<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 33-73748
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 17, 1997)
$120,000,000
(APPROXIMATE)
FUND AMERICA INVESTORS TRUST 1997-NMC1
ISSUER
COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES 1997-NMC1
DUE APRIL 25, 2029
NATIONAL MORTGAGE CORPORATION
SELLER AND SERVICER
[NATIONAL MORTGAGE CORP. LOGO]
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The Fund America Investors Trust 1997-NMC1 (the "Issuer") will be formed
pursuant to a deposit trust agreement to be dated as of September 1, 1997 (the
"Trust Agreement") between Fund America Investors Corporation II (the "Company")
and Wilmington Trust Company, as owner trustee (the "Owner Trustee"). The Issuer
is hereby offering $120,000,000 (approximate) original principal amount of its
Collateralized Mortgage Obligations, Series 1997-NMC1 (the "Bonds"). The Bonds
will be issued pursuant to an indenture, dated as of September 1, 1997 (the
"Indenture"), between the Issuer and Norwest Bank Minnesota, National
Association, as indenture trustee (the "Indenture Trustee") and as backup
servicer (the "Backup Servicer"), and will be secured by a trust estate (the
"Trust Estate") consisting primarily of (i) a pool (the "Mortgage Pool") of
adjustable rate mortgage loans secured by first liens on one- to four-family
residential properties (the "Mortgage Loans"), (ii) the Issuer's rights under
the Sales Agreement and the Servicing Agreement (each as defined herein) and
(iii) the Insurance Policy, as described herein. The Issuer also will issue
instruments evidencing the residual interest in the Trust Estate (the "Residual
Interest"). Only the Bonds are offered hereby.
Simultaneously with the issuance of the Bonds, the Seller will obtain from
MBIA Insurance Corporation (the "Bond Insurer") a financial guaranty insurance
policy relating to the Bonds (the "Insurance Policy") in favor of the Indenture
Trustee. The Insurance Policy will require the Bond Insurer to make certain
Insured Payments (as defined herein) on the Bonds.
(cover continued on next page)
[MBIA LOGO]
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE BONDS,
SEE "RISK FACTORS" BEGINNING ON PAGE S-14 HEREIN, "CERTAIN PREPAYMENT AND YIELD
CONSIDERATIONS" BEGINNING ON PAGE S-49 HEREIN AND "RISK FACTORS" BEGINNING ON
PAGE 27 IN THE PROSPECTUS.
---------------------
THE ASSETS PLEDGED TO SECURE THE BONDS AND PAYMENTS UNDER THE INSURANCE POLICY
ARE THE SOLE SOURCE OF PAYMENTS ON THE BONDS. THE BONDS REPRESENT NON-RECOURSE
OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE COMPANY, THE SELLER, THE SERVICER, THE INDENTURE TRUSTEE, THE OWNER
TRUSTEE, THE BOND INSURER OR ANY OF THEIR AFFILIATES, EXCEPT AS DESCRIBED
HEREIN. NEITHER THE BONDS NOR THE MORTGAGE LOANS ARE OR WILL BE INSURED OR
GUARANTEED BY ANY GOVERNMENT AGENCY OR INSTRUMENTALITY.
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.
---------------------
The Bonds will be purchased by Greenwich Capital Markets, Inc.
("Greenwich," and together with ContiFinancial Services Corporation, the
"Underwriters") from the Company and will be offered by Greenwich from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Company from the sale of the
Bonds are expected to be approximately $119,520,000 (based upon the original
principal amount of the Bonds set forth above), before the deduction of expenses
payable by the Company estimated to be approximately $350,000.
The Bonds are offered subject to prior sale, when, as, and if accepted by
Greenwich and subject to Greenwich's right to reject orders in whole or in part.
It is expected that delivery of the Bonds will be made through the Same-Day
Funds Settlement System of The Depository Trust Company, Cedel Bank, S.A. and
the Euroclear System on or about September 30, 1997. The Bonds will be offered
in Europe and the United States of America.
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[GREENWICH CAPITAL MARKETS] [CONTIFINANCIAL LOGO]
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The date of this Prospectus Supplement is September 17, 1997
<PAGE> 2
(continued from front cover)
The Mortgage Loans identified for inclusion in the Mortgage Pool as of
the date of issuance of the Bonds will be collectively referred to herein as the
"Initial Mortgage Loans." The aggregate of the principal balances of the Initial
Mortgage Loans, determined as of September 1, 1997 (the "Statistical Calculation
Date"), totaled approximately $110,925,309.50 (the "Initial Mortgage Pool
Balance"). Other Mortgage Loans satisfying the criteria described herein (the
"Additional Mortgage Loans") will be included in the Mortgage Pool on or before
the Closing Date. The Aggregate Principal Balance of the Additional Mortgage
Loans shall not exceed $16,993,473 (and may be substantially less than such
amount). The Mortgage Loans have been originated using underwriting standards
that are less stringent than the underwriting standards applied by other first
mortgage loan purchase programs such as those administered by Fannie Mae or by
Freddie Mac. See "Risk Factors--Risk Associated with Underwriting Standards"
herein.
The Mortgage Loans will have been originated or acquired by National
Mortgage Corporation (the "Seller") through its network of brokers and
correspondents. On or prior to the date the Bonds are issued, the Seller will
convey its interest in each Mortgage Loan to the Company who in turn will convey
such interests to the Issuer. The Issuer will then pledge all of its interest in
the Mortgage Loans, without recourse, to the Indenture Trustee pursuant to the
Indenture as collateral for the Bonds. The Company and the Seller are commonly
controlled by Steven B. Chotin.
Principal and interest on the Bonds will be payable as described on the
25th day of each month or, if such day is not a Business Day, the next
succeeding business day, beginning in October 1997 (each, a "Payment Date"). The
Bond Interest Rate with respect to each Payment Date adjusts monthly based on
One Month LIBOR as described herein.
The Bonds will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties it makes in connection with the conveyance of the
Mortgage Loans to the Company pursuant to a mortgage loan sale agreement (the
"Sales Agreement"). The Seller will also act as servicer of the Mortgage Loans
(in such capacity, the "Servicer") and, in such capacity, will have limited
obligations that arise pursuant to certain representations and warranties and to
its contractual servicing obligations under the servicing agreement (the
"Servicing Agreement") to be entered into among the Servicer, the Issuer and the
Indenture Trustee, including the obligation to advance delinquent payments of
principal and interest on the Mortgage Loans to the extent provided herein.
The Bonds will be unconditionally and irrevocably guaranteed as to
timely payment of interest due to Bondholders and as to ultimate collection of
the Bond Balance, in each case pursuant to the terms of the Insurance Policy
issued by the Bond Insurer. See "The Bond Insurance" herein.
The stated maturity for the Bonds (determined on the basis of the
assumptions described herein) is the Payment Date occurring in April 25, 2029
(the "Stated Maturity").
The yield to maturity on the Bonds will be affected by, among other
things, the rate of payment of principal (including by reason of prepayments,
defaults and liquidations) of the Mortgage Loans and the timing and receipt of
such payments as described herein and in the Prospectus. See "Risk
Factors--Prepayment and Yield Considerations" in the Prospectus and "Risk
Factors--Yield Considerations Relating to Excess Cash" and "Certain Prepayment
and Yield Considerations" herein.
The Bonds may be redeemed, in whole but not in part, at the option of
the holder(s) of a majority of the Residual Interest or, if not exercised, at
the option of the Servicer, on or after the Payment Date on which the Aggregate
Principal Balance of the Mortgage Loans is less than 10% of the Aggregate
Principal Balance of the
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Mortgage Loans as of the applicable Cut-off Date. See "Description of the
Bonds--Redemption of the Bonds" herein.
No election will be made to treat the Issuer, the Trust Estate or the
arrangement by which the Bonds are issued as a "real estate mortgage investment
conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for the Bonds. The Underwriters
intend to make a secondary market for the Bonds, but have no obligation to do
so. There can be no assurance that a secondary market for the Bonds will develop
or, if one does develop, that it will provide investors with a satisfactory
level of liquidity or that it will continue.
It is a condition to the issuance of the Bonds that they be rated "Aaa"
by Moody's Investors Service, Inc. and "AAA" by Standard and Poor's Ratings
Services, a Division of The McGraw-Hill Companies, Inc.
Reference is made to the Index of Principal Terms herein for the
location in this Prospectus Supplement of the definitions of certain capitalized
terms used herein, and reference is also made to the Index of Principal Terms in
the Prospectus for the location in the Prospectus of the definitions of certain
capitalized terms used, but not otherwise defined, herein.
----------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE RELATED
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A SEPARATE
SERIES OF SECURITIES BEING OFFERED BY THE COMPANY PURSUANT TO ITS PROSPECTUS
DATED SEPTEMBER 17, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND THAT
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THE OFFERING OF THE BONDS THAT IS NOT CONTAINED HEREIN,
AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE BONDS MAY NOT BE CONSUMMATED UNLESS THE
PROSPECTIVE INVESTOR HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
FOR UNITED KINGDOM PURCHASERS: THE BONDS MAY NOT BE OFFERED OR SOLD IN
THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY BUSINESS IS TO BUY OR
SELL SECURITIES, WHETHER AS PRINCIPAL OR AGENT (EXCEPT IN CIRCUMSTANCES THAT DO
NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THE PUBLIC OFFERS OF
SECURITIES REGULATION 1995), AND THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
MAY ONLY BE ISSUED OR PASSED ON TO ANY PERSON IN THE UNITED KINGDOM IF THAT
PERSON IS OF THE KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT
1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996.
----------------
To the extent statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the payments to be made on, or the yield of, the Bonds, which
risks and uncertainties are discussed under "Risk Factors" and "Certain
Prepayment and Yield Considerations" herein. As a consequence, no assurance can
be given as to the actual payments on, or the yield of, the Bonds.
The Company has filed with the Commission certain materials relating to
the Mortgage Loans and the Bonds on Form 8-K. Such materials were prepared by
the Underwriters (based in part on information provided
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by the Seller) for certain prospective investors, and the information included
in such materials is subject to and is superseded by the information set forth
in this Prospectus Supplement.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
BONDS OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
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TABLE OF CONTENTS
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CAPTION PAGE
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SUMMARY OF TERMS................................................................................................S-1
RISK FACTORS...................................................................................................S-14
Risk of Limitations on Adjustments of the
Bond Interest Rate and
Yield Considerations......................................................................................S-14
Risks Associated with
Underwriting Standards....................................................................................S-15
Origination Risks; Seller's Reliance on
Brokers and Correspondents................................................................................S-15
Risks Associated with Geographic
Concentration of Mortgaged Properties.....................................................................S-16
Difference Between Initial Mortgage Loans as
of the Statistical Calculation Date and the
Mortgage Loans as of the Applicable Cut-
off Dates.................................................................................................S-16
Risks Associated with Prepayment of the
Mortgage Loans............................................................................................S-16
Yield Considerations Relating to
Excess Cash...............................................................................................S-17
Bonds are Non-Recourse Obligations..........................................................................S-18
Book-Entry Registration.....................................................................................S-18
DESCRIPTION OF THE BONDS.......................................................................................S-18
General.....................................................................................................S-18
Book-Entry Registration and
Definitive Bonds..........................................................................................S-19
Assignment of Mortgage Loans................................................................................S-23
Payments on the Bonds.......................................................................................S-24
Bond Account................................................................................................S-28
Overcollateralization Feature...............................................................................S-30
Reports to Bondholders......................................................................................S-31
Redemption of the Bonds.....................................................................................S-32
Payments to the Holder(s) of the Residual
Interest..................................................................................................S-33
The Indenture Trustee.......................................................................................S-33
Voting......................................................................................................S-33
Bond Events of Default......................................................................................S-34
THE ISSUER.....................................................................................................S-34
NATIONAL MORTGAGE CORPORATION..................................................................................S-34
DESCRIPTION OF THE
MORTGAGE POOL...............................................................................................S-34
General.....................................................................................................S-34
Mortgage Rate Adjustment....................................................................................S-35
Mortgage Loan Characteristics...............................................................................S-37
Underwriting Standards......................................................................................S-44
Conveyance of Additional Mortgage Loans.....................................................................S-48
CERTAIN PREPAYMENT AND YIELD
CONSIDERATIONS..............................................................................................S-49
General.....................................................................................................S-49
Yield Considerations Relating to Adjustable
Rate Mortgage Loans.......................................................................................S-51
Weighted Average Life.......................................................................................S-52
SERVICING OF THE MORTGAGE LOANS................................................................................S-56
General.....................................................................................................S-56
Customary Servicing Procedures..............................................................................S-56
The Servicing Agreement.....................................................................................S-57
Servicing and Other Compensation; Payment
of Expenses...............................................................................................S-62
Historical Servicing Experience
of the Servicer...........................................................................................S-63
The Backup Servicer.........................................................................................S-64
THE BOND INSURANCE.............................................................................................S-64
The Insurance Policy........................................................................................S-64
The Bond Insurer............................................................................................S-66
Credit Enhancement Does Not Apply to
Prepayment Risk...........................................................................................S-68
ERISA CONSIDERATIONS...........................................................................................S-68
USE OF PROCEEDS................................................................................................S-69
LEGAL INVESTMENT CONSIDERATIONS................................................................................S-69
UNDERWRITING...................................................................................................S-70
REPORT OF EXPERTS..............................................................................................S-70
LEGAL MATTERS..................................................................................................S-71
RATING OF THE BONDS............................................................................................S-71
INDEX OF PRINCIPAL TERMS.......................................................................................S-72
ANNEX A - GLOBAL CLEARANCE,
SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES.....................................................................................A-1
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms used in this Prospectus Supplement
and not defined herein shall have the meanings set forth in the Prospectus. See
"Index of Principal Terms" in this Prospectus Supplement and in the Prospectus
for the location of the definitions of certain capitalized terms.
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SECURITIES OFFERED........................ $120,000,000 (approximate) Collateralized Mortgage Obligations,
Series 1997-NMC1 (the "Bonds"). The Bonds represent non-recourse
obligations of the Issuer. Proceeds of the assets in the Trust Estate will
be the sole source of payments on the Bonds. The original principal
amount of the Bonds may be increased or decreased by up to 5% on the
Closing Date, depending upon the Mortgage Loans actually acquired by
the Issuer and pledged to the Indenture Trustee.
ISSUER.................................... Fund America Investors Trust 1997-NMC1, a Delaware business trust
(the "Issuer"), established by the Company pursuant to a deposit trust
agreement, dated as of September 1, 1997 (the "Trust Agreement"),
between the Company and the Owner Trustee. After the Closing Date,
the Residual Interest representing all of the beneficial ownership interest
in the Issuer will be held by a limited purpose, wholly-owned subsidiary
of the Seller. The Issuer does not have, nor is it expected in the future
to have, any significant assets, other than the assets included in the
Trust Estate. See "The Issuer" herein.
COMPANY................................... Fund America Investors Corporation II, a Delaware corporation (the
"Company").
SELLER AND SERVICER....................... National Mortgage Corporation, a Colorado corporation (the "Seller"
and in its capacity as servicer of the Mortgage Loans, the "Servicer").
The Mortgage Loans were originated or acquired by the Seller through
its network of brokers and correspondents. On or prior to the date the
Bonds are issued, the Seller will convey its interest in each Mortgage
Loan to the Company who in turn will convey such interests to the
Issuer. The Company and the Seller are commonly controlled by
Steven B. Chotin.
THE INDENTURE TRUSTEE AND
BACKUP SERVICER......................... Norwest Bank Minnesota, National Association, a national banking
association, as indenture trustee (the "Indenture Trustee") and as
backup servicer (the "Backup Servicer"). The Indenture Trustee shall
receive a fee (the "Indenture Trustee Fee"), payable monthly on each
Payment Date at one-twelfth of 0.0125% of the Aggregate Principal
Balance of the Mortgage Loans as of the first day of the related Due
Period. Upon a termination of the Servicer, the Backup Servicer shall
be obligated to succeed to the obligations of the Servicer or to appoint
an eligible successor servicer.
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OWNER TRUSTEE............................. Wilmington Trust Company, a Delaware banking corporation, as owner
trustee (the "Owner Trustee") under the Trust Agreement. The Owner
Trustee shall receive a fee (the "Owner Trustee Fee") as provided
under the Trust Agreement.
CUT-OFF DATES............................. With respect to the Initial Mortgage Loans, the Cut-off Date is
September 1, 1997. With respect to the Additional Mortgage Loans,
the Cut-off Date is their respective origination dates, which have
occurred prior to the Closing Date.
CLOSING DATE.............................. On or about September 30, 1997.
ADMINISTRATIVE FEE AMOUNT................. With respect to any Payment Date, the sum of the Servicing Fee (as
defined hereafter), Indenture Trustee Fee and Bond Insurer Premium (as
defined hereafter) relating to such Payment Date (the "Administrative
Fee Amount").
DUE PERIOD................................ With respect to any Payment Date, the period commencing on the
second day of the calendar month immediately preceding the calendar
month in which such Payment Date occurs (or with respect to the first
Payment Date, commencing on the day following the applicable Cut-off
Date for each Mortgage Loan) and ending on the first day of the
calendar month in which such Payment Date occurs (the "Due Period").
COLLECTION PERIOD......................... With respect to any Payment Date, the calendar month immediately
preceding the month in which such Payment Date occurs (or, in the
case of the first Payment Date, during the period from the day
following the applicable Cut-off Date for each Mortgage Loan through
and including the last day of September 1997) (the "Collection
Period").
DEPOSIT DATE.............................. With respect to each Payment Date, the 18th day of the month in which
such Payment Date occurs, or if such day is not a Business Day, then
the next succeeding Business Day (the "Deposit Date").
DESCRIPTION OF
THE BONDS............................... The Bonds represent non-recourse obligations of the Issuer and will be
issued pursuant to an indenture to be dated as of September 1, 1997 (the
"Indenture"), entered into between the Issuer and the Indenture Trustee.
The assets included in the trust estate created by the Indenture (the
"Trust Estate") and pledged to secure the Bonds will be the sole source
of payments on the Bonds. The Bonds will be issued in a single class.
The assets of the Trust Estate will consist of (i) a pool (the "Mortgage
Pool") of Mortgage Loans, which are adjustable rate mortgage loans
secured by first lien mortgages or deeds of trust on one- to four-family
residential properties, including units in condominiums and planned unit
developments (the "Mortgaged Properties"), and including any note or
other instrument of indebtedness (each, a "Mortgage Note"); (ii) all
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payments in respect of principal and interest on the Mortgage Loans
(other than any principal or interest payments due thereon on or
prior to the applicable Cut-off Date); (iii) security interests in
the Mortgaged Properties; (iv) the Issuer's rights under the Sales
Agreement and the Servicing Agreement; (v) the rights of the
Indenture Trustee under the Insurance Policy; and (vi) certain
other property.
DENOMINATIONS AND
REGISTRATION............................ The Bonds will be issued in minimum denominations of $1,000
principal amount and in integral multiples thereof, with the exception
of one Bond which may be issued in a lesser amount. No person
acquiring a beneficial ownership interest in any Bond (any such person,
a "Beneficial Owner") will be entitled to receive such Bond in fully
registered, certificated form (a "Definitive Bond"), except under the
limited circumstances described herein. Instead, Beneficial Owners will
hold their Bonds through The Depository Trust Company ("DTC"), in
the United States, or Cedel Bank, societe anonyme ("Cedel") or the
Euroclear System ("Euroclear") in Europe, each of which will effect
payments and transfers in respect of the Bonds by means of electronic
record keeping services, acting through certain participating
organizations. 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 Bonds are in book-
entry form, the Bonds will be represented by one or more global
certificates registered in the name of Cede & Co., as nominee of DTC,
or Citibank N.A. or Morgan Guaranty Trust Company of New York,
the relevant depositaries of Cedel and Euroclear, respectively, and each
a participating member of DTC. This may result in certain delays in
receipt of payments by an investor and may restrict an investor's ability
to pledge its Bonds. See "Risk Factors--Book-Entry Registration" and
"Description of the Bonds--Book-Entry Registration and Definitive
Bonds" herein, "ANNEX A: Global Clearance, Settlement and Tax
Documentation Procedures" hereto and "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry
Registration" in the Prospectus. Unless and until Definitive Bonds are
issued, it is anticipated that the only "Bondholder" will be Cede & Co.,
as nominee of DTC. Beneficial Owners will not be Bondholders as that
term is used in the Indenture and the Servicing Agreement. Beneficial
Owners are permitted to exercise their rights only indirectly through
DTC and its Participants (including Cedel and Euroclear).
PAYMENTS ON THE BONDS
A. General........................... Payments on the Bonds will be made on the 25th day of each month, or
if such day is not a Business Day, on the next succeeding Business Day
(each, a "Payment Date"), commencing October 27, 1997, to each
Bondholder of record as of the last Business Day preceding such
Payment Date or, with respect to Definitive Bonds, as of the last
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Business Day of the month preceding the month in which such Payment Date
occurs (the "Record Date").
A "Business Day" is any day other than (i) a Saturday or Sunday or (ii)
a day on which banking institutions in the State of Colorado, the State
of New York or the city in which the corporate trust office of the
Indenture Trustee or in which the Bond Insurer's principal office is
located are authorized or obligated by law, regulation, executive order
or governmental decree to be closed.
On each Payment Date, payments of principal and interest will be made
to Bondholders as of the immediately preceding Record Date out of
Available Funds for such Payment Date, together with any payments
received under the Insurance Policy. The "Available Funds" for any
Payment Date will generally consist of the aggregate of the following
amounts:
(i) the sum of (a) all scheduled payments of principal and interest
received with respect to the Mortgage Loans and due during the
related Due Period and (b) all unscheduled principal payments or
recoveries on the Mortgage Loans, including Principal
Prepayments, received during the related Collection Period, minus
(w) amounts received with respect to payments due on or prior to
the applicable Cut-off Date, (x) the Administrative Fee Amount
payable with respect to such Payment Date, (y) Payments Ahead
and (z) reimbursements for certain Monthly Advances and
Servicing Advances made with respect to the Mortgage Loans as
described herein (other than those included in liquidation expenses
already reimbursed from related Liquidation Proceeds); and
(ii) the amount of any Monthly Advances and Compensating Interest
Payments made by the Servicer for such Payment Date, any
amounts deposited in the Bond Account in respect of the
repurchase, release, removal or substitution of Mortgage Loans
during the related Collection Period or amounts deposited in the
Bond Account in connection with the redemption of the Bonds, all
as more fully described under "Description of the
Bonds--Payments on the Bonds" herein.
B. Bond Interest Rate................ The Bond Interest Rate for the initial Interest Period will be a per
annum rate equal to One Month LIBOR plus 0.21% and will be
determined on September 26, 1997. The Bond Interest Rate for each
subsequent Interest Period will be a per annum rate equal to the lesser
of (i) for each Interest Period ending prior to the Redemption Date, One
Month LIBOR plus 0.21% and, for each Interest Period ending
thereafter, One Month LIBOR plus 0.42% (the applicable rate described
in this clause (i), the "Bond Formula Rate"), and (ii) the weighted
average of the Mortgage Rates on the Mortgage Loans, less the sum of
(A) approximately 1.1625% per annum and (B) if applicable, the Relief
Act Percentage, as defined below (the rate described in this clause (ii),
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the "Available Funds Cap"). See "Description of the Bonds--Payments
on the Bonds" herein.
If, on any Payment Date, the Available Funds Cap limits the Bond
Interest Rate (i.e., the rate set by the Available Funds Cap is less than
the Bond Formula Rate), the amount of any such shortfall will be
carried forward and be due and payable on the following Payment Date
and shall accrue interest at the applicable Bond Interest Rate until paid
(such shortfall, together with such accrued interest, the "Available
Funds Cap Carry Forward Amount"). The Insurance Policy does not
cover the Available Funds Cap Carry Forward Amount; the payment of
such amount may be funded only from (i) any excess interest resulting
from the Available Funds Cap being in excess of the Bond Formula
Rate on future Payment Dates and (ii) any Excess Cash which would
otherwise be paid to the holder(s) of the Residual Interest. The ratings
assigned to the Bonds do not address the payment of the Available
Funds Cap Carry Forward Amount.
The "Relief Act Percentage" for any Payment Date shall equal the
amount, converted to a percentage of the Aggregate Principal Balance
of the Mortgage Loans, of any interest shortfalls resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"). In computing the Relief Act Percentage,
only those shortfalls that would reduce Available Funds to an amount
less than the sum of (i) amounts owed to the Bond Insurer, (ii) Bond
Interest (calculated assuming the Relief Act Percentage is zero) and (iii)
Monthly Principal on the related Payment Date will be taken into
account for purposes of such calculation.
The "Interest Period" in respect of any Payment Date will be the period
from and including the Closing Date, in the case of the initial Payment
Date, or from and including the immediately preceding Payment Date,
in the case of any subsequent Payment Date, to but excluding the
related Payment Date. All calculations of interest on the Bonds will be
computed on the basis of the actual number of days elapsed in the
related Interest Period in a year of 360 days.
C. Payments of Interest.............. On each Payment Date, Bonds will be entitled to payments in respect
of interest accrued during the related Interest Period ("Bond Interest")
at the Bond Interest Rate on the outstanding aggregate principal balance
of the Bonds (the "Bond Balance") as of the preceding Payment Date
(after giving effect to the payment, if any, in reduction of principal
made on the Bonds on such preceding Payment Date). See "Description
of the Bonds--Payments on the Bonds" herein.
If, with respect to any Payment Date, funds are not available from
Available Funds to pay the full amount of Bond Interest due on the
Bonds, the deficiency will be covered by payments made pursuant to the
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Insurance Policy for such Payment Date. See "The Bond Insurance--The Insurance
Policy" herein.
D. Payments of Principal............. On each Payment Date, Bonds will be entitled to Monthly Principal in
reduction of the Bond Balance. "Monthly Principal" with respect to
any Payment Date will be equal to the aggregate of all scheduled
payments of principal received or advanced with respect to the
Mortgage Loans and due during the related Due Period and all other
amounts collected, received or otherwise recovered in respect of
principal on the Mortgage Loans during or in respect of the related
Collection Period, not including Payments Ahead that are not allocable
to the related Due Period, subject to reduction for any
Overcollateralization Surplus with respect to the related Payment Date
as described herein.
E. Payments of Excess Cash........... On each Payment Date with respect to which the Overcollateralization
Amount for the Bonds is less than the Required Overcollateralization
Amount for such Payment Date, Excess Cash derived from Available
Funds, if any, will be paid on the Bonds in reduction of the Bond
Balance, up to the amount necessary for the related
Overcollateralization Amount to equal the applicable Required
Overcollateralization Amount. "Excess Cash" on any Payment Date
will be equal to Available Funds on such Payment Date, reduced by the
sum of (i) any amounts payable to the Bond Insurer for Insured
Payments paid on prior Payment Dates and not yet reimbursed and for
any unpaid Bond Insurer Premiums for prior Payment Dates (in each
case with interest thereon at the Late Payment Rate set forth in the
Insurance Agreement), (ii) the Bond Interest for the related Payment
Date and (iii) the Monthly Principal for the related Payment Date. Any
Excess Cash remaining after making required payments on the Bonds
and to the Bond Insurer on any Payment Date as described herein will
be released to the holder(s) of the Residual Interest on such Payment
Date, free from the lien of the Indenture, and such amounts will not be
available to make any of the payments referred to in clauses (i)-(iii)
above on any subsequent Payment Date. Certain Mortgage Loans will
not have their first monthly payment due until the Due Period relating
to the November 1997 Payment Date. Accordingly, in the case of the
October 1997 Payment Date, the amount of Excess Cash available will
be lower than it would have been otherwise.
F. Overcollateralization Feature..... Credit enhancement with respect to the Bonds initially will be provided
in part by overcollateralization resulting from the sum of the Aggregate
Principal Balances of the Mortgage Loans as of their respective Cut-off
Dates exceeding the Original Bond Balance. The Indenture requires
that this Overcollateralization Amount be initially increased to, and
thereafter maintained at, the Required Overcollateralization Amount.
This increase and subsequent maintenance is intended to be
accomplished by the application of monthly Excess Cash to accelerate
the pay down of the Bond Balance until the Overcollateralization
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Amount reaches the Required Overcollateralization Amount. Such
applications of Excess Cash, because they consist of interest collections
on the Mortgage Loans, but are distributed as principal on the
Bonds, will increase the related Overcollateralization Amount. Such
overcollateralization is intended to result in amounts received on the
Mortgage Loans in excess of the amount necessary to pay Bond
Interest and the Monthly Principal required to be paid on the Bonds on
any Payment Date being applied to reduce the Bond Balance to zero no
later than the Stated Maturity of the Bonds.
The "Overcollateralization Amount" for the Bonds on any Payment
Date will be equal to the amount by which the sum of the Aggregate
Principal Balance of the Mortgage Loans in the Mortgage Pool as of the
end of the related Due Period exceeds the Bond Balance for such
Payment Date after taking into account payments of Monthly Principal
(disregarding any permitted reduction in Monthly Principal due to an
Overcollateralization Surplus) made on the Bonds on such Payment
Date. The "Required Overcollateralization Amount" for the Bonds on
any Payment Date will be equal to the amount specified as such in the
Indenture. The "Overcollateralization Surplus" for the Bonds on any
Payment Date will be the amount, if any, by which the
Overcollateralization Amount on such Payment Date exceeds the then
applicable Required Overcollateralization Amount. The "Overcollat-
eralization Deficit" for the Bonds on any Payment Date will be the
amount, if any, by which the Bond Balance on such Payment Date
(after taking into account the Monthly Principal and Excess Cash to be
paid on such Payment Date in reduction of the Bond Balance) exceeds
the sum of the Aggregate Principal Balance of the Mortgage Loans at
the end of the related Due Period.
On the Closing Date, the initial Overcollateralization Amount for the
Bonds will be approximately 1.5% of the sum of the Aggregate
Principal Balances of the Mortgage Loans as of their respective Cut-off
Dates. The initial Overcollateralization Amount for the Bonds is not
indicative of the quality of the Mortgage Loans nor is it intended to
reflect the loss, default or delinquency experience anticipated on the
Mortgage Loans.
The Indenture generally provides that the Required Overcollateralization
Amount may, over time, decrease or increase, subject to certain floors,
caps and triggers including triggers that allow the related Required
Overcollateralization Amount to decrease or "step down" based on the
performance of the Mortgage Loans with respect to certain delinquency
rate tests specified in the Indenture. In addition, Excess Cash will be
applied to the payment in reduction of principal of the Bonds during the
period that the Mortgage Loans are unable to meet certain tests
specified in the Insurance Agreement based on delinquency rates. Any
increase in the Required Overcollateralization Amount may result in an
accelerated amortization of the Bonds until such Required
Overcollateralization Amount is reached, and any decrease in the
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Required Overcollateralization Amount will result in a decelerated
amortization of the Bonds until such Required Overcollateralization
Amount is reached. See "Description of the Bonds--Overcollateralization
Feature" herein.
G. Insurance Policy.................. MBIA Insurance Corporation, a New York stock insurance company
(the "Bond Insurer"), will issue a financial guaranty insurance policy
(the "Insurance Policy") in favor of the Indenture Trustee for the
benefit of the Bondholders. The amount of the actual payment, if any,
required to be made by the Bond Insurer to the Indenture Trustee for
the benefit of the Bondholders under the Insurance Policy (the "Insured
Payment") is (i) for any Payment Date, the sum of (a) the Bond Interest
for such Payment Date minus Available Funds and (b) the then existing
Overcollateralization Deficit, if any, after application of Available
Funds to reduce the Bond Balance on such Payment Date and (ii) any
shortfall in the amount required to pay a Preference Amount from any
source other than the Insurance Policy. The Insurance Policy does not
insure the payment of the Available Funds Cap Carry Forward Amount
or shortfalls to the Bond Interest due to the Relief Act. See "The Bond
Insurance--The Insurance Policy" herein.
Insured Payments do not cover Realized Losses except to the extent that
an Overcollateralization Deficit exists. Insured Payments do not cover
the Servicer's failure to make Monthly Advances pursuant to the
Servicing Agreement, except to the extent that an Overcollateralization
Deficit would otherwise result from such failure. Nevertheless, the
effect of the Insurance Policy is to guaranty the timely payment of
interest on, and the ultimate payment of the principal amount of, the
Bonds.
The Insurance Policy is not cancelable for any reason.
Unless a Bond Insurer Default exists, the Bond Insurer shall have the
right to exercise certain rights of the Bondholders, as specified in the
Indenture, without any consent of such Bondholders; and such
Bondholders may exercise such rights only with the prior written
consent of the Bond Insurer, except as provided in the Indenture. In
addition, to the extent of unreimbursed payments under the Insurance
Policy, the Bond Insurer will be subrogated to the rights of the holders
of the Bonds on which such Insured Payments were made. In
connection with each Insured Payment on a Bond, the Indenture
Trustee, as attorney-in-fact for the holder thereof, will be required to
assign to the Bond Insurer the rights of such holder with respect to the
Bond to the extent of such Insured Payment. "Bond Insurer Default"
is defined under the Indenture generally as the existence and
continuance of (x) the failure by the Bond Insurer to make a required
payment under the Insurance Policy or (y) the bankruptcy or insolvency
of the Bond Insurer.
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The Bond Insurer will be entitled to receive a monthly premium (the
"Bond Insurer Premium") on each Payment Date payable from amounts
on deposit in the Bond Account.
H. Stated Maturity................... The Stated Maturity for the Bonds is April 25, 2029 (which has been
determined by adding 18 months to the last Payment Date scheduled for
the Mortgage Loan with the latest stated maturity). It is anticipated that
the actual final Payment Date for the Bonds will occur significantly
earlier than the Stated Maturity. See "Certain Prepayment and Yield
Considerations" herein.
MONTHLY ADVANCES.......................... The Servicer is required to make advances ("Monthly Advances") in
respect of delinquent payments of principal and interest on the Mortgage
Loans, subject to certain limitations described herein. See "Servicing
of the Mortgage Loans--The Servicing Agreement--Monthly Advances"
herein.
COMPENSATING INTEREST..................... With respect to any Mortgage Loan as to which a prepayment in whole
or in part was received during the related Collection Period, the
Servicer will be required to remit to the Indenture Trustee, up to the
amount otherwise payable to the Servicer as the Servicing Fee for the
related Payment Date, an amount generally calculated to ensure that a
full month's interest on each such Mortgage Loan is available for
payment to the Bondholders on the applicable Payment Date (each such
amount, a "Compensating Interest Payment"). Compensating Interest
Payments are not reimbursable to the Servicer. See "Servicing of the
Mortgage Loans--The Servicing Agreement--Compensating Interest
Payments" herein.
SERVICING FEE............................. The primary compensation payable to the Servicer on each Payment
Date (the "Servicing Fee") will equal one-twelfth (1/12) of the product
of (a) 0.50% and (b) the Aggregate Principal Balance of the Mortgage
Loans as of the first day of the related Due Period. The Servicer shall
be entitled to retain the Servicing Fee from amounts to be deposited in
the Collection Account. The Servicer also will be entitled to retain late
fees, prepayment charges and certain other amounts and charges as
additional servicing compensation. See "Servicing of the Mortgage
Loans--Servicing and Other Compensation; Payments of Expenses"
herein.
THE MORTGAGE LOANS........................ The statistical information presented in this Prospectus Supplement
regarding the Mortgage Pool is based only on the Initial Mortgage
Loans as of the close of business on September 1, 1997 (the "Statistical
Calculation Date"). As of the Statistical Calculation Date, the Initial
Mortgage Loans consisted of approximately 864 Mortgage Loans with
an Aggregate Principal Balance totaling approximately $110,925,309.50
(the "Initial Mortgage Pool Balance"). Other Mortgage Loans
satisfying the criteria described herein (the "Additional Mortgage
Loans") will be included in the Mortgage Pool on or before the Closing
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Date. The Aggregate Principal Balance of the Additional Mortgage
Loans shall not exceed $16,993,473 (and may be substantially less than
such amount). As used herein, the term "Aggregate Principal Balance"
means the aggregate of the Principal Balances of the Mortgage Loans in
the Mortgage Pool at the related date of determination.
The statistical information presented in this Prospectus Supplement does
not take into account any Additional Mortgage Loans that are added to
the Mortgage Pool on or prior to the Closing Date. In addition, certain
Mortgage Loans may prepay in full or be removed, prior to the Closing
Date, from the Mortgage Pool and other Mortgage Loans may be
substituted therefor. As a result of the foregoing, the statistical
information presented herein regarding the Initial Mortgage Loans as of
the Statistical Calculation Date may vary in certain limited respects
from comparable information based on the actual composition of the
Mortgage Pool on the Closing Date, although any such variance will not
be material.
A Current Report on Form 8-K relating to the Bonds and containing a
detailed description of the Mortgage Loans actually delivered to the
Indenture Trustee at the time the Bonds are issued will be filed with the
Securities and Exchange Commission within fifteen days after the
Closing Date. This Current Report on Form 8-K will specify the
Original Bond Balance.
The Mortgage Loans to be included in the Trust Estate will consist of
adjustable rate, fully amortizing mortgage loans and the Mortgage Notes
relating thereto. The Mortgage Loans are secured by first-lien
mortgages or deeds of trust primarily on one- to four-family residential
properties (the "Mortgaged Properties") located in 34 states and the
District of Columbia. None of the Mortgage Loans will be insured by
mortgage pool insurance policies or by primary mortgage insurance
policies. The Mortgage Loans are not guaranteed by the Issuer, the
Company, the Seller, the Servicer, the Bond Insurer, the Owner
Trustee, the Indenture Trustee or any other person.
The Mortgage Loans have been originated using underwriting standards
that are less stringent than the underwriting standards applied by other
first mortgage loan purchase programs such as those administered by
Fannie Mae or by Freddie Mac. See "Risk Factors--Risk Associated
with Underwriting Standards" herein.
The Mortgage Rate on all the Mortgage Loans will adjust semi-annually
commencing approximately (i) six months after origination (with respect
to approximately 31.16% of the Initial Mortgage Loans) (the "Six
Month LIBOR Mortgage Loans"), (ii) two years after origination (with
respect to approximately 67.46% of the Initial Mortgage Loans) (the
"2/28 Mortgage Loans"), or (iii) three years after origination (with
respect to approximately 1.38% of the Initial Mortgage Loans) (the
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"3/27 Mortgage Loans"), in each case on the Adjustment Date specified in
the related Mortgage Note to a rate equal to the sum (rounded as
specified in the related Mortgage Notes) of Six Month LIBOR and the
Gross Margin set forth in the related Mortgage Note, subject to
the limitations described herein.
As of the Statistical Calculation Date, the average Principal Balance of
the Initial Mortgage Loans was $128,385.77; the minimum and
maximum Principal Balances of the Initial Mortgage Loans were
$24,000.00 and $704,618.90, respectively; the weighted average
interest rate (the "Mortgage Rate") of the Initial Mortgage Loans was
9.9008%; the weighted average maximum Mortgage Rate (the
"Maximum Mortgage Rate") of the Initial Mortgage Loans was
15.9319%; the Maximum Mortgage Rates of the Initial Mortgage Loans
ranged from 13.5500% to 19.1000%; the weighted average Loan-to-
Value Ratio of the Initial Mortgage Loans was 79.97% and these Loan-
to-Value Ratios ranged from 25.58% to 90.00%; the weighted average
remaining term to maturity of the Initial Mortgage Loans was 359
months; the remaining terms to maturity of the Initial Mortgage Loans
ranged from 349 months to 360 months; the weighted average Gross
Margin of the Initial Mortgage Loans was 5.9477%; the minimum
Gross Margin of the Initial Mortgage Loans was 4.2500% and the
maximum Gross Margin of the Initial Mortgage Loans was 8.8000%.
No Mortgage Loan will mature later than October 1, 2027. No
Mortgage Loan will provide for negative amortization. See
"Description of The Mortgage Pool" herein.
Approximately 32.03% and 13.67% of the Initial Mortgage Loans are
secured by Mortgaged Properties located in Colorado and Georgia,
respectively. See "Risk Factors--Risks Associated with Geographic
Concentration of Mortgaged Properties" herein.
OPTIONAL REDEMPTION....................... The Bonds may be redeemed, in full but not in part, at the option of the
holder(s) of a majority of the Residual Interest or, if not exercised, at
the option of the Servicer on or after the Payment Date on which the
Aggregate Principal Balance of the Mortgage Loans in the Mortgage
Pool has declined to less than 10% of the Aggregate Principal Balance
of the Mortgage Loans as of the applicable Cut-off Dates. See
"Description of the Bonds--Redemption of Bonds" herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................ The Bonds will evidence debt obligations under the Internal Revenue
Code of 1986, as amended (the "Code"), and interest paid or accrued
thereon, including original issue discount, if any, will be taxable to non-
exempt Bondholders. Payments on Bonds held by foreign persons not
engaged in a U.S. trade or business generally will be exempt from
United States withholding tax, subject to compliance with applicable
certification procedures. No election will be made to treat the Issuer,
the Mortgage Loans, or the arrangement by which the Bonds are issued
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as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. By acceptance of its Bond, each Bondholder will
be deemed to have agreed to treat its Bond as a debt instrument for
purposes of federal and state income tax, franchise tax and any
other tax measured in whole or in part by income.
The Issuer intends to treat the Bonds as Contingent Payment Obligations
and, therefore, for reporting purposes will treat the Bonds as issued
with original issue discount as described in "Certain Federal Income
Tax Consequences--Federal Income Tax Consequences for Securities as to
which No REMIC Election is Made--Non-REMIC Bonds" in the Prospectus.
The prepayment assumption that should be used in determining the rate of
accrual of original issue discount on the Bonds is 25% CPR. However, no
representation is made herein as to the rate at which prepayments actually
will occur. See "Certain Prepayment and Yield Considerations" herein.
The Bonds will not represent "real estate assets" for purposes of
Section 856(c)(5)(A) of the Internal Revenue Code of 1986, as
amended, or "[l]oans. . . principally secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code.
ERISA CONSIDERATIONS...................... Subject to the considerations discussed under "ERISA Considerations"
herein and in the Prospectus, the Bonds may be acquired and held by
a pension or other employee benefit plan subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (a "Plan"). The Issuer
believes that the Bonds will be treated as debt obligations without
significant equity features for purposes of regulations of the Department
of Labor set forth in 29 C.F.R. Section 2510.3-101 (the "Plan Asset
Regulations"). Accordingly, a Plan that acquires a Bond should not be
treated as having acquired a direct interest in the assets of the Issuer for
purposes of the Plan Asset Regulations. However, even if the Bonds
are treated as debt for purposes of the Plan Asset Regulations, the
acquisition or holding of the Bonds by or on behalf of a Plan still could
be considered to give rise to a prohibited transaction under certain
circumstances. By purchasing a Bond, an investor will be deemed to
represent either (i) that it is not a Plan subject to the provisions of
ERISA or section 4975 of the Code or (ii) that its purchase of a Bond
will not result in a prohibited transaction under ERISA or the Code.
See "ERISA Considerations" herein.
LEGAL INVESTMENT
CONSIDERATIONS.......................... The Bonds will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so
long as they are rated in one of the two highest rating categories
by one or more nationally recognized statistical rating organizations.
As such, the Bonds will be legal investments for certain entities to
the extent provided in SMMEA, subject to state laws overriding SMMEA.
In addition, institutions whose investment
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activities are subject to review by federal or state regulatory authorities
may be or may become subject to restrictions, which may be retroactively
imposed by such regulatory authorities, on the investment by such institutions
in certain forms of mortgage related securities. Furthermore, certain states
have enacted legislation overriding the legal investment provisions of SMMEA.
In addition, institutions whose activities are subject to review by federal
or state regulatory authorities may be or may become subject to restrictions,
which may be retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain forms of mortgage related securities.
See "Legal Investment Matters" herein and in the Prospectus.
RATING.................................... It is a condition to the issuance of the Bonds that they be rated "Aaa"
by Moody's Investors Service, Inc. ("Moody's") and "AAA" by
Standard and Poor's Rating Services, a Division of The McGraw-Hill
Companies, Inc. ("S&P" and, together with Moody's, the "Rating
Agencies"). The rating issued by the Rating Agencies do not address
the payment of the Available Funds Cap Carry Forward Amount. 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 assign-
ing Rating Agency. See "Rating of the Bonds" herein.
RISK FACTORS.............................. For a discussion of certain factors that should be considered by
prospective investors in the Bonds, including certain yield and
prepayment risks, see "Risk Factors" herein and in the Prospectus.
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RISK FACTORS
Prospective investors in the Bonds should consider the following risk
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Bonds. Any statistical
information presented below is based upon the characteristics of the Initial
Mortgage Loans as of the Statistical Calculation Date. Such information does not
take into account the Additional Mortgage Loans and may vary as a result of the
possibility that certain mortgage loans may prepay in full or be removed from
the Mortgage Pool prior to the Closing Date.
RISK OF LIMITATIONS ON ADJUSTMENTS OF THE BOND INTEREST RATE AND YIELD
CONSIDERATIONS
The yield to investors on the Bonds will be sensitive to fluctuations
in the level of One Month LIBOR and may be adversely affected by the application
of the Available Funds Cap. The prepayment of the Mortgage Loans with higher
Mortgage Rates may result in a lower Available Funds Cap. If on any Payment Date
the application of the Available Funds Cap results in an interest payment lower
than the Bond Formula Rate during the related Interest Period, the value of the
Bonds may be temporarily or permanently reduced.
The Mortgage Pool will contain Mortgage Loans that, after a period of
approximately six months, two years or three years, following the date of
origination, adjust semi-annually based upon the London interbank offered rate
for six-month United States dollar deposits (the "Six Month LIBOR").
Consequently, the interest due on such Mortgage Loans (reduced by the
Administrative Fee Amount) during any Due Period may not equal the amount of
interest that would accrue at One Month LIBOR plus the applicable margin on the
Bonds during the related Interest Period. In particular, because the Bond
Interest Rate adjusts monthly, while the interest rates on the Mortgage Loans
adjust semi-annually (and in some cases, only after the expiration of the
related fixed rate period), subject to any applicable Periodic Cap, Maximum
Mortgage Rate and Minimum Mortgage Rate, in a rising interest rate environment,
the amount of Bond Interest paid on the Bonds on any Payment Date may be limited
(as a result of being determined on the basis of the Available Funds Cap) to an
amount that is less than the amount of interest that would be due on the Bond
Balance for such Payment Date at a rate equal to the Bond Formula Rate.
Approximately 68.84% of the Initial Mortgage Loans have initial
Mortgage Rates that will remain fixed for 17 months to 36 months from the
Statistical Calculation Date before initial adjustment. The inclusion of such
Mortgage Loans in the Mortgage Pool may increase the likelihood that the Bond
Interest Rate will be determined based on the Available Funds Cap rather than on
the basis of the Bond Formula Rate if One Month LIBOR increases appreciably
prior to the time that such Mortgage Loans have reached their respective dates
of first adjustment.
Although Bondholders will be entitled to receive any Available Funds
Cap Carry Forward Amount from and to the extent of funds available therefor as
described herein, there is no assurance that such funds will be available. The
failure to pay any Available Funds Cap Carry Forward Amount due to a lack of
funds therefore will not constitute an Event of Default under the Indenture. In
addition, the Insurance Policy does not cover, and the ratings of the Bonds do
not address, the likelihood of the payment of any Available Funds Cap Carry
Forward Amount.
