable preference" under the United States Bankruptcy
Code any amounts ("Preference Amounts") theretofore received by such
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Owner on account of such Class A Certificate will be entitled to receive
reimbursement for such amounts from the Certificate Insurer, but only after (i)
delivering a copy to the Trustee of a final, nonappealable order (a "Preference
Order") of a court having competent jurisdiction demanding payment of such
amount to the bankruptcy court and (ii) assigning such Owner's claim with
respect to such Preference Order to the Certificate Insurer. In no event shall
the Certificate Insurer pay more than one Insured Payment in respect of any
Preference Amount.
The Certificate Insurance Policy is non-cancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Certificate Insurer's obligation under the Certificate
Insurance Policy will be discharged to the extent that funds are received by the
Trustee for distribution to the Class A Certificateholders, whether or not such
funds are properly distributed by the Trustee.
The Certificate Insurance Policy does not guarantee to the
owners of the Class A Certificates any specific rate of prepayments of principal
of the Mortgage Loans. Also, the Certificate Insurance Policy does not guarantee
the payment of any Supplemental Interest Amount.
Pursuant to the Pooling and Servicing Agreement, the
Certificate Insurer is subrogated to the rights of the Owners of the Class A
Certificates to the extent of any such payment under the Certificate Insurance
Policy.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the Certificate
Insurance Policy is protection for credit risk and not for prepayment risk. A
claim may not be made under the Certificate Insurance Policy in an attempt to
guarantee or insure that any particular rate of prepayment is experienced by the
Trust.
CERTAIN FEDERAL TAX ASPECTS
The following general discussion of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Class A Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the REMIC Certificates.
REMIC Election
One or more elections will be made to treat certain assets
and/or accounts within the Trust Estate as real estate mortgage investment
conduits ("REMICs") within the meaning of Code Section 860D. Accordingly, the
classes of Class A Certificates will be considered to be "regular interests" in
a REMIC. For federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of REMIC Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Certificates under an accrual method.
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The Owners of Class A-6 Group II Certificates and the related
rights to receive Supplemental Interest Amounts will be treated for tax purposes
as owning two separate investments: (i) Class A-6 Group II Certificates without
the right to receive Supplemental Interest Amounts and (ii) the right to receive
the Supplemental Interest Amounts. The Owners of Class A-6 Group II Certificates
must allocate the purchase price of their Certificates between these two
investments based on their relative fair market values. The purchase price
allocated to the first investment will be the issue price of the Class A-6 Group
II Certificates for calculating accruals of OID (if any). See "Certain Federal
Income Tax Consequences--Discount and Premium" in the Prospectus.
An Owner of a Class A-6 Group II Certificate and the related
rights to receive Supplemental Interest Amounts will be treated for federal
income tax purposes as having entered into a notional principal contract on the
date that it purchases its Certificate. Treasury Regulations under Section 446
of the Code relating to notional principal contracts (the "Notional Principal
Contract Regulations") provide that taxpayers must recognize periodic payments
with respect to a notional principal contract under the accrual method of
accounting. Any Supplemental Interest Amounts will be periodic payments. Income
with respect to periodic payments under a notional principal contract for a
taxable year should constitute ordinary income. The purchase price allocated to
the right to receive the related Supplemental Interest Amounts will be treated
as a nonperiodic payment under the Notional Principal Contract Regulations. Such
a nonperiodic payment may be amortized using several methods, including the
level payment method described in the Notional Principal contract Regulations.
The right to receive the Supplemental Interest Amounts will
not constitute: (i) a "real estate asset" within the meaning of section
858(c)(5)(A) of the Internal Revenue Code (the "Code") if held by a real estate
investment trust; (ii) a "qualified mortgage" within the meaning of section
860G(a)(3) of the Code or a "permitted investment" within the meaning of section
860G(a)(5) of the Code if held by a REMIC, or (iii) an asset described in
section 7701(a)(19)(C)(xi) of the Code if held by a thrift. Moreover, other
special rules may apply to certain investors, including dealers in securities
and dealers in notional principal contracts.
Original Issue Discount
The Class A Certificates may be issued with "original issue
discount" for federal income tax purposes. The prepayment assumption to be used
in determining whether the Class A Group I Certificates are issued with original
issue discount and the rate of accrual of original issue discount is calculated
using the 100% Prepayment Assumption with respect to Group I. The prepayment
assumption to be used for the Class A Group II Certificates is the 100%
Prepayment Assumption with respect to Group II. No representation is made that
any of the Mortgage Loans will prepay at this rate or any other rate. See
"Certain Federal Income Tax Consequences -- REMICs -- Taxation of Holders of
REMIC Regular Securities -- Original Issue Discount" in the Prospectus.
The Treasury Department has issued final regulations relating
to the tax treatment of debt instruments with original issue discount (the "OID
Regulations"). The OID Regulations provide that for purposes of measuring the
accrual of original issue discount on a debt instrument, the Owners of any Class
of Certificates issued with original issue discount may use an interest accrual
period of any length as long as each distribution date falls on either the final
day or the first day of an accrual period. The Trust will report original
discount based on accrual periods of one month, beginning on a Payment Date and
ending on the day before a Payment Date.
The OID Regulations permit an Owner to elect to include in
gross income all "interest" that accrues with respect to such regular interest
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest, as adjusted by any amortizable
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bond premium or acquisition premium. An Owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), imposes certain requirements on those employee benefit plans
to which it applies ("ERISA Plan") and on those persons who are fiduciaries with
respect to such ERISA Plans. Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and certain church plans
(as defined in ERISA Section 3(33)), are not subject to ERISA. In accordance
with ERISA's general fiduciary standards, before investing in a Class A
Certificate, an ERISA Plan fiduciary should determine whether such an investment
is permitted under the governing ERISA Plan instruments and is appropriate for
the ERISA Plan in view of its overall investment policy and the composition and
diversification of its portfolio.
In addition, provisions of ERISA, and the corresponding
provisions of the Code, prohibit a broad range of transactions involving assets
of ERISA Plans, individual retirement accounts, and Keogh plans covering only a
sole proprietor or partners (collectively, the "Plans") and persons having
certain specified relationships to such a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon such persons by Section 4975 of the Code. Certain affiliates of the
Originators, the Sponsor, the Seller, the Master Servicer, any Sub-Servicer, and
of the Trustee might be considered "parties in interest" or "disqualified
persons" with respect to a Plan. If so, the acquisition or holding of Class A
Certificates by or on behalf of such Plan could be considered to give rise to a
"prohibited transaction" within the meaning of ERISA or the Code unless an
exemption is available. Furthermore, if an investing Plan's assets were deemed
to include an interest in the assets of the Mortgage Loans which constitute the
Trust Estate and not merely an interest in the Class A Certificates,
transactions occurring in the servicing of the Mortgage Loans might constitute
prohibited transactions unless an administrative exemption applies.
The DOL has issued to Prudential Securities Incorporated an
administrative exemption, Prohibited Transaction Exemption 90-24 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406(a), Section 406(b)(1) and Section
406(b)(2) of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and
(b) of the Code, certain transactions relating to the servicing and operation of
asset pools, including pools of mortgage loans, and the purchase, sale and
holding of asset-backed pass-through certificates, including pass-through
certificates evidencing interests in mortgage loans, such as the Class A
Certificates underwritten by Prudential Securities Incorporated and certain of
its affiliates, provided that certain conditions set forth in the Exemption are
satisfied.
If the general conditions of Section II of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA (as well as 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) in connection with the direct or indirect sale, exchange or
transfer of Class A Certificates by Plans in the initial issue of Certificates,
the holding of Class A Certificates by Plans or the direct or indirect
acquisition or disposition in the secondary market of Class A Certificates by
Plans. However, no exemption is provided from the restrictions of Section
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Class A Certificate on behalf of an "Excluded Plan" (defined below) by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Class A Certificates,
an Excluded Plan is a Plan sponsored by (1) the Underwriters, (2) the Master
Servicer and any Sub- Servicer, (3) the Certificate Insurer, (4) the Trustee,
(5) the Sponsor, (6) the Seller, (7) any Mortgagor with respect to Mortgage
Loans constituting more than 5 percent of the aggregate unamortized principal
balance of the Mortgage Loans as of the date of initial issuance and (8) any
affiliate or successor of a person described in (1) to (7) above (the
"Restricted Group").
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If the specific conditions of paragraph I.B of Section I of
the Exemption are also satisfied, the Exemption may provide an exemption from
the restrictions imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(E) of the Code in connection with (1) the direct or indirect sale,
exchange or transfer of Class A Certificates in the initial issuance of Class A
Certificates between the Seller, the Sponsor, the Underwriters and a Plan when
the person who has discretionary authority or renders investment advice with
respect to the investment of Plan assets in Class A Certificates is (a) a
mortgagor with respect to 5 percent or less of the fair market value of the
Mortgage Loans or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Class A Certificates by
Plans and (3) the holding of Class A Certificates by Plans.
If the specific conditions of paragraph I.C of Section I of
the Exemption are satisfied, the Exemptions may provide an exemption from the
restrictions imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code for transactions in connection with the servicing,
management and operation of the Trust.
The Exemption may provide an exemption from the restrictions
imposed by Section 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" or a "disqualified person" with
respect to an investing Plan by virtue of providing services to the Plan (or by
virtue of having certain specified relationships to such a person) solely as a
result of such Plan's ownership of Class A Certificates.
The Exemption set forth the following seven general conditions
which must be satisfied for a transaction to be eligible for exemptive relief
thereunder.
(1) The acquisition of the certificates by a
Plan is on terms (including the price for the 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 certificates acquired by the Plan are not subordinated to
the rights and interests evidenced by other certificates of
the trust;
(3) The certificates acquired by the Plan
have received a rating at the time of such acquisition that is
one of the three highest generic rating categories from either
Standard & Poor's Corporation ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Rating Co. ("D&P") or
Fitch Investors Service, Inc. ("Fitch");
(4) The trustee is not an affiliate of any
other member of the Restricted Group (as defined above);
(5) The sum of all payments made to and
retained by the Underwriters in connection with the
distribution of certificates represents not more than
reasonable compensation for underwriting the certificates. The
sum of all payments made and retained by the seller pursuant
to the assignment of the loans to the trust fund represents
not more than the fair market value of such loans. The sum of
all payments made to and retained by the servicer represents
not more than reasonable compensation for such person's
services under the pooling and servicing agreement and
reimbursement of such person's reasonable expenses in
connection therewith; and
(6) The Plan investing in the certificates
is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of
1933.
(7) The trust fund must also meet the
following requirements:
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(i) the corpus of the
trust fund must consist solely of assets of
the type that have been included in other
investment pools;
(ii) certificates in such
other investment pools must have been rated
in one of the three highest generic rating
categories of S&P, Moody's, Fitch or D&P for
at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates
evidencing interests in such other
investment pools must have been purchased by
investors other than Plans for at least one
year prior to any Plan's acquisition of
certificates.