The yield to maturity on the Bonds may be affected by the resetting of
the Mortgage Rates on the Mortgage Loans, as applicable, on the related
Adjustment Dates. In addition, because the Mortgage Rate for each Mortgage Loan
is based on Six Month LIBOR plus the related Gross Margin, such rate could be
higher than prevailing market interest rates, which may result in an increase in
the rate of prepayments on the Mortgage Loans after such adjustment.
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RISKS ASSOCIATED WITH UNDERWRITING STANDARDS
The Mortgage Loans have been originated using underwriting standards
that are less stringent than the underwriting standards applied by other first
mortgage loan purchase programs such as those run by Fannie Mae or by Freddie
Mac. For example, the Mortgage Loans may have been made to mortgagors having
imperfect credit histories, ranging from minor delinquencies to bankruptcies, or
mortgagors with higher ratios of monthly mortgage payments to income or higher
ratios of total monthly credit payments to income. As a result of the
underwriting standards, the Mortgage Loans are likely to experience rates of
delinquency, foreclosure and bankruptcy that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in a
more traditional manner. Approximately 1.21% of the Initial Mortgage Loans were
30 to 59 days delinquent in payment of principal and interest as of the
Statistical Calculation Date. In addition, because approximately 57.71% of the
Initial Mortgage Loans and substantially all of the Additional Mortgage Loans
have a first scheduled monthly payment due date occurring on or after September
1, 1997, it is not possible for such Mortgage Loans to have had a scheduled
monthly payment 30 days or more delinquent as of the Statistical Calculation
Date. Substantially all of the Mortgage Loans were originated or acquired within
the last three months and are not seasoned. Accordingly, there can be no
assurance as to the likelihood of default by the mortgagors or as to the
likelihood of delinquency. See "Description of the Mortgage Pool--Mortgage Pool
Characteristics" and "--Underwriting Standards" herein. The Mortgage Loans with
higher Loan-to-Value Ratios may also present a greater risk of loss.
Approximately 44.84% of the Initial Mortgage Loans are Mortgage Loans with
Loan-to-Value Ratios at origination in excess of 80%. None of the Mortgage Loans
will be insured by a primary mortgage insurance policy.
No assurance can be given that the values of the Mortgaged Properties
will not decline from those on the dates the related Mortgage Loans were
originated and any such decline could render the information set forth herein
with respect to the Loan-to-Value Ratios of such Mortgage Loans an unreliable
measure of security for the related debt. If the residential real estate market
should experience an overall decline in property values such that the
outstanding Principal Balances of the Mortgage Loans become equal to or greater
than the values of such Mortgaged Properties, the actual rate of delinquencies,
foreclosures and losses on the related Mortgage Loans could be higher than those
now generally experienced in the mortgage lending industry. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the foreclosure and
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by Bondholders could occur. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans, any
resulting losses will be covered by funds made available through operation of
the overcollateralization feature described herein, or, if necessary, by amounts
paid under the Insurance Policy to the extent of Bond Interest due to the
Bondholders on the related Payment Date and the amount of any
Overcollateralization Deficit with respect to such Payment Date. See
"Description of the Mortgage Pool" and "Servicing of the Mortgage Loans--The
Servicing Agreement--Realization upon Defaulted Mortgage Loans" herein.
ORIGINATION RISKS; SELLER'S RELIANCE ON BROKERS AND CORRESPONDENTS
The Seller depends largely on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for its originations and purchases of
mortgage loans, including the Mortgage Loans. All brokers and correspondents in
the Seller's network must undergo an approval process and enter into an
agreement with the Seller pursuant to which the broker or correspondent agrees
to comply with the Seller's eligibility and origination requirements. The Seller
re-underwrites all loans it funds through brokers and correspondents, and
regularly reviews the performance of loans originated or purchased through its
brokers and correspondents. The Seller undertakes pre-closing and post-closing
quality control procedures involving random samples of loans to confirm that the
loans are being originated and underwritten in accordance with the Seller's
guidelines (subject to exceptions approved by the Seller prior to loan funding).
In conducting a post-closing review of certain loan files, the Seller
recently determined that one of its brokers operating through the Seller's
Northeast regional office had submitted approximately 36 loan applications
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with (1) appraisals that appeared to have significantly overstated the values of
the related properties or (2) falsified credit, employment and/or rental
verification documentation, or (3) a combination of the foregoing. Most of these
loans were made to purchasers who bought properties from one of five sellers. In
many instances, these five sellers sold several separate properties to different
borrowers who appeared from the falsified loan documentation included in the
application files to meet the Seller's credit underwriting criteria, but who did
not in fact meet these criteria. The Seller has undertaken an investigation of
its broker-originated loans in its Northeast region, and has discovered four
loans with similar problems that were funded through a second broker, and one
loan with similar problems that was funded through a third broker. The Seller is
continuing to investigate the activities of these brokers and to ascertain the
facts relating to the mortgage loans originated through these brokers, but does
not believe that these events will have a material adverse effect on the
operations of the Seller. The Seller believes that the activities of these
brokers are an isolated occurrence and has put its underwriting staff on alert
and implemented certain changes to its underwriting procedures designed to
facilitate easier detection of these types of loans in the pre-closing stages in
the future. None of the mortgage loans originated through these brokers have
been included in the Mortgage Pool and none of the appraisers that were involved
in the overstated appraisals referred to above prepared the appraisals relating
to the Mortgage Loans. The Seller has no reason to believe that any of the files
for the Mortgage Loans included in the Mortgage Pool include defective
appraisals or falsified credit documents although no assurance can be given that
a mortgagor, broker, correspondent or appraiser has not submitted defective or
falsified documents.
RISKS ASSOCIATED WITH GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
Approximately 32.03% and 13.67% of the Initial Mortgage Loans are
secured by Mortgaged Properties located in Colorado and Georgia, respectively.
In general, declines in the Colorado or Georgia residential real estate markets
may adversely affect the values of the Mortgaged Properties securing such
Mortgage Loans such that the Aggregate Principal Balance of such Mortgage Loans
will equal or exceed the value of such Mortgaged Properties. In addition,
adverse economic conditions in Colorado or Georgia (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on such Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on such Mortgage Loans
could be higher than those currently experienced in the mortgage lending
industry in general.
DIFFERENCE BETWEEN INITIAL MORTGAGE LOANS AS OF THE STATISTICAL CALCULATION
DATE AND THE MORTGAGE LOANS AS OF THE APPLICABLE CUT-OFF DATES
The statistical information presented in this Prospectus Supplement is
based solely on the characteristics of the Initial Mortgage Loans as of the
Statistical Calculation Date and does not take into account any Additional
Mortgage Loans identified after the date of this Prospectus Supplement.
Moreover, certain Initial Mortgage Loans included as of the Statistical
Calculation Date may prepay in full or may be determined not to meet the
eligibility requirements for the Mortgage Loans, and thus not be included as
Initial Mortgage Loans. As a result of the foregoing, the statistical
distribution of characteristics of the Mortgage Loans as of the applicable
Cut-off Dates will vary somewhat from the statistical distribution of such
characteristics as of the Statistical Calculation Date with regard to the
Initial Mortgage Loans as presented in this Prospectus Supplement, although such
variance will not be material.
RISKS ASSOCIATED WITH PREPAYMENT OF THE MORTGAGE LOANS
The Mortgage Loans may be prepaid by the related mortgagors in whole or
in part, at any time. However, approximately 75.76% of the Mortgage Loans
require the payment of a fee in connection with certain prepayments, which may
discourage prepayments. The Mortgage Loans generally are assumable under certain
circumstances if, in the judgment of the Servicer, the prospective purchaser of
a Mortgaged Property is creditworthy and the security for such Mortgage Loan is
not impaired by the assumption. In the event the Servicer does not approve an
assumption, the Mortgage Loan will be due and payable in full upon the sale of
the related Mortgaged Property, in which case the Servicer generally shall be
required to enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations. The rate of
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prepayments of the Mortgage Loans cannot be predicted and may be affected by a
wide variety of general economic, social, competitive and other factors,
including state and federal income tax policies, interest rates, the
availability of alternative financing and homeowner mobility. Therefore, no
assurance can be given as to the level of prepayments that the Mortgage Loans
will experience. See "Certain Prepayment and Yield Considerations" herein and
"Certain Legal Aspects of the Mortgage Assets--The Mortgage Loans and
Multifamily Loans--Enforceability of Certain Provisions" in the Prospectus.
All of the Mortgage Loans are adjustable rate mortgage loans. As is the
case with fixed rate mortgage loans, adjustable rate mortgage loans may be
subject to a greater rate of principal prepayments in a low interest rate
environment. For example, if prevailing interest rates were to fall, mortgagors
may be inclined to refinance their adjustable rate Mortgage Loans with a fixed
rate loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap, Maximum Mortgage Rate and Minimum Mortgage Rate also may
affect the likelihood of prepayments resulting from refinancings. In addition,
the delinquency and loss experience on adjustable rate mortgage loans may differ
from that on fixed rate mortgage loans because the amount of the monthly
payments on adjustable rate mortgage loans are subject to adjustment on each
Adjustment Date.
The average life of the Bonds, and, if purchased at other than par, the
yields realized by Bondholders will be sensitive to levels of payment, including
prepayments, on the Mortgage Loans. In general, the yield on Bonds purchased at
a premium from the outstanding principal amount thereof will be adversely
affected by a higher than anticipated level of prepayments and enhanced by a
lower than anticipated level. Conversely, the yield on Bonds purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of prepayments and adversely affected by a lower
than anticipated level. See "Certain Prepayment and Yield Considerations"
herein.
YIELD CONSIDERATIONS RELATING TO EXCESS CASH
Excess Cash will be paid in reduction of the Bond Balance on each
Payment Date to the extent the then applicable Required Overcollateralization
Amount exceeds the Overcollateralization Amount on such Payment Date. If
purchased at a premium or a discount, the yield to maturity on a Bond will be
affected by the rate at which Excess Cash is paid to Bondholders in reduction of
the Bond Balance. If the actual rate of such Excess Cash payments is slower than
the rate anticipated by an investor who purchases a Bond at a discount, the
actual yield to such investor will be lower than such investor's anticipated
yield. If the actual rate of such Excess Cash payments is faster than the rate
anticipated by an investor who purchases a Bond at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of Excess Cash on any Payment Date will be affected by the actual amount
of interest received, collected or recovered in respect of the Mortgage Loans
during the related Collection Period and such amount will be influenced by
changes in the weighted average of the Mortgage Rates resulting from prepayments
and liquidations of Mortgage Loans as well as from adjustments of Mortgage
Rates. The amount of Excess Cash payments applied in reduction of the Bond
Balance on each Payment Date will be based on the then applicable Required
Overcollateralization Amount, which may increase or decrease during the period
the Bonds remain outstanding. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the related
Required Overcollateralization Amount to decrease or "step down" based on the
performance on the Mortgage Loans with respect to certain delinquency rate tests
specified in the Indenture. Any increase in a Required Overcollateralization
Amount may result in an accelerated rate of amortization of the Bonds until the
Overcollateralization Amount equals such Required Overcollateralization Amount
and any decrease in a Required Overcollateralization Amount will result in a
decelerated rate of amortization of the Bonds until the Overcollateralization
Amount equals such Required Overcollateralization Amount. See "Certain
Prepayment and Yield Considerations" herein.
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BONDS ARE NON-RECOURSE OBLIGATIONS
The Bonds will be non-recourse obligations solely of the Issuer and
will not represent an obligation of or interest in the Company, the Seller, the
Servicer, the Owner Trustee, the Indenture Trustee, the Bond Insurer or any of
their respective affiliates, except as described herein. Neither the Bonds nor
the Mortgage Loans are or will be guaranteed or insured by any governmental
agency or instrumentality, or by the Company, the Seller, the Servicer, the
Owner Trustee, the Indenture Trustee or any of their respective affiliates. The
Bonds are covered by the Insurance Policy, as and to the extent described under
the caption "The Bond Insurance--The Insurance Policy" herein. The assets
included in the Trust Estate and payments under the Insurance Policy will be the
sole source of payments on the Bonds, and there will be no recourse to the
Issuer, the Company, the Seller, the Servicer, the Owner Trustee, the Indenture
Trustee or any of their respective affiliates, or any other entity, in the event
that such assets are insufficient or otherwise unavailable to make all payments
provided for under the Bonds.
BOOK-ENTRY REGISTRATION
Issuance of the Bonds in book-entry form may reduce the liquidity of
the Bonds in the secondary trading market because investors may be unwilling to
purchase Bonds for which they cannot obtain physical certificates.
Because transactions in the Bonds can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Beneficial Owner to pledge a Bond to persons or entities
that do not participate in the DTC, Cedel or Euroclear system, or otherwise to
take actions in respect of such Bond, may be limited due to lack of a physical
certificate representing such Bond.
Beneficial Owners may experience some delay in their receipt of
payments of interest of and principal on the Bonds because such payments will be
forwarded by the Indenture Trustee to DTC and DTC will credit such payments to
the accounts of its Participants, which will thereafter credit them to the
accounts of Beneficial Owners either directly or indirectly through indirect
participants. See "Description of the Bonds--Book-Entry Registration and
Definitive Bonds" herein; "ANNEX A: Global Clearance, Settlement and Tax
Documentation Procedures" hereto and "Description of the Securities--Form of
Securities; Transfer and Exchange" and "--Book Entry Registration" in the
Prospectus.
DESCRIPTION OF THE BONDS
The Bonds will be issued pursuant to the Indenture. The summaries of
certain provisions of the Indenture set forth below and under the caption "The
Indenture" in the Prospectus, while complete in material respects, do not
purport to be exhaustive. For more details regarding the terms of the Indenture,
prospective investors in the Bonds are advised to review the Indenture, a copy
of which the Company will provide (without exhibits) without charge upon written
request addressed to the Company at Plaza Tower One, Suite 1200B, 6400 South
Fiddler's Green Circle, Englewood, Colorado 80111, Attention: Vice President.
GENERAL
The Bonds will be secured by the Trust Estate created by the Indenture.
The Bonds represent non-recourse obligations of the Issuer, and proceeds of the
assets in the Trust Estate will be the sole source of payments on the Bonds. The
Bonds will not represent an interest in or obligation of the Company, the
Servicer, the Indenture Trustee, the Underwriters, the Bond Insurer, any of
their respective affiliates or any other entity, and will not represent an
interest in or recourse obligation of the Issuer.
The assets of the Trust Estate will consist of (i) the Mortgage Pool,
which is comprised of adjustable rate mortgage loans secured by first lien
mortgages or deeds of trust on the Mortgaged Properties, and including the
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related Mortgage Notes; (ii) all payments in respect of principal and interest
on the Mortgage Loans (other than any principal or interest payments due thereon
on or prior to the applicable Cut-off Date); (iii) security interests in the
Mortgaged Properties; (iv) the Issuer's rights under the Sales Agreement and the
Servicing Agreement; (v) the rights of the Indenture Trustee under the Insurance
Policy; and (vi) certain other property.
All payments on the Bonds will be made by or on behalf of the Indenture
Trustee to each Bondholder of record on the Record Date for the related Payment
Date. Payments on Bonds issued in book-entry form will be made by or on behalf
of the Indenture Trustee to DTC. Payments on Definitive Bonds generally will be
made either (i) by check mailed to the address of each Bondholder as it appears
in the register maintained by the Indenture Trustee or (ii) by wire transfer of
immediately available funds to the account of a Bondholder, if such Bondholder
(a) is the registered holder of Definitive Bonds having an initial principal
amount of at least $1,000,000 and (b) has provided the Indenture Trustee with
wiring instructions in writing five days prior to the related Record Date or has
provided the Indenture Trustee with such instructions for any previous Payment
Date. A fee may be charged by the Indenture Trustee to a Bondholder of
Definitive Bonds for any payment made by wire transfer. Notwithstanding the
above, the final payment in redemption of any Definitive Bond will be made only
upon presentation and surrender of such Definitive Bond at the office or agency
designated by the Indenture Trustee for that purpose.
The Bonds will be issued in denominations of not less than $1,000
principal amount and in integral dollar multiples thereof, with the exception of
one Bond which may be issued in a lesser amount.
BOOK-ENTRY REGISTRATION AND DEFINITIVE BONDS
The Bonds initially will be Book-Entry Bonds (the "Book-Entry Bonds").
Beneficial Owners will hold such Bonds through DTC, in the United States, or
Cedel or Euroclear, in Europe, if they are participants of such systems, or
indirectly through organizations that are participants in such systems. The
Book-Entry Bonds initially will be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
Cedel Participants and Euroclear Participants, respectively, through customers'
securities accounts in Cedel's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
N.A. ("Citibank") will act as depositary for Cedel, and Morgan Guaranty Trust
Company of New York ("Morgan") will act as depositary for Euroclear (Citibank
and Morgan, in such capacities, individually the "Relevant Depositary" and
collectively, the "European Depositaries"). Except as described below, no person
acquiring a Book-Entry Bond will be entitled to receive a Definitive Bond.
Unless and until Definitive Bonds are issued, it is anticipated that the only
"Bondholder" will be Cede & Co., as nominee of DTC. Beneficial Owners will not
be Bondholders as that term is used in the Indenture. Beneficial Owners are
permitted to exercise their rights only indirectly through DTC and its
Participants (including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Bond will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and
interest on, the Bonds from the Indenture Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Bonds are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating and affecting DTC and its operations (the "Rules"), DTC
is required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Bonds and is required to receive and transmit payments
of principal of, and interest on, such Bonds. Participants and indirect
participants with whom Beneficial Owners have accounts with respect to
Book-Entry Bonds are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates,
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<PAGE> 25
the Rules provide a mechanism by which Beneficial Owners will receive payments
and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Bonds, except under
the limited circumstances described below. Unless and until Definitive Bonds are
issued, Beneficial Owners who are not Participants may transfer ownership of
Bonds only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Bonds, by book-entry
transfer, through DTC for the account of the purchasers of such Bonds, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Bonds will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
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 Participants 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 or Euroclear 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 settlement in DTC. For
information with respect to tax documentation procedures relating to the Bonds,
see "Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for Securities as to Which No REMIC Election Is Made--Non-REMIC Bonds,"
"--Reporting Requirements and Backup Withholding," and "--Taxation of Certain
Foreign Investors" in the Prospectus and "--Information Reporting and Backup
Withholding" in "ANNEX A: Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" 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 Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants ("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 Participant in the Book-Entry
Bonds, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Bonds will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating 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
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<PAGE> 26
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depositary, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants, through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States Dollars. Euroclear provides 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 that 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
(the "Federal Reserve Board") 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 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.
Payments on the Book-Entry Bonds will be made on each Payment Date by
the Indenture Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable Participants in accordance
with DTC's normal procedures. Each Participant will be responsible for
disbursing such payments to the Beneficial Owners that it represents and to each
Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Beneficial Owners
that it represents.
Under a book-entry format, Beneficial Owners may experience some delay
in their receipt of payments because such payments will be forwarded by the
Indenture Trustee to Cede. Payments with respect to Bonds held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for Securities as to Which No REMIC Election Is
Made--Non-REMIC Bonds," "--Reporting Requirements and Backup Withholding," and
"--Taxation of Certain Foreign Investors" in the Prospectus and "--Information
Reporting and Backup Withholding" in "ANNEX A: Global Clearance, Settlement and
Tax Documentation Procedures--Certain U.S. Federal Income
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<PAGE> 27
Tax Documentation Requirements" hereto. Because DTC has indicated that it will
act only on behalf of Financial Intermediaries, the ability of Beneficial Owners
to pledge Book-Entry Bonds to persons or entities that do not participate in the
depository system or otherwise take actions in respect of such Book-Entry Bonds
may be limited due to the lack of physical certificates representing such
Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry
form may reduce the liquidity of such Bonds in the secondary market because
certain potential investors may be unwilling to purchase Bonds for which they
cannot obtain physical certificates.
The monthly and annual statements with respect to the Mortgage Loans
and the Trust Estate as described under "--Reports to Bondholders" herein will
be provided by the Indenture Trustee to Cede & Co., as nominee of DTC and a
Bondholder, and may be made available by such entity to Beneficial Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the related Book-Entry Bonds are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Bonds are issued, DTC will take any action permitted to be taken by a Bondholder
under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Bonds are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Bonds. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Bondholder
under the Indenture on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Bonds that conflict with actions taken with respect to other
Bonds.
Definitive Bonds will be issued in registered form to Beneficial
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Issuer
advises the Indenture Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as nominee and depositary with
respect to the Bonds and the Issuer or the Indenture Trustee is unable to locate
a qualified successor, (ii) the Issuer, at its option, advises the Indenture
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after a Bond Event of Default under the Indenture, the Beneficial Owners
representing not less than 51% of the Bond Balance of the Book-Entry Bonds
advise the Indenture Trustee and DTC that the book-entry system is no longer in
the best interests of such Beneficial Owners. Upon issuance of Definitive Bonds
to Beneficial Owners, such Bonds will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Indenture Trustee with respect to transfers, notices and payments. See
"Description of the Securities--The Bonds--General" and "--Form of Securities;
Transfer and Exchange" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to use its best
efforts to notify all Beneficial Owners of the occurrence of such event and the
availability through DTC of Definitive Bonds. Upon surrender by DTC of the
global certificates representing the Book-Entry Bonds and instructions for
re-registration, the Indenture Trustee will issue Definitive Bonds and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Bonds as Bondholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfer of Bonds 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.
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ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans were originated by the Seller or acquired by the
Seller, through its network of brokers and correspondents. On or prior to the
date the Bonds are issued, the Seller will convey each Mortgage Loan to the
Company who in turn will convey each such Mortgage Loan to the Issuer.
At the time of issuance of the Bonds, the Issuer will pledge all of its
right, title and interest in and to the Mortgage Loans, including all principal
and interest due on each such Mortgage Loan after the applicable Cut-off Dates,
together with its right, title and interest in and to the proceeds of any
related insurance policies received after the applicable Cut-off Date, without
recourse, to the Indenture Trustee pursuant to the Indenture as collateral for
the Bonds; provided, however, that the Seller will reserve and retain all its
right, title and interest in and to principal and interest due on such Mortgage
Loan on or prior to the applicable Cut-off Date (whether or not received on or
prior to such Cut-off Date), and to prepayments received on or prior to the
applicable Cut-off Date. The Indenture Trustee, concurrently with such
assignment, will authenticate and deliver the Bonds at the direction of the
Issuer in exchange for, among other things, the Mortgage Loans.
The Indenture will require the Issuer to deliver to the Indenture
Trustee the Mortgage Loans, the related Mortgage Notes endorsed without recourse
to the Indenture Trustee, the related mortgages or deeds of trust with evidence
of recording thereon, the title policies with respect to the related Mortgaged
Properties, all intervening mortgage assignments, if applicable, and certain
other documents relating to the Mortgage Loans (the "Mortgage Files"). The
Seller will be required to cause to be prepared and recorded, at the expense of
the Seller and within the time period specified in the Indenture (or, if
original recording information is unavailable, within such later period as is
permitted by the Indenture), assignments of the mortgages from the Seller to the
Indenture Trustee.
The Indenture Trustee will review the Mortgage Files delivered to it
and if any document required to be included in any Mortgage File is found to be
missing or to be defective in any material respect and such defect is not cured
within 60 days following notification thereof to the Issuer, the Company, the
Bond Insurer and the Seller by the Indenture Trustee, the Indenture Trustee will
require either that the related Mortgage Loan be removed from the Mortgage Pool
or that a Mortgage Loan conforming to the requirements of the Indenture (a
"Qualified Replacement Mortgage") be substituted for the related Mortgage Loan
in the manner described below.
In connection with the transfer of the Mortgage Loans to the Company,
the Seller will make certain representations and warranties as to the accuracy
in all material respects of the information set forth on a schedule identifying
and describing each Mortgage Loan. In addition, the Seller will make certain
other representations and warranties regarding the Mortgage Loans, including,
for instance, that each Mortgage Loan, at its origination, complied in all
material respects with applicable state and federal laws, that each mortgage is
a valid first priority lien, that, as of the applicable Cut-off Date, no
Mortgage Loan was more than 59 days past due, that each Mortgaged Property
consists of a one- to four-family residential property or unit in a condominium
or planned unit development, that the Seller had good title to each Mortgage
Loan prior to such transfer and that the originator was authorized to originate
each Mortgage Loan. The rights of the Company to enforce remedies for breaches
of such representations and warranties in the Sales Agreement against the Seller
will be assigned to the Indenture Trustee pursuant to the Indenture.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
Indenture Trustee therein, the Bondholders or the Bond Insurer or (2) a breach
of any representation or warranty made by the Seller relating to such Mortgage
Loan occurs and such breach materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interests of the
Indenture Trustee, the Bondholders or the Bond Insurer therein, the Indenture
Trustee will enforce the remedies for such defects or breaches against the
Seller by requiring the Seller to remove the related Mortgage Loan (any such
Mortgage Loan, a "Defective Mortgage Loan") from the Trust Estate by remitting
to the Indenture Trustee an amount equal to the Principal Balance of such
Defective
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Mortgage Loan together with interest accruing at the Mortgage Rate (net of the
applicable Servicing Fee Rate) on such Defective Mortgage Loan from the date
interest was last paid by the related mortgagor to the end of the Collection
Period immediately preceding the related Deposit Date, less any payments
received during the related Collection Period in respect of such Defective
Mortgage Loan (the "Release Price"). The Seller will also have the option, but
not the obligation, to substitute for such Defective Mortgage Loan a Qualified
Replacement Mortgage. Upon delivery of a Qualified Replacement Mortgage and
deposit of certain amounts in the Bond Account as set forth in the Indenture, or
deposit of the Release Price in the Bond Account (as hereinafter defined) and
receipt by the Indenture Trustee and the Bond Insurer of written notification of
any such substitution or removal, as the case may be, the Indenture Trustee
shall execute and deliver an instrument of transfer or assignment necessary to
vest legal and beneficial ownership of such Defective Mortgage Loan (including
any property acquired in respect thereof or proceeds of any insurance policy
with respect thereto) in the Seller and release such Defective Mortgage Loan
from the Trust Estate.
The obligation of the Seller to cure, remove or substitute any Mortgage
Loan as described above will constitute the sole remedy available to
Bondholders, the Bond Insurer (with certain exceptions) or the Indenture Trustee
for a Defective Mortgage Loan.
PAYMENTS ON THE BONDS
Payments on the Bonds will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in October 1997, to Bondholders as of the Record Date in an amount equal to
the product of such Bondholders' Percentage Interest and the amount paid in
respect of the Bonds. The "Percentage Interest" represented by any Bond will be
equal to the percentage obtained by dividing the aggregate principal balance of
such Bond by the Bond Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts, in the following order of priority, out of Available Funds:
(a) to the Bond Insurer, the aggregate amount necessary to
reimburse the Bond Insurer for any unreimbursed payments of Insured
Payments (together with interest thereon at the Late Payment Rate
specified in the Insurance Agreement) in respect of the Bonds on prior
Payment Dates and the amount of any unpaid Bond Insurer Premiums for
prior Payment Dates (together with interest thereon at the Late Payment
Rate specified in the Insurance Agreement); provided, however, that the
Bond Insurer shall be paid unreimbursed Insured Payments and unpaid
Bond Insurer Premiums (and any interest thereon) only after Bondholders
have received Bond Interest and any Overcollateralization Deficit with
respect to such Payment Date;
(b) to the Bondholders, Bond Interest with respect to such
Payment Date;
(c) to the Bondholders, the amount of Monthly Principal for
the Bonds with respect to such Payment Date, in reduction of the Bond
Balance until such Bond Balance is reduced to zero;
(d) to the Bondholders, in reduction of the Bond Balance, the
amount, if any, equal to the lesser of (A) Excess Cash with respect to
such Payment Date, and (B) the lesser of (1) the amount necessary for
the Overcollateralization Amount to equal the Required
Overcollateralization Amount on such Payment Date (after giving effect
to application of Monthly Principal for such Payment Date) and (2) the
amount necessary to reduce the Bond Balance to zero;
(e) to the Bond Insurer, any amounts due and owing under the
Insurance Agreement that are not described in clause (a) above; and
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(f) to the Bondholders, the Available Funds Cap Carry Forward
Amount with respect to such Payment Date.
Any Available Funds remaining after application in the manner specified above
will be released to the holders of the Residual Interest on such Payment Date,
free from the lien of the Indenture, and such amounts will not be available to
make payments on the Bonds or payments to the Bond Insurer on any subsequent
Payment Date.
In the event that, with respect to a particular Payment Date, Available
Funds on such date are not sufficient to pay any portion of Bond Interest, the
Indenture Trustee will file a claim on the Insurance Policy in an amount equal
to such deficiency and apply the Insured Payment in respect of such claim to the
payment of the deficiency in such Bond Interest. In addition, the Indenture
Trustee will file a claim on the Insurance Policy in an amount equal to any
Overcollateralization Deficit on a Payment Date (after taking into account
payments in respect of Monthly Principal and Excess Cash on such Payment Date)
and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Bond Balance on such Payment Date by
the amount of such Overcollateralization Deficit. Any Insured Payment paid in
respect of the Bonds to make up any Overcollateralization Deficit shall be paid
to the Bondholders, in reduction of the Bond Balance, until such Bond Balance is
reduced to zero.
In no event will the aggregate payments of principal to Bondholders
exceed the Original Bond Balance.
"Bond Interest" for any Payment Date will be an amount equal to
interest accrued during the related Interest Period at the Bond Interest Rate on
the Bond Balance as of the preceding Payment Date (after giving effect to the
payment, if any, in reduction of principal made on the Bonds on such preceding
Payment Date).
All calculations of interest on the Bonds will be computed on the basis
of the actual number of days elapsed in the related Interest Period and in a
year of 360 days.
The "Bond Interest Rate" (a) for the initial Interest Period will be a
per annum rate equal to One Month LIBOR plus 0.21% and will be determined on
September 26, 1997, and (b) for each subsequent Interest Period will be a per
annum rate equal to the lesser of (i) for each Interest Period ending prior to
the Redemption Date, One Month LIBOR plus 0.21%, and for each Interest Period
thereafter, One Month LIBOR plus 0.42%, (the applicable rate described in this
clause (i), the "Bond Formula Rate") and (ii) the weighted average of the
Mortgage Rates on the Mortgage Loans, less the sum of (A) approximately 1.1625%
per annum and (B) the Relief Act Percentage, if applicable (the rate described
in this clause (ii), the "Available Funds Cap").
If, on any Payment Date, the Available Funds Cap limits the Bond
Interest Rate (i.e., the rate set by the Available Funds Cap is less than the
Bond Formula Rate), the amount of any such shortfall will be carried forward and
be due and payable on the following Payment Date and shall accrue interest at
the applicable Bond Interest Rate, until paid (such shortfall, together with
such accrued interest, the "Available Funds Cap Carry Forward Amount"). The
Insurance Policy does not cover the Available Funds Cap Carry Forward Amount;
the payment of such amount may be funded only from any Excess Cash which would
otherwise be paid to the holder(s) of the Residual Interest. The ratings
assigned to the Bonds do not address the payment of the Available Funds Cap
Carry Forward Amount.
"One Month LIBOR" shall mean the London interbank offered rate for
one-month United States dollar deposits. One Month LIBOR for each Interest
Period shall be determined on the second business day preceding the first day of
any such Interest Period (each, a "LIBOR Determination Date"), on the basis of
the offered rates of the Reference Banks for one-month United States dollar
deposits, as such rates appear on the Reuters Screen LIBO Page, as of 11:00 a.m.
(London time) on such LIBOR Determination Date. As used in this paragraph,
"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 Reuters 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
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by the Indenture 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
LIBOR Determination Date in question, (iii) which have been designated as such
by the Indenture Trustee and (iv) not controlling, controlled by or under common
control with the Issuer or the Seller.
On each LIBOR Determination Date, One Month LIBOR will be established
by the Indenture Trustee as follows:
(a) If on such LIBOR Determination Date two or more Reference
Banks provide such offered quotations, One Month LIBOR shall be the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of such offered quotations.
(b) If on such LIBOR Determination Date fewer than two
Reference Banks provide such offered quotations, One Month LIBOR shall
be the greater of (x) One Month LIBOR as determined on the previous
LIBOR Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum that the Indenture
Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month U.S. dollar lending rates which New York City banks selected
by the Indenture Trustee are quoting on the relevant LIBOR
Determination Date to the principal London offices of leading banks in
the London interbank market or, in the event that the Indenture 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 Indenture
Trustee are quoting on such LIBOR Determination Date to leading
European banks.
The establishment of One Month LIBOR on each LIBOR Determination Date
by the Indenture Trustee and the Indenture Trustee's calculation of the Bond
Interest Rate for the related Interest Period shall (in the absence of manifest
error) be final and binding. Each such rate of interest may be obtained by
telephoning the Indenture Trustee at (410) 884-2000.
The "Bond Balance" will equal, as of any Payment Date, the Original
Bond Balance less all Monthly Principal and Excess Cash paid to the Bondholders
on previous Payment Dates in reduction of the Bond Balance (exclusive, for the
sole purpose of effecting the Bond Insurer's subrogation rights, of payments
made by the Bond Insurer in respect of any Overcollateralization Deficit under
the Insurance Policy, except to the extent reimbursed to the Bond Insurer
pursuant to the Indenture).
"Monthly Principal" for any Payment Date will be an amount equal to (A)
the aggregate of (i) all scheduled payments of principal received or advanced
with respect to the Mortgage Loans and due during the related Due Period and all
other amounts collected, received or otherwise recovered in respect of principal
on the Mortgage Loans (including Principal Prepayments, but not including
Payments Ahead that are not allocable to principal for the related Due Period)
during or in respect of the related Collection Period, and (ii) the aggregate of
the amounts allocable to principal deposited in the Bond Account on the related
Deposit Date by the Issuer, the Company, the Servicer or the Bond Insurer in
connection with a repurchase, release, removal or substitution of any Mortgage
Loans pursuant to the Indenture, reduced by (B) the amount of any
Overcollateralization Surplus with respect to such Payment Date.
The "Principal Balance" of a Mortgage Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of the
close of business on the Determination Date in the preceding month (or, in the
case of the first Payment Date, as of the applicable Cut-off Date), less (i) all
scheduled payments of principal received or advanced with respect to the
Mortgage Loans and due during the related Due Period and all other amounts
collected, received or otherwise recovered in respect of principal on the
Mortgage Loans (including Principal Prepayments, but not including Payments
Ahead that are not allocable to principal for the related Due Period) during or
in respect of the related Collection Period, Net Liquidation Proceeds and
Insurance Proceeds allocable to principal recovered or collected in respect of
such Mortgage Loan during the related Collection Period,
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(ii) the portion of the Release Price allocable to principal remitted by the
Issuer, the Company, the Servicer or the Bond Insurer to the Indenture Trustee
on or prior to the next succeeding Deposit Date in connection with a release and
removal of such Mortgage Loan pursuant to the Indenture, to the extent such
amount is actually remitted on or prior to such Deposit Date, and (iii) the
amount to be remitted by the Seller to the Indenture Trustee on the next
succeeding Deposit Date in connection with a substitution of a Qualified
Replacement Mortgage for such Mortgage Loan pursuant to the Indenture, to the
extent such amount is actually remitted on or prior to such Deposit Date;
provided, however, that Mortgage Loans that have become Liquidated Mortgage
Loans since the preceding Determination Date (or, in the case of the first
Determination Date, since the applicable Cut-off Dates) will be deemed to have a
Principal Balance of zero on the current Determination Date.
"Determination Date" means, as to any Payment Date, the last day of the
Due Period relating to such Payment Date.
"Payments Ahead" means any payment of one or more scheduled monthly
payments remitted by a mortgagor with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Due Period with respect to
such Mortgage Note, which sums the related mortgagor has instructed the Servicer
to apply to scheduled monthly payments due in one or more subsequent Due
Periods. Payments Ahead will be deemed received in the Due Period in which they
would have become due had they not been paid in advance.
"Principal Prepayment" means any mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds and
Insurance Proceeds allocable to principal) which, in the case of a mortgagor
payment, is received in advance of its scheduled due date and is not accompanied
by an amount as to interest representing scheduled interest for any month
subsequent to the month of such payment, or that is accompanied by instructions
from the related mortgagor directing the Servicer to apply such payment to the
Principal Balance of such Mortgage Loan currently.
"Liquidated Mortgage Loan" means, as to any Payment Date, any Mortgage
Loan as to which the Servicer has determined during the related Collection
Period, in accordance with its customary servicing procedures, that all
Liquidation Proceeds which it expects to recover from or on account of such
Mortgage Loan have been recovered.
"Available Funds" with respect to any Payment Date will consist of the
sum of the amounts described in clauses (a) through (g) below, less (i) the
Administrative Fee Amount in respect of such Payment Date, (ii) Monthly Advances
and Servicing Advances previously made that are reimbursable to the Servicer
(other than those included in liquidation expenses for any Liquidated Mortgage
Loan and already reimbursed from the related Liquidation Proceeds) in such
Collection Period to the extent permitted by the Servicing Agreement and (iii)
the aggregate amounts (A) deposited into the Collection Account or Bond Account
that may not be withdrawn therefrom pursuant to a final and nonappealable order
of a United States bankruptcy court of competent jurisdiction imposing a stay
pursuant to Section 362 of the United States Bankruptcy Code and that would
otherwise have been included in Available Funds on such Payment Date and (B)
received by the Indenture Trustee that are recoverable and sought to be
recovered from the Issuer as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code in accordance with a final
nonappealable order of a court of competent jurisdiction:
(a) all scheduled payments of interest received with respect
to the Mortgage Loans and due during the related Due Period and all
other interest payments on or in respect of the Mortgage Loans received
by or on behalf of the Servicer during the related Collection Period,
net of amounts representing interest accrued on such Mortgage Loans in
respect of any period prior to the applicable Cut-off Dates, plus any
Compensating Interest Payments made by the Servicer in respect of the
related Mortgage Loans and any net income from related REO Properties
for such Collection Period;
(b) all scheduled payments of principal received with respect
to the Mortgage Loans and due during the related Due Period and all
other principal payments (including Principal Prepayments, but
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excluding amounts described elsewhere in this definition) received or
deemed to be received during the related Collection Period in respect
of the Mortgage Loans;
(c) the aggregate of any proceeds from or in respect of any
policy of insurance covering a Mortgaged Property that are received
during the related Collection Period and applied by the Servicer to
reduce the Principal Balance of the related Mortgage Loan ("Insurance
Proceeds") (which proceeds will not include any amounts applied to the
restoration or repair of the related Mortgaged Property or released to
the related mortgagor in accordance with applicable law, the Servicer's
customary servicing procedures or the terms of the related Mortgage
Loan);
(d) the aggregate of any other proceeds received by the
Servicer during the related Collection Period in connection with the
liquidation of any Mortgaged Property securing a Mortgage Loan, whether
through trustee's sale, foreclosure, condemnation, taking by eminent
domain or otherwise (including any Insurance Proceeds to the extent not
duplicative of amounts in clause (c) above) ("Liquidation Proceeds"),
less expenses incurred by the Servicer in connection with the
liquidation of such Mortgage Loan ("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any
Mortgage Loans that are required or permitted to be repurchased,
released, removed or substituted by the Seller during the related
Collection Period as described in "--Assignment of Mortgage Loans" and
"Servicing of the Mortgage Loans" herein, to the extent such amounts
are received by the Indenture Trustee on or before the related Deposit
Date;
(f) the amount of any Monthly Advances made for such Payment
Date; and
(g) the aggregate of amounts deposited in the Bond Account by
the Issuer or the Servicer, as the case may be, during such Collection
Period in connection with redemption of the Bonds as described under
"--Redemption of the Bonds" herein.
BOND ACCOUNT
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account (the "Bond Account") from which all payments with respect to
the Bonds will be made. As described below, not later than the Deposit Date, the
Servicer will be required pursuant to the Servicing Agreement to wire transfer
to the Indenture Trustee for deposit in the Bond Account the sum (without
duplication) of all amounts on deposit in the Collection Account that constitute
any portion of Available Funds for the related Payment Date. See "Description of
Securities--Payments or Distributions of Principal and Interest" in the
Prospectus.
Investment of Bond Account. All or a portion of the Bond Account may be
invested and reinvested by the Indenture Trustee in one or more Permitted
Investments bearing interest or sold at a discount. The Indenture Trustee or any
affiliate thereof may be the obligor on any investment in the Bond Account which
otherwise qualifies as a Permitted Investment. No investment in the Bond Account
may mature later than the Business Day preceding the Payment Date; provided that
any Permitted Investment that is an obligation of the Indenture Trustee may
mature on the Payment Date.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in any Bond Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon).
All income or other gain from investments in the Bond Account will not
be available to Bondholders or otherwise subject to any claims or rights of the
Bondholders and will be held in the Bond Account for the benefit of the
Indenture Trustee, subject to withdrawal from time to time as permitted by the
Indenture. Any loss resulting
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from such investments will be for the account of the Indenture Trustee. The
Indenture Trustee will be required to deposit the amount of any such loss
immediately upon the realization of such loss to the extent such loss will not
be offset by other income or gain from investments in the Bond Account and then
available for such application.
Permitted Investments. The Indenture will define "Permitted
Investments" generally as follows:
(a) direct obligations of, and obligations fully guaranteed by, the
United States of America, the Federal Home Loan Mortgage Corporation, Fannie
Mae, the Federal Home Loan Banks or any agency or instrumentality of the United
States of America, the obligations of which are backed by the full faith and
credit of the United States of America;
(b) (i) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Indenture Trustee or its agent
acting in their respective commercial capacities) incorporated under the laws of
the United States of America or any state thereof and subject to supervision and
examination by federal and/or state authorities, so long as, at the time of such
investment or contractual commitment providing for such investment, such
depository institution or trust company or its ultimate parent has a short-term
unsecured debt rating in one of the two highest available rating categories of
S&P and the highest available rating category of Moody's and provided that each
such investment has an original maturity of no more than 365 days, and (ii) any
other demand or time deposit or deposit which is fully insured by the Federal
Deposit Insurance Corporation;
(c) repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (a) above and entered into with a
depository institution or trust company (acting as a principal) rated "A" or
higher by "S&P" and rated "A2" or higher by Moody's; provided, however, that
collateral transferred pursuant to such repurchase obligation must be of the
type described in clause (a) above and must (i) be valued daily at current
market price plus accrued interest, (ii) pursuant to such valuation, be equal,
at all times, to 105% of the cash transferred by the Indenture Trustee in
exchange for such collateral and (iii) be delivered to the Indenture Trustee or,
if the Indenture Trustee is supplying the collateral, an agent for the Indenture
Trustee, in such a manner as to accomplish perfection of a security interest in
the collateral by possession of certified securities;
(d) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or any
state thereof which has a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of such
investment;
(e) commercial paper having an original maturity of less than 365 days
and issued by an institution having a short-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the time of
such investment;
(f) a guaranteed investment contract approved by each of the Rating
Agencies and the Bond Insurer and issued by an insurance company or other
corporation having a long-term unsecured debt rating in the highest available
rating category of each of the Rating Agencies at the time of such investment;
(g) money market funds having ratings in one of the two highest
available rating categories of S&P and Moody's at the time of such investment
which invest only in other Permitted Investments (any such money market funds
which provide for demand withdrawals being conclusively deemed to satisfy any
maturity requirements for Permitted Investments set forth herein), including
money market funds of the Indenture Trustee and any such funds that are managed
by the Indenture Trustee or its affiliates or for which the Indenture Trustee or
any affiliate acts as advisor as long as such money market funds satisfy the
criteria of this subparagraph (g); and
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(h) any investment approved in writing by the Bond Insurer and written
evidence that any such investment will not result in a downgrading or withdrawal
of the rating by each Rating Agency on the Bonds.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Permitted Investments listed above. All
Permitted Investments in a trust account under the Indenture shall be made in
the name of the Indenture Trustee for the benefit of the Bondholders and the
Bond Insurer.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Bonds initially will be provided
in part by overcollateralization resulting from the sum of the Aggregate
Principal Balances of the Mortgage Loans as of their respective Cut-off Dates
exceeding the Original Bond Balance. The Indenture requires that this
Overcollateralization Amount be initially increased to, and thereafter
maintained at, the Required Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
monthly Excess Cash to accelerate the pay down of the Bond Balance until the
Overcollateralization Amount reaches the Required Overcollateralization Amount.
Such applications of Excess Cash, because they consist of interest collections
on the Mortgage Loans, but are distributed as principal on the Bonds, will
increase the related Overcollateralization Amount. Such overcollateralization is
intended to result in amounts received on the Mortgage Loans in excess of the
amount necessary to pay Bond Interest and the Monthly Principal required to be
paid on the Bonds on any Payment Date being applied to reduce the Bond Balance
to zero no later than the Stated Maturity of the Bonds.
The "Excess Cash" on any Payment Date will be equal to Available Funds
for such Payment Date, reduced by the sum of (i) any amounts payable to the Bond
Insurer for Insured Payments paid on prior Payment Dates and not yet reimbursed
and for any unpaid Bond Insurer Premiums for prior Payment Dates (in each case
with interest thereon at the Late Payment Rate set forth in the Insurance
Agreement), (ii) the Bond Interest for the related Payment Date and (iii) the
Monthly Principal for the related Payment Date. Certain Mortgage Loans will not
have their first monthly payment due until the Due Period relating to the
November 1997 Payment Date. Accordingly, in the case of the October 1997 Payment
Date, the amount of Excess Cash available will be lower than it would have been
otherwise.
The "Overcollateralization Amount" with respect to any Payment Date is
the amount, if any, by which (x) the Aggregate Principal Balance of the Mortgage
Loans as of the end of the related Due Period exceeds (y) the Bond Balance as of
such Payment Date after taking into account payments of Monthly Principal
(disregarding any permitted reduction in Monthly Principal due to an
Overcollateralization Surplus) made on such Payment Date. The required level of
the Overcollateralization Amount with respect to any Payment Date (the "Required
Overcollateralization Amount") will be equal to the amount specified as such in
the Indenture. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the related
Required Overcollateralization Amount to decrease or "step down" based on the
performance on the Mortgage Loans with respect to certain delinquency rate tests
specified in the Indenture. In addition, Excess Cash will be applied to the
payment in reduction of principal of the Bonds during the period that the
Mortgage Loans are unable to meet certain tests specified in the Insurance
Agreement based on delinquency rates. Any increase in the applicable Required
Overcollateralization Amount may result in an accelerated amortization of the
Bonds until such Required Overcollateralization Amount is reached. Conversely,
any decrease in the Required Overcollateralization Amount will result in a
decelerated amortization of the Bonds until such Required Overcollateralization
Amount is reached.
The application of Excess Cash to reduce the Bond Balance on any
Payment Date will have the effect of accelerating the amortization of the Bonds
relative to the amortization of the Mortgage Loans in the Trust Estate.
In the event that the Required Overcollateralization Amount is
permitted to decrease or "step down" on any Payment Date in the future, the
Indenture will provide that all or a portion of the Excess Cash that would
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otherwise be paid to the Bonds on any such Payment Date in reduction of the Bond
Balance will be released to the holder(s) of the Residual Interest.