It is a condition of issuance of the Class A Certificates that
they be rated AAA or Aaa by S&P and Moody's, respectively. Before purchasing a
Class A Certificate, based on the Exemption, a fiduciary of a Plan should itself
confirm (1) that such Certificate constitutes a "certificate" for purposes of
the Exemption and (2) that the specific conditions set forth in Section I of the
Exemption, the general conditions set forth in Section II of the Exemption and
the other requirements set forth in the Exemption would be satisfied.
Any person purchasing a Class A-6 Group II Certificate and the
related right to receive Supplemental Interest Amounts will have acquired for
purposes of ERISA and for federal income tax purposes, such Class A-6
Certificate without the right to receive the Supplemental Interest Amounts,
together with the right to receive the Supplemental Interest Amounts. The
Exemption does not apply to the acquisition, holding or resale of the right to
receive the Supplemental Interest Amounts. Accordingly, the acquisition of the
right to receive the Supplemental Interest Amounts by a Plan could result in a
prohibited transaction unless another administrative exemption to ERISA's
prohibited transaction rules is applicable. One or more alternative exemptions
may be available with respect to certain prohibited Transaction rules of ERISA
that might apply in connection with the initial purchase, holding and resale of
the right to receive the Supplemental Interest Amounts, including, but not
limited to: (i) Prohibited transaction Class Exemption ("PTCE") 91-38, regarding
investments by bank collective investment funds; (ii) PTCE 90-1, regarding
investments by insurance company pooled separate accounts; (iii) PTCE 84-14,
regarding transactions negotiated by qualified professional asset managers; or
(iv) PTCE 75-1, Part II, regarding principal transactions by broker-dealers (the
"Principal Transactions Exemption"). It is believed that the conditions of the
Principal Transactions Exemption will be met with respect to the acquisition of
a right to receive the Supplemental Interest Amounts by a Plan, so long as such
Underwriter is not a fiduciary with respect to the Plan (and is not a party in
interest with respect to the Plan by reason of being a participating employer or
affiliate thereof). Before purchasing Class A-6 Group II Certificates based on
an administrative exemption (or exemptions), a fiduciary of a Plan should
determine whether the conditions of such exemption (or exemptions) would be met
and whether the scope of the relief provided by such exemption (or exemptions)
would cover all acts that might be construed as prohibited transactions.
Prospective Plan investors in the Class A Certificates should
consult with their legal advisors concerning the impact of ERISA and the Code,
the applicability of the Exemption, and the potential consequences in their
specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Class A Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
In addition to the matters described above, purchasers of a
Class A Certificate 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 and 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 ERISA purposes under certain
circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Class A Certificates.
S-71
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Any Plan fiduciary considering the purchase of a Class A
Certificate should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment. Moreover, each Plan
fiduciary should determine whether, under the general fiduciary standards of
investment prudence and diversification, an investment in the Class A
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio. Special caution ought to be exercised before a Plan purchases a Class
A Certificate in such circumstances.
Non-ERISA Plans
Employee benefit plans that are governmental plans (as defined
in Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA) are not subject to ERISA requirements. Accordingly, assets of such
plans may be invested in the Class A Certificates without regard to the ERISA
restrictions described above, subject to applicable provisions of other federal
and state laws.
RATINGS
Ratings which are assigned to securities such as the Class A
Certificates generally evaluate the ability of the issuer (i.e., the Trust) and
any guarantor (i.e., the Certificate Insurer) to make timely payment when such
payments are due, as required by such securities. The amounts which are "due"
with respect to the Class A Certificates consist of principal and interest. In
general, ratings address credit risk and not prepayment risk. The ratings issued
with respect to the Class A-6 Group II Certificates do not cover the payment of
the Supplemental Interest Amounts.
It is a condition of the original issuance of the Class A
Certificates that they receive ratings of AAA or Aaa by S&P and Moody's,
respectively. Explanations of the significance of such rating may be obtained
from such rating agency. The ratings will be the views only of such rating
agencies. There is no assurance that any such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Class A Certificates. A security rating is not a recommendation to
buy, sell or hold securities.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions may not be legally authorized to
invest in the Class A Certificates.
UNDERWRITING
Under the terms and subject to the conditions contained in an
Underwriting Agreement dated May 15, 1996 (the "Underwriting Agreement"),
Prudential Securities Incorporated and J.P. Morgan Securities Inc. (together,
the "Underwriters") have agreed to purchase, and the Sponsor and the Seller have
agreed to sell, the Class A Certificates offered hereby.
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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 Class A Certificates set forth opposite its name below.
<TABLE>
<CAPTION>
Underwriter Principal Amount of Class A Certificates
----------- ----------------------------------------
<S> <C>
Prudential Securities Incorporated ....................... $168,602,000
J.P. Morgan Securities Inc. .............................. 42,000,000
Total ............................................... $210,602,000
</TABLE>
The Underwriters have advised the Sponsor and the Seller that
they propose to offer the Class A Certificates for sale from time to time in one
or more transactions (which may include block transactions), in negotiated
transactions or otherwise, or a combination of such methods of sale, at market
prices prevailing at the time of sale or at negotiated prices. The Underwriters
may effect such transactions by selling the Class A Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters and/or the
purchasers of the Class A Certificates for whom they may act as agents. In
connection with the sale of the Class A Certificates, the Underwriters may be
deemed to have received compensation from the Sponsor and the Seller in the form
of underwriting discounts, and the Underwriters may also receive commissions
from purchasers of the Class A Certificates for whom it may act as agent. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
the Class A Certificates by them may be deemed to be underwriting discounts or
commissions.
The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the Class A Certificates offered
hereby if any are purchased.
The Class A Certificates are a new issue of securities with no
established trading market. The Underwriters have advised the Sponsor and the
Seller that they intend to act as market makers for the Class A Certificates.
However, the Underwriters are not obligated to do so and may discontinue any
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Class A Certificates.
The Seller has agreed to indemnify each Underwriter against
certain liabilities, including civil liabilities under the Securities Act of
1933, or contribute to payments which either Underwriter may be required to make
in respect thereof.
EXPERTS
The financial statements of Financial Guaranty Insurance
Company, included in this Prospectus Supplement in Appendix A, as of December
31, 1995 and 1994 and for each of the years in the three year period ended
December 31, 1995, have been included in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing in Appendix A,
and upon the authority of such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in
1993, in accounting methods for multiple- year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
S-73
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<PAGE>
CERTAIN LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor and
the Seller by David A. Robertson, Esq., counsel to the Sponsor and the Seller.
Certain tax matters concerning the issuance of the Certificates will be passed
upon by Dewey Ballantine, New York, New York.
S-74
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Access Financial Mortgage Loan Trust 1996-2 Class A Certificates (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of 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 Depositories 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 Depository 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.
I-1
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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 Depository, 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 Depository 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 Depository 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 account of CEDEL Participant or
Euroclear Participant the following
I-2
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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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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
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<PAGE>
APPENDIX A
Audited Financial Statements
Financial Guaranty Insurance Company
Years ended December 31, 1995 and 1994
with Report of Independent Auditors
A-1
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<PAGE>
<PAGE>
KPMG Peat Marwick LLP
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
Audited Financial Statements
December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors..............................................................1
Balance Sheets..............................................................................2
Statements of Income........................................................................3
Statements of Stockholder's Equity..........................................................4
Statements of Cash Flows....................................................................5
Notes to Financial Statements...............................................................6
</TABLE>
<PAGE>
<PAGE>
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the fnancial position of Financial Guaranty
Insurance Company as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the years in the three year period
then ended in conformity with generally accepted accounting
principles.
As described in notes 6 and 2, respectively, in 1993, the Company changed
its methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investrnents in Debt and Equity Securities.
KPMG Peat Marwick LLP
January 19, 1996
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
================================================================================
<TABLE>
<CAPTION>
($ in Thousands, except per share amounts)
December 31, December 31,
Assets 1995 1994
--------------- -------------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $2,141,584 $1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
---------- ----------
Total assets $2,580,302 $2,298,210
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
---------- ---------
Total liabilities 1,032,421 1,018,487
---------- ---------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available-
for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
---------- ----------
Total stockholder's equity 1,547,881 1,279,723
---------- ----------
Total liabilities and stockholder's equity $2,580,302 $2,298,210
========== ==========
See accompanying notes to financial statements.
</TABLE>
-2-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Statements of Income
================================================================================
<TABLE>
<CAPTION>
($ in Thousands)
For the Year Ended December 31,
---------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Gross premiums written $ 97,288 $ 161,940 $ 291,052
Ceded premiums (19,319) (46,477) (49,914)
---------- ---------- ---------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
-------- ---------- ---------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
------- ---------- ---------
Total revenues 256,438 284,553 301,595
------- --------- ---------
Expenses:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
-------- --------- ---------
Total expenses 19,806 43,597 87,022
-------- --------- ---------
Income before provision for Federal income taxes 236,632 240,956 214,573
-------- --------- ---------
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
--------- ---------- ----------
Total Federal income tax expense 48,754 51,225 52,221
--------- --------- ---------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
--------- --------- --------
Net cumulative effect of change in
accounting principle - - 3,008
-------- --------- --------
Net income $187,878 $189,731 $165,360
======== ======== ========
See accompanying notes to financial statements.
</TABLE>
-3-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Statements of Stockholder's Equity
================================================================================
<TABLE>
<CAPTION>
($ in Thousands)
Net Unrealized
Gains (Losses) on
Additional Fixed Maturity Foreign
Common Paid-in Securities Available Currency Retained
Stock Capital For-Sale, Net of Tax Adjustment Earnings
------------ ----------- -------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $324,639 $ 7,267 $(1,597) $ 618,615
Net income -- -- -- -- 165,360
Capital contribution -- 21,872 -- -- --
Adjustment to common stock par value 12,500 (12,500) -- -- --
Unrealized gains on fixed maturity securities
previously held at market, net of tax of ($713) -- -- (1,325) -- --
Implementation of change in accounting for
adoption of SFAS 115, net of tax of $45,643 -- -- 84,766 -- --
Foreign currency translation adjustment -- -- -- (668) --
------- -------- --------- ------- ----------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income -- -- -- -- 189,731
Unrealized losses on fixed maturity securities
available-for-sale, net of tax of ($71,336) -- -- (132,481) -- --
Foreign currency translation adjustment -- -- -- 1,044 --
------- -------- --------- ------- ----------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income -- -- -- -- 187,878
Dividend paid -- -- -- -- (25,000)
Unrealized gains on fixed maturity securities
available for sale, net of tax of $56,839 -- -- 105,558 -- --
Foreign currency translation adjustment -- -- -- (278) --
------- -------- --------- ------- ----------
Balance, December 31, 1995 $15,000 $334,011 $ 63,785 $(1,499) $1,136,584
======= ======== ========= ======= ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
($ in Thousands)
For the Year Ended December 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $187,878 $189,731 $165,360
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax - - (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
--------- --------- --------
Net cash provided by operating activities 94,546 184,489 277,448
--------- --------- --------
Investing Activities:
Sales and maturities of fixed maturity securities $ 836,103 $ 550,534 $ 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
--------- --------- --------
Net cash used in investing activities (71,113) (184,150) (298,335)
--------- --------- --------
Financing Activities:
Dividends paid (25,000) - -
Capital contribution - - 21,872
--------- --------- --------
Net cash provided by financing activities (25,000) - 21,872
--------- --------- --------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
--------- --------- --------
Cash at end of year $ 199 $ 1,766 $ 1,427
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
================================================================================
(1) Business
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides
financial guaranty insurance on newly issued municipal bonds and
municipal bonds trading in the secondary market, the latter including
bonds held by unit investment trusts and mutual funds. The Company also
insures structured debt issues outside the municipal market.