With respect to any Payment Date, an "Overcollateralization Surplus"
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required Overcollateralization
Amount for such Payment Date. As a technical matter, an Overcollateralization
Surplus may result even prior to the occurrence of any decrease or "step down"
in the Required Overcollateralization Amount because the Bonds will be entitled
to receive 100% of collected principal on the Mortgage Loans, even though the
Bond Balance will, as a result of the initial overcollateralization and the
accelerated amortization caused by the application of the Excess Cash, be less
than the Aggregate Principal Balance of the Mortgage Loans, in the absence of
any Realized Losses on the Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Mortgage Loans in respect of principal to be applied on such
Payment Date will be paid to Bondholders in reduction of the Bond Balance on
such Payment Date, except as provided above with respect to any Payment Date for
which there exists an Overcollateralization Surplus. If any Mortgage Loan became
a Liquidated Mortgage Loan during such prior Collection Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the Principal Balance of the related Mortgage Loan; the amount of any such
deficiency is a "Realized Loss." In addition, the Indenture will provide that
the Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage
Loan shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Bondholders on the Payment Date following the event of
loss. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount for the Bonds, and will result in more Excess Cash,
if any, being paid on the Bonds in reduction of the Bond Balance on subsequent
Payment Dates than would be the case in the absence of such Realized Loss.
Overcollateralization and the Insurance Policy. The Indenture will
require the Indenture Trustee to file a claim for an Insured Payment under the
Insurance Policy not later than 12:00 noon (New York City time) on the third
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that an Overcollateralization Deficit with respect to the Bonds will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the Bondholders on such Payment Date. With respect to
any Payment Date, an "Overcollateralization Deficit" will mean the amount, if
any, by which (x) the Bond Balance, after taking into account all payments to be
made on such Payment Date in reduction thereof, including any Excess Cash
payments, exceeds (y) the sum of Aggregate Principal Balance of the Mortgage
Loans as of the end of the applicable Due Period. Accordingly, the Insurance
Policy is similar to the provisions described above with respect to the
overcollateralization provisions insofar as the Insurance Policy guarantees
ultimate collection of the full amount of the Bond Balance, rather than current
payments of the amounts of any Realized Losses to the Bondholders. Investors in
the Bonds should realize that, under certain loss or delinquency scenarios, they
may temporarily receive no payments in reduction of the Bond Balance.
REPORTS TO BONDHOLDERS
Concurrently with each payment to Bondholders, the Indenture Trustee
will mail a statement to each Bondholder, the Bond Insurer and the Underwriters
in the form required by the Indenture and setting forth the following
information (to the extent the Servicer makes such information (other than the
information described in clause (b) below) available to the Indenture Trustee):
(a) the amount of such payment to the Bondholders on the related
Payment Date allocable to (i) Monthly Principal (separately setting forth
Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of such payment to the Bondholders on such Payment Date
allocable to (i) Bond Interest and (ii) Available Funds Cap Carry Forward
Amount;
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<PAGE> 37
(c) the Bond Balance after giving effect to the payment of Monthly
Principal and any Excess Cash applied to reduce the Bond Balance on such Payment
Date;
(d) the Aggregate Principal Balance of the Mortgage Loans as of the end
of the related Due Period;
(e) the amount of Monthly Advances made with respect to such Payment
Date and the aggregate amount of unreimbursed Monthly Advances and Servicing
Advances, if any;
(f) the number and the aggregate of the Principal Balances of the
Mortgage Loans delinquent (i) one month, (ii) two months and (iii) three or more
months as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans in
foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure during the related Collection Period;
(h) the aggregate of the Principal Balances of the Mortgage Loans
repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Mortgage Loans delinquent for three
consecutive monthly installments purchased by the Servicer at its option
pursuant to the Servicing Agreement;
(i) the Insured Payment, if any, for such Payment Date;
(j) the amount of the Servicing Fee paid to or retained by the Servicer
with respect to such Payment Date;
(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any, and the
Overcollateralization Deficit, if any, with respect to such Payment Date; and
(l) the aggregate outstanding principal balance of the three largest
outstanding Mortgage Loans in the Mortgage Pool.
In the case of information furnished pursuant to clauses (a) and (b)
above, the amounts shall be expressed as a dollar amount per Bond with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Bondholder and to the Underwriters, if requested in writing by any such person,
a statement containing the information set forth in clauses (a) and (b) above,
aggregated for such calendar year or, in the case of each person who was a
Bondholder for a portion of such calendar year, setting forth such information
for each month thereof. Such obligation of the Indenture Trustee shall be deemed
to have been satisfied to the extent that substantially comparable information
shall be prepared and furnished by the Indenture Trustee to Bondholders pursuant
to any requirements of the Code as are in force from time to time.
REDEMPTION OF THE BONDS
The Bonds will be subject to redemption, in whole but not in part, at
the option of the holder(s) of a majority of the Residual Interest or, if not
exercised, at the option of the Servicer, on or after the Payment Date on which
the Aggregate Principal Balance of the Mortgage Loans in the Mortgage Pool has
declined to less than 10% of the Aggregate Principal Balance of the Mortgage
Loans as of the applicable Cut-off Dates (the "Redemption Date").
The Bonds will be redeemed at a redemption price of 100% of the then
outstanding Bond Balance, plus accrued but unpaid interest thereon (including
any Available Funds Cap Carry Forward Amount) through the end of the Interest
Period immediately preceding the related Payment Date; provided, however, that
no redemption may
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<PAGE> 38
take place unless, in connection with such redemption, any amounts due and owing
to the Bond Insurer under the Insurance Agreement are paid in full to the Bond
Insurer. There will be no prepayment premium in connection with such a
redemption. Notice of an optional redemption of the Bonds must be mailed by the
Indenture Trustee to the Bondholders and the Bond Insurer at least ten days
prior to the Payment Date set for such redemption.
The payment on the final Payment Date in connection with the redemption
of the Bonds shall be in lieu of the payment otherwise required to be made on
such Payment Date in respect of the Bonds.
PAYMENTS TO THE HOLDER(S) OF THE RESIDUAL INTEREST
On each Payment Date, any portion of Available Funds remaining after
making payments of interest and principal due on the Bonds and other
distributions required on such Payment Date will be released to the holder(s) of
the Residual Interest, free of the lien of the Indenture. Such amounts will not
be available to make payments on the Bonds or payments to the Bond Insurer on
any subsequent Payment Date.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will be the Indenture Trustee under the Indenture. The Indenture
will provide that the Indenture Trustee is entitled to the Indenture Trustee Fee
and reimbursement of certain expenses. In addition, the Indenture Trustee will
retain the benefit, if any, from investment of funds in the Bond Account.
Norwest Bank Minnesota, National Association, will also act as Backup Servicer
under the Servicing Agreement and, upon a termination of the Servicer, shall be
obligated to succeed to the obligations of the Servicer or to appoint an
eligible successor servicer.
The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Issuer, the Servicer, the Bond Insurer and any
Rating Agency, in which event the Issuer will be obligated to appoint a
successor Indenture Trustee acceptable to the Bond Insurer. The Issuer, with the
prior consent of the Bond Insurer, may remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes insolvent. Any resignation or removal of the
Indenture Trustee and appointment of a successor Indenture Trustee will not
become effective until acceptance of the appointment by the successor Indenture
Trustee. The Indenture will provide that the Indenture Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Indenture
at the request or direction of any of the Bondholders, unless such Bondholders
shall have offered to the Indenture 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 Indenture Trustee may execute any
of the rights or powers granted by the Indenture or perform any duties
thereunder either directly or by or through its agents or attorneys, and the
Indenture Trustee is not 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 Indenture, the Indenture 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 Indenture. The Indenture Trustee and any director, officer,
employee or agent of the Indenture 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
Indenture. The Indenture Trustee will be indemnified by the Servicer for certain
losses and other events to the extent described in the Servicing Agreement.
VOTING
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Bondholders evidencing specified "Voting Interests," each Bondholder will have a
Voting Interest equal to the Percentage Interest represented by such
Bondholder's Bond. Unless a Bond Insurer Default has occurred and is continuing,
the Voting Interests of the Bondholders will be exercised solely by or with the
consent of the Bond Insurer.
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<PAGE> 39
BOND EVENTS OF DEFAULT
An Event of Default with respect to the Bonds shall occur if, on any
Payment Date, after taking into account all payments made in respect of the
Bonds on such Payment Date, the Bond Interest for such Payment Date remains
unpaid or an Overcollateralization Deficit still exists with respect to the
Bonds. The failure to pay the Available Funds Cap Carry Over Amount on any
Payment Date will only constitute an Event of Default to the extent funds are
available to make such payment as described under "Description of the
Bonds--Payments on the Bonds." See "The Indenture--Events of Default" in the
Prospectus for a description of the circumstances under which a default on the
Bonds, other than a payment default, may occur. For a description of the rights
of Bondholders in connection with any Event of Default with respect to the
Bonds, see "The Indenture--Rights upon Event of Default" in the Prospectus. In
the absence of a failure by the Bond Insurer to pay Insured Payments, no
acceleration of the maturity of the Bonds shall be permitted without the consent
of the Bond Insurer.
THE ISSUER
The Issuer is a Delaware business trust established by the Company
pursuant to the Trust Agreement. After the Closing Date, the Residual Interest
representing all of the beneficial ownership interest in the Issuer will be held
by a limited purpose, wholly-owned subsidiary of the Seller. The principal
office of the Issuer is located in Englewood, Colorado. The Issuer does not
have, nor is it expected in the future to have, any significant assets, other
than the assets included in the Trust Estate.
NATIONAL MORTGAGE CORPORATION
National Mortgage Corporation, the Seller under the Sales Agreement and
the Servicer under the Servicing Agreement, is a Colorado corporation and a full
service mortgage banker engaged in the business of originating, purchasing,
selling and servicing mortgage loans on one- to four-family residential
properties. The Seller's mortgage loans are primarily made to borrowers whose
borrowing needs are generally not being served by traditional financial
institutions because of impaired or limited credit profiles. The Seller was
formed in 1991, initially with a view to service loans for which the borrowers'
credit profiles conformed to Fannie Mae and Freddie Mac credit underwriting
standards. In 1993, the Seller shifted its business focus and commenced
sub-prime lending and servicing operations. The Seller currently acquires its
mortgage loans primarily through independent licensed brokers and also by
purchasing mortgage loans from approved correspondents. All of the Company's
brokers and correspondents are provided with the Company's written underwriting
guidelines and each Mortgage Loan is re-underwritten by the Company. See
"Description of the Mortgage Pool--Underwriting Standards" and "Servicing of the
Mortgage Loans--Historical Servicing Experience of the Servicer."
The Seller and the Company are commonly controlled by Steven B. Chotin.
The Seller has its principal offices at 7600 East Orchard Road, Suite 330S,
Englewood, Colorado 80111 (telephone number: (303) 721-7211).
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans as of the Statistical
Calculation Date. The statistical information presented herein does not take
into account any Additional Mortgage Loans that may be added to the Mortgage
Pool on or prior to the Closing Date. In addition, certain Mortgage Loans may
prepay in full or be removed, prior to the Closing Date, from the Mortgage Pool
and other Mortgage Loans may be substituted therefor. As a result of the
foregoing, the statistical
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<PAGE> 40
information regarding the Initial Mortgage Loans set forth herein may vary from
comparable information based on the actual composition of the Mortgage Pool at
the Closing Date, although such variance will not be material.
The Mortgage Pool will consist of adjustable rate, fully amortizing
mortgage loans secured by first liens on one- to four-family residential
properties located in 34 states and the District of Columbia. No Mortgage Loan
will have an original term to stated maturity in excess of 30 years or will
mature later than October 2027. All of the Mortgage Loans will be originated or
acquired by the Seller through its network of brokers and correspondents.
The Mortgage Loans have been originated using underwriting standards
that are less stringent than the underwriting standards applied by other first
mortgage loan purchase programs such as those administered by Fannie Mae or by
Freddie Mac. See "--Underwriting Standards" and "Risk Factors--Risks Associated
with the Underwriting Standards" herein.
The Mortgage Loans are generally assumable pursuant to the terms of the
related Mortgage Note. See "Certain Prepayment and Yield Considerations" herein.
None of the Mortgage Loans is or will be insured or guaranteed by the
Issuer, the Seller, the Company, the Servicer, the Indenture Trustee, the Bond
Insurer, any originator or any of their respective affiliates, or by any
governmental agency or other person, except as described herein. None of the
Mortgage Loans will be insured by mortgage pool insurance policies or primary
mortgage insurance policies.
Approximately 75.76% of the Initial Mortgage Loans will provide for the
payment of a prepayment charge. As to each such Mortgage Loan, the prepayment
charge provisions typically provide for payment of a prepayment charge for
partial prepayments and full prepayments made within approximately one to three
years of the origination of Mortgage Loan, in an amount generally equal to the
lesser of (i) six months' advance interest on the amount of the prepayment that,
when added to all other amounts prepaid during the twelve-month period
immediately preceding the date of the prepayment, exceeds twenty percent (20%)
of the original principal amount of the Mortgage Loan or (ii) the maximum of
interest permitted by state law. Prepayment charges received on the Mortgage
Loans will not be included in Available Funds for the related Collection Period
but will instead by paid to the Servicer as additional servicer compensation.
MORTGAGE RATE ADJUSTMENT
The amount of the monthly payment on each Mortgage Loan will be
adjusted semi-annually on the Due Date of the month following the month in which
the Adjustment Date occurs to equal the amount necessary to pay interest at the
then-applicable Mortgage Rate and to fully amortize the Principal Balance of
each Mortgage Loan over its remaining term to stated maturity. As of the
applicable Cut-off Date, substantially all of the Initial Mortgage Loans had not
reached their first Adjustment Date. The Mortgage Loans will have various
Adjustment Dates, Gross Margins (as defined below) and limitations on the
Mortgage Rate adjustments, as described below.
The Mortgage Rate on all the Mortgage Loans will adjust semi-annually
commencing approximately (i) six months after origination (with respect to
approximately 31.16% of the Initial Mortgage Loans) (the "Six Month LIBOR
Mortgage Loans"), (ii) two years after the origination (with respect to
approximately 67.46% of the Initial Mortgage Loans) (the "2/28 Mortgage Loans"),
or (iii) three years after origination (with respect to approximately 1.38% of
the Initial Mortgage Loans) (the "3/27 Mortgage Loans"), in each case on the
Adjustment Date specified in the related Mortgage Note to a rate equal to the
sum (rounded as specified in the related Mortgage Notes) of Six Month LIBOR and
the Gross Margin set forth in the related Mortgage Note, subject to the
limitations described herein.
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<PAGE> 41
For the 2/28 Mortgage Loans and the 3/27 Mortgage Loans, the rate may
not adjust by more than 3.00% on the initial Adjustment Date, and generally by
no more than 1.00% on any Adjustment Date thereafter. For the Six Month LIBOR
Mortgage Loans, the Periodic Rate Cap generally is not more than 1.00%.
The Mortgage Rate on a Mortgage Loan may not exceed the Maximum
Mortgage Rate or be less than the Minimum Mortgage Rate specified for such
Mortgage Loan in the related Mortgage Note. No Mortgage Loan provides for
payment caps on any Adjustment Date that would result in deferred interest or
negative amortization.
With respect to the Mortgage Loans, Six Month LIBOR will be a per annum
rate equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks ("Six Month LIBOR") as published in The Wall Street Journal and as most
recently available (i) as of the first business day of the month immediately
preceding the month in which the Adjustment Date occurs or (ii) as of the date
(45) days prior to the Adjustment Date (each such date as of which Six Month
LIBOR is determined, a "Reference Date"). In the event that Six Month LIBOR is
no longer available, an index reasonably acceptable to the Indenture Trustee
that is based on comparable information will be selected by the Servicer.
SIX MONTH LIBOR. Listed below are levels of Six Month LIBOR as
published by The Wall Street Journal that are or would have been applicable to
mortgage loans with a Reference Date of the first business day of the preceding
month, and having the following adjustment dates for the indicated years. Such
average yields may fluctuate significantly from month to month as well as over
longer periods and may not increase or decrease in a constant pattern from
period to period. There can be no assurance that levels of Six Month LIBOR
published by Fannie Mae, or published in The Wall Street Journal on a different
Reference Date would have been at the same levels as those set forth below. The
following does not purport to be representative of future levels of Six Month
LIBOR (as published by Fannie Mae or The Wall Street Journal). No assurance can
be given as to the level of Six Month LIBOR on any Adjustment Date or during the
life of any Mortgage Loan based on Six Month LIBOR.
SIX MONTH LIBOR
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1993 1994 1995 1996 1997
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1.................................... 4.000% 3.500% 6.562% 5.718% 5.562%
February 1................................... 3.625 3.500 7.000 5.531 5.625
March 1...................................... 3.375 3.375 6.687 5.281 5.687
April 1...................................... 3.312 4.000 6.437 5.312 5.718
May 1........................................ 3.375 4.250 6.500 5.531 5.968
June 1....................................... 3.312 4.688 6.375 5.562 6.000
July 1....................................... 3.500 5.000 6.000 5.656 6.000
August 1..................................... 3.500 5.250 6.000 5.812 5.937
September 1.................................. 3.500 5.313 5.875 5.906 5.812
October 1.................................... 3.437 5.313 5.906 5.843
November 1................................... 3.375 5.750 5.968 5.750
December 1................................... 3.437 5.937 5.875 5.562
</TABLE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower, and may be significantly lower, than the Mortgage Rate that would have
been in effect based on Six Month LIBOR and the related Gross Margin. Therefore,
unless Six Month LIBOR declines after origination of a Mortgage Loan, the
related Mortgage Rate will generally increase on the first Adjustment Date
following origination of such Mortgage Loan subject to the Periodic Rate Cap.
The repayment of the Mortgage Loans will be dependent on the ability of the
mortgagors to make larger monthly payments following adjustments of the Mortgage
Rate. Mortgage Loans that have the same initial Mortgage Rate may not always
bear interest at the same Mortgage Rate because such Mortgage Loans may have
different Adjustment Dates (and the Mortgage Rates, therefore, may reflect
different related values of Six Month LIBOR), Gross Margins, Maximum Mortgage
Rates and Minimum Mortgage Rates.
S-36
<PAGE> 42
MORTGAGE LOAN CHARACTERISTICS
Set forth below is certain summary statistical information regarding
the Initial Mortgage Loans as of the Statistical Calculation Date. As of the
Statistical Calculation Date, the Initial Mortgage Loans consisted of
approximately 864 Mortgage Loans with an Aggregate Principal Balance totaling
approximately $110,925,309.50 (the "Initial Mortgage Pool Balance"). Other
Mortgage Loans satisfying the criteria described herein (the "Additional
Mortgage Loans") will be included in the Mortgage Pool on or before the Closing
Date. The Aggregate Principal Balance of the Additional Mortgage Loans shall not
exceed $16,993,473 (and may be substantially less than such amount). The
Mortgage Loans, following the conveyance of the Additional Mortgage Loans, must
in the aggregate conform to certain specified characteristics described below
under "--Conveyance of Additional Mortgage Loans."
A Current Report on Form 8-K relating to the Bonds and containing a
detailed description of the Mortgage Loans actually delivered to the Indenture
Trustee at the time the Bonds are issued will be filed with the Securities and
Exchange Commission within fifteen days after the Closing Date. This Current
Report on Form 8-K will specify the Original Bond Balance.
As of the Statistical Calculation Date, the average Principal Balance
of the Initial Mortgage Loans was $128,385.77; the minimum and maximum Principal
Balances of the Initial Mortgage Loans were $24,000.00 and $704,618.90,
respectively; the weighted average interest rate (the "Mortgage Rate") of the
Initial Mortgage Loans was 9.9008%; the weighted average Maximum Mortgage Rate
of the Initial Mortgage Loans was 15.9319%; the Maximum Mortgage Rates of the
Mortgage Loans ranged from 13.5500% to 19.1000%; the weighted average Loan-
to-Value Ratio of the Initial Mortgage Loans was 79.97% and these Loan-to-Value
Ratios ranged from 25.58% to 90.00%; the weighted average remaining term to
maturity of the Initial Mortgage Loans was 359 months; the remaining terms to
maturity of the Initial Mortgage Loans ranged from 349 months to 360 months; the
weighted average Gross Margin of the Initial Mortgage Loans was 5.9477%; the
minimum Gross Margin of the Initial Mortgage Loans was 4.2500% and the maximum
Gross Margin of the Initial Mortgage Loans was 8.8000%.
Approximately 1.21% of the Initial Mortgage Loans were 30 to 59 days
delinquent in payment of principal and interest as of the Statistical
Calculation Date. As of such date, none of the Initial Mortgage Loans were 60
days or more delinquent in payment of principal and interest. None of the
Mortgage Loans will be covered by a primary mortgage insurance policy.
Approximately 44.84% of the Initial Mortgage Loans are Mortgage Loans with
Loan-to-Value Ratios at origination in excess of 80%. Approximately 75.76% of
the Initial Mortgage Loans provide for a prepayment charge.
Set forth below is a description of certain additional characteristics
of the Initial Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). The information expressed below as a percentage of the
Initial Mortgage Pool Balance may not total 100% due to rounding.
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<PAGE> 43
PRINCIPAL BALANCES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
RANGE OF PRINCIPAL MORTGAGE PRINCIPAL INITIAL MORTGAGE
BALANCES LOANS BALANCE POOL BALANCE
------------------ --------- --------------- ----------------
<S> <C> <C> <C>
$ 24,000- 50,000.................................... 40 $ 1,680,175.15 1.51%
50,001-100,000.................................... 353 26,984,417.29 24.33
100,001-150,000.................................... 239 28,928,900.79 26.08
150,001-200,000.................................... 121 20,624,341.54 18.59
200,001-250,000.................................... 48 10,845,827.27 9.78
250,001-300,000.................................... 26 6,997,120.56 6.31
300,001-350,000.................................... 17 5,625,497.03 5.07
350,001-400,000.................................... 6 2,293,587.27 2.07
400,001-450,000.................................... 6 2,573,504.39 2.32
450,001-500,000.................................... 4 1,924,034.43 1.73
500,001-704,619.................................... 4 2,447,903.78 2.21
--- --------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the average Principal Balance
of the Initial Mortgage Loans was approximately $128,385.77.
MORTGAGE RATES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
RANGE OF MORTGAGE PRINCIPAL INITIAL MORTGAGE
MORTGAGE RATES (%) LOANS BALANCE POOL BALANCE
------------------ --------- -------------- ----------------
<S> <C> <C> <C>
7.550-8.000................................ 9 $ 2,221,807.66 2.00%
8.001-8.500................................ 22 2,744,897.21 2.47
8.501-9.000................................ 50 7,062,660.71 6.37
9.001-9.500................................ 142 20,380,901.71 18.37
9.501-10.000................................ 227 30,237,235.82 27.26
10.001-10.500................................ 211 24,885,290.95 22.43
10.501-11.000................................ 157 19,052,274.27 17.18
11.001-11.500................................ 30 2,985,892.77 2.69
11.501-12.000................................ 9 735,530.55 0.66
12.001-12.500................................ 4 501,242.46 0.45
12.501-13.000................................ 2 92,575.39 0.08
13.001-13.100................................ 1 25,000.00 0.02
---- --------------- ------
Total ................................ 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average Mortgage
Rate (a) of the Initial Mortgage Loans was approximately 9.9008% per annum, (b)
of the Six Month LIBOR Initial Mortgage Loans was approximately 9.4680%, (c) of
the 2/28 Initial Mortgage Loans was approximately 10.1110% and (d) of the 3/27
Initial Mortgage Loans was approximately 9.3986%.
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<PAGE> 44
ORIGINAL LOAN-TO-VALUE RATIOS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF ORIGINAL MORTGAGE PRINCIPAL INITIAL MORTGAGE
LOAN-TO-VALUE RATIOS (%) LOANS BALANCE POOL BALANCE
- -------------------------- -------- --------------- ----------------
<S> <C> <C> <C>
0.01-50.00.................................. 23 $ 1,883,514.98 1.70%
50.01-55.00.................................. 10 853,334.78 0.77
55.01-60.00.................................. 16 1,807,742.49 1.63
60.01-65.00.................................. 45 5,520,199.51 4.98
65.01-70.00.................................. 51 6,723,638.65 6.06
70.01-75.00.................................. 103 13,562,833.94 12.23
75.01-80.00.................................. 232 30,832,825.79 27.80
80.01-85.00.................................. 153 19,972,860.70 18.01
85.01-90.00.................................. 231 29,768,358.66 26.84
--- --------------- ------
Total .................................. 864 $110,925,309.50 100.00%
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Initial
Mortgage Loans was approximately 79.97%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE PRINCIPAL INITIAL MORTGAGE
STATE LOANS BALANCE POOL BALANCE
- ---- -------- ---------- ----------------
<S> <C> <C> <C>
Colorado............................................ 268 $ 35,530,194.75 32.03%
Georgia............................................. 124 15,163,466.71 13.67
Connecticut......................................... 70 9,561,116.34 8.62
California.......................................... 58 9,172,986.06 8.27
Massachusetts....................................... 68 8,441,838.20 7.61
Maryland............................................ 34 5,681,426.18 5.12
Virginia............................................ 27 4,598,017.26 4.15
Utah ............................................. 32 3,897,319.99 3.51
Rhode Island........................................ 31 2,684,235.92 2.42
North Carolina...................................... 20 2,034,466.26 1.83
Arizona............................................. 21 1,869,867.88 1.69
Illinois............................................ 14 1,834,269.84 1.65
New Mexico.......................................... 4 1,248,134.73 1.13
Oklahoma............................................ 8 1,217,619.89 1.10
Florida............................................. 13 1,097,156.57 0.99
Oregon.............................................. 9 825,146.48 0.74
Minnesota........................................... 7 698,103.79 0.63
Wyoming............................................. 9 632,561.77 0.57
Ohio ............................................. 2 535,943.21 0.48
District of Columbia................................ 5 534,192.19 0.48
Texas ............................................. 6 520,159.06 0.47
New Hampshire....................................... 5 473,786.73 0.43
Tennessee........................................... 4 395,753.70 0.36
South Dakota........................................ 5 349,145.00 0.31
</TABLE>
S-39
<PAGE> 45
<TABLE>
<S> <C> <C> <C>
Idaho............................................... 3 342,642.39 0.31
South Carolina...................................... 4 305,323.39 0.28
Washington.......................................... 2 291,021.71 0.26
Montana............................................. 3 264,946.75 0.24
Nevada.............................................. 1 249,628.17 0.23
New York............................................ 2 136,427.68 0.12
Indiana............................................. 1 92,165.55 0.08
Nebraska............................................ 1 91,963.82 0.08
Michigan............................................ 1 63,171.73 0.06
Kansas.............................................. 1 55,109.80 0.05
Missouri............................................ 1 36,000.00 0.03
--- --------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
No more than 1.71% of the Initial Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area.
MORTGAGE LOAN PURPOSE OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE PRINCIPAL INITIAL MORTGAGE
LOAN PURPOSE LOANS BALANCE POOL BALANCE
- ------------ --------- --------------- ---------------
<S> <C> <C> <C>
Purchase............................................ 470 $ 58,275,155.96 52.54%
Cashout Refinance................................... 251 33,934,024.31 30.59
Rate/Term Refinance................................. 85 11,384,557.08 10.26
Debt Consolidation.................................. 58 7,331,572.15 6.61
--- --------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
MORTGAGE LOAN DOCUMENTATION TYPES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE PRINCIPAL INITIAL MORTGAGE
DOCUMENTATION TYPE LOANS BALANCE POOL BALANCE
- ------------------ --------- -------- ----------------
<S> <C> <C> <C>
Full Documentation.................................. 572 $ 69,384,714.14 62.55%
Limited (Fast) Documentation........................ 48 8,008,038.65 7.22
Stated Documentation................................ 244 33,532,556.71 30.23
--- -------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
S-40
<PAGE> 46
OCCUPANCY STATUS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE PRINCIPAL INITIAL MORTGAGE
OCCUPANCY LOANS BALANCE POOL BALANCE
- --------- --------- --------------- ----------------
<S> <C> <C> <C>
Primary Residence................................... 831 $108,251,259.63 97.59%
Second/Vacation..................................... 12 880,001.29 0.79
Investor............................................ 21 1,794,048.58 1.62
--- --------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
PREPAYMENT PENALTIES WITH RESPECT TO THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
PREPAYMENT MORTGAGE PRINCIPAL INITIAL MORTGAGE
PENALTY LOANS BALANCE POOL BALANCE
- ------------------ --------- ---------------- -----------------
<S> <C> <C> <C>
5 Year.............................................. 3 $ 484,532.53 0.44%
3 Year.............................................. 123 13,879,375.90 12.51
2 Year.............................................. 306 36,707,860.09 33.09
1 Year.............................................. 249 32,966,630.21 29.72
None ............................................. 183 26,886,910.77 24.24
--- ---------------- -----
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
MORTGAGED PROPERTY TYPES OF THE INITIAL MORTGAGE LOANS
<TABLE>
NUMBER OF PERCENTAGE OF
MORTGAGE PRINCIPAL INITIAL MORTGAGE
PROPERTY TYPE LOANS BALANCE POOL BALANCE
- ------------- ------- -------------- ----------------
<S> <C> <C> <C>
Single-family....................................... 777 $101,395,909.16 91.41%
Planned Unit Developments (detached)................ 12 1,986,580.72 1.79
Two- to four-family units........................... 36 3,631,294.57 3.27
Manufactured Housing................................ 8 664,689.65 0.60
Condominium......................................... 31 3,246,835.40 2.93
---- --------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
S-41
<PAGE> 47
SELLER ASSIGNED RISK CATEGORIES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SELLER ASSIGNED MORTGAGE PRINCIPAL INITIAL MORTGAGE
RISK CATEGORIES LOANS BALANCE POOL BALANCE
- --------------- -------- --------- ----------------
<S> <C> <C> <C>
Loan Class A........................................ 536 $ 73,309,903.47 66.09%
Loan Class A-....................................... 155 19,547,684.79 17.62
Loan Class B........................................ 100 11,119,951.73 10.02
Loan Class C........................................ 47 4,686,784.80 4.23
Loan Class D........................................ 26 2,260,984.71 2.04
---- -------------- --------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
For a description of the Seller's risk categories, see "--Underwriting
Standards".
SEASONING OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE PRINCIPAL INITIAL MORTGAGE
MONTHS OF SEASONING (MONTHS) LOANS BALANCE POOL BALANCE
- ---------------------------- --------- --------- ----------------
<S> <C> <C> <C>
0......................................... 218 $ 27,332,612.00 24.64%
1......................................... 295 36,685,094.84 33.07
2......................................... 257 33,254,318.38 29.98
3......................................... 83 11,726,264.02 10.57
4-11...................................... 11 1,927,020.26 1.74
---- --------------- -------
Total.................................. 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average seasoning of
the Initial Mortgage Loans was one month.
REMAINING TERMS TO MATURITY OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MONTHS REMAINING NUMBER OF PRINCIPAL INITIAL MORTGAGE
TO MATURITY (MONTHS) MORTGAGE LOANS BALANCE POOL BALANCE
-------------------- -------------- ------- ----------------
<S> <C> <C> <C>
349-356................................... 11 $ 1,927,020.26 1.74%
357....................................... 83 11,726,264.02 10.57
358....................................... 257 33,254,318.38 29.98
359....................................... 295 36,685,094.84 33.07
360....................................... 218 27,332,612.00 24.64
--- --------------- ------
Total................................... 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average remaining
terms to maturity of the Initial Mortgage Loans was 359 months.
S-42
<PAGE> 48
GROSS MARGINS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF MORTGAGE PRINCIPAL INITIAL MORTGAGE
GROSS MARGINS (%) LOANS BALANCE POOL BALANCE
----------------- --------- --------- ----------------
<S> <C> <C> <C>
4.250-4.500..................................... 5 $ 642,926.08 0.58%
4.501-5.000..................................... 42 6,504,711.65 5.86
5.001-5.500..................................... 159 21,041,978.72 18.97
5.501-6.000..................................... 304 41,033,432.31 36.99
6.001-6.500..................................... 256 30,102,683.94 27.14
6.501-7.000..................................... 45 5,955,997.12 5.37
7.001-7.500..................................... 29 3,500,669.42 3.16
7.501-8.000..................................... 18 1,774,694.75 1.60
8.001-8.500..................................... 3 233,415.51 0.21
8.501-8.800..................................... 3 134,800.00 0.12
---- --------------- -------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average Gross
Margins of (a) the Initial Mortgage Loans was approximately 5.9477% per annum,
(b) the Six Month LIBOR Mortgage Loans was approximately 5.7771% per annum, (c)
the 2/28 Mortgage Loans was approximately 6.0332% per annum and (d) the 3/27
Mortgage Loans was approximately 5.6231% per annum.
MAXIMUM MORTGAGE RATES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF MAXIMUM MORTGAGE PRINCIPAL INITIAL MORTGAGE
MORTGAGE RATES (%) LOANS BALANCE POOL BALANCE
------------------ --------- --------- ----------------
<S> <C> <C> <C>
13.550-14.000................................... 9 $ 2,221,807.66 2.00%
14.001-14.500................................... 20 2,534,128.38 2.28
14.501-15.000................................... 47 6,601,132.45 5.95
15.001-15.500................................... 140 19,860,412.94 17.90
15.501-16.000................................... 223 29,496,469.87 26.59
16.001-16.500................................... 211 25,129,686.16 22.65
16.501-17.000................................... 161 19,967,958.02 18.00
17.001-17.500................................... 33 3,400,928.62 3.07
17.501-18.000................................... 12 1,022,141.01 0.92
18.001-18.500................................... 5 573,069.00 0.52
18.501-19.000................................... 2 92,575.39 0.08
19.001-19.100................................... 1 25,000.00 0.02
---- --------------- ------
Total........................................ 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average Maximum
Mortgage Rate of (a) the Initial Mortgage Loans was approximately 15.9319% per
annum, (b) the Six Month LIBOR Mortgage Loans was approximately 15.4733% per
annum, (c) the 2/28 Mortgage Loans was approximately 16.1547% per annum and (d)
the 3/27 Mortgage Loans was approximately 15.3986% per annum.
S-43
<PAGE> 49
NEXT INTEREST RATE ADJUSTMENT DATES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NEXT INTEREST NUMBER OF PRINCIPAL INITIAL MORTGAGE
ADJUSTMENT DATE MORTGAGE LOANS BALANCE POOL BALANCE
- --------------- -------------- ---------- ----------------
<S> <C> <C> <C>
October 1997............................ 1 $ 125,596.28 0.11%
November 1997........................... 2 439,362.66 0.40
December 1997........................... 19 3,531,512.73 3.18
January 1998............................ 75 9,920,116.00 8.94
February 1998........................... 76 11,028,090.95 9.94
March 1998.............................. 61 9,524,453.66 8.59
February 1999........................... 2 160,077.80 0.14
March 1999.............................. 1 94,137.57 0.08
May 1999................................ 5 1,107,845.95 1.00
June 1999............................... 64 8,194,751.29 7.39
July 1999............................... 179 22,857,625.08 20.61
August 1999............................. 216 24,789,921.74 22.35
September 1999.......................... 153 17,534,868.00 15.81
October 1999............................ 1 90,000.00 0.08
July 2000............................... 3 509,501.60 0.46
August 2000............................. 2 744,948.19 0.67
September 2000.......................... 4 272,500.00 0.25
--- --------------- -----
Total............................. 864 $110,925,309.50 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average months to
Next Interest Adjustment Date of (a) the Initial Mortgage Loans was
approximately 17 months, (b) the Six Month LIBOR Mortgage Loans was
approximately five months, (c) the 2/28 Mortgage Loans was approximately 23
months and (d) the 3/27 Mortgage Loans was approximately 35 months.
UNDERWRITING STANDARDS
The Mortgage Loans were underwritten in accordance with the Seller's
underwriting standards (the "Seller's Standards"), which are designed to permit
mortgage lending to borrowers whose creditworthiness and repayment ability do
not satisfy the more stringent underwriting requirements used as standards for
Fannie Mae and Freddie Mac. The Seller has established risk categories by which
it could aggregate acceptable loans into groupings considered to have
progressively greater risk characteristics. A more detailed description of those
Seller-assigned risk categories applicable to the Mortgage Loans is set forth
below.
The Seller's underwriting of the Mortgage Loans generally consisted of
analyzing the following as standards applicable to the Mortgage Loans: the
creditworthiness of a mortgagor, the income sufficiency of a mortgagor's
projected family income relative to the mortgage payment and to other fixed
obligations (including in certain instances rental income from investment
property), and the adequacy of the mortgaged property (expressed in terms of
Loan-to-Value Ratio), to serve as the collateral for a mortgage loan.
Generally, each mortgagor would have been required to complete an
application designed to provide to the original lender pertinent credit
information concerning the mortgagor. As part of the description of the
mortgagor's financial condition, each mortgagor furnished information (which may
have been supplied solely in such application) with respect to its assets,
liabilities, income, credit history, employment history and personal
information, and furnished an authorization to apply for a credit report which
summarized the borrower's credit history with local merchants and lenders and
any record of past or present bankruptcy or foreclosure proceedings. The
mortgagor
S-44
<PAGE> 50
may have also been required to authorize verifications of deposits at financial
institutions where the mortgagor had demand or savings accounts. In the case of
investment properties, income derived from the mortgaged property may have been
considered for underwriting purposes. With respect to mortgaged property
consisting of vacation or second homes, generally no income derived from the
property was considered for underwriting purposes.
Based on the data provided in the application, certain verifications
(which are not required with respect to "Stated Income Applications," as
described below), and the appraisal or other valuation of the mortgaged
property, a determination was made by the Seller that the mortgagor's monthly
income would be sufficient to enable the mortgagor to meet its monthly
obligations on the mortgage loan and other expenses related to the property
(such as property taxes, utility costs, standard hazard insurance and other
fixed obligations other than housing expenses). In certain circumstances, the
Seller may also have considered the amount of liquid assets available to the
mortgagor after origination.
Prospective mortgagors may submit loan applications under one of three
programs, which differ from each other with respect to the requirements for the
verification of the income of the mortgagor and the source of funds required to
be deposited by the applicant in order to close the loan. Certain of the
Mortgaged Loans have been originated under "limited documentation" programs that
require less documentation and verification than do traditional "full
documentation" programs. Generally, under such a program, minimal investigation
into a mortgagor's credit history and income profile would have been undertaken
by the originator and the underwriting for such mortgage loans will place a
greater emphasis on the value of the mortgaged property. Under the "Full App"
program, mortgagors are generally required to submit documentation verifying at
least two years of employment history. Under the "Fast App" program, applicants
must have a proven one-year employment history verified by appropriate
documentation. Under the "Stated Income Application" program, no verification of
the applicant's income is required; rather, the applicant may be qualified based
on monthly income as stated in the mortgage loan application, if that income is
supported by the general information included in the loan application package.
Verification of the source of funds (if any) to be deposited by the applicant in
order to close the loan is required under both the Full App and Fast App
programs.
As used in this section, "Loan-to-Value Ratio" shall generally mean
that ratio, expressed as a percentage, borne by (a) the principal amount of the
Mortgage Loan at origination over (b) (i) the lesser of the sales price or the
appraised value of the related Mortgage Property at origination, or (ii) in the
case of a Mortgage Loan made to refinance a previous loan, the appraised value
determined at origination of the new Mortgage Loan.
The adequacy of a mortgaged property as security for repayment of the
related mortgage loan generally has been determined by an appraisal in
accordance with preestablished appraisal guidelines for appraisals established
by the Seller. Appraisers were typically independent appraisers selected in
accordance with the Seller's Standards. The appraisal procedure guidelines
generally required the appraiser or an agent on its behalf to inspect the
property personally and to verify whether the property was in good condition and
that construction, if new, had been substantially completed. The appraisal would
have considered a market data analysis of recent sales of comparable properties
and, when deemed applicable, an analysis, based on income generated from the
property or replacement cost analysis based on the current cost of constructing
or purchasing a similar property. In certain instances, the Loan-to-Value Ratio
or Combined Loan-to-Value Ratio may have been based on the appraised value as
indicated on a review appraisal conducted by the Seller.
Pursuant to the Seller's Standards, each Mortgage Loan was assigned a
risk grade and categorized in a "Loan Class," denominated by a letter. The
Seller's risk classification system is designed to assess the likelihood that
each borrower will satisfy the repayment obligations associated with the related
mortgage loan and to establish the maximum permissible Loan-to-Value Ratio for
the mortgage loan. Time frames referred to below (e.g., "within the last 12
months") are measured from the time of underwriting of a mortgagor's credit.
S-45
<PAGE> 51
Loan Class A: For a Mortgage Loan to have been assigned by the Seller
to Loan Class A, the prospective mortgagor must have repaid installment debt
with no more than two 30-day late payments within the last 12 months, and must
have repaid all revolving debt with no more than three 30-day late payments
within the last 12 months. A maximum of one 30-day late payment, and no 60-day
or 90-day late payments, within the last 12 months is acceptable on an existing
mortgage loan, and any existing mortgage loan must be current at the time of the
application. Minor derogatory items are allowed as to non-mortgage credit
(provided, open collections and charge-offs in excess of $200 must be paid down
to zero at closing unless they are three years old or older and not reflected in
the title report or are medical related). No Chapter 7 bankruptcies with respect
to the mortgagor may have been discharged during the previous two years, and no
Chapter 13 bankruptcy filings may have been made by the mortgagor during the
previous three years. No foreclosures may have been filed within the last three
years with respect to real property owned by the mortgagor or no foreclosure
sales with respect to mortgagor property may have been conducted within the last
two years. The mortgaged property must be in average to good condition. A
maximum Loan-to-Value Ratio of 90% is permitted for a mortgage loan secured by a
single family owner-occupied property (or 85% for a mortgage loan originated
under a "Fast App" program and 80% for a mortgage loan originated under a
"Stated Income" application program). A maximum Loan-to-Value Ratio of 75% (or
70% for mortgage loans originated under the "Fast App" program and 65% for
mortgage loans originated under the "Stated Income" application program) is
permitted for a mortgage loan secured by a non-owner occupied property. The
maximum permissible Loan-to-Value Ratio is lower for mortgage loans with initial
principal amounts in excess of $350,000 for loans secured by owner-occupied
properties (or lower dollar amounts for loans secured by non-owner-occupied
properties), and for mortgage loans made in connection with a mortgage
refinancing in which the mortgagor borrows more than is needed to refinance his
old mortgage loan. The mortgagor's debt service-to-income ratio generally is 45%
or less. In the case of adjustable rate mortgage loans, this ratio will be
calculated including the prospective mortgage loan debt, based on the initial
rate on the mortgage loan plus 2% per annum unless the initial rate would not be
subject to change for an extended period.
Loan Class A-: For a Mortgage Loan to have been assigned by the Seller
to Loan Class A-, the prospective mortgagor is required to have repaid all
previous or existing installment debt with no more than three 30-day late
payments and one 60-day late payment within the last 12 months and must have
repaid all previous or existing revolving debt with no more than four 30-day
late payments and one 60-day late payment in the last 12 months. A maximum of
two 30-day late payments, and no 60-day or 90-day late payments, within the last
12 months is acceptable on an existing mortgage loan, and any existing mortgage
loan must be current at the time of the application. As to non-mortgage credit,
some prior defaults may have occurred (provided, open collections and
charge-offs in excess of $200 must be paid down to zero at closing unless they
are three years old or older and not reflected in the title report or are
medical related). No Chapter 7 bankruptcies with respect to the mortgagor may
have been discharged during the two years, and no Chapter 13 bankruptcy filings
may have been made by the mortgagor during the previous three years. No
foreclosures may have been filed within the last three years with respect to
real property owned by the mortgagor or no foreclosure sales with respect to the
mortgagor property may have been conducted within the last two years. The
mortgaged property must be in average to good condition. A maximum Loan-to-Value
Ratio of 85% (or 80% for a mortgage loan originated under a "Fast App" program
and 75% for a mortgage loan originated under a "Stated Income" application
program) is permitted for a mortgage loan secured by an owner-occupied property.
A maximum Loan-to-Value Ratio of 75% (or 70% for mortgage loans originated under
a "Fast App" program and 65% for mortgage loans originated under a Stated Income
Application program) is permitted for a mortgage loan secured by a
non-owner-occupied property. The maximum permissible Loan-to-Value Ratio is
lower for mortgage loans with initial principal amounts in excess of $350,000
for loans secured by owner-occupied properties (or lower dollar amounts for
loans secured by non-owner-occupied properties), and for mortgage loans made in
connection with a mortgagor refinancing in which the mortgagor borrows more than
is needed to refinance his old mortgage loan. The debt service-to-income ratio
generally is 50% or less. In the case of adjustable rate mortgage loans, the
ratio will be calculated including the prospective mortgage loan debt, based on
an initial rate on the mortgage loan plus 2% per annum unless the initial rate
would not be subject to change for an extended period.
S-46
<PAGE> 52
Loan Class B: For a Mortgage Loan to have been assigned by the Seller
to Loan Class B, the prospective mortgagor may not have paid all previous or
existing installment or revolving debt according to its terms and may have some
charge-offs. The mortgagor may have no more than five 30-day late payments, two
60-day late payments and one 90-day late payment in the last 12 months with
respect to installment credit obligations, and no more than six 30-day late
payments, two 60-day late payments and one 90-day late payment in the last 12
months with respect to revolving credit obligations. A maximum of four 30-day
late payments, and one 60-day but no 90-day late payments, within the last 12
months is acceptable on an existing mortgage loan. As to non-mortgage credit,
some prior defaults may have occurred (provided, open collections and
charge-offs must be paid down to an amount not in excess of $500 at closing
unless they are three years old or older and not reflected in the title report
or are medical related). No Chapter 7 bankruptcies with respect to the mortgagor
may have been discharged during the two years, and no Chapter 13 bankruptcy
filings may have been made by the mortgagor during the previous two years. No
foreclosures may have been filed within the last two years with respect to real
property owned by the mortgagor. A maximum Loan-to-Value Ratio of 80% (or 75%
for a mortgage loan originated under a "Fast App" program and 70% for a mortgage
loan originated under a "Stated Income" application program) is permitted for a
mortgage loan secured by an owner-occupied property. A maximum Loan-to-Value
Ratio of 70% (or 65% for mortgage loans originated under a "Fast App" program
and 60% for mortgage loans originated under a "Stated Income" application
program) is permitted for a mortgage loan secured by a non-owner-occupied
property. The maximum permissible Loan-to-Value Ratio is lower for mortgage
loans with initial principal amounts in excess of $350,000 for loans secured by
owner-occupied properties (or lower dollar amounts for loans secured by
non-owner-occupied properties), and for mortgage loans made in connection with
a mortgagor refinancing in which the mortgagor borrows more than is needed to
refinance his old mortgage loan. The debt service-to-income ratio generally is
50% or less. In the case of adjustable rate mortgage loans, this ratio will be
likely calculated including the prospective mortgage loan debt, based on an
initial rate on the mortgage loan plus 2% per annum unless the initial rate
would not be subject to change for an extended period.