Approximately 88% of the business written since inception by the
Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest
when due on scheduled maturity, sinking fund or other mandatory
redemption and interest payment dates to the holders of municipal
securities. The Company's insurance policies do not provide for
accelerated payment of the principal of, or interest on, the bond
insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service,
the Company will make scheduled interest and principal payments as due
and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Significant Accounting Policies
The accompanying financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted
by regulatory authorities (see Note 3). The prior years financial
statements have been reclassified to conform to the 1995 presentation.
Significant accounting policies are as follows:
Investments
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's
equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining
terms of the securities. Realized gains or losses on the sale of
investments are determined on the basis of specific identification.
-6-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
Premium Revenue Recognition
Premiums are earned over the period at risk in proportion to the amount
of coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related
unearned premiums, net of premium credits allowed against the premiums
charged for insurance of refunding issues and applicable acquisition
costs, are earned immediately. Unearned premiums represent the portion
of premiums written related to coverage yet to be provided on policies
in force.
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate
directly to premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance
functions, rating agency fees, state premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums
ceded to reinsurers (see Note 6). Net acquisition costs are deferred
and amortized over the period in which the related premiums are earned.
Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount
equal to the present value of unpaid principal and interest and other
payments due under insured risks at the balance sheet date for which,
in management's judgment, the likelihood of default is probable. Such
reserves amounted to $77.8 million and $98.7 million at December 31,
1995 and 1994, respectively. As of December 31, 1995 and 1994, such
reserves included $28.8 million and $71.0 million, respectively,
established based on an evaluation of the insured portfolio in light of
current economic conditions and other relevant factors. Loss and loss
adjustment expenses include amounts discounted at an interest rate of
5.5% in 1995 and 7.8% in 1994. The reserve for loss and loss adjustment
expenses is necessarily based upon estimates, however, in management's
opinion the reserves for loss and loss adjustment expenses is adequate.
However, actual results will likely differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. These temporary differences relate principally to
unrealized gains (losses) on fixed maturity securities
available-for-sale, premium revenue recognition, deferred acquisition
costs and deferred compensation. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to
statutory contingency reserves (see Note 3). The amounts deducted must
be included in taxable income upon their release from the reserves or
upon earlier release of such amounts from such reserves to cover excess
losses as permitted by insurance regulators. The amounts deducted are
allowed as deductions from taxable income only to the extent that U.S.
government non-interest bearing tax and loss bonds are purchased and
held in an amount equal to the tax benefit attributable to such
deductions.
-7-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and
equipment are depreciated straight-line over five years. Leasehold
improvements are amortized over their estimated service life or over
the life of the lease, whichever is shorter. Computer equipment and
software are depreciated over three years. Maintenance and repairs are
charged to expense as incurred.
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of
exchange existing at December 31, 1995 and 1994 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation loss at December 31, 1995 and 1994 was $1.5
million and $1.2 million, respectively, net of tax, and is reported as
a separate component of stockholder's equity.
(3) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory-basis accounting practices
differ from GAAP:
(a) premiums are earned in proportion to the reduction of the
related risk rather than in proportion to the coverage
provided;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and the tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal
income tax payments; and
(g) all fixed income investments are carried at amortized cost
rather than at fair value for securities classified as
available-for-sale under GAAP.
-8-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- --------------------
Net Stockholder's Net Stockholder's Net Stockholder's
Income Equity Income Equity Income Equity
----------- ------------- ------- ------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $187,878 $1,547,881 $ 189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve -- (386,564) -- (328,073) -- (252,542)
Non-admitted assets -- (5,731) -- (7,566) -- (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax -- (63,785) -- 41,773 -- (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance -- -- -- (266) -- --
Contingency reserve tax deduction (see Note 2) -- 78,196 -- 55,496 -- 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 -- 9,716
-------- ---------- --------- ---------- -------- ----------
Statutory-basis amount $166,906 $1,001,521 $ 179,348 $ 893,734 $185,145 $ 777,097
======== ========== ========= ========== ======== ==========
</TABLE>
-9-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
(4) Investments
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994,
respectively, were on deposit with various regulatory authorities as
required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as
available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
---- --------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 71,182 $ 1,696 - $ 72,878
Obligations of states and political
subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments 30,270 152 550 29,872
--------------- --------------- ------------- ----------------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
--------------- --------------- ------------- ----------------
Total $2,134,485 $100,306 $2,175 $2,232,616
=============== =============== ============= ================
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1995, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
1995 Cost Value
---- ----------- ------------
<S> <C> <C>
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
----------- -----------
Total $2,134,485 $2,232,616
========== ==========
</TABLE>
-10-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1994 Cost Gains Losses Value
---- -------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political
subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments 103,666 400 (4,765) 99,301
---------- ------- -------- ----------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
---------- ------- -------- ----------
Total $2,029,851 $26,217 $(90,484) $1,965,584
========== ======= ======== ==========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were
$836.1 million, $550.5 million, and $789.0 million, respectively. For
1995, 1994 and 1993 gross gains of $36.3 million, $18.2 million and
$36.1 million respectively, and gross losses of $5.5 million, $12.3
million and $1.0 million respectively, were realized on such sales.