Loan Class C: For a Mortgage Loan to have been assigned by the Seller
to Loan Class C, the prospective mortgagor may have experienced significant
credit problems in the past. The mortgagor may have had no more than four 60-day
late payments and two 90-day late payment in the last 12 months with respect to
installment credit obligations, and no more than five 60-day late payments and
two 90-day late payment in the last 12 months with respect to revolving credit
obligations. As to mortgage credit, the mortgagor may have had a history of
being generally 30 days delinquent, and a maximum of one 60-day late payment and
one 90-day late payment within the last 12 months is acceptable on an existing
mortgage loan. As to non-mortgage credit significant prior defaults may have
occurred (provided, open collections and charge-offs must be paid down to an
amount not in excess of $1,500 at closing unless they are three years old or
older and not reflected in the title report or are medical related). No
bankruptcies may have been filed or discharged during the 12-month period prior
to the date the mortgage loan was made. No foreclosures may have been filed
within the last year with respect to real property owned by the mortgagor. The
mortgaged property must be in average to good condition. A maximum Loan-to-Value
Ratio of 75% (or 70% for a mortgage loan originated under a "Fast App" program
and 65% for a mortgage loan originated under a "Stated Income" application
program) is permitted for a mortgage loan secured by an owner-occupied property.
A maximum Loan-to-Value Ratio of 65% (or 60% for mortgage loans originated under
a "Fast App" program and 55% for mortgage loans originated under a "Stated
Income" application program) is permitted for a mortgage loan secured by a
non-owner-occupied property. The maximum permissible Loan-to-Value Ratio is
lower for mortgage loans with initial principal amounts in excess of $350,000
for loans secured by owner-occupied properties (or lower dollar amounts for
loans secured by non-owner-occupied properties), and for mortgage loans made in
connection with a mortgagor refinancing in which the mortgagor borrows more than
is needed to refinance his old mortgage loan. The debt service-to-income ratio
generally is 55% or less. In the case of adjustable rate mortgage loans, this
ratio will be calculated including the prospective mortgage loan debt, based on
an initial rate on the mortgage plus 2% per annum unless the initial rate would
not be subject to change for an extended period.
Loan Class D: For a Mortgage Loan to have been assigned by the Seller
to Loan Class D, the prospective mortgagor will have experienced substantial
credit problems in the past and generally will have overall poor credit.
S-47
<PAGE> 53
As to mortgage credit, the mortgagor may have had a history of being generally
30 to 60 days delinquent, and a maximum of two 90-day late payments within the
last 12 months is acceptable on an existing mortgage loan. The prospective
mortgagor's credit history is poor and a notice of default on an existing
mortgage loan may have been filed against the mortgagor. As to non-mortgage
credit, significant prior defaults may have occurred (provided, open collections
and charge-offs must be paid down to an amount not in excess of $2,500 at
closing unless they are three years old or older and not reflected in the title
report or are medical related). A bankruptcy filing by the mortgagor is
permitted if it is discharged at closing. Also, on a case-by-case basis, the
Seller may make a loan on a mortgage that takes a mortgagor out of foreclosure.
The Seller will make a mortgage loan to a borrower to take him out of bankruptcy
or foreclosure only if it improves the borrower's financial situation. The
mortgaged property must be in average to good condition. A maximum Loan-to-Value
Ration of 65% for mortgage loans originated under a full documentation program
(or 60% in the case of a mortgage loan originated under a "Fast App" program) is
permitted for a mortgage loan secured by an owner-occupied property. A maximum
Loan-to-Value Ration of 60% for mortgage loans originated under a full
documentation program (or 55% in the case of a mortgage loan originated under a
"Fast App" program) is permitted for a mortgage loan secured by a non-owner
occupied property. Loan Class D borrowers may not use the "Stated Income"
application program. The maximum permissible Loan-to-Value Ratio is lower for
mortgage loans with initial principal amounts in excess of $350,000 for loans
secured by owner-occupied properties (or lower dollar amounts for loans secured
by non-owner-occupied properties), and for mortgage loans made in connection
with a mortgagor refinancing in which the mortgagor borrows more than is needed
to refinance his old mortgage loan. The debt service-to income ratio generally
is 60% or less. In the case of adjustable rate mortgage loans, this ratio will
be calculated including the prospective mortgage loan debt, based on the initial
rate on the mortgage loan plus 2% per annum unless the initial rate would not be
subject to change for an extended period.
The Seller's Standards applicable to the Mortgage Loans include the
foregoing categories and characteristics as guidelines only. On a case-by-case
basis, the Seller may have determined in the course of its underwriting process
that a prospective mortgagor warrants a Loan-to-Value Ratio upgrade based on
compensating factors. For example, a borrower may be able to get a loan in a
particular Loan Class with a Loan-to-Value Ratio 5% higher than the ratio that
would otherwise be permitted for such Loan Class if certain compensating factors
exist.
The foregoing risk grade classifications are based on factors that are
exclusive of the additional protection against loss that primary mortgage
insurance customarily provides on loans which have Loan-to-Value Ratios or
combined Loan-to-Value Ratios in excess of 80%. None of the Mortgage Loans have
primary mortgage insurance coverage. Approximately 44.84% of the Initial
Mortgage Loans as of the Statistical Calculation Date have Loan-to-Value Ratios
in excess of 80%.
Based on the indicated underwriting standards applicable for mortgage
loans with risk features originated thereunder, and in particular Mortgage Loans
in Loan Classes C and D as described herein, such Mortgage Loans are likely to
experience greater rates of delinquency, foreclosure and loss, and may
experience substantially greater rates of delinquency, foreclosure and loss,
than mortgage loans underwritten under more stringent underwriting standards.
CONVEYANCE OF ADDITIONAL MORTGAGE LOANS
The pledge of Additional Mortgage Loans by the Issuer on or prior to
the Closing Date is subject to the following requirements: (i) no Additional
Mortgage Loans may be contractually delinquent as of the applicable Cutoff Dates
beyond any applicable grace periods, (ii) the original term to stated maturity
of such Additional Mortgage Loans may not exceed 30 years, (iii) each Additional
Mortgage Loan will have an adjustable rate of interest determined on the basis
of Six Month LIBOR, (iv) each Additional Mortgage Loan will have an initial
interest rate of not less than 8.00% (with the exception of one Mortgage Loan
which has an initial interest rate of 7.95%), (v) such Additional Mortgage Loans
will have been underwritten or re-underwritten, as applicable, substantially in
accordance with the criteria set forth under "--Underwriting Standards" herein,
(vi) each Additional Mortgage Loan will have a principal balance not in excess
of $500,000 and (vii) following the acquisition of such Additional
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<PAGE> 54
Mortgage Loans, the Mortgage Loans (a) will have an initial weighted average
Mortgage Rate of at least 9.90%; (b) will have Seller assigned risk categories
substantially similar to the Initial Mortgage Loans; and (c) will have no final
payment date after October 1, 2027. The transfer of Additional Mortgage Loans to
the Mortgage Pool is subject to the approval of the Bond Insurer and, in
instances deemed appropriate by the Bond Insurer, the requirements for
Additional Mortgage Loans specified above may be waived or modified.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield on the Bonds will be sensitive to fluctuations in the level
of One Month LIBOR. In addition, the effective yield of the Bonds will be
affected by the rate and timing of payments of principal on the Mortgage Loans
securing the Bonds (including, for this purpose, prepayments and amounts
received by virtue of refinancings, liquidations of Mortgage Loans due to
defaults, casualties, condemnations, and repurchases, whether optional or
required, by the Seller or the Bond Insurer), the amount and timing of mortgagor
delinquencies and defaults resulting in realized losses, and the application of
Excess Cash on the Bonds. Such yield may be adversely affected by a higher or
lower than anticipated rate of principal payments (including Principal
Prepayments) on the Mortgage Loans. The rate of Principal Payments on such
Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans, the rate and timing of principal prepayments thereon by the
mortgagors, liquidations of defaulted Mortgage Loans and optional or required
repurchases of Mortgage Loans as described herein. The timing of changes in the
rate of prepayments, liquidations and repurchases of the Mortgage Loans may, and
the timing of Realized Losses could, significantly affect the yield to an
investor, even if the average rate of Principal Payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
Principal Payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein), no assurance can be given
as to such rate or the timing of principal prepayments on the Bonds.
Because all amounts available for payment on the Bonds after payments
in respect of interest on the Bonds, including all or a portion of the Excess
Cash, are applied as reductions of the Bond Balance, the weighted average life
of such Bonds will also be influenced by the amount of Excess Cash so applied.
Because Excess Cash attributable to the overcollateralization feature is
derived, in part, from interest collections on the Mortgage Loans and will be
applied to reduce the Bond Balance, the aggregate payments in reduction of the
Bond Balance on a Payment Date will usually be greater than the aggregate amount
of principal payments (including Principal Prepayments) on the Mortgage Loans
payable on such Payment Date until the Required Overcollateralization Amount is
reached and assuming an Overcollateralization Deficit does not occur. As a
consequence, Excess Cash available for payment in reduction of the Bond Balance
will increase in proportion to the outstanding Bond Balance over time in the
absence of offsetting Realized Losses on the Mortgage Loans.
Excess Cash will be paid on the Bonds in reduction of the Bond Balance
on each Payment Date to the extent the then applicable Required
Overcollateralization Amount exceeds the Overcollateralization Amount on such
Payment Date. Any remaining Excess Cash will be released to the holder(s) of the
Residual Interest. If a Bond is purchased at other than par, its yield to
maturity will be affected by the rate at which Excess Cash is paid to the
Bondholders. If the actual rate of Excess Cash payments on the Bonds applied in
reduction of the Bond Balance is slower than the rate anticipated by an investor
who purchases a Bond at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of Excess Cash
payments applied in reduction of the Bond Balance is faster than the rate
anticipated by an investor who purchases a Bond at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of Excess Cash on any Payment Date will be affected by, among other
things, the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in the weighted average of the Mortgage
Rates resulting from prepayment and liquidations of Mortgage Loans, by the
relationship between Six Month LIBOR and One Month LIBOR, by adjustments of
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<PAGE> 55
Mortgage Rates and by adjustments in the Bond Interest Rate. The amount of
Excess Cash paid to the Bondholders applied to the Bond Balance on each Payment
Date will be based on the Required Overcollateralization Amount. The Indenture
generally provides that the Required Overcollateralization Amount may, over
time, decrease, or increase, subject to certain floors, caps and triggers
including triggers that allow the related Required Overcollateralization Amount
to decrease or "step down" based on the performance on the Mortgage Loans with
respect to certain tests specified in the Indenture based on delinquency rates.
Any increase in the Required Overcollateralization Amount may result in an
accelerated amortization until such Required Overcollateralization Amount is
reached. Conversely, any decrease in the Required Overcollateralization Amount
will result in a decelerated amortization of the Bonds until such Required
Overcollateralization Amount is reached.
The Mortgage Loans generally may be prepaid in full or in part at any
time, although a substantial portion of the Mortgage Loans provide for payment
of a prepayment charge. The Mortgage Loans generally are assumable under certain
circumstances if, in the sole judgment of the Servicer, the prospective
purchaser of a Mortgaged Property is creditworthy and the security for such
Mortgage Loan is not impaired by the assumption. In the event the Servicer does
not approve an assumption, the related Mortgaged property will be due on sale,
in which case the Servicer shall enforce any due-on-sale clause contained in any
Mortgage Note or Mortgage, to the extent permitted under applicable law and
governmental regulations; provided, however, if the Servicer determines that it
is reasonably likely that the mortgagor will bring, or if any mortgagor does
bring legal action to declare invalid or otherwise avoid enforcement of a
due-on-sale clause contained in any Mortgage Note or Mortgage, the Servicer
shall not be required to enforce the due-on-sale clause or to contest such
action. The extent to which the Mortgage 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 Bonds and may result in a prepayment experience on the Mortgage Loans
that differs from that on other conventional mortgage loans.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of Principal Payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early years
as increases in the monthly payments to an amount in excess of the monthly
payment required at the time of origination may result in a default rate higher
than that on level payment mortgage loans, particularly since the mortgagor
under each Mortgage Loan was qualified on the basis of the Mortgage Rate in
effect at origination. The repayment of the Mortgage Loans will be dependent on
the ability of the mortgagor to make larger monthly payments as the Mortgage
Rate increases. See "Risk Factors" herein and in the Prospectus. Furthermore,
the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. As a result of the
underwriting standards applicable to the Mortgage Loans, the Mortgage Loans are
likely to experience rates of delinquency, foreclosure, bankruptcy and loss that
are higher, and that may be substantially higher, than those experienced by
mortgage loans underwritten in accordance with the standards applied by Fannie
Mae and Freddie Mac first mortgage loan purchase programs. See "Description of
the Mortgage Pool--Underwriting Standards." In addition, because of such
underwriting criteria and their likely effect on the delinquency, foreclosure,
bankruptcy and loss experience of the Mortgage Loans, the Mortgage Loans will
generally be serviced in a manner intended to result in a faster exercise of
remedies, which may include foreclosure, in the event Mortgage Loan
delinquencies and defaults occur, than would be the case of the Mortgage Loans
were serviced in accordance with such other programs. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. To the extent that the
locations of the Mortgaged Properties are concentrated in a given region, the
risk of delinquencies, loss and involuntary prepayments resulting from adverse
economic conditions in such region or from other factors, such as fires, storms,
landslides and mudflows and earthquakes, is increased. Certain information
regarding the location of the Mortgaged Properties is set forth under
"Description of the Mortgage Pool--Mortgage Loan Characteristics" herein. See
"Risk Factors--Risks Associated with Geographic Concentration of the Mortgage
Properties" herein.
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<PAGE> 56
Other factors affecting prepayment of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Bonds will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of the Bonds could occur
significantly earlier than the Stated Maturity. See "--Weighted Average Life"
herein.
In addition, the yield to maturity of the Bonds will depend on the
price paid by the holders of the Bonds and the Bond Interest Rate. The extent to
which the yield to maturity of a Bond is sensitive to prepayments will depend
upon the degree to which it is purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be passed
through to the Indenture Trustee and included in the Available Funds in the
month following the month of receipt thereof by the Servicer. Any prepayment of
a Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or
by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Bonds of amounts that otherwise would be paid in
amortized increments over the remaining term of such Mortgage Loan.
To the extent that principal prepayments with respect to the Mortgage
Loans result in prepayments on the Bonds during periods of generally lower
interest rates, Bondholders may be unable to reinvest such principal prepayments
in securities having a yield and rating comparable to the Bonds.
The yield on the Bonds may be affected by any delays in receipt of
payments thereon as described under "Description of the Bonds--Book-Entry
Registration and Definitive Bonds" herein and "Risk Factors--Book Entry
Registration" and "Description of the Securities--Book Entry Registration" in
the Prospectus.
The yield on the Bonds may also be affected by a redemption of the
Bonds as described under "Description of the Bonds--Redemption of the Bonds"
herein.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS OR AS TO THE YIELD TO MATURITY OF ANY BOND. AN INVESTOR IS URGED
TO MAKE AN INVESTMENT DECISION WITH RESPECT TO A BOND BASED ON THE ANTICIPATED
YIELD TO MATURITY OF SUCH BOND RESULTING FROM ITS PRICE AND SUCH INVESTOR'S OWN
DETERMINATION AS TO ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES. PROSPECTIVE
INVESTORS ARE URGED TO ANALYZE FULLY THE EFFECT OF MORTGAGE LOAN PRINCIPAL
PREPAYMENTS AND MARKET CONDITIONS ON THE YIELD AND VALUE OF THE BONDS, BEFORE
ACQUIRING ANY BONDS. IN PARTICULAR, INVESTORS THAT ARE REQUIRED TO PERFORM
PERIODIC VALUATIONS ON THEIR INVESTMENT PORTFOLIOS SHOULD CONSIDER THE EFFECT OF
SUCH FLUCTUATIONS IN VALUE. IN ADDITION, INVESTORS SHOULD CAREFULLY CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS--RISKS ASSOCIATED WITH THE PREPAYMENT OF
THE MORTGAGE LOANS" HEREIN.
YIELD CONSIDERATIONS RELATING TO ADJUSTABLE RATE MORTGAGE LOANS
During the initial period following origination, substantially all of
the Mortgage Loans bore interest at Mortgage Rates which were set by the
originators of such Mortgage Loans independently of the Six Month LIBOR
applicable at the time of origination. See "Description of the Mortgage
Pool--Mortgage Rate Adjustment" herein.
At the initial Adjustment Date for each Mortgage Loan, the Mortgage
Rate thereon was or will be adjusted to a rate based on the applicable Six Month
LIBOR plus the related Gross Margin, subject to the applicable Periodic Cap and
applicable Maximum Mortgage Rate and Minimum Mortgage Rate. On an Adjustment
Date, increases in Six Month LIBOR will increase the Mortgage Rates of the
Mortgage Loans, subject to the applicable Periodic Cap and the applicable
Maximum Mortgage Rate. Resulting increases in the amount of the required monthly
payments on the Mortgage Loans in excess of those assumed in underwriting such
Mortgage Loans may result in a default rate higher than that on mortgage loans
with fixed mortgage rates.
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<PAGE> 57
Notwithstanding prevailing market interest rates, in the event the
Mortgage Rate on any Mortgage Loan cannot increase due to the applicable
Periodic Cap or the applicable Maximum Mortgage Rate, the yield on the Bonds
could be adversely affected. In addition, should the Mortgage Rate on any
Mortgage Loan not be able to decrease below a certain level due to the
applicable Minimum Mortgage Rate or Periodic Cap, the related mortgagor may be
more likely to prepay such Mortgage Loan in full and to refinance at a lower
rate.
The Mortgage Rates on the Mortgage Loans adjust semiannually based upon
Six Month LIBOR, whereas the Bond Interest Rate adjusts monthly based upon One
Month LIBOR as described under "Description of the Bonds" herein, subject to the
Available Funds Cap. The interest due on the Mortgage Loans during any Due
Period may not equal the amount of interest that would accrue at the Bond
Interest Rate during the related Interest Accrual Period, and any such shortfall
will only be paid to Bondholders to the extent and in the priority described
under "Description of the Bonds--Payments on the Bonds" herein. In addition, the
Six Month LIBOR and One Month LIBOR may respond to different economic and market
factors, and there is not necessarily a correlation between them. Thus, it is
possible, for example, that One Month LIBOR may rise during periods in which Six
Month LIBOR is stable or is falling or that, even if both One Month LIBOR and
Six Month LIBOR rise during the same period, One Month LIBOR may rise more
rapidly than Six Month LIBOR.
The Company is not aware of any publicly available statistics that set
forth principal prepayment experience or prepayment forecasts of adjustable rate
mortgage loans over an extended period of time, and its experience with respect
to such loans is insufficient to draw any conclusions with respect to the
expected prepayment rates on the Mortgage Loans. The rate of principal
prepayments with respect to adjustable rate mortgage loans has fluctuated in
recent years. In addition, the features of adjustable rate mortgage loan
programs in the past have varied significantly in response to market conditions
such as interest rates, consumer demand, regulatory restrictions and other
factors. The lack of uniformity of the terms and provisions of such adjustable
rate mortgage loan programs have made it impracticable to compile meaningful
comparative data on prepayment rates and, accordingly, there can be no certainty
as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. As is the case with conventional fixed rate mortgage
loans, adjustable rate mortgage loans may be subject to a greater rate of
principal prepayment 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 cause mortgagors to refinance their adjustable
rate mortgage loans in order to obtain lower fixed interest rates.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Bonds
will be influenced by the rate at which principal on the Mortgage Loans is paid,
which may be in the form of scheduled payments or prepayments (including
prepayments of principal by the borrower as well as amounts received by virtue
of repurchases, condemnation, insurance or foreclosure with respect to the
Mortgage Loans), and the timing thereof.
The weighted average life of the Bonds also will be influenced by the
overcollateralization of the Bonds because collections are applied as principal
prepayments to the Bonds until the outstanding Bond Balance is less than the
Aggregate Principal Balance of the Mortgage Loans by an amount equal to the
Required Overcollateralization Amount. These prepayments have the effect of
accelerating the amortization of the Bonds, thereby shortening their respective
weighted average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Constant Prepayment Rate model ("CPR"), assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume 25% CPR
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<PAGE> 58
or any other CPR percentage is to assume that the stated percentage of the then
outstanding principal balance of the pool is prepaid over the course of a year.
No representation is made that the Mortgage Loans will prepay at that or any
other rate.
The table under the heading "Weighted Average Life of the Bonds
Outstanding at the Specified Percentages of CPR" indicates the weighted average
lives of the Bonds at various percentages of CPR. The table is based on the
following assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool
consists of representative mortgage loans with the characteristics set forth in
the tables below, (ii) payments on the Bonds are based upon the actual days
elapsed and a 360 day year and are received, in cash, on the 25th day of each
month, commencing in October 1997, (iii) the Mortgage Loans prepay at the
indicated percentages of CPR, (iv) no defaults, delinquencies or shortfalls
occur in the payment by mortgagors of principal and interest on the Mortgage
Loans, (v) none of the Seller, the Company, the Servicer or any other person
repurchases any Mortgage Loan pursuant to any obligation or option under the
Sales Agreement, the Servicing Agreement or otherwise (except, as indicated
below, in those weighted average life calculations assuming that the holder(s)
of the Residual Interest or the Servicer exercises its option to redeem the
Bonds on the first Payment Date on which it is permitted to do so), (vi)
scheduled monthly payments on the Mortgage Loans are received on the first day
of each month commencing in October 1997, in the case of the Representative
Initial Mortgage Loans, and November 1997, in the case of the Representative
Additional Mortgage Loans, and are computed prior to giving effect to any
prepayments received in the prior month, (vii) prepayments representing payment
in full of individual Mortgage Loans are received on the last day of each month
(commencing in September 1997 in the case of the Representative Initial Mortgage
Loans and in October 1997 in the case of the Representative Additional Mortgage
Loans) and include 30 days' interest thereon, (viii) the scheduled monthly
payment for each Mortgage Loan is calculated based on its principal balance,
Mortgage Rate and remaining term to maturity such that each Mortgage Loan will
amortize in amounts sufficient to repay the remaining principal balance of such
Mortgage Loan by its remaining term to maturity, (ix) the Bonds are purchased on
September 30, 1997, (x) Six Month LIBOR remains constant at 5.84375% and the
Mortgage Rate on each Mortgage Loan is adjusted on the next Adjustment Date (and
on subsequent Adjustment Dates, as necessary) to equal Six Month LIBOR plus the
applicable Gross Margin, subject to applicable interest rate caps and floors set
forth below, (xi) with respect to the each Mortgage Loan, the monthly payment on
the Mortgage Loan is adjusted on the Due Date immediately following the next
Adjustment Date (and on subsequent Adjustment Dates, as necessary) to equal a
fully amortizing payment as described in clause (viii) above, (xii) the original
principal amount of the Bonds is as set forth on the cover hereof and (xiii) the
overcollateralization levels are set as specified in the Insurance Agreement.
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REPRESENTATIVE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL
NUMBER WEIGHTED TERM TO ORIGINAL
OF AVERAGE STATED AMORTIZATION REMAINING MAXIMUM
MORTGAGE MORTGAGE PRINCIPAL MORTGAGE MATURITY TERM TERM SEASONING GROSS MORTGAGE
LOAN PRODUCT LOANS BALANCE RATE (MONTHS) (MONTHS) (MONTHS) (MONTHS) MARGIN RATE
------------ -------- -------------- -------- -------- ------------ --------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six Month LIBOR
Mortgage Loans 1 $ 125,596.28 10.6500% 360 360 349 11 5.5500% 15.6500%
Six Month LIBOR
Mortgage Loans 2 439,362.66 9.2215 360 360 356 4 5.4505 15.9212
Six Month LIBOR
Mortgage Loans 19 3,531,512.73 8.8549 360 360 357 3 5.5788 14.8549
Six Month LIBOR
Mortgage Loans 75 9,920,116.00 9.6845 360 360 358 2 5.9344 15.6845
Six Month LIBOR
Mortgage Loans 76 11,028,090.95 9.4611 360 360 359 1 5.6500 15.4611
Six Month LIBOR
Mortgage Loans 61 9,524,453.66 9.4738 360 360 360 0 5.8521 15.4738
2/28 Mortgage Loans 2 160,077.80 10.9288 360 360 353 7 5.9564 17.9288
2/28 Mortgage Loans 1 94,137.57 10.8250 360 360 354 6 5.8250 17.8250
2/28 Mortgage Loans 5 1,107,845.95 9.5400 360 360 356 4 5.8151 15.5400
2/28 Mortgage Loans 64 8,194,751.29 10.0082 360 360 357 3 6.0356 16.0234
2/28 Mortgage Loans 179 22,857,625.08 10.1554 360 360 358 2 6.0642 16.2162
2/28 Mortgage Loans 216 24,789,921.74 10.1276 360 360 359 1 6.0956 16.1882
2/28 Mortgage Loans 153 17,534,868.00 10.1004 360 360 360 0 5.9187 16.1004
3/27 Mortgage Loans 1 90,000.00 10.5000 360 360 360 0 6.1000 16.5000
3/27 Mortgage Loans 3 509,501.60 9.5916 360 360 358 2 5.6971 15.5916
3/27 Mortgage Loans 2 744,948.19 9.0635 360 360 359 1 5.5135 15.0635
3/27 Mortgage Loans 4 272,500.00 9.9540 360 360 360 0 5.7841 15.9540
REPRESENTATIVE ADDITIONAL MORTGAGE LOANS
Six Month LIBOR
Mortgage Loans 2,616,504.40 9.4738 360 360 360 0 5.8521 15.4738
2/28 Mortgage Loans 8,285,597.27 10.1004 360 360 360 0 5.9187 16.1004
<CAPTION>
MONTHS TO
NEXT INITIAL
MORTGAGE ADJUSTMENT PERIODIC PERIODIC
LOAN PRODUCT DATE RATE CAP RATE CAP
------------ ---------- -------- --------
<S> <C> <C> <C>
Six Month LIBOR
Mortgage Loans 1 1.0000% 1.0000%
Six Month LIBOR
Mortgage Loans 2 1.0000 1.0000
Six Month LIBOR
Mortgage Loans 3 1.0000 1.0000
Six Month LIBOR
Mortgage Loans 4 1.0000 1.0000
Six Month LIBOR
Mortgage Loans 5 1.0000 1.0000
Six Month LIBOR
Mortgage Loans 6 1.0000 1.0000
2/28 Mortgage Loans 17 1.0000 3.0000
2/28 Mortgage Loans 18 1.0000 3.0000
2/28 Mortgage Loans 20 1.0000 3.0000
2/28 Mortgage Loans 21 1.0076 3.0000
2/28 Mortgage Loans 22 1.0304 2.9815
2/28 Mortgage Loans 23 1.0373 3.0000
2/28 Mortgage Loans 24 1.0000 3.0000
3/27 Mortgage Loans 25 1.0000 3.0000
3/27 Mortgage Loans 34 1.0000 3.0000
3/27 Mortgage Loans 35 1.0000 3.0000
3/27 Mortgage Loans 36 1.0000 3.0000
REPRESENTATIVE ADDITIONAL MORTGAGE LOANS
Six Month LIBOR
Mortgage Loans 6 1.0000 1.0000
2/28 Mortgage Loans 24 1.0000 3.0000
</TABLE>
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There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table set forth
below. Any such discrepancy may have an effect upon the weighted average life of
the Bonds set forth in the table. In addition, since the actual Mortgage Loans
included in the Mortgage Pool will have characteristics that differ from those
assumed in preparing the table set forth below and since it is not likely the
level of Six Month LIBOR will remain constant as assumed, the Bonds may mature
earlier or later than indicated by the table. Based on the foregoing
assumptions, the table indicates the weighted average life of the Bonds at
various percentages of CPR. Neither the prepayment model used herein nor any
other prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans. Variations in the
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the weighted average lives shown in the following table.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the prepayment
assumption.
WEIGHTED AVERAGE LIFE OF THE BONDS
OUTSTANDING AT THE SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
0% 10% 20% 25% 30% 40% 50%
CPR CPR CPR CPR CPR CPR CPR
--- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Life in Years (1)................. 21.59 7.84 4.09 3.21 2.61 1.84 1.35
Weighted Average Life in Years (2)................. 21.55 7.47 3.78 2.97 2.41 1.69 1.25
</TABLE>
- ---------------------
(1) The weighted average life of a Bond is determined by (a) multiplying the
amount of each distribution of principal by the number of years from the
date of issuance of the Bond to the related Payment Date, (b) adding the
results and (c) dividing the sum by the original principal balance of the
Bond.
(2) Calculated pursuant to footnote one, but assumes the holder(s) of the
Residual Interest or the Servicer exercises its option to redeem the Bonds
on the first Payment Date on which it would be permitted to do so. See
"Description of the Bonds--Optional Redemption" herein.
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<PAGE> 61
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Servicer will service and administer the Mortgage Loans in
accordance with the policies, procedures and practices customarily employed by
the Servicer in servicing other comparable mortgage loans and pursuant to the
provisions of the Servicing Agreement The Servicer will not amend or modify in
any material respect its policies, procedures and practices with respect to the
Mortgage Loans (other than as required by applicable laws and regulations)
without the prior consent of the Bond Insurer.
Generally, servicing includes, but is not limited to, post-origination
loan processing, customer service, remittance handling, collections and
liquidations. Consistent with the servicing standard described in the foregoing
paragraph, the Servicer, in its discretion, may (a) waive any assumption fees,
late payment charges, charges for checks returned for insufficient funds or
other fees that may be collected in the ordinary course of servicing a Mortgage
Loan, (b) arrange a schedule for the payment of delinquent payments on the
related Mortgage Loan, subject to conditions set forth in the Servicing
Agreement, if a mortgagor is in default or about to be in default because of
such mortgagor's financial condition or (c) modify monthly payments on Mortgage
Loans in accordance with the Servicer's general policy on Mortgage Loans subject
to the Relief Act; provided, however, the Servicer may not, without the prior
consent of the Bond Insurer, permit any waiver, modification or variance of a
Mortgage Loan which would (i) change the Mortgage Rate, (ii) forgive the payment
of any principal or interest, (iii) lessen the lien priority or (iv) extend the
final maturity date on a Mortgage Loan past twelve months prior to the maturity
date of the Bonds, in any case except to the extent required under the Relief
Act. The Servicer, acting as agent for the Indenture Trustee, will not consent
to the subsequent placement of a deed of trust or mortgage, as applicable, on
any Mortgaged Property that is of equal or higher priority to that of the lien
securing the related Mortgage Loan unless such Mortgage Loan is prepaid in full
and thereby removed from the Mortgage Pool.
CUSTOMARY SERVICING PROCEDURES
The procedures of the Servicer with respect to day to day servicing of
the Mortgage Loans may vary considerably depending on the particular Mortgage
Loan, the Mortgaged Property, the mortgagor, the availability of an acceptable
party to assume a Mortgage Loan and the laws of the jurisdiction in which the
Mortgaged Property is located. Generally, it is the current practice of the
Servicer to send borrowers coupon books periodically reflecting their Monthly
Payments and the due dates therefor. Although borrowers generally make loan
payments within ten to fifteen days after the due date, if a borrower fails to
pay the monthly payment within such time period, the Servicer will commence
collection efforts by notifying the borrower of the delinquency. Under the terms
of each Mortgage Loan, the mortgagor agrees to pay a late charge (which the
Servicer is entitled to retain as additional servicing compensation under the
Servicing Agreement) if a monthly payment on a Mortgage Loan is not received
within the number of days specified in the Mortgage Note after its due date. If
the Mortgage Loan remains delinquent, the Servicer will attempt to contact the
mortgagor to determine the cause of the delinquency and to obtain a commitment
to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been
successful shortly after the due date of the next subsequently scheduled
installment, a pre-foreclosure notice will be sent to the mortgagor providing 30
days' notice of impending foreclosure action. During the 30-day notice period,
collection efforts continue. However, if no substantial progress has been made
in obtaining delinquent monies from the mortgagor, foreclosure proceedings will
be commenced.
Regulations and practices regarding foreclosure vary greatly from state
to state. Generally, the Servicer will have commenced foreclosure proceedings
prior to the time when a loan is 90 days delinquent. If the Servicer determines
that purchasing a property securing a mortgage loan will minimize the loss
associated with such defaulted loan, the Servicer may bid at the foreclosure
sale for such property or accept a deed in lieu of foreclosure. After
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the Servicer converts title to a mortgaged property into the name of the
Indenture Trustee on behalf of the Bondholders and the Bond Insurer by
foreclosure or deed in lieu of foreclosure, a real estate broker is selected to
market the property.
THE SERVICING AGREEMENT
The summaries of certain provisions of the Servicing Agreement set
forth below and in other places in this Prospectus Supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Bonds are
advised to review the Servicing Agreement, a copy of which the Company will
provide (without exhibits) without charge upon written request addressed to the
Company.
Generally, the Servicer will be authorized and empowered pursuant to
the Servicing Agreement (i) to execute and deliver (or procure the execution and
delivery by the Indenture Trustee of) 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 Mortgaged
Properties and (ii) to institute foreclosure proceedings or obtain deeds in lieu
of foreclosure so as to convert title to of any Mortgaged Property in the name
of the Indenture Trustee on behalf of the Bondholders and the Bond Insurer.
Payments on Mortgage Loans and Establishment of Collection Account. The
Servicer shall establish and maintain one or more accounts (collectively, the
"Collection Account") at one or more institutions meeting the requirements set
forth in the Servicing Agreement. The Collection Account, and all amounts
deposited therein from time to time, shall be part of the Trust Estate. The
Servicer will deposit into the Collection Account not later than two Business
Days after receipt, all payments on or in respect of the Mortgage Loans received
from or on behalf of mortgagors and all proceeds of the Mortgage Loans, net of
servicing fees, all other items of servicing compensation, and reimbursable
outstanding Servicing Advances and Monthly Advances, to the extent the
Servicer's automated system deducts such amounts prior to deposit to the
Collection Account. On or prior to each Deposit Date, funds to be remitted to
the Bond Account will be remitted from the Collection Account to the Indenture
Trustee for deposit into the Bond Account. Notwithstanding the foregoing,
payments and collections that do not constitute Available Funds (e.g., amounts
representing interest accrued on Mortgage Loans in respect of any period prior
to the applicable Cut-off Dates, fees, late payment charges, prepayment charges,
charges for checks returned for insufficient funds, extension or other
administrative charges or other amounts received for application towards the
payment of taxes, insurance premiums, assessments and similar items) will not be
required to be deposited into the Collection Account. The Servicer may make
withdrawals from the Collection Account only for the following purposes: (a) to
make deposits into the Bond Account as described above; (b) to pay itself any
monthly Servicing Fees and other items of servicing compensation and investment
income on Permitted Investments to the extent permitted by the Servicing
Agreement; (c) to make any Servicing Advance to the extent permitted by the
Servicing Agreement or to reimburse itself for any Servicing Advance or Monthly
Advance previously made to the extent permitted by the Servicing Agreement; (d)
to withdraw amounts that have been deposited to the Collection Account in error;
and (e) to clear and terminate the Collection Account.
Investment of Collection Account. All or a portion of the Collection
Account may be invested and reinvested in one or more Permitted Investments
bearing interest or sold at a discount, at the Servicer's direction. The
Indenture Trustee or any affiliate thereof may be the obligor on any investment
in any Collection Account which otherwise qualifies as a Permitted Investment.
No investment in the Collection Account may mature later than the Deposit Date
next succeeding the date of investment.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in the Collection Account resulting from any loss on any
Permitted Investment included therein (except to the extent the Indenture
Trustee is the obligor thereon).
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All income or other gain from investments in the Collection Account
will be held in the Collection Account for the benefit of the Servicer and will
be subject to withdrawal from time to time as permitted by the Servicing
Agreement. Any loss resulting from such investments will be for the account of
the Servicer. The Servicer will be required to deposit the amount of any such
loss immediately upon the realization of such loss to the extent such loss will
not be offset by other income or gain from investments in the Collection Account
and then available for such application.
Monthly Advances. In order to maintain a regular flow of scheduled
interest to Bondholders (rather than to guarantee or insure against losses), the
Servicing Agreement will require that, not later than the close of business on
the Deposit Date prior to each Payment Date, the Servicer will remit or cause to
be remitted a Monthly Advance, if necessary, to the Indenture Trustee for
deposit in the Bond Account to be paid on the related Payment Date. A "Monthly
Advance" will be equal to the sum of (i) the interest and principal portions of
the aggregate amount of monthly payments (net of the related Servicing Fee) due
on the Mortgage Loans during the related Due Period but delinquent so as not to
have been deposited into the Collection Account as of the close of business on
the last day before the related Deposit Date and with respect to each Mortgaged
Property that was acquired in foreclosure or similar action (each, an "REO
Property") during or prior to the related Collection Period and as to which
final sale did not occur during the related Collection Period, an amount equal
to the excess, if any, of interest on the Principal Balance of the Mortgage Loan
relating to such REO Property for the related Collection Period at the related
Mortgage Rate (net of the Servicing Fee) over the net income from the REO
Property transferred to the Bond Account for such Payment Date.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Monthly Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date; any such
amounts so used are required to be replaced by the Servicer by deposit to the
Collection Account on or before the Deposit Date relating to such subsequent
Payment Date.
The Servicer may recover Monthly Advances, if not theretofore recovered
from the mortgagor on whose behalf such Monthly Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds (but only to the extent of such Insurance Proceeds
or Liquidation Proceeds) and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Monthly Advance will not be ultimately recoverable from subsequent collections,
Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself on the
first Deposit Date thereafter out of collections received on other Mortgage
Loans.
The Servicer will not be required to make any Monthly Advance that it
determines would be a Nonrecoverable Advance.
Compensating Interest Payments. With respect to each Mortgage Loan as
to which a prepayment in whole or in part was received, the Servicer will be
required with respect to such Payment Date to remit to the Indenture Trustee no
later than the related Deposit Date, from amounts otherwise payable to the
Servicer as the Servicing Fee for the related Payment Date, an amount equal to
the excess, if any, of (a) 30 days' interest on the Principal Balance of each
such Mortgage Loan (immediately prior to such payment) at the related Mortgage
Rate, less (b) the amount of interest actually received on such Mortgage Loan
during the related Due Period (each such amount, a "Compensating Interest
Payment") for payment on the Bonds on such Payment Date. The Servicer will not
be entitled to be reimbursed from collections on the Mortgage Loans or any
assets of the Trust Estate for any Compensating Interest Payments made.
Realization upon Defaulted Mortgage Loans. The Servicing Agreement will
require the Servicer, acting as the agent of the Indenture Trustee, to foreclose
upon or otherwise comparably convert to ownership in the name of the Indenture
Trustee, on behalf of the Bondholders and the Bond Insurer, Mortgaged Properties
securing such
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of the Mortgage Loans as come into default, as to which no satisfactory
arrangements can be made for the collection of delinquent payments and which the
Servicer has not reacquired pursuant to the option described below; provided,
however, that if the Servicer has actual knowledge or reasonably believes that
any Mortgaged Property is contaminated by hazardous or toxic wastes or
substances, the Servicer will cause an environmental inspection of the Mortgaged
Property that complies with Fannie Mae's selling and servicing guide applicable
to single family homes and its servicing procedures to be conducted. If the
environmental inspection reveals any potentially hazardous substances, the
Servicer will notify the Indenture Trustee and the Bond Insurer, and the
Servicer will not foreclose or accept a deed in lieu of foreclosure on the
Mortgaged Property without the consent of the Indenture Trustee and the Bond
Insurer. In connection with such foreclosure or other conversion, the Servicer
will follow such practices as it deems necessary or advisable and as are in
keeping with its general mortgage loan servicing activities; provided, however,
that the Servicer will not be required to expend its own funds in connection
with foreclosure or other conversion, correction of a default on a senior deed
of trust or restoration of any Mortgaged Property unless the Servicer determines
that such foreclosure, correction or restoration will increase Net Liquidation
Proceeds.
In servicing the Mortgage Loans, the Servicer will be required to
determine, with respect to each defaulted Mortgage Loan, 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 will be charged off and will become a Liquidated
Mortgage Loan.
The Servicer may have the right and the option under the Servicing
Agreement, but not the obligation, to reacquire for its own account any Mortgage
Loan which becomes delinquent, in whole or in part, as to three consecutive
monthly installments or any Mortgage Loan as to which enforcement proceedings
have been brought by the Servicer. Any such Mortgage Loan so reacquired will be
withdrawn from the Mortgage Pool on a Deposit Date at the Release Price
therefor.
Enforcement of Due-on-Sale Clauses. In any case in which the Servicer
becomes aware that a Mortgaged Property has been or is about to be voluntarily
conveyed by the related mortgagor, the Servicer may enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the related
promissory note and, to the extent permitted by applicable law or the mortgage
documents, the mortgagor remains liable thereon. In addition, the Servicer may
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
Servicing Agreement will prohibit the Servicer from entering into an assumption
or substitution of liability agreement unless permitted by applicable law and
unless the Servicer determines that the assuming party would not fall within a
lower Seller risk category than the original mortgagor and such assumption or
substitution of liability agreement would not materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan. Notwithstanding any of the foregoing, the Servicer will not enter
into any assumption agreement unless such assumption agreement is pursuant to
its standard servicing procedure and the Servicer would enter into such
assumption agreement with respect to a mortgage loan in its own portfolio. Any
fees collected by the Servicer for entering into an assumption or substitution
of liability agreement will be retained by the Servicer as additional servicing
compensation. In the event the Servicer does not approve an assumption, the
Servicing Agreement will require the Servicer to enforce the rights of the
Indenture Trustee as the mortgagee of record to accelerate the maturity of the
related Mortgage Loan under any due-on-sale clause contained in the related
Mortgage or Mortgage Note to the extent permitted by the related Mortgage Note
and Mortgage and applicable law or regulation, but only to the extent the
Servicer does not believe that such enforcement will (i) adversely affect or
jeopardize coverage under any related insurance policy, (ii) result in legal
action by the mortgagor or (iii) materially increase the risk of default or
delinquency on, or materially impair the security for, such Mortgage Loan.
Evidence as to Compliance. The Servicing Agreement provides that on or
before a specified date in each year, a firm of independent public accountants
will furnish a report to the Indenture Trustee, the Rating Agencies
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and the Bond Insurer to the effect that on the basis of certain procedures
substantially in conformance with the Uniform Single Attestation Program for
Mortgage Bankers ("USAP") (to the extent the procedures are applicable to the
servicing obligations set forth in the Servicing Agreement), the servicing by or
on behalf of the Servicer of mortgage loans, and such procedures have disclosed
no exceptions or errors in records relating to the mortgage loans serviced by
the Servicer for others which, in the opinion of such firm, such firm's required
to report under USAP, except for such exceptions as will be referred to in the
report. The Servicing Agreement will provide that the Servicer will be required
to deliver to the Indenture Trustee, the Rating Agencies and the Bond Insurer,
on or before a specified date in each year, an annual statement signed by an
officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Servicing Agreement throughout the preceding
year.
Certain Matters Regarding Servicer's Servicing Obligations. The
Servicing Agreement will provide that the Servicer may not resign from its
obligations and duties as the Servicer thereunder, except upon the delivery, at
the Servicer's expense, of an opinion of counsel addressed to the Indenture
Trustee and the Bond Insurer and in form and substance acceptable to the
Indenture Trustee and the Bond Insurer to the effect that its duties thereunder
are no longer permissible under applicable law or regulation or are in material
conflict by reason of applicable law or regulation with any other of its
activities carried on as of the date of the Servicing Agreement. No such
resignation will become effective until the Indenture Trustee or a successor
servicer approved by the Bond Insurer has assumed the servicing obligations and
duties of the Servicer under the Servicing Agreement.
The Servicing Agreement will also provide that neither the Servicer,
nor any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust, or the Bondholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the Mortgage Loans under
the Servicing Agreement and which in its opinion may involve it in any expense
or liability.
The Servicing Agreement will provide that any corporation or other
entity (a) into which the Servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the Servicer shall
be a party or (c) that may succeed to all or substantially all of the business
of the Servicer, will, in any case where an assumption is not effected by
operation of law, execute an agreement of assumption to perform every obligation
of the Servicer under the Servicing Agreement, and will be the successor to the
Servicer thereunder without the execution or filing of any document or any
further act by any of the parties to the Servicing Agreement; provided, however,
that if the Servicer in any of the foregoing cases is not the surviving entity,
the surviving entity shall execute an agreement of assumption to perform every
obligation of the Servicer thereunder and the corporation or other entity
satisfies the eligibility requirements for a successor Servicer.
Servicer Events of Default. Events of default (each, a "Servicer Event
of Default") under the Servicing Agreement will include (a) any failure by the
Servicer to make a required Monthly Advance on the related Deposit Date as
required or any failure by the Servicer to deposit in the Collection Account or
Bond Account any other amount required to be so deposited under the Servicing
Agreement, which failure continues unremedied for one Business Day after the
giving of written notice of such failure to the Servicer by the Indenture
Trustee or the Bond Insurer or to the Servicer, the Bond Insurer and the
Indenture Trustee by Bondholders evidencing Voting Interests represented by all
Bonds aggregating not less than 51%; (b) any failure by the Servicer to duly
observe or perform in any material respect any other of its covenants or
agreements in the Servicing Agreement or the Sales Agreement which materially
and adversely affects the rights of Bondholders and continues unremedied for the
applicable cure period, if any, after the giving of written notice of such
failure to the Servicer by the Indenture Trustee, at the direction of the Bond
Insurer, or by the Bond Insurer or, with the consent of the Bond Insurer, the
Bondholders
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evidencing Voting Interests represented by all Bonds aggregating not less than
51%; (c) certain events of insolvency, readjustment of debt, marshaling 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; (d) any representation or warranty made by the Servicer in the
Servicing Agreement or the Sales Agreement or certificate delivered by the
Servicer pursuant thereto having been incorrect in any material respect as of
the time made and the circumstance in respect of which such representation and
warranty is incorrect, if capable of being cured, not having been cured within
any applicable cure period after notice is given to the Servicer by the
Indenture Trustee, at the direction of the Bond Insurer, or the Bond Insurer,
or, with the consent of the Bond Insurer, the Bondholders evidencing Voting
Interests represented by all Bonds aggregating not less than 51%; (e) the
failure by the Servicer to satisfy certain net worth requirements of the Bond
Insurer; and (f) the occurrence of delinquencies and/or losses in respect of the
Mortgage Loans in excess of a level, and for a period of time, as specified in
the Servicing Agreement.
Rights Upon Servicer Events of Default. Upon the occurrence of a
Servicer Event of Default, the Bond Insurer or, with the consent of the Bond
Insurer, Bondholders evidencing Voting Interests represented by all Bonds
aggregating not less than 51% or the Indenture Trustee, at the direction of the
Bond Insurer, may terminate all of the rights and obligations of the Servicer
under the Servicing Agreement, whereupon the Indenture Trustee will be obligated
to appoint a successor Servicer or, if it does not, succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to such compensation as the Servicer would have
been entitled to under the Servicing Agreement. In the event that the Indenture
Trustee fails to appoint a successor Servicer and it is unwilling or legally
unable to act as Servicer, it may petition a court of competent jurisdiction for
the appointment of a successor Servicer. Any such successor Servicer must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of at
least $10,000,000. The appointment of any such successor Servicer (other than
the Indenture Trustee) shall be acceptable to the Bond Insurer and shall not
result in the qualification, reduction or withdrawal of the implied rating
assigned to the Bonds by the Rating Agencies (without taking into account the
Insurance Policy). Pending appointment of a successor Servicer, unless the
Indenture Trustee is prohibited by law from so acting, the Indenture Trustee
shall be obligated to act as Servicer. The Indenture Trustee and such successor
Servicer may agree upon the servicing compensation to be paid, which in no event
may be greater than the compensation described above.
No Bondholder, solely by virtue of its status as a Bondholder, will
have any right under the Servicing Agreement to institute any action, suit or
proceeding with respect to the Servicing Agreement unless the Bond Insurer shall
have consented thereto, unless such Bondholder previously has given to the
Indenture Trustee written notice of default and unless Bondholders evidencing
Voting Interests represented by all Bonds aggregating not less than 51% have
made written request upon the Indenture Trustee to institute such action, suit
or proceeding in its own name as Indenture Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity for costs, expenses and
liabilities to be incurred, and the Indenture Trustee for 60 days has neglected
or refused to institute any such action, suit or proceeding. However, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Bondholders, unless such Bondholders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
Amendments. Subject to the prior written consent of the Bond Insurer,
at any time and from time to time, without the consent of the Bondholders, the
Indenture Trustee, the Issuer and the Servicer may amend the Servicing Agreement
for the purposes of (a) curing any ambiguity or correcting or supplementing any
provision of such agreement that may be inconsistent with any other provision of
such agreement or (b) complying with the requirements of the Code; provided,
however, that such action shall not materially and adversely affect the
interests of any Bondholder, as evidenced by an opinion of counsel delivered to
the Indenture Trustee to such effect (which opinion shall not be at the expense
of the Indenture Trustee) or written confirmation from each of the Rating
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Agencies that such action will not result in a qualification, reduction or
withdrawal of the implied ratings on the Bonds (without taking into account the
Insurance Policy).
The Servicing Agreement may also be amended by the Indenture Trustee,
the Issuer and the Servicer, at any time and from time to time, with the prior
written approval of the Rating Agencies, the Bond Insurer and not less than a
majority of the Voting Interests represented by the Bonds 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
Bondholders thereunder; provided, however, that no such amendment shall (a)
reduce in any manner the amount of, or delay the timing of, payments which are
required to be paid to the Bond Account without the consent of all Bondholders
or (b) reduce the aforesaid percentages of Voting Interests which are required
to consent to any such amendments, without the consent of all Bondholders.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out of
collections of interest received on or in respect of the Mortgage Loans for the
related Collection Period. The Servicing Fee will equal one-twelfth (1/12) of
the product of (a) the 0.50% and (b) the Aggregate Principal Balance of the
Mortgage Loans as of the first day of the related Due Period. The Servicer shall
be entitled to retain the Servicing Fee from amounts to be deposited in the
Collection Account. In addition, the Servicer will retain the benefit, if any,
from any deposit, maintenance or investment of funds in the Collection Account.
Assumption fees, late payment charges, prepayment charges, charges for checks
returned for insufficient funds, and extension and other administrative charges,
to the extent collected from mortgagors, will be retained by the Servicer as
additional servicing compensation.
Subject to its right to refuse to make Nonrecoverable Advances as
described below, the Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the payment of fees for
any sub-servicer and the cost of (i) any enforcement or judicial proceedings
relating to the mortgagors, including foreclosures, and (ii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans. Such expenditures (each, a "Servicing Advance") may include
costs of collection efforts, reappraisals, forced placement of hazard insurance
if a borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing delinquent property taxes and upkeep and
maintenance of the Mortgaged Property if it is acquired through foreclosure and
similar types of expenses.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date relating
to such Collection Period; any such amounts so used are required to be replaced
by the Servicer by deposit to the Collection Account on or before the Deposit
Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore
recovered from the mortgagor on whose behalf such Servicing Advance was made,
from subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Servicing Advance will be or has become a Nonrecoverable Advance, the Servicer
may reimburse itself for such advance from the Collection Account.
The Servicer will not be required to make any Servicing Advance that it
determines would be a Nonrecoverable Advance if made.
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HISTORICAL SERVICING EXPERIENCE OF THE SERVICER
The Servicer has provided the Company with the following information
regarding its organization and the servicing of mortgage loans which it
considers non-conforming credits and none of the Company, the Issuer or the
Underwriters make any representations or warranties as to the accuracy or
completeness of such information. The table below sets forth the overall
delinquency experience on residential one-to-four-family mortgage loans for
non-conforming credits which are currently serviced by the Servicer. No mortgage
loan is considered delinquent for purposes of the table until a payment is 30
days past due on a contractual basis. It should be noted that the Servicer
commenced its servicing activities for these types of non-conforming mortgage
loans in 1993 and that its portfolio consists of mortgage loans that were
originated during the periods from 1993 to 1996 in accordance with the
underwriting standards it had established or other underwriting guidelines that
it determined were substantially similar. The information in the table below is
not intended to indicate or predict the expected delinquency experience on past,
current or future pools of mortgage loans for which the Servicer is the primary
servicer.
NATIONAL MORTGAGE CORPORATION
NON-CONFORMING MORTGAGE LOAN PORTFOLIO EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Total principal balance (at period end) .... $134,567 $ 178,743 $ 230,458 $ 273,847
Average portfolio principal balance(1) ..... $ 82,248 $ 177,084 $ 203,276 $ 238,155
DELINQUENCIES (at period end)(2) 30-59 Days:
Principal balance ........................ $ 3,802 $ 9,161 $ 8,185 $ 5,886
Percent(3) ............................... 2.83% 5.13% 3.55% 2.15%
60-89 Days:
Principal balance ........................ $ 694 $ 821 $ 285 $ 559
Percent(3) ............................... 0.51% 0.46% 0.12% 0.20%
90 Days or More:
Principal balance ........................ $ 467 $ 1,473 $ 4,369 $ 4,816
Percent(3) ............................... 0.35% 0.82% 1.90% 1.76%
Total Delinquencies:
Principal balance ........................ $ 4,964 $ 11,455 $ 12,840 $ 11,261
Percent(3) ............................... 3.69% 6.41% 5.57% 4.11%
FORECLOSURES
Principal balance ........................ $ 1,370 $ 6,945 $ 10,178 $ 8,292
Percent(3) ............................... 1.02% 3.89% 4.42% 3.03%
REO (at period end) ........................ $ 84 $ 2,096 $ 3,412 $ 5,541
Net gains/(losses) on liquidated loans ..... -- $ (168) $ (1,540) $ (879)
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance) ............. -- (0.10)% (0.76)% (0.74)%(4)
</TABLE>
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information does not include loans in foreclosure or REO.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(4) Annualized.
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It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on the
results obtained over the life of the Mortgage Pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Servicer. In addition, adverse economic conditions
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the Mortgage Pool.
THE BACKUP SERVICER
Norwest Bank Minnesota, National Association will act as Backup
Servicer. Upon a termination of the Servicer, the Backup Servicer shall be
obligated to succeed to the obligations of the Servicer or to appoint an
eligible successor servicer.
THE BOND INSURANCE
THE INSURANCE POLICY
The information set forth in this section has been provided by the
Bond Insurer. No representation is made by the Underwriters, the Issuer, the
Seller, the Servicer, the Company or any of their affiliates as to the accuracy
or completeness of such information or any information related to the Bond
Insurer incorporated by reference herein.
The Bond Insurer, in consideration of the payment of the premium and
subject to the terms of the Insurance Policy, will unconditionally and
irrevocably guarantee to any Bondholder that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Bondholders, on behalf of the Bondholders from the
Bond Insurer, for distribution by the Indenture Trustee to each Bondholder of
each Bondholder's proportionate share of the Insured Payment. The Bond Insurer's
obligations under the Insurance Policy with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Indenture Trustee, whether or not such funds are
properly applied by the Indenture Trustee. Insured Payments shall be made only
at the time set forth in the Insurance Policy and no accelerated Insured
Payments shall be made regardless of any acceleration of the Bonds, unless such
acceleration is at the sole option of the Bond Insurer.
Notwithstanding the foregoing paragraph, the Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Issuer, or the
Indenture Trustee or withholding taxes, if any (including interest and penalties
in respect of any such liability). The Insurance Policy does not cover
shortfalls to Bond Interest due to the Relief Act and does not insure the
payment of the Available Funds Cap Carry Forward Amount.
The Bond Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of such preference payment, (ii) an opinion of counsel satisfactory to
the Bond Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Bond Insurer,
irrevocably assigning to the Bond Insurer all rights and claims of the
Bondholder relating to or arising under the
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<PAGE> 70
Bonds against the debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate instruments to effect
the appointment of the Bond Insurer as agent for such Bondholder in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Bond Insurer; provided, that if such documents are received
after 12:00 noon, New York City time on such Business Day, they will be deemed
to be received on the following Business Day. Such payments shall be disbursed
to the receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Bondholder and not to any Bondholder
directly unless such Bondholder has returned principal or interest paid on the
Bonds to such receiver or trustee in bankruptcy, in which case such payment
shall be disbursed to such Bondholder.
The Bond Insurer will pay any other amount payable under the Insurance
Policy no later than 12:00 noon New York City time, on the later of the Payment
Date on which the Deficiency Amount is due or the third Business Day following
receipt in New York, New York, on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Bond Insurer or any successor fiscal
agent appointed by the Bond Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon New
York City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Insurance Policy, it shall be deemed not to have been received by the
Fiscal Agent for purposes of this paragraph, and the Bond Insurer or the Fiscal
Agent, as the case may be, shall promptly so advise the Indenture Trustee and
the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of Bondholders by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Bond Insurer only and the Fiscal
Agent shall in no event be liable to Bondholders for any acts of the Fiscal
Agent or any failure of the Bond Insurer to deposit or caused to be deposited,
sufficient funds to make payment due under the Insurance Policy.
As used in the Insurance Policy, the following terms shall have the
following meanings:
"Agreement" means the Indenture, dated as of September 1,
1997, by and between the Issuer and the Indenture Trustee, without
regard to any amendment or supplement thereto, unless the Bond Insurer
shall have consented in writing thereto.
"Bondholder" means each Bondholder (as defined in the
Indenture) who, on the applicable Payment Date, is entitled under the
terms of the applicable Bond to payment thereunder.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City, Englewood,
Colorado, the city in which the corporate trust office of the
Indenture Trustee under the Indenture is located or the city in which
the principal office of the Bond Insurer is located are authorized or
obligated by law or executive order to close.
"Deficiency Amount" means, with respect to any Payment Date
the sum of (i) the Bond Interest for such Payment Date minus Available
Funds and (ii) the then existing Overcollateralization Deficit, if
any, after application of Available Funds to reduce the Bond Balance
on such Payment Date.
"Insured Payment" means, (i) as of any Payment Date, the
Deficiency Amount and (ii) any Preference Amount due and then owing
under the Insurance Policy.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit
A attached to the Insurance Policy, the original of which is
S-65
<PAGE> 71
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due
and owing on the applicable Payment Date.
"Preference Amount" means any amount previously distributed to
an Owner of a Bond that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of the Insurance Policy, without giving effect to any
subsequent amendment to or modification of the Agreement unless such amendment
or modification has been approved in writing by the Bond Insurer.
Any notice under the Insurance Policy or service of process on the
Fiscal Agent of the Bond Insurer may be made at the address listed below for the
Fiscal Agent of the Bond Insurer or such other address as the Bond Insurer shall
specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Insurance Policy is not cancelable for any reason. The premium on
the Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Bonds.
THE BOND INSURER
The Bond Insurer is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company, MBIA Inc. is not obligated to pay the
debts of or claims against the Bond Insurer. The Bond Insurer is domiciled in
the State of New York and is licensed to do business in and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The Bond
Insurer has two European branches, one in the Republic of France and the other
in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentration of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Bond Insurer, changes in control and transactions among
affiliates. Additionally, the Bond Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
The consolidated financial statements of the Bond Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for each of the three years in the period ended December
31, 1996, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1996 and the consolidated financial statements of the Bond Insurer
and its subsidiaries for the six months ended June 30, 1997 and for the periods
ending June 30, 1997 and June 30, 1996, included in the Quarterly Report on Form
10-Q of MBIA Inc. for the period ending June
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<PAGE> 72
30, 1997, are hereby incorporated by reference into this Prospectus Supplement
and shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Bond Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Bonds shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Bond
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
---------------------------------------
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets $4,476 $4,824
Liabilities 3,009 3,259
Capital and Surplus 1,467 1,565
</TABLE>
<TABLE>
<CAPTION>
GAAP
---------------------------------------
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets $5,066 $5,408
Liabilities 2,262 2,412
Shareholder's Equity 2,804 2,996
</TABLE>
----------------------------------
Copies of the financial statements of the Bond Insurer incorporated by
reference herein and copies of the Bond Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Bond Insurer. The address of the Bond
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Bond Insurer is (914) 273-4545.
S-67
<PAGE> 73
The Bond Insurer does not accept any responsibility for the accuracy of
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Insurance Policy and Bond Insurer set forth
under the headings "The Bond Insurance--The Insurance Policy" and "--The Bond
Insurer" herein. Additionally, the Bond Insurer makes no representations
regarding the Bonds or the advisability of investing in the Bonds.
Moody's Investor Service, Inc. rates the claims paying ability of the
Bond Insurer "Aaa".
Standard & Poor's Rating Services, a Division of the McGraw-Hill
Companies, Inc. rates the claims paying ability of the Bond Insurer "AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Bond Insurer as "AAA".
Each rating of the Bond Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Bond Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Bonds and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Bonds. The Bond
Insurer does not guaranty the market price of the Bonds nor does it guaranty
that the ratings on the Bonds will not be revised or withdrawn.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Insurance Policy, in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the Trust.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and corresponding provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), impose certain restrictions on employee benefit plans and
certain other retirement plans and arrangements to which ERISA applies,
including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested (any of the foregoing, a "Plan"), persons acting on
behalf of a Plan, or persons using the assets of a Plan (collectively, "Plan
Investors"). In particular, Sections 406 and 407 of ERISA and Section 4975 of
the Code prohibit certain transactions involving the assets of a Plan between
the Plan and certain persons ("Parties in Interest").
Under regulations of the Department of Labor set forth in 29 C.F.R.
Section 2510.3-101 (the "Plan Asset Regulations"), the assets of a Plan
generally include not only securities held by a Plan but also the underlying
assets of the issuer of any equity securities (the "Look-Through Rule") unless
one or more exceptions specified in the Plan Asset Regulations are satisfied.
For purposes of those Regulations, an equity security is a security other than
a security that is treated as debt for state law purposes and that has no
substantial equity features. The Issuer believes that the Bonds will be treated
as debt obligations without significant equity features for purposes of the
Plan Asset Regulations. Accordingly, a Plan that acquires a Bond should not be
treated as having acquired a direct interest in the assets of the Issuer.
However, there can be no complete assurance that the Bonds will be treated as
debt obligations without significant equity features for purposes of the Plan
Asset Regulations. If the Bonds are treated
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<PAGE> 74
as having substantial equity features, the purchaser of a Bond could be treated
as having acquired a direct interest in the Mortgage Loans securing the Bonds.
In that event, the purchase, holding, or resale of the Bonds could result in a
transaction that is prohibited under ERISA or the Code.
However, even if the Bonds are treated as debt for such purposes, the
acquisition or holding of Bonds by or on behalf of a Plan could be considered to
give rise to a prohibited transaction if the Issuer or the Indenture Trustee, or
any of their respective affiliates is or becomes a "party in interest" under
ERISA or a "disqualified person" under the Code with respect to such Plan. In
such case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire Bonds. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 96-23, regarding transactions effected by
"in-house asset managers"; PTCE 90-1, regarding investments by insurance company
pooled separate accounts; PTCE 95-60, regarding transactions effected by
"insurance company general accounts; PTCE 91-38, regarding investments by bank
collective investment funds; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers." A purchaser of a Bond should be aware,
however, that even if the conditions specified in one or more exemptions are
met, the scope of the relief provided by an exemption might not cover all acts
that might be construed as prohibited transactions. The purchase of a Bond will
be deemed a representation by the acquirer that either, (i) it is not, and is
not purchasing a Bond for or on behalf of, a "benefit plan investor" as such
term is defined in the Plan Asset Regulations, or (ii) the acquisition or
holding of a Bond by the acquirer qualifies for prohibited transaction exemptive
relief under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or some
other applicable exemption.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law.
The sale of Bonds to a Plan is in no respect a representation by the
Issuer or the Underwriters that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan. See "ERISA Considerations" in the Prospectus.
USE OF PROCEEDS
The Issuer intends to use the net proceeds to be received from the sale
of the Bonds to acquire the Mortgage Loans from the Company and to pay other
expenses associated with the pooling of the Mortgage Loans and the issuance of
the Bonds.
LEGAL INVESTMENT CONSIDERATIONS
The Bonds will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as
they are rated in one of the two highest rating categories by one or more
nationally recognized statistical rating organizations. As such, the Bonds will
be legal investments for certain entities to the extent provided in SMMEA,
subject to state laws overriding SMMEA. In addition, institutions whose
investment activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities. Furthermore,
certain states have enacted legislation overriding the legal investment
provisions of SMMEA. In addition, institutions whose activities are subject to
review by federal or state regulatory authorities may be or may become subject
to restrictions, which may be
S-69
<PAGE> 75
retroactively imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities. See "Legal
Investment Matters" in the Prospectus.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement, dated the date
hereof (the "Underwriting Agreement"), the Company has agreed to cause the
Issuer to sell, and Greenwich has agreed, subject to the terms and conditions
set forth therein, to purchase the entire principal amount of the Bonds.
Greenwich has informed the Company that it proposes to offer the Bonds
for sale from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of the related
sale. Greenwich may effect such transactions by selling the Bonds to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from Greenwich. In connection with the
sale of the Bonds, the Underwriters may be deemed to have received compensation
from the Company in the form of underwriting compensation. The Underwriters and
any dealers that participate with the Underwriters in the distribution of the
Bonds may be deemed to be underwriters and any commissions received by them and
any profit on the resale of the Bonds by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act").
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
The Company has been advised by the Underwriters that the Underwriters
intend to make a market in the Bonds, as permitted by applicable laws and
regulations. The Underwriters are not obligated, however, to make a market in
the Bonds and such market-making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Bonds.
The Underwriters or affiliates of the Underwriters (collectively
referred to as the Underwriters for purposes of this paragraph) provide certain
lending and financing facilities to the Seller. An affiliate of Greenwich
provides warehouse financing to the Seller. An affiliate of ContiFinancial
Services Corporation has made available a subordinated debt facility convertible
into common stock of the Seller and a working capital financing facility. Both
Underwriters provide residual financing to the Seller. The Seller has issued
warrants to the Underwriters as partial consideration for the Underwriters'
having made such credit facilities available. A portion of the proceeds of the
sale of the Bonds may ultimately be used to make payments on outstanding debt
owed by the Seller to the Underwriters. Also in connection with such credit
facilities, the Seller agreed to provide the Underwriters with the opportunity
to underwrite a certain volume of its mortgage-backed securities such as the
Bonds. The Underwriters' underwriting of the Bonds partially satisfies this
obligation.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
Subsidiaries, as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon incorporated by reference
herein in reliance upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 76
LEGAL MATTERS
Certain legal matters with respect to the Bonds will be passed upon for
the Issuer by Hunton & Williams, Richmond, Virginia. Dewey Ballantine, New York,
New York, will act as counsel for the Underwriters. Certain legal matters
relating to the Bond Insurer and the Insurance Policy will be passed upon for
the Bond Insurer by Kutak Rock, Omaha, Nebraska.
RATING OF THE BONDS
It is a condition to the issuance of the Bonds that each shall be rated
"Aaa" by Moody's and "AAA" by S&P.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, and S&P, 25 Broadway, New
York, New York 10004. Each rating will be the view only of the assigning Rating
Agency.
The ratings on the Bonds are based in substantial part on the
claims-paying ability of the Bond Insurer. Any changes in the ratings of the
Bond Insurer by the Rating Agencies may result in a change in the ratings of the
Bonds.
The ratings assigned to the Bonds do not represent any assessment of
the likelihood or rate of principal prepayments and do not address the
possibility that Bondholders might suffer a lower than anticipated yield. The
ratings do not address the likelihood that Bondholders will be paid any
Available Funds Carry Forward Amount.
There is no assurance that any rating assigned to the Bonds 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 or liquidity of the Bonds.
The ratings of the Bonds should be evaluated independently form similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities.
There can be no assurances as to whether any other rating agency will
rate the Bonds, or, if one does, what rating will be assigned by such other
rating agency. A rating on the Bonds by another rating agency, if assigned at
all, may be lower than the ratings assigned to the Bonds by Moody's or S&P.
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<PAGE> 77
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2/28 Mortgage Loans................................................................S-10
3/27 Mortgage Loans................................................................S-11
Additional Mortgage Loans...........................................................S-9
Administrative Fee Amount...........................................................S-2
Aggregate Principal Balance........................................................S-10
Agreement..........................................................................S-65
Available Funds....................................................................S-27
Available Funds Cap................................................................S-25
Backup Servicer.....................................................................S-1
Beneficial Owner....................................................................S-3
Bond Account.......................................................................S-28
Bond Balance.................................................................. S-5,S-26
Bond Insurer........................................................................S-8
Bond Insurer Default................................................................S-8
Bond Insurer Premium................................................................S-9
Bond Interest..................................................................S-5,S-25
Bond Interest Rate.................................................................S-25
Bondholder.....................................................................S-3,S-65
Bonds...............................................................................S-1
Book-Entry Bonds...................................................................S-19
Business Day.......................................................................S-65
Cedel...............................................................................S-3
Cedel Participants.................................................................S-20
Citibank...........................................................................S-19
Code...............................................................................S-11
Collection Account.................................................................S-57
Collection Period...................................................................S-2
Company.............................................................................S-1
Compensating Interest Payment......................................................S-58
CPR................................................................................S-52
Cut-off Date........................................................................S-2
Defective Mortgage Loan............................................................S-23
Deficiency Amount..................................................................S-65
Definitive Bond.....................................................................S-3
Deposit Date........................................................................S-2
Determination Date.................................................................S-27
DTC.................................................................................S-3
Due Period..........................................................................S-2
ERISA..............................................................................S-12
Euroclear...........................................................................S-3
Euroclear Operator.................................................................S-21
Euroclear Participants.............................................................S-21
European Depositaries..............................................................S-19
Excess Cash........................................................................S-30
Financial Intermediary.............................................................S-19
Fiscal Agent.......................................................................S-65
Indenture..........................................................................S-18
</TABLE>
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<TABLE>
<S> <C>
Indenture Trustee ..............................................................S-1
Indenture Trustee Fee...........................................................S-1
Initial Mortgage Pool Balance ............................................S-9, S-37
Insurance Policy................................................................S-8
Insurance Proceeds.............................................................S-28
Insured Payment...........................................................S-8, S-65
Issuer..........................................................................S-1
LIBOR Determination Date.......................................................S-25
Liquidated Mortgage Loan.......................................................S-27
Liquidation Proceeds...........................................................S-28
Loan Class.....................................................................S-45
Loan-to-Value Ratio............................................................S-45
Look-Through Rule..............................................................S-68
Maximum Mortgage Rate..........................................................S-11
Modeling Assumptions...........................................................S-53
Monthly Advance................................................................S-58
Monthly Principal..............................................................S-26
Moody's........................................................................S-13
Mortgage Files.................................................................S-23
Mortgage Note...................................................................S-2
Mortgage Pool...................................................................S-2
Mortgage Rate..................................................................S-11
Mortgaged Properties............................................................S-2
Net Liquidation Proceeds.......................................................S-28
Nonrecoverable Advances........................................................S-58
Notice.........................................................................S-65
One Month LIBOR................................................................S-25
Overcollateralization Amount..............................................S-7, S-30
Overcollateralization Deficit ............................................S-7, S-31
Overcollateralization Surplus ............................................S-7, S-31
Owner Trustee...................................................................S-2
Owner Trustee Fee ..............................................................S-2
Participants...................................................................S-20
Paying Agent...................................................................S-24
Payment Date.....................................................................ii
Payments Ahead ................................................................S-27
Percentage Interest ...........................................................S-24
Permitted Investments..........................................................S-29
Plan...........................................................................S-12
Plan Asset Regulations.........................................................S-12
Plan Investors ................................................................S-68
Preference Amount..............................................................S-66
Principal Balance..............................................................S-26
Principal Prepayment ..........................................................S-27
PTCE...........................................................................S-69
Qualified Replacement Mortgage...........................................S-23, S-24
Rating Agencies................................................................S-13
Realized Loss..................................................................S-31
Record Date ....................................................................S-4
Redemption Date................................................................S-32
Reference Banks................................................................S-25
Reference Date ................................................................S-36
</TABLE>
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<PAGE> 79
<TABLE>
<S> <C>
Release Price.........................................................................................S-24
Relief Act.............................................................................................S-5
Relief Act Percentage..................................................................................S-5
REMIC.................................................................................................S-12
REO Property..........................................................................................S-58
Required Overcollateralization Amount............................................................S-7, S-30
Reserve Interest Rate.................................................................................S-26
Residual Interest........................................................................................i
S&P...................................................................................................S-13
Sales Agreement.........................................................................................ii
Securities Act........................................................................................S-70
Seller.................................................................................................S-1
Seller's Standards....................................................................................S-44
Servicer...........................................................................................ii, S-1
Servicer Event of Default.............................................................................S-60
Servicing Advance ...................................................................................S-62
Servicing Agreement ....................................................................................ii
Servicing Fee..........................................................................................S-9
Similar Law .........................................................................................S-69
Six Month LIBOR.......................................................................................S-14
Six Month LIBOR Mortgage Loans........................................................................S-10
SMMEA ................................................................................................S-69
Stated Maturity.........................................................................................ii
Statistical Calculation Date...........................................................................S-9
Trust Agreement........................................................................................S-1
Trust Estate...........................................................................................S-2
Underwriting Agreement................................................................................S-70
USAP..................................................................................................S-60
Voting Interests......................................................................................S-33
</TABLE>
S-74
<PAGE> 80
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Collateralized Mortgage Obligations, Series 1997-NMC1 (the "Global Securities"),
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through 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 holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or
Euroclear and Participants holding Bonds will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as 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
Depositaries, which in turn will hold such positions in accounts as
Participants.
Investors selecting to hold their Global Securities through DTC will
follow DTC settlement practice. 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
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because 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 Participants. Secondary market trading between
Participants will be settled using the procedures applicable to prior
asset-backed bond issues in same-day funds.
A-1
<PAGE> 81
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 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 respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the 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 accounts 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 clear the overdraft when the Global Securities are credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the Participants a cross-market transaction will
settle no differently than a trade between two 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 Depositary, to a 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 Relevant Depositary, as appropriate, to deliver
the Global Securities to the 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 the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel
A-2
<PAGE> 82
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel 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 Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day 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
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 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, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners
of Global Securities that are Non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8
changes, a new Form W-8 must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected
income (Form 4224). A non-U.S. Person, including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the
United States, can obtain an exemption from the withholding tax by
filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade of 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 the beneficial owners or their agents.
A-3
<PAGE> 83
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 beneficial
owner of a Global Security or, in the case of a Form 1001 or a Form
4224 filer, his agent, files by submitting the appropriate form to the
person through whom it holds (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8
and Form 1001 are effective for three calendar years, and Form 4224 is
effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate that is
subject to United States federal income tax, regardless of the source of its
income or (iv) a trust if (a) a court in the United States is able to exercise
primary supervision over the administration of the trust, and (b) one or more
United States fiduciaries have the authority to control all substantial
decisions of the trust. 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 Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Global Securities.
A-4
<PAGE> 84
PROSPECTUS
COLLATERALIZED MORTGAGE OBLIGATIONS
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
AND CERTAIN NON-AGENCY CERTIFICATES
AND PRIVATE MORTGAGE-BACKED SECURITIES
FUND AMERICA INVESTORS CORPORATION II
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL OWNERSHIP INTEREST
IN WHICH IS OWNED BY FUND AMERICA INVESTORS CORPORATION II
This Prospectus relates to Collateralized Mortgage Obligations (the
"Bonds") and Pass-Through Certificates (the "Certificates" and, together with
the Bonds, the "Securities"), which may be sold from time to time in one or more
series (a "Series") by Fund America Investors Corporation II (the "Company") on
terms determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement (a "Prospectus Supplement"). As specified in the
related Prospectus Supplement, the Securities of each Series will be either
Bonds secured by a trust estate (a "Trust Estate") and issued pursuant to an
Indenture, which Bonds representing indebtedness of the Company or an owner
trust (an "Owner Trust") beneficially owned by the Company, or Certificates
which will evidence a beneficial ownership interest in assets deposited into a
trust fund (a "Trust Fund") by the Company as depositor pursuant to a Trust
Agreement, as described herein. The issuer (the "Issuer") with respect to a
Series of Bonds will be the Company or the Owner Trust established to issue such
Bonds and, with respect to a Series of Certificates, will be the Trust Fund
established in respect of such Certificates.
The Securities of each Series will be secured by or will represent a
beneficial interest in certain mortgage-related assets (the "Mortgage Assets")
and may also be secured by, represent beneficial interests in, or have the
benefits of certain other assets (together with the Mortgage Assets, the
"Assets") which may include reinvestment income, reserve funds, cash accounts,
insurance policies, guarantees, letters of credit or other credit enhancement
("Credit Enhancement") as described in the related Prospectus Supplement. The
Mortgage Assets with respect to a Series of Bonds will consist of one or more of
the following: (i) mortgage-backed certificates, mortgage pass-through
certificates, or mortgage participation certificates ("Agency Securities")
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"); (ii) pass-through certificates or participation
certificates, formed by the Company in connection with the issuance of the
related Series of Securities for purposes of ease of administration, which are
neither issued nor guaranteed by any agency or instrumentality of the United
States ("Non-Agency Certificates") and which evidence undivided interests in (a)
Agency Securities, (b) pools of single family (one- to four-unit) residential
mortgage loans or participation interests therein ("Mortgage Loans"), (c)
conditional sales contracts and installment sales or loan agreements or
participation interests therein either secured by manufactured housing ("Secured
Contracts") or unsecured ("Unsecured Contracts" and, together with the Secured
Contracts, the "Contracts") or (d) multifamily mortgage loans secured by rental
apartment buildings or projects containing five or more residential units, or
cooperative apartment building loans ("Multifamily Loans"); (iii) (A) a pool or
pools of Mortgage Loans, Contracts and/or Multifamily Loans, or (B) mortgage
pass-through or participation certificates representing beneficial interests in
certain mortgage loans or certain mortgage-backed securities, collateralized
mortgage obligations secured by certain mortgage loans or certain
mortgage-backed securities, and residual interest securities relating to
issuances of mortgage pass-through certificates or collateralized mortgage
obligations (collectively, "Private Mortgage-Backed Securities") and (iv)
participation or other interests in any of the foregoing. Private
Mortgage-Backed Securities may include securities formed or issued by the
Company (or an Owner Trust beneficially owned by the Company), an affiliate of
the Company, or by third parties. The Mortgage Assets with respect to a Series
of Certificates will consist of one or more of the following: (i) Agency
Securities, (ii) Non-Agency Certificates, (iii) Mortgage Loans, (iv) Contracts,
(v) Multifamily Loans, (vi) Private Mortgage-Backed Securities, and (vii)
participation or other interests in any of the foregoing. To the extent
specified in the related Prospectus Supplement, Mortgage Loans, Contracts and
Multifamily Loans may be secured by junior liens on the related mortgaged
properties, and may include Title I Loans.
Each Series will be issued in one or more Classes, one or more of which may
be Principal Only Securities, Interest Only Securities, Compound Interest
Securities, Variable Interest Rate Securities, Scheduled Amortization
Securities, Companion Securities, Special Allocation Securities, or any other
Class of Securities, if any, included in such Series and described in the
related Prospectus Supplement. Principal Only Securities will not accrue, and
will not be entitled to receive, any interest. Payments or distributions of
interest on each Class of Securities other than Principal Only Securities and
Compound Interest Securities will be made on each Payment Date or Distribution
Date as specified in the Prospectus Supplement. Interest will not be paid or
distributed on Compound Interest Securities on a current basis until the date or
period specified in the related Prospectus Supplement. Prior to such time,
interest on such Class of Compound Interest Securities will accrue and the
amount of interest so accrued will be added to the principal thereof on each
Payment Date or Distribution Date. The amount
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 27 HEREIN FOR A DESCRIPTION OF CERTAIN
RISKS AND OTHER FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT
IN THE SECURITIES.
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 OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Offers of the Securities of a Series may be made through one or more
different methods, including offerings through underwriters, as more fully
described under "Plan of Distribution" herein and in the related Prospectus
Supplement.
There will have been no public market for any Securities prior to the
offering thereof. There can be no assurance that a secondary market will develop
for the Securities of any Series or, if it does develop, that such market will
continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 17, 1997.
<PAGE> 85
(Cover continued from previous page)
of principal and interest available and payable on each Series on each Payment
Date or Distribution Date will be applied to the Classes of such Series in the
order and as otherwise specified in the related Prospectus Supplement. Principal
payments or distributions on each Class of a Series will be made on a pro rata,
random lot or other selection basis among Securities of such Class, as specified
in the related Prospectus Supplement. Securities of a Series will be subject to
redemption or repurchase only under the circumstances and according to the
priorities described herein and in the related Prospectus Supplement. The
Company or its affiliates may retain or hold for sale from time to time all or a
portion of one or more Classes of a Series.
Bonds of a Series will constitute non-recourse obligations of the related
Issuer and Certificates of a Series will evidence an interest in the related
Trust Fund only. Neither the Bonds nor the Certificates will be insured or
guaranteed by GNMA, FNMA, FHLMC, any governmental entity or, unless otherwise
specified in the related Prospectus Supplement, by any other person. Unless
otherwise specified in the related Prospectus Supplement, the Company's only
obligations, if any, with respect to a Series will be to obtain certain
representations and warranties from each Seller of the related Mortgage Assets
and to assign to the related Trustee (or, in the case of Bonds issued by an
Owner Trust, to such Owner Trust) the Company's rights with respect thereto, and
its obligations pursuant to certain representations and warranties made by it.
Unless otherwise specified in the Prospectus Supplement relating to a Series, no
affiliate of the Company will have any obligations with respect to such Series.
The yield on each Class of a Series will be affected by the rate of payment
of principal (including prepayments) on the related Trust Estate or Mortgage
Assets and the timing of receipt of such payments as described herein and in the
related Prospectus Supplement.
Each Private Mortgage-Backed Security and each participation or other
interest therein securing a Series of Bonds or underlying a Series of
Certificates (including Private Mortgage-Backed Securities formed or issued by
the Company or an affiliate of the Company) will have been acquired by the
Company, in a secondary market transaction, from a seller other than the issuer
thereof and any of its affiliates, and will have been (i) issued in an offering
registered under the Securities Act of 1933, as amended (the "Securities Act")
or (ii) issued in an offering exempt from the registration requirements of the
Securities Act and will have been held by persons other than the issuer of such
securities and its affiliates for at least three years.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat all or specified portions of the related Trust
Estate or Trust Fund as a "real estate mortgage investment conduit" ("REMIC") or
to treat the arrangement by which such Series is issued as a REMIC, for federal
income tax purposes. See "Certain Federal Income Tax Consequences".
--2--
<PAGE> 86
PROSPECTUS SUPPLEMENT AND CURRENT REPORT ON FORM 8-K
The Prospectus Supplement and Current Report on Form 8-K relating to a
Series to be offered hereunder will, among other things, set forth all of the
following with respect to such Series:
(i) whether the Securities of such Series are Bonds or
Certificates;
(ii) information as to the Assets, included in the related Trust
Estate or Trust Fund, or otherwise available for such Series including (A) the
certain characteristics of the Mortgage Assets included therein and (B) a
description of the Credit Enhancement, if any, with respect to such Series;
(iii) the aggregate original principal balance of each Class of such
Series entitled to payments or distributions allocable to principal and, if a
fixed rate of interest, the interest rate for each Class of such Series entitled
to distributions allocable to interest;
(iv) information as to any Class of such Series that has a rate of
interest that is subject to change from time to time and the basis on which such
interest rate will be determined;
(v) information as to any Class of such Series on which interest
will accrue and be added to the principal or, if applicable, notional principal
balance thereof;
(vi) information as to the method used to calculate the amount of
interest to be paid on any Class of such Series entitled to payments or
distributions of interest only;
(vii) information as to the nature and extent of subordination with
respect to any Class of such Series that is subordinate in right of payment to
any other Class of such Series;
(viii) the Stated Maturity of each Class of Bonds or the Assumed
Final Distribution Date of each Class of Certificates;
(ix) the circumstances, if any, under which the Securities of such
Series are subject to redemption or repurchase;
(x) the Payment Dates or Distribution Dates, as applicable,
for each Class of such Securities;
(xi) the method used to calculate the aggregate amounts of principal
and interest available and required to be applied to the Securities of such
Series on each Payment Date or Distribution Date, as applicable, and with
respect to a Series consisting of more than one Class, the basis on which such
amounts will be allocated among the Classes of such Series;
(xii) the identity of the Trustee for such Series;
(xiii) whether one or more elections will be made to treat all or
specified portions of the Assets securing such Series or included in the related
Trust Fund as a REMIC and, if applicable, the designation of the regular
interests and residual interests therein; and
(xiv) information with respect to the plan of distribution of
such Series.
The actual characteristics of the Mortgage Assets relating to a Series
will not deviate in any material respect from the parameters specified in the
related Prospectus Supplement; provided, however, that if the characteristics
described in the initial related Prospectus Supplement materially differ from
the actual characteristics, a supplement to the related Prospectus Supplement
will be distributed.
- 3 -
<PAGE> 87
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file reports and other information (the
"Reports") with the Securities and Exchange Commission (the "Commission"). The
Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material documents referred to herein and therein, but do not contain all of the
information contained in such Registration Statement pursuant to the rules and
regulations of the Commission. The Registration Statement can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., 1st Floor, Room
1024, Washington, D.C. 20549, and at the following regional offices of the
Commission: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048.
The Company does not plan to send any financial information to holders
of Securities. The Trustee, however, will include with each payment or
distribution on Securities of a Series a statement containing certain payment
information with respect to such Securities.
The Company's principal executive offices are located at 6400 S.
Fiddler's Green Circle, Suite 1200B, Englewood, Colorado 80111. Its telephone
number is (303) 290-6025.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission under the Exchange Act are incorporated by reference in this
Prospectus:
(1) the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1996;
(2) the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended March 31, 1997; and
(3) the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended June 30, 1997.
All documents filed by the Company 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 shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. 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 an other subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy
of this Prospectus has been delivered, upon the request of such person, a copy
of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed to Helen M.
Dickens, Vice President, Fund America Investors Corporation II, 6400 S.
Fiddler's Green Circle, Suite 1200B, Englewood, Colorado 80111 (303/290-6025).
- 4 -
<PAGE> 88
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT AND CURRENT REPORT ON FORM 8-K..............................................................3
AVAILABLE INFORMATION.............................................................................................4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................4
TABLE OF CONTENTS.................................................................................................5
INDEX OF PRINCIPAL TERMS..........................................................................................8
SUMMARY OF PROSPECTUS............................................................................................12
RISK FACTORS.....................................................................................................27
General ...............................................................................................27
Prepayment and Yield Considerations.....................................................................27
Security Interests and Other Aspects of the Contracts...................................................28
Limited Liquidity.......................................................................................28
Limited Assets..........................................................................................29
Limitations, Reduction and Substitution of Credit Enhancement...........................................30
Original Issue Discount; Residual Certificates..........................................................30
Funds Available for Redemptions or Repurchases at the Request of Holders................................30
Book Entry Registration.................................................................................31
Nature of Direct or Indirect Backing for Securities.....................................................31
Insurance Considerations for Certain Non-Agency Certificates and Private
Mortgage-Backed Securities.....................................................................32
Certain Matters Relating to Insolvency..................................................................32
Junior Lien Mortgage Loans; Liquidation of Mortgage Loans...............................................32
Remedies Following Default..............................................................................33
Risks Associated With Mortgaged Properties Not Located in the United States.............................33
Deposits, Substitutions and Withdrawals of Assets.......................................................33
Other Legal Considerations..............................................................................33
DESCRIPTION OF THE SECURITIES....................................................................................34
General.................................................................................................34
The Bonds - General.....................................................................................35
The Certificates - General..............................................................................35
Form of Securities; Transfer and Exchange...............................................................35
REMIC Election..........................................................................................36
Classes of Securities...................................................................................36
Payments or Distributions of Principal and Interest.....................................................38
Redemption of Bonds; Termination or Repurchase with Respect to Certificates.............................40
Book Entry Registration.................................................................................40
ASSETS SECURING OR UNDERLYING THE SECURITIES.....................................................................41
Mortgage Loans..........................................................................................41
Agency Securities.......................................................................................43
Non-Agency Certificates.................................................................................48
Multifamily Loans.......................................................................................49
Contracts...............................................................................................50
Private Mortgage-Backed Securities......................................................................51
</TABLE>
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<PAGE> 89
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Characteristics of Agency Securities and Private Mortgage-Backed Securities.............................52
Deposit, Substitution and Withdrawal of Assets..........................................................53
CREDIT ENHANCEMENT...............................................................................................53
General.................................................................................................53
Subordination...........................................................................................53
Cross-Support...........................................................................................54
Pool Insurance..........................................................................................54
Special Hazard Insurance................................................................................55
FHA Insurance on the Multifamily Loans..................................................................55
Bankruptcy Bond.........................................................................................56
Reserve Funds...........................................................................................56
Other Insurance, Guarantees and Similar Instruments or Agreements.......................................56
SERVICING OF THE MORTGAGE LOANS, MULTIFAMILY LOANS AND CONTRACTS.................................................57
Servicing Agreements....................................................................................57
Payments on Mortgage Loans..............................................................................58
Advances................................................................................................59
Servicing Procedures....................................................................................59
Primary Mortgage Insurance..............................................................................61
Standard Hazard Insurance...............................................................................62
Title Insurance Policies................................................................................63
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance Policies;
Other Realization Upon Defaulted Loans.........................................................63
Administration and Servicing Compensation and Payment of Expenses.......................................64
THE INDENTURE....................................................................................................65
Modification of Indenture...............................................................................65
Events of Default.......................................................................................65
Rights Upon Event of Default............................................................................66
List of Holders of Bonds................................................................................66
Issuer's Annual Compliance Statement....................................................................66
Trustee's Annual Report.................................................................................67
Satisfaction and Discharge of Indenture.................................................................67
Reports by Trustee to Bondholders.......................................................................67
Limitation on Suits.....................................................................................67
THE AGREEMENT....................................................................................................67
Assignment of Mortgage Assets...........................................................................68
Repurchase or Substitution of Mortgage Loans, Contracts and Multifamily Loans...........................71
Evidence as to Compliance...............................................................................71
List of Certificateholders..............................................................................72
Administration of the Certificate Account...............................................................72
Reports to Holders of Certificates......................................................................73
Events of Default.......................................................................................74
Rights Upon Event of Default............................................................................74
Amendment...............................................................................................74
Termination.............................................................................................75
</TABLE>
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<PAGE> 90
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
USE OF PROCEEDS..................................................................................................75
THE ISSUER.......................................................................................................75
The Company.............................................................................................75
Owner Trust Issuer......................................................................................76
Management Agreement....................................................................................76
THE TRUSTEE......................................................................................................77
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS.....................................................................77
The Mortgage Loans and Multifamily Loans................................................................78
Consumer Protection Laws with respect to Contracts......................................................85
The Title I Program.....................................................................................85
LEGAL INVESTMENT MATTERS.........................................................................................90
ERISA CONSIDERATIONS.............................................................................................92
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..........................................................................93
Federal Income Tax Consequences for REMIC Securities....................................................93
General........................................................................................94
Status of REMIC Securities.....................................................................95
Qualification as a REMIC.......................................................................95
Taxation of Regular Securities.................................................................96
Taxation of Residual Securities...............................................................102
Limitations on Deduction of Certain Expenses..................................................108
Taxation of Certain Foreign Investors.........................................................109
Backup Withholding............................................................................110
Reporting Requirements........................................................................110
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is Made...................110
Non-REMIC Bonds...............................................................................110
Standard Certificates.........................................................................111
Stripped Certificates.........................................................................114
Reporting Requirements and Backup Withholding.................................................117
Taxation of Certain Foreign Investors.........................................................117
PLAN OF DISTRIBUTION............................................................................................117
LEGAL MATTERS...................................................................................................118
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION................................................................118
EXPERTS .......................................................................................................118
</TABLE>
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<PAGE> 91
INDEX OF PRINCIPAL TERMS
Page
Accrued Value ...........................................................33
Adjustable Multifamily Loan Rates........................................22
Adjustable Rate Multifamily Loans........................................22
Administrator ...........................................................14
Advance Account .........................................................64
Agency Securities .......................................................18
Agreement ...............................................................12
Annual Reduction ........................................................88
Applicable Accounting Standards..........................................71
APR .................................................................22, 51
Assumed Final Distribution Date..........................................17
Bankruptcy Bond .........................................................56
Beneficial Owners ...................................................24, 41
BIF .....................................................................72
Bond Interest Rate.......................................................14
Book Entry Securities................................................23, 40
Certificate Account......................................................38
Certificate Interest Rate................................................14
Certificate Trustee......................................................48
Certificates of Beneficial Ownership.....................................76
Class ...................................................................12
Clearing Agency Participants.........................................24, 41
Clearing Agency .....................................................23, 40
Code ....................................................................24
Collateral Value ........................................................51
Collection Account.......................................................38
Commission ...............................................................4
Committee Report ........................................................95
Companion Securities.....................................................37
Company .............................................................13, 75
Compound Interest Securities.........................................13, 37
Contract Loan Schedule...................................................69
Contract Pool .......................................................18, 50
Contracts ...........................................................18, 50
Conventional Multifamily Loans...........................................22
Cooperative Loans .......................................................42
Cooperatives ........................................................21, 42
Counsel to the Company...................................................93
CPTs ....................................................................52
Credit Enhancement...................................................23, 53
Custodial Account .......................................................58
Cut-off Date ............................................................36
Deposit Date ............................................................71
Deposit Trust Agreement..............................................13, 35
Disqualified Organization...............................................106
Distribution Date .......................................................14
DOL .....................................................................92
ERISA ...............................................................25, 92
Event of Default ........................................................65
Exchange Act .............................................................4
- 8 -
<PAGE> 92
FAMC ....................................................................76
FDIC ............................................................58, 72, 91
FHA Loans ...............................................................43
FHA .....................................................................22
FHA-Insured Multifamily Loans............................................22
FHLMC Certificate Group..................................................46
FHLMC Certificates.......................................................19
FHLMC ...................................................................18
Final REMIC Regulations..................................................93
FLTs ....................................................................52
FmHA Loans ..............................................................43
FNMA Certificates .......................................................19
FNMA ....................................................................18
Funding Agreement Trustee................................................48
Funding Agreement .......................................................48
Garn-St. Germain Act.....................................................82
GNMA Certificates .......................................................19
GNMA Issuer .............................................................43
GNMA ....................................................................18
Guaranty Agreement.......................................................44
Indenture ...............................................................12
Initial Depositor .......................................................76
Insurance Proceeds.......................................................58
Interest Accrual Period..................................................14
Interest Only Securities.............................................12, 37
INVs ....................................................................52
IOs .....................................................................52
IRS .....................................................................96
Issuer ..................................................................35
Liquidation Proceeds.....................................................58
Loan-to-Value Ratio......................................................43
Management Agreement.....................................................76
Manager .................................................................76
Manufactured Home Loans..................................................85
Manufactured Home .......................................................51
Manufacturer's Invoice Price.............................................51
Market Discount ........................................................100
Maximum Variable Interest Rate...........................................15
Minimum Variable Interest Rate...........................................15
Monthly Advance .........................................................59
Mortgage Loans ......................................................18, 94
Mortgage Notes ..........................................................41
Mortgage Pool Insurance Policy...........................................55
Mortgage Pool ...........................................................18
Mortgage Rates ..........................................................43
Mortgaged Properties.....................................................41
Mortgages ...............................................................41
Mortgagors ..............................................................58
Multifamily Loan Pool................................................18, 49
Multifamily Loan Schedule................................................69
Multifamily Loan Seller..................................................69
Multifamily Loans .......................................................18
NCUA ................................................................58, 91
Nonrecoverable Advance...................................................59
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<PAGE> 93
Non-Agency Administrator.................................................48
Non-Agency Certificates..................................................18
Non-Agency Pooling and Administration Agreement..........................48
Non-Agency Servicers.....................................................49
Non-Agency Servicing Agreement...........................................49
Non-Priority Securities..................................................37
Non-REMIC Bonds ........................................................111
Notional Principal Balance...............................................35
OID Regulations .........................................................95
Original Issue Discount..............................................33, 95
Original Value ..........................................................43
OTS .................................................................83, 91
Owner Trust .............................................................13
Owner Trustee .......................................................13, 35
Owner ...................................................................84
PACs ....................................................................52
Parties in Interest......................................................92
Pass-Through Entity.....................................................106
Pass-Through Rate .......................................................36
Payment Date ............................................................14
Permitted Instruments....................................................72
Plan Asset Regulations...................................................92
Plans ...................................................................92
PMBS Agreement ..........................................................51
PMBS Issuer .............................................................52
PMBS Servicer ...........................................................51
PMBS Trustee ............................................................51
Policy Statement ........................................................91
Pool Insurer ............................................................55
POs .....................................................................52
Premium REMIC Regular Securities........................................100
Prepayment Assumption....................................................96
Principal Only Securities............................................12, 37
Principal Prepayments....................................................39
Priority Securities......................................................37
Private Mortgage-Backed Securities.......................................18
Prohibited Transactions..............................................36, 92
Property Improvement Loans...............................................85
PTC .....................................................................44
Record Date .............................................................38
Registrar ...............................................................35
Regular Securities...................................................24, 94
Regular Securityholder...................................................95
REIT ....................................................................94
Relief Act ..............................................................84
REMIC Pool ..............................................................94
REMIC Securities ........................................................94
REMIC ...............................................................24, 94
Remittance Date .........................................................58
Remittance Rate .........................................................58
Reports ..................................................................4
Reserve Fund ............................................................56
Residual Holders ........................................................30
Residual Securities..............................................24, 30, 94
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<PAGE> 94
Residual Securityholders................................................102
Residuals ...............................................................52
Retail Class Security....................................................96
SAIF ....................................................................72
Scheduled Amortization Securities........................................37
Scheduled Principal......................................................47
Secured Contract ....................................................22, 50
Seller...................................................................41
Senior Securities .......................................................53
Servicers ...............................................................57
Servicing Agreement......................................................57
SMMEA ...............................................................26, 90
Special Allocation Securities............................................37
Special Hazard Insurance Policy..........................................55
Standard Indenture Provisions............................................12
Stated Maturity .........................................................17
Stripped Certificateholder..............................................117
Stripped Certificates...................................................115
Subordinated Securities..................................................53
TACs ....................................................................52
TAMRA ...................................................................93
Thrift Institution.......................................................94
Title I Contracts .......................................................85
Title I Loans ...........................................................85
Title I Program .........................................................85
Title V .................................................................84
TMP .....................................................................95
Trust Estate ............................................................12
Trust Fund ..............................................................12
Trust ...................................................................35
Trustee ............................................................ 12, 57
U.S. Person ............................................................107
UCC .....................................................................80
Underlying Mortgage Loans................................................27
Underwriters ...........................................................118
Unsecured Contract...................................................22, 50
VA Loans ................................................................43
VA ......................................................................22
Variable Interest Rate Securities........................................13
Window Period Loans......................................................82
Zs ......................................................................52
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<PAGE> 95
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
Prospectus Supplement with respect to the Series offered thereby and to the
related Indenture or Agreement, as applicable. Unless otherwise specified,
initially capitalized terms used and not defined in this Summary of Prospectus
have the meanings given to them in this Prospectus and in the related Prospectus
Supplement. See "Index of Principal Terms" herein.