Net investment income of the Company is derived from the following
sources (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
-------- ------- -----
<S> <C> <C> <C>
Income from fixed maturity securities $112,684 $108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
-------- -------- --------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
-------- -------- --------
Net investment income $120,398 $109,828 $ 99,920
======== ======== ========
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
(5) Income Taxes
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the
Company and the Parent based upon their respective contributions to
consolidated net income. The Company's effective federal corporate tax
rate (20.6 percent in 1995, 21.3 percent in 1994 and 24.3 percent in
1993) is less than the corporate tax rate on ordinary income of 35
percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the
Company for 1995, 1994 and 1993 is comprised of the following
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Current tax expense $28,913 $43,484 $59,505
Deferred tax expense 19,841 7,741 (7,284)
------- ------- -------
Federal income tax expense $48,754 $51,225 $52,221
======= ======= =======
</TABLE>
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1994 1993
-------- ---------- ---------
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $82,821 $84,334 $75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
--------- --------- --------
Provision for income taxes $48,754 $51,225 $52,221
======= ======= =======
</TABLE>
-12-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995 and 1994
are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -------------
<S> <C> <C>
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available-for-sale - $22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
----------- -------------
Total gross deferred tax assets 18,434 52,439
----------- -------------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
----------- -------------
Total gross deferred tax liabilities 117,605 75,079
----------- -------------
Net deferred tax liability $ 99,171 $22,640
=========== =============
</TABLE>
Based upon the level of historical taxable income, projections of
future taxable income over the periods in which the deferred tax assets
are deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it
will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1995 and 1994. The
company anticipates that the related deferred tax asset will be
realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 million, respectively.
-13-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
(6) Reinsurance
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where
warranted, on a facultative basis. This process serves to limit the
Company's exposure on risks underwritten. In the event that any or all
of the reinsuring companies were unable to meet their obligations, the
Company would be liable for such defaulted amounts. The Company
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from activities or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company holds
collateral under reinsurance agreements in the form of letters of
credit and trust agreements in various amounts with various reinsurers
totaling $33.7 million that can be drawn on in the event of default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent
a payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial
statements, an initial adjustment of $4.6 million, before applicable
income taxes, has been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December
31, 1995, 1994 and 1993, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $1.1 million,
$0.3 million and $9.1 million for the years ended December 31, 1995,
1994 and 1993, respectively.
-14-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1995 1994 1993
-------------- --------------- -----------------
<S> <C> <C> <C>
Balance at January 1, $98,746 $96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
------ -------- --------
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
-------- -------- --------
Total Incurred (8,426) 3,646 42,894
------- -------- --------
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
------- --------- ---------
Total Paid (5,712) (1,302) (670)
------- --------- ---------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
-------- -------- --------
Balance at December 31, $77,808 $98,746 $96,098
======= ======= =======
</TABLE>
The changes in incurred portfolio reserves principally relate to
business written in prior years. The changes are based upon an
evaluation of the insured portfolio in light of current economic
conditions and other relevant factors.
-15-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
(8) Related Party Transactions
The Company has various agreements with subsidiaries of General
Electric Company ("GE") and GE Capital. These business transactions
include appraisal fees and due diligence costs associated with
underwriting structured finance mortgage-backed security business;
payroll and office expenses incurred by the Company's international
branch offices but processed by a GE subsidiary; investment fees
pertaining to the management of the Company's investment portfolio; and
telecommunication service charges. Approximately $3.2 million, $3.2
million and $1.0 million in expenses were incurred in 1995, 1994 and
1993, respectively, related to such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also
provides first loss protection in the event of default. Gross premiums
written on these issues amounted to $1.3 million in 1995, $2.5 million
in 1994, and $3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross
premiums written in 1995 and 1994 and 2 percent in 1993).
(9) Compensation Plans
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit
sharing plans. Expenses incurred by the Company under compensation
plans and bonuses amounted to $7.5 million, $12.2 million and $16.7
million in 1995, 1994 and 1993, respectively, before deduction for
related tax benefits.
(10) Dividends
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $2.1 million in 1995 and 1994, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York
State Insurance Department. At December 31, 1995 and 1994, the amount
of the Company's surplus available for dividends was approximately
$100.2 million and $89.3 million, respectively.
During 1995, the company paid dividends of $25 million. No dividends
were paid during 1994 or 1993.
-16-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
===============================================================================
(ii) Financial Instruments
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market price is not
available, fair values is estimated using quoted market prices for similar
securities. Fair value disclosure for fixed maturity securities is included in
the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------------ ----------------------
Carrying Fair Carrying Fair
amount Value amount Value
----------- ------ -------- ------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts $ 199 $ 199 $1,766 $1,766
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of
deferred acquisition costs, and loss and loss adjustment expense
reserves. Estimated fair values of these guaranties are based on
amounts currently charged to enter into similar agreements (net of
applicable ceding commissions), discounted cash flows considering
contractual revenues to be received adjusted for expected prepayments,
the present value of future obligations and estimated losses, and
current interest rates. The estimated fair values of such financial
guaranties range between $412.8 million and $456.2 million compared to
a carrying value of $540.6 million as of December 31, 1995 and between
$518.1 million and $565.9 million compared to a carrying value of
$585.1 million as of December 31, 1994.