Securities Offered..................Bonds and Certificates issuable in Series.
Bonds of a Series will be issued pursuant to
an indenture (the "Indenture") between the
respective Issuer (as defined below) and the
Trustee (the "Trustee") for such Series, and
will be secured by the Assets included in a
trust estate (the "Trust Estate") and
pledged to secure such Series. Such
Indenture may be in the form of a Terms
Indenture incorporating by reference the
Standard Indenture Provisions (the "Standard
Indenture Provisions") of the Issuer.
Certificates of a Series will be issued
pursuant to a pooling agreement or a pooling
and administration agreement (each, an
"Agreement") between the Company, the
Administrator, if any, and the Trustee for
such Series and will evidence beneficial
interests in the Assets included in a trust
fund (the "Trust Fund") and assigned to the
Trustee for the applicable Series. With
respect to each Series, a bank, trust
company or other fiduciary acting as a
trustee and named in the Prospectus
Supplement with respect to such Series (the
"Trustee" with respect to such Series) will
enter into the related Indenture or
Agreement, as indicated above. Holders of
Securities are referred to herein as
"Holders" or "Securityholders."
The Securities of any Series may be issued
in one or more classes (each a "Class"), as
specified in the related Prospectus
Supplement. One or more Classes of
Securities of each Series
(i) may be entitled to receive payments or
distributions allocable only to principal
("Principal Only Securities"), only to
interest ("Interest Only Securities") or to
any combination thereof;
(ii) may be entitled to receive payments or
distributions only of prepayments of
principal throughout the lives of the
Securities of such Series or during
specified periods;
(iii) may be subordinated in the right to
receive payments or distributions of
scheduled payments of principal, prepayments
of principal, interest or any combination
thereof to one or more other Classes of such
Series throughout the lives of the
Securities of such Series or during
specified periods;
(iv) may be entitled to receive such
payments or distributions only after the
occurrence of events specified in the
Prospectus Supplement;
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<PAGE> 96
(v) may be entitled to receive payments or
distributions in accordance with a schedule
or formula or on the basis of collections
from designated portions of the Assets
securing such Series or in the related Trust
Fund;
(vi) as to Securities entitled to payments
or distributions allocable to interest, may
be entitled to receive interest at a rate
that is subject to change from time to time
("Variable Interest Rate Securities") or at
a fixed rate;
(vii) may accrue interest, with such accrued
interest added to the principal amount of
the Securities of such Class and no payments
being made thereon until such time as is
specified in the related Prospectus
Supplement ("Compound Interest Securities").
The timing and amounts of such distributions
may vary among Classes, over time, or
otherwise as specified in the related
Prospectus Supplement.
The Company or its affiliates may retain or
hold for sale from time to time all or a
portion of one or more Classes of a Series.
The Securities of each Class of a Series
will be issued either in fully registered
form or in book entry form in the authorized
denominations specified in the Prospectus
Supplement. The Securities will not be
guaranteed or insured by GNMA, FNMA, FHLMC,
any governmental entity or, unless otherwise
specified in the related Prospectus
Supplement, by any other person and, except
as otherwise specified in the related
Prospectus Supplement, the Mortgage Assets
(other than Agency Securities) relating to a
Series will not be guaranteed or insured by
any governmental agency or instrumentality
or any other insurer.
The Company.........................Fund America Investors Corporation II (the
"Company") is a limited purpose Delaware
corporation formed on December 14, 1992. The
Company's principal executive offices are
located at 6400 S. Fiddler's Green Circle,
Suite 1200B, Englewood, Colorado 80111;
telephone number (303) 290-6025. See "The
Issuer -- The Company."
Issuer..............................The Issuer with respect to a Series of Bonds
will be the Company or an owner trust
established by it (the "Owner Trust") for
the purpose of issuing one or more Series of
Bonds. Each such Owner Trust will be created
pursuant to an Agreement (the "Deposit Trust
Agreement") between the Company, acting as
depositor, and a bank, trust company or
other fiduciary, acting as owner trustee
(the "Owner Trustee"). Each Series of Bonds
will be non-recourse obligations of the
related Issuer. The Issuer with respect to a
Series of Bonds will not have, nor be
expected in the future to have, any
significant assets available for payments on
such Series of Bonds, other than the Assets
included in the related Trust Estate.
- 13 -
<PAGE> 97
The Issuer with respect to a Series of
Certificates will be the Trust Fund
established by the Company pursuant to the
related Agreement.
Unless otherwise specified in a related
Prospectus Supplement (i) each Series of
Bonds will be separately secured by the
related Trust Estate, which will constitute
the only significant assets available to
make payments on the Bonds of such Series
and (ii) each Series of Certificates will be
entitled to distributions only from the
Assets included in the related Trust Fund
and any other Assets pledged or otherwise
available for the benefit of Holders of such
Series as specified in the related
Prospectus Supplement.
The Administrator;
Non-Agency Administrator............With respect to a Series of Securities for
which the related Trust Estate or Trust Fund
includes Mortgage Loans, Multifamily Loans,
and Contracts, the entity or entities named
as the Administrator in the related
Prospectus Supplement, if any (the
"Administrator"), will act as administrator,
and may act as a servicer, with respect to
such Mortgage Loans, Multifamily Loans, and
Contracts. The Administrator may be an
affiliate of the Company. With respect to a
Series of Certificates for which the Trust
Fund does not include Mortgage Loans,
Multifamily Loans or Contracts, there will
be no Administrator unless otherwise
specified in the related Prospectus
Supplement.
With respect to a Non-Agency Certificate,
the entity named as the Non-Agency
Administrator will act as administrator, and
may act as servicer, with respect to the
underlying Mortgage Loans, Multifamily
Loans, and Contracts. The Non-Agency
Administrator may be an affiliate of the
Company.
Payments or Distributions of
Interest ...........................Each Class of a Series (other than a Class
of Principal Only Securities) will accrue
interest at the rate set forth in (or, in
the case of Variable Interest Securities, as
determined as provided in) the related
Prospectus Supplement (the "Bond Interest
Rate" with respect to a Class of Bonds and
the "Certificate Interest Rate" with respect
to a Class of Certificates). One or more
Classes may be entitled to receive payments
or distributions of interest only to the
extent of amounts available to make such
payments or distributions. Interest on each
Class will accrue during the respective
periods and be paid or distributed on the
respective dates specified in the related
Prospectus Supplement (each such period an
"Interest Accrual Period" and each such date
a "Payment Date" with respect to a Class of
Bonds and a "Distribution Date" with respect
to a Class of Certificates). Interest on all
Securities which bear or receive interest,
other than Compound Interest Securities,
will be due and payable on the Payment
Dates, or distributed on the Distribution
Dates, as applicable, specified in the
related Prospectus Supplement. However,
failure to pay or distribute interest on a
current basis may not necessarily be an
Event of Default with respect to a
- 14 -
<PAGE> 98
particular Series or Class of Securities.
Interest on any Class of Compound Interest
Securities will not be paid or distributed
currently, but will accrue and the amount of
the interest so accrued will be added to the
principal thereof on each Payment Date or
Distribution Date, as applicable, until such
time as is specified in the related
Prospectus Supplement. Principal Only
Securities will not accrue, and will not be
entitled to receive, any interest. Upon
maturity or earlier redemption of the
Securities of any Class, interest will be
paid to the date specified in the related
Prospectus Supplement.
Each payment of interest on each Class of
Securities (or addition to principal of a
Class of Compound Interest Securities) on a
Payment Date or Distribution Date, as
applicable, will include all interest
accrued during the related Interest Accrual
Period. If the Interest Accrual Period for a
Series ends on a date other than a Payment
Date or Distribution Date, as applicable,
for such Series, the yield realized by the
Holders of such Securities may be lower than
the yield that would result if the Interest
Accrual Period ended on such Payment Date or
Distribution Date. Additionally, if so
specified in the related Prospectus
Supplement, interest accrued for an Interest
Accrual Period for one or more Classes may
be calculated on the assumption that
principal payments or distributions (and
additions to principal of the Securities),
and allocations of losses on the Mortgage
Assets (if so specified in the related
Prospectus Supplement), are made on the
first day of the preceding Interest Accrual
Period and not on the Payment Date or
Distribution Date, as applicable, for such
preceding Interest Accrual Period when
actually made or added. Such method would
produce a lower effective yield than if
interest were calculated on the basis of the
actual principal amount outstanding.
With respect to each Class of Variable
Interest Rate Securities of a Series, the
related Prospectus Supplement will set
forth: (i) the initial Bond Interest Rate or
Certificate Interest Rate, as applicable,
(or the manner of determining the initial
Bond Interest Rate or Certificate Interest
Rate); (ii) the formula, index or other
method by which the Bond Interest Rate or
Certificate Interest Rate, as applicable,
will be determined from time to time; (iii)
the periodic intervals at which such
determination will be made; (iv) the
interest rate cap (the "Maximum Variable
Interest Rate") if any, and the interest
rate floor (the "Minimum Variable Interest
Rate"), if any, on the Bond Interest Rate or
Certificate Interest Rate for such Variable
Interest Rate Securities; and any other
terms relevant to such Class of Securities.
See "Description of the Securities --
Payments or Distributions of Principal and
Interest -- Payments or Distributions of
Interest."
Payments or Distributions
of Principal .......................Principal payments or distributions on the
Securities of a Series will be made from
amounts available therefor on each Payment
Date or Distribution Date, as applicable, in
an aggregate amount determined as set forth
in the related Prospectus Supplement and
- 15 -
<PAGE> 99
will be allocated among the respective
Classes of a Series of Securities at the
times, in the manner and in the priority set
forth in the related Prospectus Supplement.
Except with respect to Compound Interest
Securities and Interest Only Securities,
unless specified otherwise in the related
Prospectus Supplement, on each Payment Date
or Distribution Date, as applicable,
principal payments or distributions will be
made on the Securities of a Series in an
aggregate amount determined in the related
Prospectus Supplement. If a Series has a
Class of Compound Interest Securities,
additional principal payments on the
Securities of such Series will be made on
each Payment Date or Distribution Date, as
applicable, in an amount equal to the
interest accrued, but not then payable or
distributable, on such Class of Compound
Interest Securities for the related Interest
Accrual Period. See "Description of the
Securities -- Payments or Distributions of
Principal and Interest -- Payments or
Distributions of Principal."
Unscheduled Payments or
Distributions.......................If specified in the related Prospectus
Supplement, the Securities of a Series will
be subject to receipt of payments or
distributions before the next scheduled
Payment Date or Distribution Date as
described under "Description of Securities
-- Payments or Distributions of Principal
and Interest -- Unscheduled Payments or
Distributions."
Allocation of Losses................If so specified in the related Prospectus
Supplement, on any Payment Date or
Distribution Date, as applicable, on which
the principal balance of the Mortgage Assets
relating to a Series is reduced due to
losses on such Mortgage Assets, (i) the
amount of such losses will be allocated
first, to reduce the aggregate outstanding
principal balance of the Subordinate
Securities of such Series or other
subordination, if any, and, thereafter, to
reduce the aggregate outstanding principal
balance of the remaining Securities of such
Series in the priority and manner specified
in such Prospectus Supplement until the
aggregate outstanding principal balance of
each Class of such Securities so specified
has been reduced to zero or paid in full,
thus reducing the amount of principal
payable or distributable on each such Class
of Securities or (ii) such losses may be
allocated in any other manner set forth in
the related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, such reductions of
principal of a Class or Classes of
Securities will be allocated to the Holders
of the Securities of such Class or Classes
pro rata in the proportion which the
outstanding principal of each Security of
such Class or Classes bears to the aggregate
outstanding principal balance of all
Securities of such Class. See "Description
of the Securities -- Payments or
Distributions of Principal and Interest --
Payments or Distributions of Principal."
- 16 -
<PAGE> 100
Stated Maturity and Assumed
Final Distribution Date.............The "Stated Maturity" for each Class of
Bonds of a Series will be the date specified
in the related Prospectus Supplement no
later than which all the Bonds of such Class
will be fully paid, as determined on the
basis of the assumptions set forth in the
related Prospectus Supplement. The "Assumed
Final Distribution Date" for each Class of
Certificates of a Series will be the date
specified in the related Prospectus
Supplement after which no Certificates of
such Class will remain outstanding, as
determined on the basis of the assumptions
set forth in the related Prospectus
Supplement. The Assumed Final Distribution
Date of a Class of Certificates may equal
the maturity date of the Mortgage Asset in
the related Trust Fund which has the latest
stated maturity or will be determined as
described herein and in the related
Prospectus Supplement.
The actual maturity date of the Securities
of a Series will depend primarily upon the
level of prepayments with respect to the
Mortgage Asset (including the Underlying
Mortgage Loans if such Mortgage Assets
consist of Mortgage Certificates) securing
or underlying such Series of Securities. The
actual maturity of any Securities is likely
to occur earlier and may occur substantially
earlier than its Stated Maturity or Assumed
Final Distribution Date, as applicable, as a
result of the application of prepayments to
the reduction of the principal balances of
the Securities. The rate of prepayments on
the Mortgage Assets securing or underlying a
Series will depend on a variety of factors,
including certain characteristics of such
Mortgage Loans and the prevailing level of
interest rates from time to time, as well as
on a variety of economic, demographic, tax,
legal, social and other factors. No
assurance can be given as to the actual
prepayment experience with respect to a
Series. See "Special Considerations."
Redemption of Bonds.................To the extent provided in the related
Prospectus Supplement, the Bonds of any
Class of a Series may be (i) redeemed at the
request of holders of such Bonds; (ii)
redeemed at the option of the Company or
another party specified in the related
Prospectus Supplement; or (iii) subject to
special redemption under certain
circumstances. The circumstances and terms
under which the Bonds of a Series may be
redeemed will be described in the related
Prospectus Supplement.
Termination or Repurchase with
Respect to Certificates.............To the extent provided in the related
Prospectus Supplement, the Certificates of
any Class of a Series may be (i) repurchased
at the request of holders of such
Certificates; (ii) repurchased at the option
of the Company, the Administrator, if any,
or another party specified in the related
Prospectus Supplement; or (iii) subject to
special repurchase under certain
circumstances. In addition, if so specified
in the Prospectus Supplement for a Series of
Certificates, the Company, the
Administrator, if any, or another party
specified in the related Prospectus
Supplement
- 17 -
<PAGE> 101
may, at its option, cause an early
termination of the Trust Fund for such
Series by repurchasing all of the Mortgage
Assets from such Trust Fund, under the
circumstances specified in such Prospectus
Supplement. The circumstances and terms
under which the Certificates of a Series may
be repurchased and the circumstances and
terms under which the related Trust Fund may
be terminated will be described in the
related Prospectus Supplement.
Assets Securing or
Underlying the Securities...........Each Series of Bonds will be separately
secured by a Trust Estate, and each Series
of Certificates will represent beneficial
ownership interests in a Trust Fund. The
Mortgage Assets included in the Trust Estate
with respect to a Series of Bonds will
include Mortgage Assets consisting of one or
more of the following, as specified in the
related Prospectus Supplement:
(i) mortgage-backed certificates,
mortgage pass-through certificates
or mortgage participation
certificates, including residual
interests ("Agency Securities")
issued or guaranteed by the
Government National Mortgage
Association ("GNMA"), the Federal
National Mortgage Association
("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC");
(ii) non-publicly offered pass-through
certificates or participation
certificates which are neither
issued nor guaranteed by any agency
or instrumentality of the United
States ("Non-Agency Certificates")
and which evidence undivided
interests in (a) Agency Securities,
(b) a pool (a "Mortgage Pool") of
single family (one- to four-unit)
residential mortgage loans or
participation interests therein
("Mortgage Loans"), (c) a pool (a
"Contract Pool") of conditional
sales contracts and installment
sales or loan agreements or
participation interests therein
secured by manufactured housing
("Contracts") or (d) a pool (a
"Multifamily Loan Pool") of
multifamily mortgage loans
including cooperative apartment
building loans ("Multifamily
Loans");
(iii) (A) a pool or pools of Mortgage
Loans, Contracts and/or Multifamily
Loans or (B) mortgage pass-through
certificates representing
beneficial interests in certain
mortgage loans or certain
mortgage-backed securities,
collateralized mortgage obligations
secured by certain mortgage loans
or certain mortgage-backed
securities, and residual interest
securities relating to issuances of
mortgage pass-through certificates
or collateralized mortgage
obligations (collectively, "Private
Mortgage-Backed Securities"); and
(iv) participation or other interests in
any of the foregoing.
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The Mortgage Assets included in the Trust
Fund with respect to a Series of
Certificates will include Mortgage Assets
consisting of one or more of the following,
as specified in the related Prospectus
Supplement:
(i) Agency Securities,
(ii) Non-Agency Certificates,
(iii) a Mortgage Pool,
(iv) a Contract Pool,
(v) a Multifamily Loan Pool,
(vi) Private Mortgage-Backed Securities,
and
(vii) participation or other interests in
any of the foregoing.
A Trust Estate or Trust Fund may also
include, or the related Securities may also
have the benefits of, certain other Assets,
including but not limited to: reinvestment
income, reserve funds, cash accounts,
insurance policies, guarantees, letters of
credit or other credit enhancement as
described in the related Prospectus
Supplement, intended to decrease the
likelihood that holders of Securities will
experience delays in payments or
distributions of scheduled payments on, or
losses in respect of, the assets included in
such Trust Estate or Trust Fund. The
Securities of any Series will be entitled to
payment only from the Assets included in the
related Trust Estate or Trust Fund and any
other Assets pledged or otherwise available
for the benefit of the holders of such
Securities as specified in the related
Prospectus Supplement.
A. Agency Securities................Agency Securities will consist of:
(i) "fully modified pass-through"
mortgage-backed certificates
guaranteed as to timely payment of
principal and interest by the GNMA
("GNMA Certificates"),
(ii) guaranteed mortgage pass-through
certificates issued and guaranteed
as to timely payment of principal
and interest by the FNMA ("FNMA
Certificates"),
(iii) mortgage participation certificates
issued and guaranteed as to timely
payment of interest and, unless
otherwise specified in the related
Prospectus Supplement, ultimate
payment of principal by the FHLMC
("FHLMC Certificates"),
(iv) stripped mortgage-backed securities
representing an undivided interest
in all or a part of either the
principal distributions (but not
the interest distributions) or the
interest distributions (but not the
principal distributions)
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<PAGE> 103
or in some specified portion of the
principal and interest
distributions (but not all of such
distributions) on certain GNMA,
FNMA or FHLMC Certificates and,
unless otherwise specified in the
Prospectus Supplement, guaranteed
to the same extent as the
underlying securities,
(v) other types of mortgage-backed
certificates, mortgage pass-through
certificates or mortgage
participation certificates issued
or guaranteed by GNMA, FNMA or
FHLMC, such as FNMA Guaranteed
REMIC Pass- Through Certificates
and FHLMC Multiclass Mortgage
Participation Certificates, and
including residual interest
securities, as described in the
related Prospectus Supplement or
(vi) a combination of such Agency
Securities.
All GNMA Certificates will be backed by the
full faith and credit of the United States.
No FHLMC or FNMA Certificates will be
backed, directly or indirectly, by the full
faith and credit of the United States.
The Prospectus Supplement for a Series will
describe any Agency Securities to be
included in the related Trust Estate or
Trust Fund, and will specify certain
characteristics of the mortgage loans
underlying such Agency Securities. See
"Assets Securing or Underlying the
Securities -- Agency Securities."
B. Non-Agency Certificates.........Non-Agency Certificates will evidence an
undivided interest in Agency Securities, a
Mortgage Loan Pool, a Contract Pool, or a
Multifamily Loan Pool. Non-Agency
Certificates themselves will have been
formed by the Company in connection with the
issuance of the related Series of Securities
for purposes of ease of administration, and
will not be insured or guaranteed by the
United States or any agency or
instrumentality thereof. Unless otherwise
specified in the related Prospectus
Supplement relating to a Series, payments on
the Non-Agency Certificates to be included
in the related Trust Estate or Trust Fund
will be distributed directly to the related
Trustee as registered owner of such
Non-Agency Certificates. The Prospectus
Supplement for a Series will describe any
Non-Agency Certificates to be included in
the related Trust Estate or Trust Fund, and
will specify certain characteristics of the
Agency Securities, Mortgage Loans, Contracts
or Multifamily Loans underlying such
Non-Agency Certificates. See "Assets
Securing or Underlying the Securities --
Non-Agency Certificates."
C. Private Mortgage-Backed
Securities.....................Private Mortgage-Backed Securities may
include (a) mortgage pass-through
certificates representing beneficial
interests in certain mortgage loans or
certain mortgage-backed securities, (b)
collateralized mortgage obligations secured
by certain mortgage loans or certain
mortgage-backed securities or (c) residual
interest securities relating to an issuance
of securities
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<PAGE> 104
of the type referred to in clause (a) or
(b). Private Mortgage-Backed Securities may
include stripped mortgage-backed securities
representing an undivided interest in all or
a part of either the principal distributions
(but not the interest distributions) or the
interest distributions (but not the
principal distributions) or in some
specified portion of the principal and
interest distributions (but not all of such
distributions) on certain mortgage loans.
Private Mortgage-Backed Securities may
include securities formed or issued by the
Company (or an Owner Trust beneficially
owned by it), by an affiliate of the
Company, or by third parties. Although
individual mortgage loans underlying a
Private Mortgage-Backed Security may be
insured or guaranteed by the United States
or an agency or instrumentality thereof,
they need not be, and the Private
Mortgage-Backed Securities themselves will
not be so insured or guaranteed. The
mortgage loans underlying Private
Mortgage-Backed Securities may be secured by
single-family property, multifamily
property, manufactured homes, or by an
assignment of the proprietary lease or
occupancy agreement relating to a specific
dwelling within a Cooperative and the
related shares issued by such Cooperative.
Unless otherwise specified in the related
Prospectus Supplement relating to a Series,
payments on the Private Mortgage-Backed
Securities relating to a Series will be
distributed directly to the related Trustee
as registered owner of such Private
Mortgage-Backed Securities. The Prospectus
Supplement for a Series will describe any
Private Mortgage-Backed Securities to be
included in the related Trust Estate or
Trust Fund, and will specify certain
characteristics of the mortgage loans
underlying such Private Mortgage-Backed
Securities. See "Assets Securing or
Underlying the Securities -- Private
Mortgage-Backed Securities."
D. Mortgage Loans..................Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans
underlying the Non-Agency Certificates
included in the Trust Estate or Trust Funds
for a Series, or the Mortgage Loans included
in the Trust Estate or Trust Fund for a
Series of Securities will be conventional
mortgage loans originated or acquired by the
Company, either directly or through an
affiliate. The residential properties
securing the Mortgage Loans may be located
in or outside of the United States. If so
specified in the related Prospectus
Supplement, the Mortgage Loans relating to a
Series may include cooperative apartment
loans with respect to individual units in
cooperative apartment complexes, which loans
are secured by security interests in shares
issued by private, non-profit, cooperative
housing corporations ("Cooperatives") and in
the related proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in such
Cooperatives' buildings. In addition, the
Mortgage Loans may be secured by junior
liens on the related mortgaged properties.
Mortgage Loans may include Title I Loans.
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<PAGE> 105
The related Prospectus Supplement for a
Series will describe any Mortgage Loans
underlying the Non-Agency Certificates to be
included in the related Trust Estate or
Trust Fund, or the Mortgage Loans included
in the Trust Estate or Trust Fund for a
Series of Securities, and will specify
certain information regarding the payment
terms of such Mortgage Loans. See "Assets
Securing or Underlying the Securities --
Mortgage Loans."
E. Contracts.......................The Contracts underlying the Non-Agency
Certificates included in the Trust Estate or
Trust Fund, for a Series, or the Contracts
included in the Trust Estate or Trust Fund
for a Series of Securities will consist of
conditional sales contracts and installment
sales or loan agreements or participation
interests therein secured by new or used
Manufactured Homes (as defined herein). As
specified in the related Prospectus
Supplement, Contracts may either be secured
by new or used Manufactured Homes (as
defined herein) (a "Secured Contract") or
unsecured (an "Unsecured Contract").
Contracts may be conventional (i.e., not
insured or guaranteed by any government
agency), insured by the Federal Housing
Administration ("FHA"), including Title I
Contracts, or partially guaranteed by the
Veterans Administration ("VA"), as specified
in the related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, each Contract will be
fully amortizing and will bear interest at a
fixed annual percentage rate ("APR"). The
related Prospectus Supplement for a Series
will describe any Contracts underlying the
Non-Agency Certificates included in the
related Trust Estate or Trust Fund, for a
Series, or the Contracts included in the
Trust Estate or Trust Fund for a Series of
Securities. The Unsecured Contracts included
in the Trust Estate or Trust Fund for a
Series will not constitute a material
concentration of the assets of such Trust
Estate or Trust Fund. See "Assets Securing
or Underlying the Securities -- Contracts."
F. Multifamily Loans...............Multifamily Loans underlying the Non-Agency
Certificates included in the Trust Estate or
Trust Fund for a Series or the Multifamily
Loans included in the Trust Estate or Trust
Fund for a Series of Securities may, as
specified in the related Prospectus
Supplement, include fixed rate or adjustable
rate Multifamily Loans. Multifamily Loans
may be conventional multifamily mortgage
loans ("Conventional Multifamily Loans") or
mortgage loans insured by the FHA
("FHA-Insured Multifamily Loans") in each
case secured by rental apartment buildings
or projects containing five or more
residential units or may be mortgage loans
with respect to apartment buildings owned by
Cooperatives. Multifamily Loans may include
Title I Loans. Adjustable rate Multifamily
Loans ("Adjustable Rate Multifamily Loans")
may, as described in the related Prospectus
Supplement, permit or require periodic
changes in the interest rates borne by the
Multifamily Loans ("Adjustable Multifamily
Loan Rates") and in the monthly payments
made on the Multifamily Loans. Multifamily
Loans relating to a Series may, as described
in the related Prospectus Supplement,
provide for
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<PAGE> 106
no amortization of the principal amount of
such loans prior to maturity or for a
specified period after origination, and
require the entire unpaid principal balance
to be paid in a lump sum at maturity or may
provide for full amortization of principal
over the term of the Multifamily Loan.
Multifamily Loans may provide for negative
amortization as specified in the related
Prospectus Supplement.
The related Prospectus Supplement for a
Series will describe any Multifamily Loans
underlying the Non-Agency Certificates to be
included in the related Trust Estate or
Trust Fund, for a Series, or the Multifamily
Loans included in the Trust Estate or Trust
Fund for a Series of Securities. See "Assets
Securing or Underlying the Securities --
Multifamily Loans."
Advances............................Unless otherwise specified in the Prospectus
Supplement for a Series, the Servicer or
Servicers of the related Mortgage Loans,
Contracts and Multifamily Loans and the
Non-Agency Servicers (in the case of
Non-Agency Certificates) will be obligated
to advance delinquent installments of
principal and interest (less applicable
servicing fees) on such Mortgage Loans,
Contracts and Multifamily Loans. Unless
otherwise specified in the related
Prospectus Supplement, in the event a
Servicer or Non- Agency Servicer fails to
make such advances, the related
Administrator, if any, and the related
Non-Agency Administrator, (in the case of
Non-Agency Certificates), if any, shall be
obligated to make the advance. Any such
obligation to make advances may be limited
to amounts due holders of the related
Securities or Non-Agency Certificates, as
applicable, to amounts deemed to be
recoverable from late payments or
liquidation proceeds, to specified periods
or any combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable by the applicable Servicer (or
the related Administrator) as specified in
the related Prospectus Supplement.
Credit Enhancement..................If specified in the related Prospectus
Supplement, a Series, or certain Classes
within such Series, may have the benefit of
one or more types of credit enhancement
("Credit Enhancement") including but not
limited to subordination, cross support,
mortgage pool insurance, special hazard
insurance, a bankruptcy bond, reserve funds,
other insurance, guarantees and similar
instruments and arrangements. The protection
against losses afforded by any such Credit
Enhancement will be limited. See "Credit
Enhancement."
Book Entry Registration.............If the Prospectus Supplement for a Series so
provides, Securities of one or more Classes
of such Series may be issued in book entry
form ("Book Entry Securities") in which case
a single Bond or Certificate, as applicable,
will be issued in the name of a clearing
agency (a "Clearing Agency") registered with
the Securities and Exchange Commission, or
its nominee. Transfers and pledges of Book
Entry Securities may be made only through
entries on the books of the Clearing Agency
in the name of
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<PAGE> 107
brokers, dealers, banks and other
organizations eligible to maintain accounts
with the Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers
and pledges by purchasers and other
beneficial owners of Book Entry Securities
("Beneficial Owners") other than Clearing
Agency Participants may be effected only
through Clearing Agency Participants.
Beneficial Owners will receive payments or
distributions of principal and interest,
and, if applicable, may tender Securities
for redemption or repurchase to the related
Trustee, only through the Clearing Agency
and Clearing Agency Participants. Except as
otherwise specified in this Prospectus or a
related Prospectus Supplement, the terms
"Securityholders" and "holders" shall be
deemed to include Beneficial Owners. See
"Special Considerations -- Book Entry
Registration" and "Description of the
Securities -- Book Entry Registration."
Certain Federal Income Tax
Consequences........................The federal income tax consequences to
Holders of a Series will depend on, among
other factors, whether one or more elections
are made to treat the related Trust Estate
or Trust Fund or specified portions thereof
as a "real estate mortgage investment
conduit" ("REMIC") under the provisions of
the Internal Revenue Code of 1986, as
amended (the "Code"). The Prospectus
Supplement for each Series will specify
whether such an election will be made.
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Securities, one or more REMIC elections will
be made with respect to such Series of
Securities. Securities of such Series will
be designated as "regular interests" in a
REMIC ("Regular Securities") or as "residual
interests" in a REMIC ("Residual
Securities").
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Securities, the Securities of such Series
will not be treated as regular or residual
interests in a REMIC for federal income tax
purposes but instead will be treated as (i)
indebtedness of the Issuer, (ii) an
undivided beneficial ownership interest in
the Mortgage Assets (and the arrangement
pursuant to which the Mortgage Assets will
be held and the Securities will be issued
will be treated as a grantor trust under
Subpart E, part I of subchapter J of Chapter
1 of Subtitle A of the Code and not as an
association taxable as a corporation for
federal income tax purposes); (iii) equity
interests in an association that will
satisfy the requirements for qualification
as a real estate investment trust; or (iv)
interests in an entity that will satisfy the
requirements for qualification as a
partnership for federal income tax purposes.
The federal income tax consequences to
Holders of any such Series will be described
in the related Prospectus Supplement to the
extent not described herein.
Compound Interest Securities and Principal
Only Securities will, and certain other
Classes of Securities may, be issued with
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<PAGE> 108
original issue discount that is not de
minimis. In such cases, the Holder will be
required to include the original issue
discount in gross income as it accrues,
which may be prior to the receipt of cash,
or a portion of the cash, attributable to
such income. If a Security is issued at a
premium, the Holder will be entitled to make
an election to amortize such premium on a
constant yield method. Securities
constituting regular or residual interests
in a REMIC will generally represent
qualifying assets for domestic building and
loan associations and real estate investment
trusts to the extent that the underlying
mortgage loans and interest thereon qualify
for such treatment. Non-REMIC Securities
will not qualify for such treatment.
A Holder of a Residual Security will be
required to include in its income its pro
rata share of the taxable income of the
REMIC. In certain circumstances, the Holder
of a Residual Security may have REMIC
taxable income or tax liability attributable
to REMIC taxable income for a particular
period in excess of cash distributions for
such period or have an after-tax return that
is less than the after-tax return on
comparable debt instruments. In addition, a
portion (or, in some cases, all) of the
income from a Residual Security (i) may not
be subject to offset by losses from other
activities, (ii) for a Holder that is
subject to tax under the Code on unrelated
business taxable income, may be treated as
unrelated business taxable income and (iii)
for a foreign Holder, may not qualify for
exemption from or reduction of withholding.
Further, individual Holders are subject to
limitations on the deductibility of expenses
of the REMIC. See "Certain Federal Income
Tax Consequences."
ERISA Considerations................A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code should carefully review with its
own legal advisors whether the purchase or
holding of Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations." To the extent
described in the Prospectus Supplement for a
Series, certain Classes of Securities of
such Series may not be transferred unless
the Trustee and the Company are furnished
with a letter of representation or an
opinion of counsel to the effect that such
transfer will not result in a violation of
the prohibited transaction provisions of
ERISA and the Code and will not subject the
Trustee, the Company or the Administrator,
if any, to additional obligations under
ERISA. Additionally, unless otherwise
specified in the related Prospectus
Supplement, Securities representing an
"equity" interest in a Mortgage Pool
consisting of multifamily mortgage loans may
not be transferred to an employee benefit
plan or other retirement plan or arrangement
subject to ERISA. See "Description of the
Securities -- General" and "ERISA
Considerations."
Legal Investment Matters............Unless otherwise specified in the related
Prospectus Supplement, Securities of each
Series will constitute "mortgage related
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<PAGE> 109
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
and, as such, will be legal investments for
certain types of institutional investors to
the extent provided in SMMEA, subject, in
any case, to any other regulations which may
govern investments by such institutional
investors. See "Legal Investment Matters."
Use of Proceeds.....................Substantially all of the net proceeds from
the sale of a Series will be applied to the
simultaneous purchase of the Mortgage Assets
included in the related Trust Estate or
Trust Fund or to reimburse the amounts
previously used to effect such purchase, the
costs of carrying the Mortgage Assets until
sale of such Series and to pay other
expenses connected with pooling the Mortgage
Assets and issuing such Series. See "Use of
Proceeds."
Rating..............................It is a condition to the issuance of each
Class of a Series specified as being offered
by the related Prospectus Supplement that
the Securities of such Class be rated in one
of the four highest rating categories
established for such Securities by a
nationally recognized statistical rating
agency.
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<PAGE> 110
RISK FACTORS
Prospective investors in the Securities should consider, among other
things, the following factors in connection with the purchase of the Securities:
GENERAL
An investment in Securities secured by or evidencing interests in a
Mortgage Pool may be affected, among other things, by a decline in real estate
values or a decline in mortgage interest rates. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans, and any secondary financing on the
related 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 mortgage lending industry. To the extent that such losses are
not covered by applicable insurance policies, if any, or by any Credit
Enhancement as described herein, Holders of Securities secured by or evidencing
interests in such Mortgage Pool will bear all risk of loss resulting from
default by Mortgagors and will have to look primarily to the value of the
related Mortgaged Properties for recovery of the outstanding principal and
unpaid interest of the defaulted Mortgage Loans. See "Assets Securing or
Underlying the Securities -- Mortgage Loans."
An investment in Securities secured by or evidencing interests in a
Multifamily Loan Pool may also be affected, among other things, by a decline in
real estate values or a decline in mortgage interest rates. The actual rates of
delinquencies, foreclosures and losses on Multifamily Loans could be affected by
adverse changes in general economic conditions and by local conditions including
excessive building resulting in an oversupply of rental housing stock or a
decrease in employment reducing the demand for rental units in the area, by
federal, state or local regulations and controls affecting rents, prices of
goods, fuel and energy consumption and prices, water and environmental
restrictions affecting new construction, by increasing labor and materials
costs, and by the relative attractiveness to tenants of the multifamily rental
projects securing such Multifamily Loans and their neighborhoods. Repayment of a
Multifamily Loan secured by an apartment building owned by a cooperative will
depend primarily on the receipt of payments from the tenant-stockholders of the
cooperative and its ability to refinance the loan at maturity. To the extent
that such losses are not covered by applicable insurance policies, if any, or by
any Credit Enhancement, Holders of Securities secured by or evidencing interests
in a Multifamily Loan Pool will bear all risk of loss resulting from default by
mortgagors and will have to look primarily to the value of the multifamily
projects for recovery of the outstanding principal and unpaid interest of the
defaulted Multifamily Loans. See "Assets Securing or Underlying the Securities
- -- Multifamily Loans."
An investment in Securities secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are often
volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts are
not covered by applicable insurance policies, if any, or by any Credit
Enhancement, Holders of the Securities secured by or evidencing interests in
such Contracts will bear all risk of loss resulting from default by obligors and
will have to look primarily to the value of the Manufactured Homes for recovery
of the outstanding principal and unpaid interest of the defaulted Contracts. See
"Assets Securing or Underlying the Securities -- Contracts."
PREPAYMENT AND YIELD CONSIDERATIONS
The prepayment experience on the Mortgage Loans, the Multifamily Loans,
and the Contracts included in a Trust Estate or Trust Fund or underlying the
Non-Agency Certificates included in a Trust Estate or Trust Fund, and on the
mortgage loans underlying the Agency Securities and the Private Mortgage-Backed
Securities (the "Underlying Mortgage Loans") will affect the average life of
each Class of Securities relating to a Trust Estate or Trust Fund including such
Mortgage Assets. Prepayments on the Mortgage Loans, the Multifamily Loans, the
Contracts and the Underlying Mortgage Loans may be influenced by a variety of
economic, geographic, social and other factors, including the difference between
the interest rates on the Mortgage Loans, the Multifamily Loans, the Contracts
or the Underlying Mortgage Loans (giving consideration to the cost of
refinancing) and prevailing mortgage rates. In general, if mortgage interest
rates fall below the interest rates on the Mortgage Loans, the Multifamily
Loans, the Contracts or the Underlying
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<PAGE> 111
Mortgage Loans relating to a Series, the rate of prepayment would be expected to
increase and Securityholders of such Series may be unable to reinvest such
payments in securities of comparable quality having interest rates similar to
those borne by the Securities of such Series. Conversely, if mortgage interest
rates rise above the interest rates on the Mortgage Loans, the Multifamily
Loans, the Contracts or the Underlying Mortgage Loans, the rate of prepayment
would be expected to decrease. Prepayments on Multifamily Loans may also be
influenced by a variety of economic factors affecting project sale or
refinancing, including, without limitation, the relative tax benefits of
continued ownership of the property as a result of changes in federal tax law,
among other factors. Prepayments may be influenced by a variety of economic,
geographic, social and other factors, including aging, seasonality and interest
rate fluctuations. Other factors affecting prepayment of mortgage loans include
changes in housing needs, job transfers, unemployment and servicing decisions.
Additional prepayment, yield and weighted average life considerations
with respect to a Series of Securities will be set forth in the related
Prospectus Supplement.
SECURITY INTERESTS AND OTHER ASPECTS OF THE CONTRACTS
Secured Contracts. Each Secured Contract will be secured by a security
interest in a Manufactured Home. Perfection of security interests in the
Manufactured Homes and enforcement of rights to realize upon the value of the
Manufactured Homes as collateral for the Secured Contracts are subject to a
number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, the Servicer (in the case of a Series of Certificates) or the
Non-Agency Servicer (in the case of Non-Agency Certificates) of a Secured
Contract will not amend any certificate of title to change the lienholder
specified therein from such Servicer or Non-Agency Servicer, as applicable to
the Trustee (in the case of a Series of Certificates) or Certificate Trustee (in
the case of Non-Agency Certificates) and will not deliver any certificate of
title to such trustee or note thereon the trustee's interest. Consequently, in
some states, in the absence of such an amendment, the assignment to such trustee
of the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to such trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Servicer or
Non-Agency Servicer, as applicable or a trustee in bankruptcy of such servicer.
Unsecured Contracts. The obligations of the obligor under any Unsecured
Contract included in the related Trust Estate or Trust Fund for a Series will
not be secured by an interest in the related real estate or otherwise, and the
related Trust Estate or Trust Fund, as the owner of such Unsecured Contract,
will be a general unsecured creditor as to such obligations. As a consequence,
in the event of a default under an Unsecured Contract, the related Trust Estate
or Trust Fund will have recourse only against the obligor's assets generally,
along with all other general unsecured creditors of the obligor. In a bankruptcy
or insolvency proceeding relating to an obligor on an Unsecured Contract, the
obligations of the obligor under such Unsecured Contract may be discharged in
their entirety, notwithstanding the fact that the portion of such obligor's
assets made available to the related Trust Estate or Trust Fund as a general
unsecured creditor to pay amounts due and owing thereunder are insufficient to
pay all such amounts. An obligor on an Unsecured Contract may not demonstrate
the same degree of concern over performance of the obligor's obligations under
such Unsecured Contract as if such obligations were secured by the real estate
owned by such obligor.
Federal and State Consumer Protection Laws. In addition, numerous
Federal and state consumer protection laws impose requirements on lending under
conditional sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to a
Trustee (in the case of a Series of Certificates) or Certificate Trustee (in the
case of Non-Agency Certificates) as an assignee of Contracts. Each Seller of
Contracts will warrant that each Contract complies with all requirements of law
and, in the case of Secured Contracts, will make certain warranties relating to
the validity, subsistence, perfection and priority of the security interest in
each Manufactured Home securing a Secured Contract. A breach of any such
warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale
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of Manufactured Homes securing Contracts that are in default, certain other
factors may limit the ability of the Holders to realize upon the Manufactured
Homes or may limit the amount realized to less than the amount due.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide the related Holders with
liquidity of investment or will continue for the life of such Series. The market
value of the Securities will fluctuate with changes in prevailing rates of
interest. Consequently, the sale of Securities by a Holder in any market that
may develop may be at a discount from par value or their purchase price. Unless
otherwise specified in the Prospectus Supplement for a Series, Holders of the
Securities of such Series will have no right to request redemption or repurchase
of such Securities, and such Securities will be subject to redemption only under
the limited circumstances described in such Prospectus Supplement.
LIMITED ASSETS
The Issuer with respect to a Series will not have, nor will it be
expected in the future to have, any significant assets available for payments on
such Series other than the Assets in the related Trust Estate or Trust Fund, as
applicable. The Bonds will be non-recourse obligations of the related Issuer and
each Series of Bonds will be separately secured. Unless otherwise specified in
the related Prospectus Supplement, no Series of Bonds will have any claim
against or any security interest in the Mortgage Assets or other Assets pledged
to secure any other Series. If the Mortgage Assets and other Assets securing a
Series of Bonds is insufficient to make payments on such Bonds, no other assets
of an Issuer will be available for payment of the deficiency. In addition,
unless otherwise set forth in the Prospectus Supplement for a Series of
Certificates, the Trust Fund for such Series will be the only available source
of funds to make distributions on the Certificates of such Series.
The only obligations, if any, of the Company with respect to a Series
will be to obtain certain representations and warranties from each Seller of the
related Mortgage Assets and to assign to the related Trustee (or, in the case of
Bonds issued by an Owner Trust, to such Owner Trust) the Company's rights with
respect thereto, and its obligations pursuant to certain representations and
warranties made by it. The Company does not have, and is not expected in the
future to have, any significant assets. If the Company were required to
repurchase a Mortgage Asset included in the Trust Estate or Trust Fund for a
Series, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the Seller of such Mortgage Asset or the related Servicer (if any), as the
case may be, or from a Reserve Fund, if any, established to provide funds for
such repurchases.
Immediately after each required payment or distribution of principal
of, and interest on, a Series has been paid in full, funds held in one or more
accounts maintained pursuant to the related Indenture or Agreement, as
applicable, if not required to be deposited in any related Reserve Fund or
otherwise applied pursuant to the related Indenture or Agreement, may be
withdrawn under certain circumstances and conditions described in the related
Prospectus Supplement, or may be distributed to a party specified in such
Indenture or Agreement. In addition, certain amounts remaining in related
Reserve Funds with respect to a Series may likewise be withdrawn or
distributable to a party specified in the related Indenture or Agreement after
such Reserve Funds reach certain prescribed balances, or after the principal
balances of the Securities of such Series have been reduced to a prescribed
level, in which cases such amounts would no longer be available to make payments
on such Securities.
Because payments or distributions of principal on the Securities of a
Series may, if so provided in the related Prospectus Supplement, be applied to
outstanding Classes of such Series in the priority specified in the related
Prospectus Supplement, a deficiency that arises after Securities of a Class of
any such Series having higher priority in payment have been fully or partially
repaid will have a disproportionately greater effect on the Securities of
Classes of such Series having lower priority in payment. The disproportionate
effect of any such deficiency is further increased in the case of Classes of
Compound Interest Securities of any Series because, prior to the retirement of
all Classes of such Series having higher priority in payment than such Compound
Interest Securities, interest is not payable, unless
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otherwise provided in the related Prospectus Supplement, but is accrued and
added to the principal of such Compound Interest Securities.
In addition, due to the priority of payments and the allocation of
losses, defaults experienced on the Mortgage Assets included in the Trust Estate
or Trust Fund for a Series of Special Allocation Securities may have a
disproportionate effect on a specified Class or Classes within such Series. If
so specified in the Prospectus Supplement for a Series of Special Allocation
Securities, on any Payment Date or Distribution Date, as applicable, for such
Series on which the principal balance of the related Mortgage Assets is reduced
due to losses on such Mortgage Assets (i) the amount of such losses shall be
allocated first to reduce the aggregate outstanding principal balance of the
Subordinate Securities and thereafter to reduce the aggregate outstanding
principal balance of the remaining Securities in the priority and manner
specified in such Prospectus Supplement until the aggregate outstanding
principal balance of each Class of Securities so specified has been reduced to
zero or paid in full, thereby reducing the amount of principal payable on each
such Class of Securities or (ii) such losses may be allocated in any other
manner set forth in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, such reductions of principal of
a Class of a Series will be allocated to the Holders of the Securities of such
Class pro rata in their proportion which the outstanding principal balance of
each Security of such Class bears to the aggregate outstanding principal balance
of all Securities of such Class.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
As specified in the related Prospectus Supplement with respect to each
Series, Credit Enhancement will be provided to the extent required by the rating
agencies requested to rate any Securities of such Series of Certificates. Credit
Enhancement with respect to a Series will be provided in one or more of the
forms described in the related Prospectus Supplement, including, but not limited
to, prioritization as to payments of one or more Classes of such Series, a
Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy, a bankruptcy
bond, one or more Reserve Funds, other insurance, guarantees and similar
instruments and agreements, or any combination thereof. Regardless of the form
of Credit Enhancement provided with respect to a Series, the amount of 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
Enhancement may provide only very limited coverage as to certain types of
losses, and may provide no coverage as to certain other types of losses. The
related Trustee will generally be permitted to reduce, terminate or substitute
all or a portion of the Credit Enhancement for a Series, if the applicable
rating agencies indicate that the then-current rating of the Securities of such
Series will not be adversely affected.
ORIGINAL ISSUE DISCOUNT; RESIDUAL CERTIFICATES
All of the Compound Interest Securities and Principal Only Securities
will be, and certain of the other Securities may be, issued with original issue
discount for federal income tax purposes. A Holder of a Security issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash, or a portion of the cash, attributable to such income.
Accrued but unpaid interest on the Compound Interest Securities generally will
be treated as original issue discount for this purpose. At certain rapid
Mortgage Asset prepayment rates, original issue discount may accrue on certain
Classes of Securities, including certain variable rate Regular Securities, that
may never be received as cash, resulting in a subsequent loss on such
Securities. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Securities -- Taxation of Regular Securities -- Original
Issue Discount" and "Certain Federal Income Tax Consequences -- Federal Income
Tax Consequences for Securities as to Which No REMIC Election Is Made --
Non-REMIC Bonds" and "-- Standard Certificates -- Premium and Discount --
Original Issue Discount" and "-- Stripped Certificates -- Taxation of Stripped
Certificates -- Original Issue Discount."
An election may be made to treat all or any portion of any Trust Estate
or Trust Fund or a portion thereof as a REMIC for federal income tax purposes.
Holders ("Residual Holders") of Securities representing the residual interests
in the related REMIC ("Residual Securities") must report on their federal income
tax returns their pro rata share of REMIC taxable income or loss. All or a
portion of the REMIC taxable income reportable by Residual Holders may be
treated as such holders' "excess inclusion" subject to special rules for federal
income tax purposes. The REMIC taxable income, and possibly the tax liabilities
of the Residual Holders, may exceed the cash distributions on the Residual
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Securities during certain periods. Residual Holders who are individuals may be
subject to limitations on the deductibility of servicing fees on the related
Mortgage Assets and other REMIC administrative expenses. Hence, Residual Holders
may experience an after-tax return that is significantly lower than would be
anticipated based upon the stated interest rate, if any, of their Residual
Securities. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Securities -- Taxation of Residual Securities."
FUNDS AVAILABLE FOR REDEMPTIONS OR REPURCHASES AT THE REQUEST OF HOLDERS
With respect to any Series for which the related Prospectus Supplement
provides for redemptions or repurchases of the Securities of such Series at the
request of Holders, there can be no assurance that amounts available for such
redemptions or repurchases, if any, for such Securities will be sufficient to
permit such Securities to be redeemed or repurchased within a reasonable time
after redemption or repurchase is requested, for reasons including the
following:
1. Scheduled principal payments on the related Mortgage Assets
generally will be minimal in the early years and will increase in the later
years of such Mortgage Assets. As a result, funds available to be applied to
redemptions or repurchases at the request of Holders, may be expected to be
limited in the early years and to increase during the later years of each
Series. Accordingly, the availability of funds for redemptions or repurchases of
Securities of any Series at the request of Holders will depend largely upon the
rates of prepayment of the related Mortgage Assets. See "Certain Yield,
Prepayment and Weighted Average Life Considerations" in the related Prospectus
Supplement.
2. Prepayments of principal on Mortgage Assets are less likely to occur
during periods of higher interest rates when it is more likely that requests for
redemption by Holders will be made. During periods in which prevailing interest
rates are higher than the interest rate paid on Securities that may be redeemed
at the request of Holders, greater numbers of such Securities are expected to be
tendered for redemption in order to take advantage of the higher interest rates
payable on other investments then available. During such periods, there will
likely also be a reduction in the rate of prepayments on the related Mortgage
Assets, thus limiting the funds available to satisfy requested redemption by
Holders.
3. As specified in the related Prospectus Supplement, certain Holders,
such as personal representatives of deceased Holders, may have certain
priorities as to redemption at the request of Holders.
BOOK ENTRY REGISTRATION
Because transfers and pledges of Book Entry Securities can be effected
only through book entries at a Clearing Agency through Clearing Agency
Participants, the liquidity of the secondary market for Book Entry Securities
may be reduced to the extent that some investors are unwilling to hold
Securities in book entry form in the name of Clearing Agency Participants and
the ability to pledge Book Entry Securities may be limited due to lack of a
physical certificate. Beneficial Owners of Book Entry Securities may, in certain
cases, experience delay in the receipt of payments of principal and interest
since such payments will be forwarded by the related Trustee to the Clearing
Agency who will then forward payment to the Clearing Agency Participants who
will thereafter forward payment to Beneficial Owners. In the event of the
insolvency of the Clearing Agency or of a Clearing Agency Participant in whose
name Securities are recorded, the ability of Beneficial Owners to obtain timely
payment and (if the limits of applicable insurance coverage by the Securities
Investor Protection Corporation are exceeded, or if such coverage is otherwise
unavailable) ultimate payment of principal and interest on Book Entry Securities
may be impaired.
NATURE OF DIRECT OR INDIRECT BACKING FOR SECURITIES
Only Agency Securities are guaranteed by an agency or instrumentality
of the United States and only the guarantee by GNMA of GNMA Certificates is
entitled to the full faith and credit of the United States. The guaranteed by
FNMA and FHLMC of FNMA Certificates and FHLMC Certificates, respectively, are
backed only by the credit of FNMA, a federally chartered privately owned
corporation, or by the credit of FHLMC, a federally chartered corporation
controlled by the Federal Home Loan Banks. See "Assets Securing or Underlying
the Securities - Agency Securities." Although payment of principal of, and
interest on, any Agency Security securing or underlying a Series will be
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guaranteed by either GNMA, FNMA or FHLMC, such guarantee will run only to such
Agency Security and will not guarantee the payment of principal or interest on
the Securities of such Series. The Prospectus Supplement for a Series with
respect to which the related Trust Estate or Trust Fund includes Non-Agency
Certificates or Private Mortgage-Backed Securities may describe certain
arrangements through which such Non-Agency Certificates or Private
Mortgage-Backed Securities and/or the related Underlying Mortgage Loans are
insured, guaranteed or otherwise backed, but any such guarantee will inure only
to the benefit of such Non-Agency Certificates or Private Mortgage-Backed
Securities or Underlying Mortgage loans, as the case may be, and will not
guarantee the payment of principal or interest on the Securities of such Series.
Any such backing may be subject to contingencies described in the applicable
Prospectus Supplement and will be limited to the credit and assets of the
particular specified insurer or guarantor and will not be entitled to the full
faith and credit of the United States or to any agency or instrumentality
thereof.
INSURANCE CONSIDERATIONS FOR CERTAIN NON-AGENCY CERTIFICATES AND PRIVATE
MORTGAGE-BACKED SECURITIES
Potential investors should be aware that (a) any decline in the value
of a property securing an Underlying Mortgage Loan with respect to Non-Agency
Certificate or Private Mortgage-Backed Security may result in a loss on such
Non-Agency Certificate or Private Mortgage-Backed Security if the Mortgagor on
such Underlying Mortgage Loan defaults and the loss is not covered by any
insurance policy, guarantee or comparable instrument, and (b) any hazard loss
not covered by a standard hazard insurance policy or any applicable special
hazard insurance policy or comparable instrument covering a defaulted Underlying
Mortgage Loan with respect to a Non-Agency Certificate or Private
Mortgage-Backed Security will result in a loss on such Non-Agency Certificate or
Private Mortgage-Backed Security. Any such loss on a Non-Agency Certificate or
Private Mortgage-Backed Security, if not covered by funds available in the
Reserve Fund, if any, or Collection Account, or by a guarantee, will result in a
loss to Holders.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Sellers of the Mortgage Assets to the Company and the Company will
intend that the transfers of such Mortgage Assets to the Company and, in turn to
the applicable Trust Funds or Owner Trusts, constitute sales rather than pledges
to secure indebtedness of the Seller. However, if a Seller of Mortgage Assets
were to become a debtor under the federal bankruptcy code, it is possible that a
creditor or trustee-in-bankruptcy of such Seller may argue that the sale thereof
by such Seller is a pledge rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Holders.
JUNIOR LIEN MORTGAGE LOANS; LIQUIDATION OF MORTGAGE LOANS
An overall decline in the residential real estate market could
adversely affect the values of the properties securing the Mortgage Loans,
including Title I Loans, with junior liens such that the outstanding principal
balances, together with any senior financing thereon, exceeds the value of the
Mortgaged Properties. Since Mortgage Loans secured by junior (i.e. second,
third, etc.) liens are subordinate to the rights of the beneficiaries under the
related senior deeds of trust or senior mortgages, such a decline would
adversely affect the position of the related junior beneficiary or junior
mortgagee before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of a Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated. As a result, the ratio
of the amount of the Mortgage Loan to the value of the Mortgaged Property may
exceed the ratio in effect at the time the Mortgage Loan was originated. Such an
increase may reduce the likelihood that, in the event of a default by the
borrower, liquidation or other proceeds will be sufficient to satisfy the junior
lien Mortgage Loan after satisfaction of any senior liens and the payment of any
liquidation expenses.
Even assuming that the Mortgaged Property provides adequate security
for the junior lien Mortgage Loan, substantial delay could be encountered in
connection with the liquidation of a defaulted Mortgage Loan and corresponding
delays in the receipt of related proceeds by Holders could occur. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) could reduce the proceeds available for payment to
Holders and thereby reduce the security for the junior lien Mortgage Loan. In
the event that any Mortgaged Properties fail to provide adequate security for
the related junior lien Mortgage Loan and any related Credit Enhancement has
been exhausted, Holders would experience a loss.
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Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust Estate or Trust Fund are relatively small, realizations net of
liquidation expenses may also be relatively small as a percentage of the
principal amount of the Mortgage Loans.
REMEDIES FOLLOWING DEFAULT
The market value of the Mortgage Assets securing or underlying a Series
will fluctuate as general interest rates fluctuate. Following an Event of
Default with respect to a Series of Bonds, there is no assurance that the market
value of the Mortgage Assets securing such Series of Bonds will be equal to or
greater than the unpaid principal and accrued interest due on the Bonds of such
Series, together with any other expenses or liabilities payable thereon. If the
Mortgage Assets securing a Series of Bonds are sold by the Trustee following an
Event of Default, the proceeds of such sale may be insufficient to pay in full
the principal of and interest on such Bonds, and any Classes on which principal
payments have previously been made may have, in the aggregate, a greater
proportion of their principal repaid than will Classes on which principal
payments have not previously been made. However, in certain events the Trustee
may be restricted from selling the Mortgage Assets securing a Series of Bonds.
See "The Indenture -- Events of Default."
In the event the principal of the Securities of a Series is declared
due and payable, the Holders of any such Securities issued at a discount from
par ("original issue discount") may be entitled, under applicable provisions of
the federal Bankruptcy Code, to receive no more than an amount equal to the
unpaid principal amount thereof less unamortized original issue discount
("accrued value"). There is no assurance as to how such accrued value would be
determined if such event occurred.
RISKS ASSOCIATED WITH MORTGAGED PROPERTIES NOT LOCATED IN THE UNITED STATES.
If so provided in the related Prospectus Supplement, the Trust Estate
or Trust Fund with respect to a Series may include Mortgage Loans or Multifamily
Loans that are, or Non-Agency Certificates backed by Mortgage Loans or
Multifamily Loans that are, secured by Mortgaged Properties not located in the
United States. The related Prospectus Supplement will set forth certain material
risks associated with such Mortgage Loans or Multifamily Loans which are
different and additional to those associated with similar properties in the
United States, including restrictions on enforcement of the rights of the holder
of the debt secured by such properties, currency exchange rate fluctuations,
currency exchange controls and general trends or conditions in the related real
estate market.
DEPOSITS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS
To the extent provided in the Prospectus Supplement for a Series, the
related Issuer or the Company may, subsequent to the issuance of such Series,
deposit additional Assets and withdraw Assets previously included in the related
Trust Estate or Trust Fund or Assets deposited in a Reserve Fund for such
Series. The effect of deposit or substitution of other Assets (i) for a Series
of Bonds may be to overcollateralize such Series, thus limiting the amount of
funds available for application to payments of principal on such Series and (ii)
for a Series of Bonds or Certificates, may be to alter the characteristics of
the Assets securing or underlying such Series, either of which may alter the
timing and amount of principal and/or interest payments or distributions on, and
the maturity of, or the date of the final distribution on, the Securities of
such Series. See "Assets Securing or Underlying the Securities -- Deposit,
Substitution and Withdrawal of Assets."
OTHER LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of the originators
of the Mortgage Loans and Contracts. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt recollection practices may apply to the
origination, servicing and collection of the Mortgage Loans and Contracts.
Depending on the
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provisions of the applicable law and the specified facts and circumstances
involved, violations of these laws, policies and principles may limit collection
of all or part of the principal of or interest on the Mortgage Loans and
Contracts, and may entitle the borrower to a refund of amounts previously paid.
See "Certain Legal Aspects of the Mortgage Assets."
The Mortgage Loans and Contracts are also subject to federal laws,
including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms thereof.
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, martial 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 borrower's credit experience. Violations
of certain provisions of these federal laws may limit the ability of the
Servicer or the Administrator, if any, to collect all or part of the principal
of or interest on the Mortgage Loans and Contracts and in addition could subject
the Servicer or the Administrator, if any, to damages and administrative
enforcement.
Unless otherwise specified in the related Prospectus Supplement, the
related Seller or the Company will be required to repurchase any Mortgage Loan
or Contract which, at the time of origination, did not comply with applicable
federal and state laws or regulations.
DESCRIPTION OF THE SECURITIES
GENERAL
The following summaries describe certain features common to each
Series. Such 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
Indenture or Agreement, as applicable, and the Prospectus Supplement relating to
each Series. When particular provisions or terms used or referred to in an
Indenture or Agreement are referred to herein, such provisions or terms shall be
as used or referred to in such Indenture or Agreement.
Neither the Bonds nor the Certificates will be insured or guaranteed by
GNMA, FNMA, FHLMC, any governmental entity or, unless otherwise specified in the
related Prospectus Supplement by any other person. Unless otherwise specified in
the related Prospectus Supplement, the Company's only obligations with respect
to a Series will be to obtain certain representations and warranties from each
Seller and to assign to the related Trustee the Company's rights with respect
thereto, and its obligations pursuant to certain representations and warranties
made by it. Unless otherwise specified in the Prospectus Supplement relating to
a Series, no affiliate of the Company will have any obligations with respect to
such Series.
The Mortgage Assets relating to a Series, other than the Agency
Securities, will not be, insured or guaranteed by any governmental entity or,
unless otherwise specified in the related Prospectus Supplement, by any other
person. With respect to a Series for which the related Trust Estate or Trust
Fund includes Mortgage Loans, Contracts or Multifamily Loans, to the extent that
delinquent payments on or losses in respect of defaulted Mortgage Loans,
Contracts or Multifamily Loans, are not advanced by the related Servicer, the
Administrator, if any, or any other entity or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in payments or
distributions to the Holders of one or more Classes of such Series, and such
losses will be borne by the Holders of one or more Classes of such Series.
In addition, with respect to a Series for which the related Trust
Estate or Trust Fund includes Mortgage Assets other than Mortgage Loans, late
payments on such Mortgage Assets may result in delays in payments or
distributions to the Holders of one or more Classes of such Series, and losses
on such Mortgage Assets will be borne by the Holders
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of one or more Classes of such Series, to the extent such late payments and
losses are not advanced or paid from any applicable Credit Enhancement.
THE BONDS - GENERAL
The Bonds will be issued in Series pursuant to an Indenture between the
applicable Issuer and the related Trustee named in the related Prospectus
Supplement, each such Indenture as supplemented by or as incorporated by
reference into a Series Supplement, if any, with respect to each Series. A form
of Indenture has been filed with the Commission as an Exhibit to the
Registration Statement of which Prospectus forms a part. A copy of the Indenture
or the Series Supplement for a Series, if any, will be filed with the Commission
as an Exhibit to a Current Report on Form 8-K to be filed with the Commission
within 15 days of issuance of such Series of Bonds.
The "Issuer" with respect to a Series of Bonds will be the Company or a
trust beneficially owned initially by the Company (each, a "Trust"). Each such
Trust will be created by an agreement (the "Deposit Trust Agreement") between
the Company, acting as depositor, and a bank, trust company or other fiduciary,
acting as owner trustee (the "Owner Trustee"), solely for the purpose of issuing
one or more Series of Bonds. The Company may sell or assign its beneficial
ownership interest in any Trust, in whole or in part, to another entity or
entities at the time of, or subsequent to, the issuance of any Bonds by such
Trust. Each Series of Bonds will be non-recourse obligations of the related
Issuer. The Issuer with respect to a Series of Bonds will not have, nor be
expected in the future to have, any significant assets available for payments on
such Series of Bonds other than the Assets included in the related Trust Estate.
Unless otherwise specified in the related Prospectus Supplement, each Series of
Bonds will be separately secured by the related Trust Estate, which will
constitute the only significant assets available to make payments on the Bonds
of such Series. Accordingly, the investment characteristics of a Series of Bonds
will be determined by the Assets included in the related Trust Estate and will
not be affected by the identity of the obligor with respect to such Series of
Bonds.
THE CERTIFICATES - GENERAL
The Certificates will be issued in Series pursuant to separate
Agreements between the Company, the Administrator, if any, and the related
Trustee named in the Prospectus Supplement. A form of Trust Agreement has been
filed as an Exhibit to the Registration Statement of which this Prospectus forms
a part. The Agreement relating to a Series of Certificates will be filed as an
Exhibit to a Report on Form 8-K to be filed with the Commission within 15 days
following the issuance of such Series of Certificates.
The "Issuer" with respect to a Series of Certificates will be the
related Trust Fund established by the Company pursuant to the related Agreement.
Each Series of Certificates will be entitled to distributions only from the
Assets included in the related Trust Fund and any other Assets pledged or
otherwise available for the benefit of the Holders of such Series as specified
in the related Prospectus Supplement. Accordingly, the investment
characteristics of a Series of Certificates will be determined by the Assets
included in the related Trust Fund. The Certificates of a Series will not
represent obligations of the Company, any Administrator, any Servicer or any
affiliate thereof.
FORM OF SECURITIES; TRANSFER AND EXCHANGE
As specified in the related Prospectus Supplement, the Securities of
each Series will be issued either in book entry form or fully registered
certificated form in the minimum denominations for each Class specified in the
related Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, the original Principal Balance of each Security will equal the
aggregate payments or distributions allocable to principal to which such
Security is entitled. Unless otherwise specified in the related Prospectus
Supplement, payments or distributions allocable to interest on each Security of
a Series that is not entitled to payments or distributions allocable to
principal will be calculated based on the Notional Principal Balance of such
Security. The "Notional Principal Balance" of a Security will be a notional
amount assigned to such security and will not evidence an interest in or
entitlement to payments or distributions allocable to principal, but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Securities, the Securities of each Series will be transferable and
exchangeable on a register to be maintained at the corporate trust office
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of the related Trustee or such other office or agency maintained for such
purposes by the Trustee in New York City. Unless otherwise specified in the
Prospectus Supplement with respect to a Series, under the related Indenture or
Agreement, the Trustee will be appointed initially as the "Registrar" for such
Series for purposes of maintaining books and records of the ownership and
transfer of the Securities of such Series. Unless otherwise specified in the
Prospectus Supplement with respect to a Series, no service change will be made
for any registration of transfer or exchange of Securities of such Series, but
payment of a sum sufficient to cover any tax or other governmental charge may be
required.
Under current law the purchase and holding of a Class of Securities
entitled only to a specified percentage of payments or distributions of either
interest or principal or a notional amount of either interest or principal on
the related Mortgage Assets or a Class of Securities entitled to receive
payments or distributions of interest and principal on the Mortgage Assets only
after payments or distributions to other Classes or after the occurrence of
certain specified events by or on behalf of any employee benefit plan or other
retirement arrangement (including individual retirement accounts and annuities,
Keogh plans and collective investment funds in which such plans, accounts or
arrangements are invested) subject to provisions of ERISA or the Code, may
result in "prohibited transactions" within the meaning of ERISA and the Code.
See "ERISA Considerations." Unless otherwise specified in the related Prospectus
Supplement, transfer of Securities of such a Class will not be registered unless
the transferee (i) executes a representation letter stating that it is not, and
is not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the related Trustee and the
Company that the purchase of Securities of such a Class by or on behalf of such
plan, account or arrangement is permissible under applicable law and will not
subject the related Trustee, the Administrator, if any, or the Company to any
obligation or liability in addition to those undertaken in the Agreement.
REMIC ELECTION
As to each Series, one or more elections may be made to treat all or
specified portions of the related Trust Estate or Trust Fund as a REMIC for
federal income tax purposes. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Indenture or
Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Company, the Administrator, if any, or another entity and may
only be made if certain conditions are satisfied. As to any such Series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Holders of such Series not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one or more of
the Classes of such Series will be designated as evidencing the "residual
interests" in the related REMIC or REMICs, as defined in the Code. All other
Classes of such Series will constitute "regular interests" in the related REMIC
or REMICs, as defined in the Code. As to each Series with respect to which a
REMIC election is to be made, the Administrator, if any, the related Trustee, a
Residual Holder or another person as specified in the related Prospectus
Supplement will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. The person so specified, unless otherwise provided in the
related Prospectus Supplement, will be entitled to reimbursement for any such
payment from the assets of the related Trust Estate or Trust Fund or, if
applicable, from any Residual Holder.
CLASSES OF SECURITIES
Each Series will be issued in one or more Classes. If specified in the
Prospectus Supplement, one or more Classes of a Series may be secured by (in the
case of Bonds), or evidence beneficial ownership interests in (in the case of
Certificates), separate groups of Assets included in the related Trust Estate or
Trust Fund or otherwise available for the benefit of such Series.
If specified in the related Prospectus Supplement, the Certificates of
a Series will have an aggregate original principal balance equal to the
aggregate unpaid principal balance of the Mortgage Assets included in the
related Trust Fund as of the close of business on the first day of the month of
creation of such Trust Fund (the "Cut-off Date") after deducting payments of
principal due on or before the Cut-off Date and, unless otherwise specified in
the related Prospectus Supplement, will bear interest in the aggregate equal to
the Pass-Through Rate for such Series. The "Pass-Through Rate" for a Series will
equal the rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees and any other amounts (including fees payable to the
Administrator, if any, for such Series) as are
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specified in the Prospectus Supplement. The original principal balance of the
Certificates of a Series and the Certificate Interest Rate on the Classes of
such Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each Class of Securities that is entitled to payments or distributions
allocable to interest will bear interest at the applicable Bond Interest Rate or
Certificate Interest Rate, which in either case may be a fixed rate (which may
be zero) or, in the case of Variable Interest Securities, may be a rate that is
subject to change from time to time (a) in accordance with a schedule, (b) in
reference to an index, or (c) otherwise in each case as specified in the related
Prospectus Supplement. Notwithstanding the foregoing, if so specified in the
related Prospectus Supplement, one or more Classes of a Series may be entitled
to receive payments or distributions of interest only to the extent of amounts
available to make such payments or distributions. One or more Classes of
Securities may provide for interest that accrues, but is not currently payable
("Compound Interest Securities"). With respect to any Class of Compound Interest
Securities, if specified in the related Prospectus Supplement, any interest that
has accrued but is not paid on a given Payment Date or Distribution Date will be
added to the aggregate principal balance of such Class on that Payment Date or
Distribution Date.
A Series may include one or more Classes entitled only to payments or
distributions (i) allocable to interest ("Interest Only Securities"), (ii)
allocable to principal ("Principal Only Securities"), and allocable as between
scheduled payments of principal and Principal Prepayments, as defined below
under "Payments or Distributions of Principal and Interest" or (iii) allocable
to both principal (and allocable as between scheduled payments of principal and
Principal Prepayments) and interest. A Series may include one or more classes as
to which payments or distributions will be allocated (i) on the basis of
collections from designated portions of the Assets included in the related Trust
Estate or Trust Fund, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of events, or (iv) otherwise, in each case as
specified in the related Prospectus Supplement. The timing and amounts of such
payments or distributions may vary among Classes, over time or otherwise, in
each case as specified in the related Prospectus Supplement.
A Series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities with respect to which payments or distributions of
principal are to be made in specified amounts on specified Payment Dates or
Distribution Dates, to the extent of funds available on such Payment Date or
Distribution Date. "Companion Securities" are Securities which receive payments
or distributions of all or a portion of any funds available on a given Payment
Date or Distribution Date which are in excess of amounts required to be applied
to payments or distributions on Scheduled Amortization Securities on such
Payment Date or Distribution Date. Because of the manner of application of
payments or distributions of principal to Companion Securities, the weighted
average lives of Companion Securities of a Series may be expected to be more
sensitive to the actual rate of prepayments on the Mortgage Assets in the
related Trust Estate or Trust Fund than will the Scheduled Amortization
Securities of such Series.
One or more Series of Securities may constitute Series of "Special
Allocation Securities," which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As more fully
described in the related Prospectus Supplement for a Series of Special
Allocation Securities, Special Allocation Securities are Securities for which
the timing and/or priority of payments or distributions of principal and/or
interest may favor one or more Classes of such Securities over one or more other
Classes of such Securities. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Unless otherwise
specified in the related Prospectus Supplement for a Series of Special
Allocation Securities, losses on the Assets included in the related Trust Estate
or Trust Fund may be disproportionately borne by one or more Classes of such
Series, and the proceeds and distributions from such Assets may be applied to
the payment in full of one or more Classes of such Series before the balance, if
any, of such proceeds are applied to one or more other Classes within such
Series. For example, Special Allocation Securities in a Series may be comprised
of one or more Classes of Senior Securities having a priority in right to
payments or distributions of principal and interest over one or more Classes of
Subordinated Securities, to the extent described in the related Prospectus
Supplement, as a form of Credit Enhancement. See "Credit Enhancement
- --Subordination". Typically, Subordinated Securities of a Series will carry a
rating by the rating agencies rating the Securities of such Series lower than
that of the Senior Securities of such Series. In addition, one or more Classes
of Securities of a Series ("Priority Securities") may be entitled to a priority
of payments or distributions of principal or
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interest from Assets included in the related Trust Estate or Trust Fund over
another Class of Securities of such Series ("Non-Priority Securities"), but only
after the exhaustion of other Credit Enhancement applicable to such Series.
Priority Securities and Non-Priority Securities nonetheless may be within the
same rating category.
PAYMENTS OR DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General
Payments or distributions of principal and interest on the Securities
of a Series will be made by the related Trustee, to the extent of funds
available therefor, on the related Payment Date or Distribution Date. Payments
or distributions will be made to the persons in whose names the Securities of
such Series are registered at the close of business on the dates specified in
the related Prospectus Supplement (each, a "Record Date"). With respect to
Securities other than Book Entry Securities, payments or distributions will be
made by check or money order mailed to Securityholders of such Series at their
addresses appearing in the books and records maintained by or on behalf of the
Issuer of such Series or, if specified in the related Prospectus Supplement, in
the case of Securities that are of a certain minimum denomination as specified
in the related Prospectus Supplement, upon written request by a holder of such
Series, by wire transfer or by such other means as are agreed upon with such
Securityholder; provided, however, that the final payment or distribution in
retirement of a Series (other than Book Entry Securities) will be made only upon
presentation and surrender of such Securities at the office or agency of the
related Trustee specified in the notice to Securityholders of such final
distribution. With respect to Book Entry Securities, such payments or
distributions will be made as described below under "Book Entry Registration"
and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
payments or distributions allocable to principal and interest on the Securities
of a Series will be made by the related Trustee out of, and only to the extent
of, funds in a separate account established and maintained under the related
Indenture or Agreement for the benefit of Securityholders of such Series (the
"Collection Account" with respect to a Series of Bonds and the "Certificate
Account" with respect to a Series of Certificates), including any funds
transferred from any related Reserve Fund. As between Securities of different
Classes of a Series and as between payments or distributions of principal (and,
if applicable, between payments or distributions of Principal Prepayments and
scheduled payments of principal) and interest, payments or distributions made on
any Payment Date or Distribution Date will be applied as specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, payments or distributions to any Class of Securities will
be made pro rata to all Securityholders of that Class. If so specified in the
related Prospectus Supplement, the amounts received by the Trustee as described
below under "Assets Securing or Underlying the Securities" will be invested in
the Permitted Instruments specified herein and in the related Prospectus
Supplement and all income or other gain from such investments will be deposited
in the related Collection Account or Certificate Account and will be available
to make payments or distributions on the Securities of the applicable Series on
the next succeeding Payment Date or Distribution Date in the manner specified in
the related Prospectus Supplement.
Payments or Distributions of Interest
Each Class of a Series (other than a Class of Principal Only
Securities) will accrue interest at the applicable Bond Interest Rate or
Certificate Interest Rate. One or more Classes may be entitled to receive
payments or distributions of interest only to the extent of amounts available to
make such payments or distributions. Interest on each Class will accrue during
the related Interest Accrual Period and will be paid or distributed on the
related Payment Date or Distribution Date. Interest on all Securities which bear
or receive interest, other than Compound Interest Securities, will be due and
payable on the Payment Dates, or distributed on the Distribution Dates, as
applicable, specified in the related Prospectus Supplement. However, failure to
pay or distribute interest on a current basis may not necessarily be an Event of
Default with respect to a particular Series or Class of Securities. Interest on
any Class of Compound Interest Securities will not be paid or distributed
currently, but will accrue and the amount of the interest so accrued will be
added to the principal thereof on each Payment Date or Distribution Date, as
applicable, until the date specified in the related Prospectus Supplement.
Principal Only Securities will not accrue, and will not be entitled to receive,
any interest. Upon maturity or earlier redemption of the Securities of any
Class, interest will be paid to the date specified in the related Prospectus
Supplement.
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Each payment of interest on each Class of Securities (or addition to
principal of a Class of Compound Interest Securities) on a Payment Date or
Distribution Date, as applicable, will include all interest accrued during the
related Interest Accrual Period. If the Interest Accrual Period for a Series
ends on a date other than a Payment Date or Distribution Date, as applicable,
for such Series, the yield realized by the Holders of such Securities may be
lower than the yield that would result if the Interest Accrual Period ended on
such Payment Date or Distribution Date. Additionally, if so specified in the
related Prospectus Supplement, interest accrued for an Interest Accrual Period
for one or more Classes may be calculated on the assumption that principal
payments or distributions (and additions to principal of the Securities), and
allocations of losses on the Mortgage Assets (if so specified in the related
Prospectus Supplement), are made on the first day of the preceding Interest
Accrual Period and not on the Payment Date or Distribution Date, as applicable,
for such preceding Interest Accrual Period when actually made or added. Such
method would produce a lower effective yield than if interest were calculated on
the basis of the actual principal amount outstanding.
A Series may include one or more Classes of Variable Interest Rate
Securities. With respect to each Class of Variable Interest Securities of a
Series, the related Prospectus Supplement will set forth: (i) the initial Bond
Interest Rate or Certificate Interest Rate, as applicable (or the manner of
determining the initial Bond Interest Rate or Certificate Interest Rate); (ii)
the formula, index or other method by which the Bond Interest Rate or
Certificate Interest Rate, as applicable, will be determined from time to time;
(iii) the periodic intervals at which such determination will be made; (iv) the
Maximum Variable Interest Rate, if any, and the Minimum Variable Interest Rate;
and (v) any other terms relevant to such Class of Securities.
Payments or Distributions of Principal
Principal payments or distributions on the Securities of a Series will
be made from amounts available therefor on each Payment Date or Distribution
Date, as applicable, in an aggregate amount determined as set forth in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series of Securities at the times, in the manner and in the priority set
forth in the related Prospectus Supplement.
Except with respect to Compound Interest Securities and Interest Only
Securities, unless specified otherwise in the related Prospectus Supplement, on
each Payment Date or Distribution Date, as applicable, principal payments or
distributions will be made on the Securities of a Series in an aggregate amount
determined in the related Prospectus Supplement. If a Series of Securities has a
Class of Compound Interest Securities, additional principal payments on the
Securities of such Series will be made on each Payment Date or Distribution
Date, as applicable, in an amount equal to the interest accrued, but not then
payable or distributable, on such Class of Compound Interest Securities for the
related Interest Accrual Period.
If so specified in the related Prospectus Supplement, on any Payment
Date or Distribution Date, as applicable, on which the principal balance of the
Mortgage Assets relating to a Series is reduced due to losses on such Mortgage
Assets, (i) the amount of such losses will be allocated first, to reduce the
aggregate outstanding principal balance of the Subordinate Securities of such
Series or other subordination, if any, and, thereafter, to reduce the aggregate
outstanding principal balance of the remaining Securities of such Series in the
priority and manner specified in such Prospectus Supplement until the aggregate
outstanding principal balance of each Class of such Securities of such Series so
specified has been reduced to zero or paid in full, thus reducing the amount of
principal payable or distributable on each such Class of Securities or (ii) such
losses may be allocated in any other manner set forth in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
such reductions of principal of a Class or Classes of Securities will be
allocated to the Holders of the Securities of such Class or Classes pro rata in
the proportion which the outstanding principal of each Security of such Class or
Classes bears to the aggregate outstanding principal balance of all Securities
of such Class.
If so provided in the related Prospectus Supplement, one or more
Classes of Senior Securities of a Series will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. Unless
otherwise provided in the related Prospectus Supplement, any such allocation of
principal prepayments to such Class or Classes will have the effect of
accelerating
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the amortization of such Senior Securities while increasing the interests
evidenced by the Subordinated Securities in rights to the benefit of the Assets
in the related Trust Estate or in the related Trust Fund. Increasing the
interests of the Subordinated Securities relative to that of the Senior
Securities is intended to preserve the availability of the subordination credit
enhancement provided to the Priority Securities by the Subordinated Securities.
See "Credit Enhancement -- Subordination."
Unscheduled Payments or Distributions
If specified in the related Prospectus Supplement, the Securities of a
Series will be subject to receipt of payments or distributions before the next
scheduled Payment Date or Distribution Date under the circumstances and in the
manner described below and in the related Prospectus Supplement. If applicable,
the related Trustee will be required to make such unscheduled payments or
distributions on the Securities of a Series on the date and in the amount
specified in the related Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the related Mortgage Assets,
low rates then available for reinvestment of such payments or both, the Trustee
determines, based on the assumptions specified in the related Indenture or
Agreement, that the amount anticipated to be on deposit in the Collection
Account or Certificate Account for such Series on the next related Payment Date
or Distribution Date, together with, if applicable, any amounts available to be
withdrawn from any related Reserve Fund or from any other Credit Enhancement
provided for such Series, may be insufficient to make required payments or
distributions on the Securities of such Series on such Payment Date or
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled payment or distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be paid or distributed as principal on the Securities of such Series
on the next Payment Date or Distribution Date. Unless otherwise specified in the
related Prospectus Supplement, all unscheduled payments or distributions will
include interest at the applicable Bond Interest Rate or Certificate Interest
Rate (if any) on the amount of the unscheduled payment or distribution allocable
to principal for the period and to the date specified in such Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all
payments or distributions allocable to principal in any unscheduled payment or
distribution made on the Securities of a Series will be made in the same
priority and manner as payments or distributions of principal on such Securities
would have been made on the next Payment Date or Distribution Date, and with
respect to Securities of the same Class, unscheduled payments or distributions
of principal will be made on a pro rata basis. Notice of any unscheduled payment
or distribution will be given by the Trustee prior to the date of such payment
or distribution.
REDEMPTION OF BONDS; TERMINATION OR REPURCHASE WITH RESPECT TO CERTIFICATES
To the extent provided in the related Prospectus Supplement, the Bonds
of any Class of a Series may be (i) redeemed at the request of holders of such
Bonds; (ii) redeemed at the option of the Company or another party specified in
the related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Bonds of a
Series may be redeemed will be described in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, the
Certificates of any Class of a Series may be (i) repurchased at the request of
holders of such Certificates; (ii) repurchased at the option of the Company, the
Administrator, if any, or another party specified in the related Prospectus
Supplement; or (iii) subject to special repurchase under certain circumstances.
In addition, if so specified in the Prospectus Supplement for a Series of
Certificates, the Company, the Administrator, if any, or another party specified
in the related Prospectus Supplement may, at its option, cause an early
termination of the Trust Fund for such Series by repurchasing all of the
Mortgage Assets from such Trust Fund, under the circumstances specified in such
Prospectus Supplement. The circumstances and terms under which the Certificates
of a Series may be repurchased and the circumstances and terms under which the
related Trust Fund may be terminated will be described in the related Prospectus
Supplement.
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BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Securities of
any Class of such Series may be issued in book entry form ("Book Entry
Securities") and held in the form of a single bond or certificate issued in the
name of a Clearing Agency ("Clearing Agency") registered with the Securities and
Exchange Commission or its nominee. Transfers and pledges of Book Entry
Securities may be made only through entries on the books of the Clearing Agency
in the name of brokers, dealers, banks and other organizations eligible to
maintain accounts with the Clearing Agency ("Clearing Agency Participants") or
their nominees. Clearing Agency Participants may also be Beneficial Owners (as
defined below) of Book Entry Securities.
Purchasers and other Beneficial Owners of Book Entry Securities
("Beneficial Owners") may not hold Book Entry Securities directly, but may hold,
transfer or pledge their ownership interest in the Book Entry Securities only
through Clearing Agency Participants. Additionally, Beneficial Owners will
receive all payments or distributions of principal and interest with respect to
Book Entry Securities, and, if applicable, may request redemption or repurchase
of Book Entry Securities, only through the Clearing Agency and the Clearing
Agency Participants. Beneficial Owners will not be registered holders of
Securities or be entitled to receive definitive certificates representing their
ownership interest in the Securities except under the limited circumstances, if
any, described in the related Prospectus Supplement. See "Special Considerations
- -- Book Entry Registration."
If Securities of a Series are issued as Book Entry Securities, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments or distributions of
principal and interest with respect to the Securities of such Series, and to
receive and transmit requests for redemption or repurchase with respect to such
Securities. Clearing Agency Participants with whom Beneficial Owners have
accounts with respect to such Book Entry Securities will be similarly required
to make book entry transfers and receive and transmit payments or distributions
and redemption or repurchase requests on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not be registered holders
of Securities and will not possess physical certificates, a method will be
provided whereby Beneficial Owners may receive payments or distributions,
transfer their interests, and submit redemption or repurchase requests.
ASSETS SECURING OR UNDERLYING THE SECURITIES
Each Series of Bonds will be secured by a pledge by the Issuer of such
Bonds to the related Trustee of the Assets included in the related Trust Estate,
and each Series of Certificates will represent a beneficial interest in the
Assets included in the related Trust Fund and transferred to the related Trustee
by the Company. Such Assets may include (i) Mortgage Assets and payments or
distributions thereon (subject, if specified in the Prospectus Supplement, to
certain exclusions); (ii) if specified in the Prospectus Supplement,
reinvestment income on such payments or distributions; (iii) with respect to a
Trust Estate or Trust Fund that includes Mortgage Loans, Contracts or
Multifamily Loans, all property acquired by foreclosure or deed in lieu of
foreclosure with respect to any such Mortgage Loan, Contract or Multifamily Loan
and certain rights of the Administrator, if any, and the Servicers under any
policies required to be maintained in respect of the related Mortgage Assets;
and (iv) if so specified in the Prospectus Supplement, one or more forms of
Credit Enhancement. The primary Assets of any Trust Estate or Trust Fund will
consist of Mortgage Assets. The Company expects to acquire Mortgage Assets from
various sellers (each, a "Seller"), which may be affiliates of the Company, in
open market or privately negotiated transactions. Such acquisitions may be made
through an affiliate of the Company.
Mortgage Assets may be acquired by the Company from affiliates of the
Company. The following is a brief description of the Mortgage Assets expected to
be included in the Trust Estates and Trust Funds. If specific information
respecting the Mortgage Assets is not known at the time a Series is initially
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Series. A copy of the
related Indenture or Agreement with respect to each Series will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the related Trustee specified in the related Prospectus Supplement. A
schedule of the Mortgage Assets relating to each Series, will be attached to the
related Indenture or Agreement delivered to the Trustee upon delivery of such
Series.
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MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classification of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If so
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by private, non-profit, cooperative housing corporations
("Cooperatives") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings, or the Mortgage Loans may be secured by junior liens on
the related mortgaged properties, including Title I Loans. The Mortgaged
Properties securing the Mortgage Loans may be located in or outside of the
United States, and may include investment properties and vacation and second
homes. Each Mortgage Loan will be selected by the Company for inclusion in a
Trust Estate or Trust Fund from among those acquired by the Company or
originated or acquired by one or more affiliates of the Company, including newly
originated loans.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans included in the Trust Estate or Trust Fund for a Series or
underlying a Non-Agency Certificate included in the Trust Estate or Trust Fund
for a Series will be "conventional" mortgage loans, that is, they will not be
insured or guaranteed by any governmental agency, the principal and interest on
such Mortgage Loans will be payable on the first day of each month, and the
interest will be calculated based on a 360-day year of twelve 30-day months.
When full payment is made on a Mortgage Loan during a month, the mortgagor is
charged interest only on the days of the month actually elapsed up to the date
of such prepayment, at a daily interest rate that is applied to the principal
amount of the loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust
Estate or Trust Fund for a Series or underlying a Non-Agency Certificate
included in the Trust Estate or Trust Fund for a Series will be described in the
related Prospectus Supplement and may include any of the following features or
combinations thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for period of time or
under certain circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. 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
loan for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period of time
or for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged Property or
another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan 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. Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may change
from period to period. Mortgage Loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout periods").
Certain loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
such subsequent prepayment. Other loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time periods. The 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
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certain transfers of the related mortgaged property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards of the
Company.
With respect to a Series for which the related Trust Estate or Trust
Fund includes Mortgage Loans, or for which Mortgage Loans underlie the
Non-Agency Certificates included in the related Trust Estate or Trust Fund, the
related Prospectus Supplement may specify, among other things, information
regarding the interest rates (the "Mortgage Rates"), the average principal
balance and the aggregate principal balance of such Mortgage Loans, the years of
origination and original principal balances and the original loan-to-value
ratios of such Mortgage Loans.
Unless otherwise specified in the Prospectus Supplement, the
"Loan-to-Value Ratio" of any Mortgage Loan will be determined by dividing the
amount of the loan by the "Original Value" of the related mortgaged property.
The principal amount of the "loan," for purposes of computation of the
Loan-to-Value Ratio of any Mortgage Loan, will include any part of an
origination fee that has been financed. In some instances, it may also include
amounts which the seller or some other party to the transaction has paid to the
mortgagor, such as minor reductions in the purchase price made at the closing.
The "Original Value" of a mortgaged property is (a) in the case of any newly
originated mortgage loan, the lesser of (i) the value of the mortgaged property,
based on an appraisal thereof acceptable to the Company and (ii) the selling
price, and (b) in the case of any mortgage loan used to retire a previous
mortgage loan, the value of the mortgaged property, based on an appraisal
thereof acceptable to the Company.
There can be no assurance that the Original Value will reflect actual
real estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Loans become equal to or
greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than those
now generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real estate values) may affect
the timely and ultimate payment by mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
AGENCY SECURITIES
Government National Mortgage Association (GNMA)
GNMA is a wholly-owned corporate instrumentality of the United States
within the United States Department of Housing and Urban Development. Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of
mortgage loans insured by the Federal Housing Administration ("FHA Loans"), or
guaranteed by the Farmers Home Administration ("FmHA Loans") or partially
guaranteed by the Veterans' Administration ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate relating to a series (which
may be issued under either the GNMA I program or the GNMA II program, as
referred to by GNMA) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other financial
concern ("GNMA Issuer") approved by GNMA or approved by FNMA as a
seller-servicer of FHA Loans, FmHA Loans and/or VA Loans. Each GNMA Certificate
will represent a fractional undivided interest in a pool of mortgage loans which
may include FHA Loans, FmHA Loans and/or VA Loans. Each such mortgage loan is
secured by a one- to four-family residential property. Each such GNMA
Certificate will provide for the payment by or on behalf of the GNMA Issuer to
the registered holder of such GNMA Certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA Loan, FmHA
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Loan or VA Loan underlying such GNMA Certificate, less the applicable servicing
and guarantee fee which together equal the difference between the interest on
the FHA Loan, FmHA Loan or VA Loan and the pass-through rate on the GNMA
Certificate. In addition, each payment will include proportionate pass-through
payments of any prepayments of principal on the FHA Loans, FmHA Loans or VA
Loans underlying such GNMA Certificate and liquidation proceeds in the event of
a foreclosure or other disposition of any such FHA Loans, FmHA Loans or VA
Loans.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States.