-17-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The Company
has established and maintains its own underwriting standards that are based on
those aspects of credit that the Company deems important for the particular
category of obligations considered for insurance. Credit criteria include
economic and social trends, debt management, financial management and legal and
administrative factors, the adequacy of anticipated cash flows, including the
historical and expected performance of assets pledged for payment of securities
under varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be pledged or, in
some instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to make
payment prior to any payment by the Company. The types and extent of collateral
pledged varies, but may include residential and commercial mortgages, corporate
debt, government debt and consumer receivables.
As of December 31, 1995, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $98.7 billion, net of
reinsurance of $20.7 billion. The Company's insured portfolio as of December 31,
1995 was broadly diversified by geography and bond market sector with no single
debt issuer representing more than 1% of the Company's principal exposure
outstanding, net of reinsurance.
As of December 31, 1995, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
Net
Principal
Outstanding
------------
<S> <C>
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
----------
Total $98,660.3
==========
</TABLE>
-18-
<PAGE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
================================================================================
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure outstanding
at December 31, 1995 by state, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
Net
Principal
Outstanding
-----------
<S> <C>
California $10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
---------
Sub-total 59,518.2
Other states and International 39,142.1
---------
Total $98,660.3
=========
</TABLE>
(12) Commitments
Total rent expense was $2.2 million, $2.6 million and $2.4 million in
1995, 1994 and 1993, respectively. For each of the next five years and
in the aggregate as of December 31, 1995, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-----
Total minimum future rental payments $16,844
=======
</TABLE>
-19-
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
1933 Act .................................................................... 3
Accrual Period .............................................................. 8
AFL ......................................................................... 18
Appraised Values ............................................................ 23, 29
Balloon Loans ............................................................... 6
Beneficial Certificate Owner ................................................ 12
Book-Entry Certificates ..................................................... 48
Cargill ..................................................................... 18
Cede ........................................................................ 3, 12
CEDEL ....................................................................... 12
CEDEL Participants .......................................................... 50
Certificate Account ......................................................... 44
Certificateholder ........................................................... 3
Certificates ................................................................ 5, 42
CFSC ........................................................................ 18
Citibank .................................................................... 12
Class ....................................................................... 42
Class A Carry-Forward Amount ................................................ 11
Class A Certificate Principal Balance ....................................... 11
Class A Certificates ........................................................ 5, 42
Class A Distribution Amount ................................................. 11
Class A Group I Certificate Principal Balance ............................... 11
Class A Group I Certificates ................................................ 5, 42
Class A Group II Certificate Principal Balance .............................. 11
Class A Insured Distribution Amount ......................................... 11
Class A Interest Distribution Amount ........................................ 9
Class A Principal Distribution Amount ....................................... 9
Class A-1 Group I Certificates .............................................. 42
Class A-1 Pass-Through Rate ................................................. 7
Class A-2 Group I Certificates .............................................. 42
Class A-3 Group I Certificates .............................................. 42
Class A-4 Group I Certificates .............................................. 42
Class A-5 Group I Certificates .............................................. 42
Class A-6 Formula Pass-Through Rate ......................................... 8
Class A-6 Group II Certificates ............................................. 5, 42
Class A-6 Pass-Through Rate ................................................. 7
Class B Certificates ........................................................ 5
Class B Group I Certificates ................................................ 5
Class B Group II Certificates ............................................... 5
Class B Interest ............................................................ 46
Closing Date ................................................................ 4
Combined Loan-to-Value Ratio ................................................ 22, 29
Commission .................................................................. 3
Compensating Interest ....................................................... 54
Cooperative ................................................................. 50
Coupon Rates ................................................................ 6
Cut-Off Date ................................................................ 4, 5, 19
D&P ......................................................................... 70
Definitive Certificate ...................................................... 48
Delinquency Advances ........................................................ 44
Description of the Certificates ............................................. 5
</TABLE>
i
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Disqualified persons ........................................................ 69
DTC ......................................................................... 3, 12
DTC Participants ............................................................ 49
EDS ......................................................................... 18
ERISA ....................................................................... 14, 69
ERISA Plan .................................................................. 69
Euroclear ................................................................... 12
Euroclear Operator .......................................................... 50
Euroclear Participants ...................................................... 50
European Depositaries ....................................................... 48
European Depositories ....................................................... 12
Event of Default ............................................................ 56
Excluded Plan ............................................................... 69
Exemption ................................................................... 14, 69
Financial Intermediary ...................................................... 48
Fitch ....................................................................... 70
GE Capital .................................................................. 65
Global Securities ........................................................... 1
Group I ..................................................................... 6
Group I Interest Remittance Amount .......................................... 43
Group I Monthly Remittance .................................................. 43
Group I Principal Remittance Amount ......................................... 43
Group I Subordination Deficit ............................................... 46
Group I Total Available Funds ............................................... 48
Group II .................................................................... 6
Group II Interest Remittance Amount ......................................... 43
Group II Monthly Remittance ................................................. 43
Group II Principal Remittance Amount ........................................ 43
Group II Subordination Deficit .............................................. 47
Group II Total Available Funds .............................................. 48
Insurance Proceeds .......................................................... 10
Insured Payment ............................................................. 44
Interest Determination Date ................................................. 45
Interest Remittance Amount .................................................. 43
LIBOR ....................................................................... 7, 45
Liquidated Mortgage Loan .................................................... 56
Liquidation Proceeds ........................................................ 10
LSI ......................................................................... 18
Master Servicer ............................................................. 52
Monthly Remittance .......................................................... 43
Moody's ..................................................................... 70
Morgan ...................................................................... 12
Mortgage Loan Group ......................................................... 6, 19
Mortgaged Properties ........................................................ 19
Mortgages ................................................................... 6
Mortgagors .................................................................. 35
Net Liquidation Proceeds .................................................... 10
Non-U.S. Person ............................................................. 4
Notes ....................................................................... 19
OID Regulations ............................................................. 68
Original Group I Pool Principal Balance ..................................... 6
Original Group II Pool Principal Balance .................................... 6
Original Pool Principal Balance ............................................. 6
Owner ....................................................................... 3
</TABLE>
ii
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Participants ................................................................ 48
Parties in interest ......................................................... 69
Payment Date ................................................................ 8, 42
Percentage Interest ......................................................... 43
Plans ....................................................................... 14, 69
Pooling and Servicing Agreement ............................................. 5, 42
Preference Amounts .......................................................... 66
Preference Order ............................................................ 67
Prepayment Assumption ....................................................... 38
Prepayments ................................................................. 10, 16
Principal and Interest Account .............................................. 43
Principal Remittance Amount ................................................. 43
Properties .................................................................. 19
Qualifying Rate ............................................................. 35
Record Date ................................................................. 8
Reference Banks ............................................................. 45
Released Mortgaged Property Proceeds ........................................ 10
Relevant Depositary ......................................................... 48
REMICs ...................................................................... 14, 67
Remittance Date ............................................................. 43
Remittance Period ........................................................... 43
Reserve Interest Rate ....................................................... 45
Residual Certificates ....................................................... 5, 42
Restricted Group ............................................................ 69
Reuters Screen LIBO Page .................................................... 45
Rules ....................................................................... 48
S&P ......................................................................... 70
Seller ...................................................................... 4
Seller Optional Termination Date ............................................ 13
Servicing Advances .......................................................... 55
Servicing Fee ............................................................... 13
SMMEA ....................................................................... 15, 72
Specified Subordinated Amount ............................................... 46
Sponsor ..................................................................... 4
Subordinated Amount ......................................................... 46
Subordination Deficiency .................................................... 46
Subordination Increase Amount ............................................... 47
Subordination Reduction Amount .............................................. 47
Terms and Conditions ........................................................ 50
The Mortgage Loan Pool ...................................................... 5
Total Available Funds ....................................................... 48
Trust ....................................................................... 4
Trust Estate ................................................................ 61
Trustee ..................................................................... 4
U.S. Person ................................................................. 4
Underwriters ................................................................ 72
Underwriting Agreement ...................................................... 72
Weighted average life ....................................................... 36
</TABLE>
iii
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
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
3
<PAGE>
<PAGE>
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.
4
<PAGE>
<PAGE>
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).
5
<PAGE>
<PAGE>
- -------------------------------------------------------------------------------
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.
</TABLE>
<TABLE>
<S> <C>
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.
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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.
109
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INDEX OF PRINCIPAL DEFINITIONS
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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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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>
111
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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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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>
113
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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, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
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, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE SPONSOR, THE SELLER, THE SERVICERS, THE BACK-UP SERVICER OR
THE CERTIFICATE INSURER SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
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<S> <C>
PROSPECTUS SUPPLEMENT
Available Information........................................................................................................ S-3
Reports to the Holders....................................................................................................... S-3
Summary...................................................................................................................... S-4
Risk Factors................................................................................................................. S-16
Use of Proceeds.............................................................................................................. S-18
The Sponsor.................................................................................................................. S-18
The Seller and Master Servicer............................................................................................... S-18
The Mortgage Loan Pool....................................................................................................... S-19
Maturity, Prepayment and Yield Considerations................................................................................ S-35
Description of the Certificates.............................................................................................. S-42
The Trustee.................................................................................................................. S-61
The Certificate Insurance Policy and the Certificate Insurer................................................................. S-64
Certain Federal Tax Aspects.................................................................................................. S-67
ERISA Considerations......................................................................................................... S-69
Ratings...................................................................................................................... S-72
Legal Investment Considerations.............................................................................................. S-72
Underwriting................................................................................................................. S-72
Experts...................................................................................................................... S-73
Certain Legal Matters........................................................................................................ S-74
Annex I...................................................................................................................... I-1
Appendix A -- Audited Financial Statements of Certificate Insurer............................................................ A-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>
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UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT OR A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
ACCESS
FINANCIAL MORTGAGE
LOAN TRUST 1996-2
$210,602,000
MORTGAGE LOAN PASS-THROUGH
CERTIFICATES,
SERIES 1996-2
$58,456,000 Class A-1 Group I Certificates,
Variable Pass-Through Rate
$38,768,000 Class A-2 Group I Certificates,
6.925% Pass-Through Rate
$16,525,000 Class A-3 Group I Certificates,
7.300% Pass-Through Rate
$14,713,000 Class A-4 Group I Certificates,
7.625% Pass-Through Rate
$13,796,000 Class A-5 Group I Certificates,
7.925% Pass-Through Rate
$68,344,000 Class A-6 Group II Certificates
Variable Pass-Through Rate
ACCESS FINANCIAL LENDING CORP.
SELLER
FINANCIAL GUARANTY INSURANCE
[Logo] COMPANY
FGIC is a registered service mark used by Financial Guaranty Insurance Company,
a private company not affiliated with any U.S. Government agency.
------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
J.P. MORGAN & CO.
May 15, 1996
__________________________________ _________________________________
STATEMENT OF DIFFERENCES
The section symble shall be expressed by ................... 'SS'.
<PAGE>