Each such GNMA Certificate will have an original maturity of not more
than 30 years (but may have an original maturity of substantially less than 30
years). GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guarantee agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on the GNMA Certificate, even if the payments received by the GNMA
Issuer on the mortgage loans underlying each such GNMA Certificate are less than
the amounts due on such GNMA Certificate.
If a GNMA Issuer is unable to make payments on a GNMA Certificate as
such payments become due, it is required promptly to notify GNMA and request
GNMA to make such payments. Upon such notification and request, GNMA will make
such payments directly to the registered holder of the GNMA Certificate. In the
event no payment is made by a GNMA Issuer and the GNMA Issuer fails to notify
and request GNMA to make such payment, the holder of the GNMA Certificate will
have recourse only against GNMA to obtain such payment. In the case of GNMA
Certificates issued in definitive form, the Trustee, as registered holder of the
GNMA Certificates pledged to secure a series of Bonds, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
In the case of GNMA Certificates issued in book-entry form, The Participants
Trust Corporation ("PTC"), or its nominee, will have the right to proceed
against GNMA in such event.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on each GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate relating
to a series will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans of VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installment on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans, FmHA Loans or VA Loans underlying a GNMA Certificate relating to
a series or any other early recovery of principal on such loan will be passed
through to the Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated
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interest payments that, during the early years of such mortgage loans, will be
less than the amount of stated interest on such mortgage loans. The interest not
so paid will be added to the principal of such graduated payment mortgage loans
and, together with interest thereon, will be paid in subsequently years. The
obligations of GNMA and of a GNMA Issuer will be the same irrespective of
whether the GNMA Certificates relating to a series of Certificates are backed by
graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates included in the Trust Estate or Trust Fund for a
Series or underlying a Non-Agency Certificate included in the Trust Estate or
Trust Fund for a Series may be held in book-entry form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Estate or Trust Fund for a Series or underlying a
Non-Agency Certificate included in the Trust Estate or Trust Fund for a Series
may be held on deposit at PTC, a limited purpose trust company organized under
the banking law of the State of New York. PTC operates a private sector,
industry-owned depository and settlement facility for the book-entry transfer of
interests in GNMA Certificates. Distributions of principal of and interest on
each GNMA Certificate held through PTC will be credited by PTC to the PTC
participant on whose account the GNMA Certificate is credited.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Estate or Trust Fund for a Series or underlying a
Non-Agency Certificate included in the Trust Estate or Trust Fund for a Series
may be backed by multifamily mortgage loans having the characteristics specified
in such Prospectus Supplement.
Federal National Mortgage Association (FNMA)
FNMA is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act (the
"Charter Act"). FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately-managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will generally be between 50 basis points and 250 points greater than the annual
FNMA Certificate pass-through rate. If specified in the related Prospectus
Supplement, FNMA Certificates included in the Trust Estate or Trust Fund with
respect to a Series or underlying a Non-Agency Certificate included in the Trust
Estate or Trust Fund for a Series may be backed by adjustable rate mortgages.
Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the Mortgage Loans underlying such FNMA
Certificate due during the period beginning on the second day of the month prior
to the month in which the scheduled
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monthly installment on such FNMA Certificate is due and ending on the first day
of such month in which the scheduled monthly installment on such FNMA
Certificate is due. Such regular monthly installments on each such FNMA
Certificate will be distributed to the holder of record on the 25th day of each
month. Any principal prepayments on the mortgage loans underlying any FNMA
Certificate included in the Trust Estate or Trust Fund with respect to a Series
or underlying a Non-Agency Certificate included in the Trust Estate or Trust
Fund for a Series or any other early recovery of principal on such mortgage
loans will be passed through to the holder of record of such FNMA Certificate on
the 25th day of the month next following such prepayment or recovery and, in
turn, a portion of such amounts will be paid or distributed to Holders of such
Series, secured thereby, as additional principal payments.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
If specified in the related Prospectus Supplement, FNMA Certificates
included in the Trust Estate or Trust Fund for a Series or underlying a
Non-Agency Certificate included in the Trust Estate or Trust Fund for a Series
may be backed by multifamily mortgage loans having the characteristics specified
in such Prospectus Supplement.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks.
FHLMC was established primarily for the purpose of increasing the availability
of mortgage credit for the financing of urgently needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase of
first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so purchased
in the form of mortgage securities, primarily FHLMC Certificates. FHLMC is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the related Prospectus Supplement,
mortgage loans underlying the FHLMC Certificates relating to a series will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented
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by such FHLMC Certificate, whether or not received. FHLMC also guarantees to
each registered holder of a FHLMC Certificate collection by such holder of all
principal on the underlying mortgage loans, without any offset or deduction, to
the extent of such holder's pro rata share thereof, but does not, except if and
to the extent specified in the Prospectus Supplement for a Series, guarantee the
timely payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC
guarantees the timely payment of principal based on the difference between the
pool factor published in the month preceding the month of distribution and the
pool factor published in such month of distribution. Pursuant to its guarantees,
FHLMC indemnifies holders of FHLMC Certificates against any diminution in
principal by reason of charges for property repairs, maintenance and
foreclosure. FHLMC may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than (i) 30 days following foreclosure sale, (ii) 30 days
following payment of the claim by any mortgage insurer, or (iii) 30 days
following the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding the
collection of principal after default on the mortgage loans underlying FHLMC
Certificates, including the timing of demand for acceleration, FHLMC reserves
the right to exercise its judgment with respect to the mortgage loans in the
same manner as for mortgage loans which it has purchased but not sold. The
length of time necessary for FHLMC to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
In addition to FHLMC's guarantees of timely payment of interest and
ultimate collection of principal, FHLMC guarantees with respect to FHLMC
Certificates representing certain qualifying mortgage loans the timely payment
by each mortgagor of the monthly principal scheduled to be paid under the
amortization schedule applicable to each such mortgage loan ("Scheduled
Principal"). Servicers of the mortgage loans comprising these FHLMC Certificates
are required to pay Scheduled Principal to FHLMC whether or not received from
the mortgagors. FHLMC, in turn, guarantees to pay Scheduled Principal to each
registered holder of such FHLMC Certificates whether or not received from the
servicers. FHLMC monthly payments of Scheduled Principal are computed based upon
the servicer's monthly report to FHLMC of the amount of Scheduled Principal due
to be paid on the related mortgage loans. The Prospectus Supplement for each
Series for which the related Trust Estate or Trust Fund includes FHLMC
Certificates or for which the related Trust Estate or Trust Fund includes
Non-Agency Certificates backed by FHLMC Certificates will set forth the nature
of FHLMC's guarantee with respect to scheduled principal payments on the
mortgage loans in the pools represented by such FHLMC Certificates.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first day
of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, a Federal Reserve Bank which maintains book-entry accounts with
respect thereto will make payments of interest and principal each month to
holders in accordance with the holders' instructions. The first payment to a
holder of a FHLMC Certificate will normally be received by the 15th day of the
second month following the month in which the purchaser became recognized as the
holder of such FHLMC Certificate. Thereafter, payments will normally be received
by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC,
including its Cash Program or Guarantor Program. Under FHLMC's Cash Program, the
pooled mortgage loans underlying a FHLMC Certificate are purchased for cash from
a number of sellers. With respect to FHLMC Certificate Pools formed prior to
June 1, 1987, under the Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate may
exceed the interest rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which, when
applied to the interest rate of the mortgage loans purchased, results in the
yield (expressed
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as a percentage) required by FHLMC. The required yield, which includes a minimum
servicing fee retained by the servicer, is calculated using the outstanding
principal balance of the mortgage loans, an assumed term and a prepayment period
as determined by FHLMC. No mortgage loan is purchased by FHLMC at greater than
100% of its outstanding principal balance. Thus, the range of interest rates on
the mortgage loans in a FHLMC Certificate Pool formed prior to June 1987 under
the Cash Program will vary since mortgage loans are purchased and identified to
a FHLMC Certificate Pool based upon their yield to FHLMC rather than on the
interest rates on the mortgage loans. With respect to FHLMC Certificate Pools
formed on or after June 1, 1987, the range of interest rates on the mortgage
loans and participations in a FHLMC Certificate Pool which is comprised of 15-
or 30-year fixed-rate single family mortgage loans bought by FHLMC under the
Cash Program will be restricted to one percentage point. In addition, the
minimum interest rate on any mortgage loan in a FHLMC Certificate Pool will be
greater than or equal to the annual pass-through rate on the related FHLMC
Certificate, and the maximum interest rate will not be more than two percentage
points above such pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the Guarantor
Program, the range between the lowest and highest annual interest rates on the
mortgage loans in a FHLMC Certificate Pool may not exceed two percentage points.
For some FHLMC Certificates issued pursuant to purchase contracts under the
Guarantor Program on or after September 1, 1987, the range of the interest rates
on the mortgage loans in a FHLMC Certificate Pool will not exceed one percentage
point.
If specified in the related Prospectus Supplement, FHLMC Certificates
included in the Trust Estate or Trust Fund for a Series or underlying a
Non-Agency Certificate included in the Trust Estate or Trust Fund for a Series
may be backed by multifamily mortgage loans having the characteristics specified
in such Prospectus Supplement.
Stripped Agency Securities
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain GNMA Certificates, FNMA Certificates, FHLMC
Certificates, or other Agency Securities. The underlying securities will be held
under a trust agreement by GNMA, FNMA or FHLMC each as trustee, or by another
trustee named in the related Prospectus Supplement. FHLMC, FNMA or GNMA will
guarantee each stripped Agency Security to the same extent as such entity
guarantees the underlying securities backing such stripped Agency Security,
unless otherwise specified in the related Prospectus Supplement.
Other Agency Securities
If specified in the related Prospectus Supplement, a Trust Estate or
Trust Fund may include, or Non-Agency Certificates included in a Trust Estate or
Trust Fund may be backed by, other mortgage pass-through or participation
certificates issued or guaranteed by GNMA, FNMA or FHLMC, such as FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multiclass Mortgage
Participation Certificates. The characteristics of any such mortgage
pass-through or participation certificates will be described in such Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be included in a Trust Estate or Trust Fund or may back
Non-Agency Certificates.
NON-AGENCY CERTIFICATES
Each Non-Agency Certificate will evidence an undivided interest in
Agency Securities, a Mortgage Pool, a Contract Pool or a Multifamily Loan Pool.
Unless otherwise specified in the Prospectus Supplement, the Non-Agency
Certificates will have the characteristics described herein. Non-Agency
Certificates backed directly by Mortgage Loans, Contracts, or Multifamily Loans
will be issued pursuant to a pooling and administration agreement (the
"Non-Agency
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Pooling and Administration Agreement") between the Company, as the entity
forming such Non-Agency Certificates, an administrator (the "Non-Agency
Administrator") and a trustee acting under such Pooling and Administration
Agreement (the "Certificate Trustee"). Non-Agency Certificates backed by Agency
Securities may be issued pursuant to a Funding Agreement (the "Funding
Agreement") between the Company, as the entity forming such Non-Agency
Certificates and a trustee acting under such Funding Agreement (the "Funding
Agreement Trustee"). Non-Agency Certificates will be formed by the Company in
connection with the issuance of the related Series of Securities for purposes of
ease of administration of the assets underlying such Non-Agency Certificates.
Non-Agency Certificates themselves will not have been and will not be publicly
offered. It is expected that non-Agency Certificates will primarily be used by
the Company to back Series of Bonds, as opposed to Certificates.
The Mortgage Loans, Contracts, and Multifamily Loans directly backing
the Non-Agency Certificates issued under a Non-Agency Pooling and Administration
Agreement will be serviced by one or more loan servicing institutions (the
"Non-Agency Servicers") pursuant to servicing agreements between each Servicer
and the Company (each a "Non-Agency Servicing Agreement"). All of the Company's
right, title and interest in the Servicing Agreements with respect to the
Mortgage Loans, Contracts, and Multifamily Loans will be assigned to the
Certificate Trustee. Pursuant to the Non-Agency Pooling and Administration
Agreement, the Servicers of the Mortgage Loans, Contracts, and Multifamily Loans
covered thereby will be required to deposit with the Certificate Trustee all
collections received by such Servicers on the Mortgage Loans, Contracts, and
Multifamily Loans (net of a servicing fee to be retained by the Non-Agency
Servicers). Monthly distributions of the principal and interest (adjusted to the
pass-through rate borne by such Non-Agency Certificate) components of such
collections will be made to the Trustee for the Bonds of the applicable Series
for deposit into the Collection Account. The Mortgage Loans, Contracts, and
Multifamily Loans underlying any such Non-Agency Certificates may be covered by
(i) individual policies of primary mortgage insurance insuring
against all or a portion of any foreclosure losses on the particular
Mortgage Loans, Contracts, and Multifamily Loans covered thereby;
(ii) a pool insurance policy insuring against foreclosure
losses on all of the Mortgage Loans, Contracts, and Multifamily Loans
in the underlying pool up to a specified limit of liability;
(iii) a policy of special hazard insurance insuring against
losses from causes not covered by standard fire and extended coverage
policies of insurance, and/or
(iv) such other policies of insurance or other forms of
support (including, without limitation, obligations to advance
delinquent payments and overcollateralization) as shall be specified in
the Prospectus Supplement for a Series which is secured or backed by
Non-Agency Certificates backed directly by Mortgage Loans, Contracts,
or Multifamily Loans, including, if applicable, any insurance for Title
I Loans under the Title I Program.
All of the Company's rights, title and interest in the Agency
Securities directly backing Non-Agency Certificates issued under a Funding
Agreement will be assigned to the Funding Agreement Trustee. Pursuant to the
Funding Agreement, distributions on the Agency Securities will be collected by
the Funding Agreement Trustee, and monthly payments of the principal and
interest (adjusted to the pass-through rate borne by the Non-Agency
Certificates) components of such distributions will be made to the Trustee for
the applicable Series for deposit into the Collection Account. Each of the
Agency Securities sold or assigned to the Funding Agreement Trustee will have
the benefit of the applicable guarantees and other attributes described
hereinabove under "GNMA Certificates," "FNMA Certificates" and "FHLMC
Certificates," as the case may be, and in the related Prospectus Supplement for
the Series which is secured or backed by Non-Agency Certificates backed by
Agency Securities.
Any default by any insurer under a policy of insurance covering a
Mortgage Loan, Contracts, or Multifamily Loans, any loss or losses in excess of
policy limits, any failure by a Non-Agency Servicer or other obligor to make
advances in respect of delinquent payments or any loss occasioned by an
uninsured cause will adversely affect distributions to the Trustee for the
related Series and, as a consequence, may result in there being insufficient
funds in the related Collection Account with which to make required payments or
distributions of principal and interest on the Securities of such Series.
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MULTIFAMILY LOANS
Each pool of Multifamily Loans included in the Trust Estate or Trust
Fund with respect to a Series or underlying a Non-Agency Certificate included in
the Trust Estate or Trust Fund for a Series (the "Multifamily Loan Pool") will
consist of Conventional Multifamily Loans or FHA-Insured Multifamily Loans
secured by mortgages or deeds of trust or other similar security instruments
creating a first lien on rental apartment buildings or projects containing five
or more units, including, but not limited to, high-rise, mid-rise and garden
apartments or Multifamily Loans secured by apartment buildings owned by
cooperative housing corporations. The Company expects that these loans will have
been originated by mortgagees in the ordinary course of their real estate
lending activities. Each Multifamily Loan Pool will be composed of Multifamily
Loans bearing interest at the annual fixed or adjustable rates of interest
specified in the Prospectus Supplement.
The related Prospectus Supplement may specify for the Multifamily Loans
contained in the related Multifamily Loan Pool, among other things, the dates of
origination of the Multifamily Loans; the interest rates on the Multifamily
Loans, if fixed rate, and in the case of Adjustable Multifamily Loans, the
initial Adjustable Multifamily Rates, the index or formula, if any, used to
determine the Adjustable Multifamily Rate, the margin or margins, if any, to be
added or subtracted from the Index to calculate the Multifamily Loan Rate, and
the maximum and minimum percentage adjustment, if any, for the life of the
Multifamily Loan and on any annual basis, and the frequency of adjustment; the
number of Multifamily Loans in the Multifamily Loan Pool; the original loan
amounts or range of original loan amounts of Multifamily Loans contained in the
Multifamily Loan Pool; the original Loan-to-Value Ratio on a weighted average
basis of the Multifamily Loans contained in the Multifamily Loan Pool; and the
original and remaining terms of the loans on a weighted average basis. The
related Prospectus Supplement may also specify the number and type of units
contained in each property secured by a Multifamily Loan contained in a
Multifamily Loan Pool, the loan amount per unit for each project, the percentage
of units in each property occupied as a specified date, the appraised value of
each property and whether each property is subject to local rent control
ordinances. The related Prospectus Supplement may set forth the types and
locations of properties securing the Multifamily Loans, the balloon, principal
amortization or interest only terms, if any, and whether the Multifamily Loan
financed the acquisition or rehabilitation of the underlying properties or
refinanced prior indebtedness. Unless otherwise specified in the related
Prospectus Supplement, the properties securing the Multifamily Loans will be
located in one or more states in the United States, the District of Columbia, or
Puerto Rico.
Certain of the Multifamily Loans may be secured by apartment buildings
owned by Cooperatives. The Cooperative apartment building and the land under the
building will be owned by a private, non-profit cooperative. The Cooperative
owns all of the apartment units in the building and all common areas. The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the cooperative representing such tenant-stockholder's pro
rata share of the cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Such
payments to the Cooperative are in addition to any payments of principal and
interest the tenant-stockholder must make on any loans of 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. The Cooperative's ability to meet debt
service obligations on the Multifamily Loans, as well as all other operating
expenses, will be dependent in large part on the receipt of maintenance payments
from the tenant-stockholders, as well as any rental income from units or
commercial assessments on the tenant-stockholders. The Cooperative's ability to
pay the principal amount of the Multifamily Loan at maturity depends primarily
on its ability to pay the principal amount of the Multifamily Loan. The Company,
the Seller and the Administrator or Non-Agency Administrator, if any, will have
no obligation to provide refinancing for the Multifamily Loans.
CONTRACTS
Each pool of Contracts included in the Trust Estate or Trust Fund with
respect to a Series or underlying a Non-Agency Certificate included in the Trust
Estate or Trust Fund for a Series (the "Contract Pool") will consist of
manufactured housing conditional sales contracts and installment loan agreements
or participation interests therein
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(collectively, "Contracts"). As specified in the related Prospectus Supplement,
Contracts may either be secured by a Manufactured Home (a "Secured Contract") or
unsecured (an "Unsecured Contract"). The Contracts may be conventional
manufactured housing contracts or contracts insured by the FHA, including Title
I Contracts, or partially guaranteed by the VA. Each Contract is secured by a
Manufactured Home. Unless otherwise specified in the related Prospectus
Supplement, the Contracts included in the Trust Estate or Trust Fund with
respect to a Series will be fully amortizing and will bear interest at a fixed
annual percentage rate ("APR").
The Manufactured Homes securing the Secured Contracts 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 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 requires 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." Moreover, if an election is made to treat a Trust Estate or
Trust Fund including Contracts as a REMIC as described in "Certain Federal
Income Tax Consequences -- Certain Income Tax Consequences for REMIC
Securities," the related Manufactured Homes will have a minimum of 400 square
feet of living space and a minimum width in excess of 102 inches.
Unless otherwise specified in the Prospectus Supplement with respect to
a Series for which the related Trust Estate or Trust Fund includes Contracts or
with respect to which the related Trust Estate or Trust Fund includes Non-Agency
Certificates backed by Contracts, for purposes of calculating the loan-to-value
ratio of a Secured Contract relating to a new Manufactured Home, the "Collateral
Value" is 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 Collateral Value of a used Manufactured Home
is the least of the sales price, the appraised value, and the National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, 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 balance as
of the Cut-off Date and the average outstanding principal balance; the
outstanding principal balances of the Contracts included in the Contract Pool;
and the original maturities of the Contracts and the last maturity date of any
Contract.
The Unsecured Contracts included in the Trust Estate or Trust Fund for
a Series of Securities will not constitute a material concentration of the
assets of such Trust Estate or Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of
Underlying Mortgage Loans or certain mortgage-backed securities, or (b)
collateralized mortgage obligations secured by Underlying Mortgage Loans or
certain mortgage-backed securities. Private Mortgage-Backed Securities may
include stripped mortgage-backed securities representing an undivided interest
in all or a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain Underlying Mortgage
Loans or on certain underlying mortgage-backed securities. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement").
Generally, the seller/servicer of the Underlying Mortgage Loans will have
entered into the PMBS Agreement with the trustee under such PMBS Agreement (the
"PMBS Trustee"). The PMBS Trustee or its agent, or
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a custodian, will possess the Underlying Mortgage Loans relating to such Private
Mortgage-Backed Security. Underlying Mortgage Loans relating to a Private
Mortgage-Backed Security will be serviced by a servicer (the "PMBS Servicer")
directly or by one or more subservicers who may be subject to the supervision of
the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities (the "PMBS
Issuer") will be a financial institution or other entity engaged generally in
the business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the related Prospectus Supplement, the PMBS Issuer may be the
Company or an affiliate of the Company. The obligations of the PMBS Issuer will
generally be limited to certain representations and warranties with respect to
the assets conveyed by it to the related trust. Unless otherwise specified in
the related Prospectus Supplement, neither the PMBS Issuer nor any agency or
instrumentality of the United States nor any other person will have guaranteed
any of the assets conveyed to the related trust or any of the Private
Mortgage-Backed Securities issued under the PMBS Agreement.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
The Underlying Mortgage Loans relating to the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such Underlying
Mortgage Loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a Cooperative and the related
shares issued by such Cooperative.
Credit support in the form of reserve funds, subordination of other
private mortgage certificates issued under the PMBS Agreement, letters of
credit, surety bonds, insurance policies or other types of credit support may be
provided with respect to the Underlying Mortgage Loans relating to the Private
Mortgage-Backed Securities or with respect to the Private Mortgage-Backed
Securities themselves.
The Prospectus Supplement for a Series for which the related Trust
Estate or Trust Fund includes Private Mortgage-Backed Securities will describe
such Private Mortgage-Backed Securities and will specify certain characteristics
of the mortgage loans underlying the Private Mortgage-Backed Securities.
CHARACTERISTICS OF AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and the Private Mortgage-Backed Securities may
include component securities ("CPTs"), floaters ("FLTs"), inverse floaters
("INVs"), interest only securities ("IOs"), principal only securities ("POs"),
planned amortization classes ("PACs"), targeted amortization classes ("TACs"),
residual interest securities ("Residuals"), accrual securities ("Zs"), and other
types of securities, including securities which combine the characteristics of
two or more of such types of securities. The exact types and characteristics of
such securities will be set forth in the related Prospectus Supplement for a
Series for which the related Trust Estate or Trust Fund includes such
securities.
A CPT is a security that consists of multiple payment components which
have differing principal and/or interest characteristics. The payment
characteristics of a CPT will reflect a combination of the payment
characteristics of such components.
An FLT has an interest rate that varies directly with an objective
index such as LIBOR, i.e., as LIBOR increases, the FLT interest rate will
increase.
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An INV has an interest rate that varies inversely with an objective
index such as LIBOR, i.e., as LIBOR increases, the INV interest rate will
decrease. The interest rate on a INV might be expressed as a multiple of the
index, such as 35% - (3 x LIBOR).
An IO pays only interest or primarily interest and pays no
disproportionately small amount of principal. A PO pays principal only and no
interest.
A PAC is a security with respect to which principal payments are made
in predetermined amounts on specified payment dates to the extent funds are
available on such payment dates. Generally, a PAC will adhere to its payment
schedule if the underlying mortgage loans prepay at a constant prepayment
assumption in the "planned range" between certain specified prepayment rates.
The cash flow of a PAC is thus relatively stable if prepayments are within such
"planned range." Payment stability in a PAC is necessarily offset by instability
in other classes of related mortgage-backed securities, which are said to
"support" the more stable classes. Such "support classes" are likely to be much
more sensitive to prepayments on the underlying mortgage loans than the classes
they support or such mortgage loans.
A TAC, like a PAC, is designed to provide more stable cash flows, but
is more likely than a PAC to have the expected maturity extended or shortened.
A Residual generally represents an interest in the residual cash flows
from the collateral relating to an issuance of mortgage-backed securities after
the other classes of securities supported by such collateral are paid on a
payment date. Residuals include both securities with stated principal and
interest and those without stated principal and interest.
A Z is a security that accretes all of interest, which is added to the
outstanding principal balance of such security. This accretion may continue
until such security begins receiving principal payments, until such other events
has occurred or until the security is retired.
DEPOSIT, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, to the extent provided in the related
Indenture or Agreement and the related Prospectus Supplement, the related Issuer
or the Company may deposit or withdraw Assets or substitute new Mortgage Assets
for Mortgage Assets previously included in the related Trust Estate or Trust
Fund or for Assets deposited in a Reserve Fund for such Series.
CREDIT ENHANCEMENT
GENERAL
Various forms of credit enhancement ("Credit Enhancement") may be
provided with respect to one or more Classes of a Series or with respect to the
Assets in the related Trust Estate or Trust Fund. Credit Enhancement may be in
the form of the subordination of one or more Classes of such Series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
use of a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Unless otherwise
specified in the related Prospectus Supplement, any Credit Enhancement with
respect to a Series will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the Securities
of such Series and interest thereon. If losses occur which exceed the amount
covered by such Credit Enhancement or which are not covered by the Credit
Enhancement, Holders will bear their allocable share of deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, payments or
distributions in respect of scheduled principal, interest or any combination
thereof that otherwise would have been payable or distributable to one or more
Classes of a Series (the "Subordinated Securities") will instead be payable to
one or more other Classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in such Prospectus Supplement. If
specified in the
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Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage
Assets and losses on defaulted Mortgage Assets will be borne first by the
various Classes of Subordinated Securities and thereafter by the various Classes
of Senior Securities, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate payments or
distributions in respect of delinquent payments or distributions on the Mortgage
Assets over the lives of the Securities of a Series or at any time, the
aggregate losses in respect of defaulted Mortgage Assets which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
payments or distributions otherwise payable or distributable to the Subordinated
Securities that will be distributable to Holders of Senior Securities on any
Payment Date or Distribution Date may be limited as specified in the related
Prospectus Supplement. If aggregate payments or distributions in respect of
delinquent payments or distributions on the Mortgage Assets or aggregate losses
in respect of such Mortgage Assets were to exceed the total amounts payable or
distributable and available for payment or distribution to Holders of
Subordinated Securities of, if applicable, were to exceed the specified maximum
amount, Holders of Senior Securities could experience losses on their
Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of payments or distributions
otherwise payable or distributable to Holders of Subordinated Securities on any
Payment Date or Distribution Date may instead be deposited into one or more
Reserve Fund (as defined below) established by the related Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Payment Date or Distribution Date, on each Distribution Date for specified
periods, or on each Distribution Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Holders of Senior Securities or otherwise, thereafter to the extent necessary to
restore the balance in the Reserve Fund to required levels, in each case as
specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released to
the Company or the Holders of any Class of Securities at the times and under the
circumstances specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments or distributions may be allocated among such
Classes (i) in the order of their Stated Maturities or Assumed Final
Distribution Dates, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of events, or (iv) otherwise, in each case as
specified in the related Prospectus Supplement. As between Classes of
Subordinated Securities, payments or distributions to Holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the related Prospectus Supplement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Estate or
Trust Fund for a Series or otherwise available for the benefit of such
Securities. In such case, Credit Enhancement may be provided by a cross-support
feature which may require that distributions or payments be made with respect to
Securities evidencing beneficial ownership of or secured by one or more asset
groups prior to distributions to Subordinated Securities evidencing a beneficial
ownership interest in or secured by other asset groups within the same Trust
Estate or Trust Fund. The Prospectus Supplement for a Series which includes a
cross-support feature will describe the manner and conditions for applying such
cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trust Estates or Trust Funds for a separate Series of Securities. If
applicable, the Prospectus Supplement will identify the Trust Funds 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 Trust Funds.
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POOL INSURANCE
With respect to a Series for which the related Trust Estate or Trust
Fund includes Mortgage Loans (and, if specified in the related Prospectus
Supplement, a Series for which the related Trust Fund includes Contracts), in
order to decrease the likelihood that Holders of the Securities of such Series
will experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more mortgage pool insurance policies
(each, a "Mortgage Pool Insurance Policy") will be obtained. Such Mortgage Pool
Insurance Policy will, subject to the limitations described below and in the
Prospectus Supplement, cover loss by reason of default in payments on such
Mortgage Loans up to the amounts specified in the Prospectus Supplement or
report on Form 8-K and for the periods specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Administrator or the Trustee under the related Indenture or Agreement will agree
to use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to file claims thereunder to the issuer of
such Mortgage Pool Insurance Policy (the "Pool Insurer"). A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent set forth in such policy
as described in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Mortgage Pool Insurance Policies, if any,
will not cover losses due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefor. The
related Prospectus Supplement will describe the terms of any applicable Mortgage
Pool Insurance Policy and will set forth certain information with respect to the
related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Estate or Trust
Fund includes Mortgage Loans (and, if specified in the related Prospectus
Supplement, each Series for which the related Trust Estate or Trust Fund
includes Contracts), in order to decrease the likelihood that Holders of the
Securities of such Series will experience losses in respect of such Mortgage
Loans, if specified in the related Prospectus Supplement, one or more Special
Hazard Insurance Policies will be obtained. Such a "Special Hazard Insurance
Policy" with respect to a Series will, subject to limitations described below
and in the related Prospectus Supplement, protect Holders of the Securities of
such Series from (i) loss by reason of damage to Mortgaged Properties caused by
certain hazards (including earthquakes and, to a limited extent, tidal waves and
related water damage) not covered by the standard form of hazard insurance
policy for the respective states in which the Mortgaged Properties are located
or under flood insurance policies, if any, covering the Mortgaged Properties,
and (ii) loss caused by reason of the application of the coinsurance clause
contained in hazard insurance policies. See "Servicing of the Mortgage Loans,
Multifamily Loans and Contracts -- Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood area),
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related Special Hazard Insurer.
FHA INSURANCE ON THE MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insurance mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for coinsurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved coinsurer. Generally the term of such a
mortgage loan can be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for coinsurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation
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work, but repairs may be made for up to, in general, the greater of 15% of the
value of the project or a dollar amount per apartment unit established from time
to time by HUD. In general the loan term may not exceed 35 years and a loan to
value ratio of no more than 85% is required for the purchase of a project and
70% for the refinancing of a project.
FHA insurance is generally payable in cash or at the option of the
mortgagee in debentures. Such insurance does not cover 100% of the mortgage loan
but is instead subject to certain deductions and certain losses of interest from
the date of the default.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Mortgage Loan at an
amount less than the then outstanding principal balance of such Mortgage Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Mortgage Loan thus would become an unsecured creditor to the extent the
outstanding principal balance of such Mortgage Loan exceeds the value so
assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Assets" herein. If so
provided in the related Prospectus Supplement, the Company will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The bankruptcy
bond will cover certain losses resulting from a reduction by a bankruptcy court
of scheduled payments of principal of and interest on a Mortgage Loan or a
reduction by such court of the principal amount of a Mortgage Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
A bankruptcy bond with respect to a Series will provide coverage in the
aggregate amount specified in the related Prospectus Supplement. Such amount
will be reduced by payments made under such bankruptcy bond in respect of the
related Mortgage Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series,
assets such as cash, U.S. Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the related Issuer
or the Company in one or more accounts (each, a "Reserve Fund") established and
maintained with the related Trustee. Such cash and the payments on such other
assets will be used to enhance the likelihood of timely payment or distribution
of principal of, and interest on, or, if so specified in the related Prospectus
Supplement, to provide additional protection against losses in respect of, the
Assets in the related Trust Estate or Trust Fund, to pay the expenses of the
related Trust Estate or Trust Fund or for such other purposes specified in such
Prospectus Supplement. Whether or not the related Issuer or the Company has any
obligation to make such a deposit, certain amounts to which the Holders of the
Subordinated Securities of such Series, if any, the related Issuer or the
Company would otherwise be entitled may instead be deposited into the Reserve
Fund from time to time and in the amounts as specified in the related Prospectus
Supplement. Any cash in any Reserve Fund and the proceeds of any other
instrument upon maturity will be invested in Permitted Instruments. If a letter
of credit is deposited with the Trustee, such letter of credit will be
irrevocable. Unless otherwise specified in the Prospectus Supplement with
respect to a Series, any instrument deposited therein will name the related
Trustee, in its capacity as trustee for the Holders of the Securities of such
Series, as beneficiary and will be issued by an entity acceptable to each rating
agency that rates such Securities. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement with respect to a Series, the
related Trust Estate or Trust Fund may also include or the Securities of such
Series may also have the benefits of, assets such as insurance, guarantees,
surety
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bonds, letters of credit, guaranteed investment contracts, swap agreements,
option agreements or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the Assets
included in such Trust Estate or Trust Fund, (ii) paying administrative
expenses, (iii) establishing a minimum reinvestment rate on the payments or
distributions made in respect of such Assets, (iv) guaranteeing timely payment
or distribution of principal and interest on the Securities of such Series, or
(v) for such other purpose as is specified in such Prospectus Supplement. Such
arrangements may include agreements under which Holders of the Securities of a
Series are entitled to receive amounts deposited in various accounts held by the
related Trustee upon the terms specified in the related Prospectus Supplement.
Such arrangements may be in lieu of any obligation of the Servicers or the
Administrator, if any, to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans, Multifamily Loans and
Contracts -- Advances".
SERVICING OF THE MORTGAGE LOANS,
MULTIFAMILY LOANS AND CONTRACTS
Except as otherwise noted, the description set forth below of the
servicing of Mortgage Loans, Multifamily Loans and Contracts is applicable to
Mortgage Loans, Multifamily Loans and Contracts (i) included in the Trust Estate
or Trust Fund with respect to a Series of Securities and (ii) underlying
Non-Agency Certificates. Accordingly, except as otherwise noted, references
under the heading "Servicing of the Mortgage Loans, Multifamily Loans and
Contracts" to the "Administrator," the "Servicers," a "Servicing Agreement," and
the "Trustee" should be read as applying to the related Non-Agency Servicers,
the Non-Agency Servicing Agreements and the Certificate Trustees with respect to
Non-Agency Certificates.
Unless otherwise provided in the related Prospectus Supplement, with
respect to a Series of Securities for which the related Trust Estate or Trust
Fund includes Mortgage Loans, Multifamily Loans and Contracts or Non-Agency
Certificates, such Mortgage Loans, Multifamily Loans and Contracts will be
serviced either (i) by the related Administrator as sole servicer, (ii) by the
related Administrator as administrator or master servicer, (iii) by one or more
loan servicing institutions as servicers or (iv) by another institution as
master servicer. If an institution other than an Administrator acts as the sole
servicer or as the master servicer for a Series or with respect to a Non-Agency
Certificate, the Administrator may have no servicing obligations with respect to
such Series or such Non-Agency Certificate. Generally, the discussion in this
section of the Prospectus is applicable under circumstances when the
Administrator is an affiliate of the Company. If the Administrator is not an
affiliate of the Company, the discussion relating to the servicing of the
Mortgage Loans, Multifamily Loans and Contracts as set forth below may be
modified or superseded by any discussion relating to the servicing of the
Mortgage Loans, Multifamily Loans and Contracts set forth in the Prospectus
Supplement.
The Prospectus Supplement for each Series of Certificates for which the
related Trust Estate or Trust Fund includes Mortgage Loans, Multifamily Loans or
Contracts, and for each Series for which the related Trust Estate or Trust Fund
includes Non-Agency Certificates, will specify whether the Administrator, if
any, or another institution will act as sole servicer or master servicer. If an
Administrator acts as master servicer or administrator, all references to the
Servicer under the heading "Servicing of the Mortgage Loans, Multifamily Loans
and Contracts" (and in the case of a Series of Certificates, under the heading
"The Agreement") should be read to refer to the direct Servicers of such series,
acting under the supervision of the Administrator as master servicer or
administrator. If an institution other than an Administrator acts as sole
Servicer for a series, or acts as master servicer for such series, all
references to the Servicer herein and under the headings "Servicing of the
Mortgage Loans, Multifamily Loans and Contracts" and "The Agreement" should be
read to refer to such institution as sole or master servicer, as appropriate.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans, Multifamily Loans and Contracts will be serviced by one or more
loan servicing institutions (the "Servicers"), which may include an
Administrator, pursuant to servicing agreements between each Servicer and the
Administrator or the Trustee (each, a "Servicing Agreement").
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SERVICING AGREEMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Servicer must be a FNMA- or FHLMC-approved servicer of conventional mortgage
loans. In addition, the Administrator, if any, will require adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth of at least $1,000,000, as well as satisfaction of certain other
criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance and primary mortgage insurance policies,
maintenance of escrow or impoundment accounts of Mortgagors for payment of
taxes, insurance, and other items required to be paid by the Mortgagor pursuant
to the Mortgage Loan, Multifamily Loan and Contract, attempting to cure
delinquencies, supervising foreclosures, management of Mortgaged Properties
under certain circumstances, and maintaining accounting records relating to the
Mortgage Loans, Multifamily Loans and Contracts, as applicable. Unless otherwise
specified in the related Prospectus Supplement, each Servicer will also be
obligated to make advances in respect of delinquent installments of principal
and interest on Mortgage Loans, Multifamily Loans and Contracts, as applicable,
as described more fully under " -- Payments on Mortgage Loans" and " --
Advances," and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors.
The Servicers will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. The Servicers will also generally be
entitled to collect and retain, as part of their servicing compensation, late
payment charges and assumption underwriting fees. The Servicers will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures. See " -- Advances" and " --Administration and Servicing
Compensation and Payment of Expenses" herein.
Each Servicer will be required to service each Mortgage Loan,
Multifamily Loan and Contract, as applicable, pursuant to the terms of its
Servicing Agreement for the entire term of such Mortgage Loan, Multifamily Loan
and Contract, as applicable, unless such Servicing Agreement is earlier
terminated by the Trustee, or in the event of a monetary default, by the Trustee
or the Administrator, on behalf of the Trustee. Upon termination of a Servicing
Agreement, the Trustee or the Administrator will act as Servicer of the related
Mortgage Loans pursuant to a Servicing Agreement on the same terms and
conditions applicable to any other Servicer.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee the amount on deposit
in such Custodial Account which exceeds the amount so insured or secured, less
any amount such Servicer may retain for its own account pursuant to its
Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Securities of the applicable Series.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the 18th day of
each month, or such other day specified in the related Prospectus Supplement
(the "Remittance Date"), each Servicer of the Mortgage Loans will remit to the
Trustee all funds held in its Custodial Account with respect to each Mortgage
Loan; provided, however, that Principal
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Prepayments may be remitted on the Remittance Date in the month following the
month of such prepayment. Each Servicer will be required, pursuant to the terms
of the related Servicing Agreement and as specified in the related Prospectus
Supplement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer is also required to advance its own funds as
described below.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, with
respect to a delinquent Mortgage Loan, Multifamily Loan or Contract, the related
Servicer will be obligated to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Such advances are required to be made
by the Servicer unless the Servicer, with the concurrence of the Administrator,
if any, determines that such advance ultimately would not be reimbursable under
any applicable insurance policy, from the proceeds of liquidation of the related
Mortgaged Properties, or from any other source (any amount not so reimbursable
being referred to herein as a "Nonrecoverable Advance"). Such advance obligation
will continue through the month following the month of final liquidation of such
Mortgage Loan, Multifamily Loan or Contract. Any Servicer funds thus advanced
will be reimbursable to such Servicer out of recoveries on the Mortgage Loans,
Multifamily Loans or Contracts with respect to which such amounts were advanced.
The Servicers will also be obligated to make advances with respect to certain
taxes and insurance premiums not paid by Mortgagors on a timely basis. Funds so
advanced are reimbursable to the Servicers out of recoveries on the related
Mortgage Loans, Multifamily Loans or Contracts and out of other recoveries to
the extent advanced funds are subsequently determined to be non-recoverable.
Each Servicer's right of reimbursement for any advance will be prior to the
rights of the Holders of the Securities of the applicable Series to receive any
related Insurance Proceeds or Liquidation Proceeds.
Unless otherwise specified in the Prospectus Supplement with respect to
a Series, the Administrator, if any, will be obligated pursuant to the related
Indenture or Agreement to advance on or before the applicable Payment Date or
Distribution Date an amount equal to any Monthly Advance which a Servicer fails
to remit, but will not be obligated to make such advance if the Administrator
determines it to be a Nonrecoverable Advance. Failure by a Servicer to make a
required Monthly Advance will be grounds for termination under the related
Servicing Agreement.
SERVICING PROCEDURES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will service the Mortgage Loans, Multifamily Loans and Contracts
pursuant to written guidelines promulgated by the Company or the Administrator.
The Administrator will exercise its best reasonable efforts to insure that the
Servicers service the Mortgage Loans, Multifamily Loans and Contracts in
compliance with such guidelines and in a manner consistent with industry
standards.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets -- The Mortgage Loans and Multifamily Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders" for a description of the limited
availability of deficiency judgments), foreclose against such property and
proceed for the deficiency against the appropriate person. The amount of the
ultimate net recovery (including the proceeds of any Mortgage Pool Insurance
Policy or other applicable Credit Enhancement), after reimbursement to the
Servicer of its expenses incurred in connection with the liquidation of any such
defaulted Mortgage Loan and prior unreimbursed advances of principal and
interest with respect thereto will be deposited in the Certificate Account or
Collection Accounts for the applicable Series (or, in the case of a Mortgage
Loan underlying a Non-Agency Certificate in an account maintained by the related
Certificate Trustee) when realized, and will be paid or distributed to Holders
of the Securities of such Series on the next Payment Date or Distribution Date
following the
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month of receipt (or, in the case of a Mortgage Loan underlying a Non-Agency
Certificate, will be distributed to the Trustee for the related Series in
accordance with the terms of such Non-Agency Certificate).
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to Holders of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to exercise its right to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes it is unable to enforce that
Mortgage Loan's "due-on-sale" clause under the applicable law. If it reasonably
believes it may be restricted by law, for any reason, from enforcing such a
"due-on-sale" clause, the Servicer may enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note,
provided such person satisfies the criteria required to maintain the coverage
provided by applicable insurance policies (unless otherwise restricted by
applicable law). Any fee collected by the Servicer for entering into an
assumption agreement will be retained by the Servicer as additional servicing
compensation. For a description of circumstances in which the Servicer may be
unable to enforce "due-on-sale" clauses, see "Certain Legal Aspects of the
Mortgage Assets -- The Mortgage Loans and Multifamily Loans -- Enforceability of
Certain Provisions." In connection with any such assumption, the Mortgage Rate
borne by the related Mortgage Note may not be decreased.
The Servicer will maintain with one or more depository institutions one
or more accounts into which it will deposit all payments of taxes, insurance
premiums, assessments or comparable items received for the account of the
mortgagors. Withdrawals from such account or accounts may be made only to effect
payment of taxes, insurance premiums, assessments or comparable items, to
reimburse the Servicer out of related collections for any cost incurred in
paying taxes, insurance premiums and assessments or otherwise preserving or
protecting the value of the Mortgages, to refund to mortgagors any amounts
determined to be overages and to pay interest to mortgagors on balances in such
account or accounts to the extent required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
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Contracts. With respect to a Trust Estate or Trust Fund that includes
Contracts, pursuant to each Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Administrator, either directly or through Servicers subject to general
supervision by the Administrator, will perform diligently all services and
duties specified in each Agreement, in the same manner as prudent lending
institutions of manufactured housing installment sales contracts of the same
type as the Contracts in those jurisdictions where the related Manufactured
Homes are located. The Administrator will monitor the performance of each
Servicer, if any, and, unless the related Prospectus Supplement states
otherwise, will remain liable for the servicing of the Contracts in accordance
with the terms of the Agreement. The duties to be performed by the Servicer will
include collection and remittance of principal and interest payments, collection
of insurance claims and, if necessary, repossession.
Each Servicing Agreement will provide that, when any Manufactured Home
securing a Secured Contract is about to be conveyed by the borrower, the
Servicer (to the extent it has knowledge of such prospective conveyance and
prior to the time of the consummation of such conveyance) may exercise its
rights to accelerate the maturity of such Contract under the applicable
"due-on-sale" clause, if any, unless the Servicer reasonably believes it is
unable to enforce such "due-on-sale" clause under applicable law. In such case,
the Servicer is authorized to take or enter into an assumption agreement from or
with the person to whom such Manufactured Home has been or is about to be
conveyed, pursuant to which such person becomes liable under the related Secured
Contract, provided such person satisfies the criteria required to maintain the
coverage provided by applicable insurance policies (unless otherwise restricted
by applicable law). Where authorized by the Contract the APR may be increased,
upon assumption, to the then-prevailing market rate, but will not be decreased.
Under each Servicing Agreement, the Servicer will repossess or
otherwise comparably convert the ownership of properties securing such of the
related Contracts as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments. In
connection with such repossession or other conversion, the Servicer will follow
such practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with any repossession
or towards the restoration of any property unless it determines (i) that such
restoration or repossession will increase the proceeds of liquidation of the
related Contract to the Holders after reimbursement to itself for such expenses
and (ii) that such expenses will be recoverable to it either through liquidation
proceeds or through insurance proceeds.
PRIMARY MORTGAGE INSURANCE
Generally, Mortgage Loans that the Company acquires do not have
Loan-to-Value Ratios in excess of 80% of their Original Value. Unless otherwise
specified in the Prospectus Supplement, Mortgage Loans that the Company acquires
that have an original principal amount exceeding 80% of Original Value usually
will have primary mortgage insurance. The Company generally requires such
coverage to continue until the Loan-to-Value Ratio drops below 80%.
The primary mortgage insurance policies will not insure against certain
losses which may be sustained in the event of a personal bankruptcy of the
mortgagor under a Mortgage Loan.
The primary mortgage insurance policies generally provide that no claim
may be validly presented thereunder unless (i) certain cash advances have been
made, and (ii) where there has been physical loss or damage to the Mortgaged
Property, it has been restored to its condition as of the date it was insured,
reasonable wear and tear excepted. Assuming the satisfaction of these
conditions, the issuer of a primary mortgage insurance policy will be required,
within the applicable policy limits, to pay either (a) an amount equal to the
principal balance of the defaulted Mortgage Loan covered thereby, plus accrued
and unpaid interest thereon to the date of claim, property preservation
expenses, certain other costs and other advances made by the insured, against
receipt of good and marketable title to the Mortgaged Property or (b) the
product of the amount described in clause (a), subject to certain exceptions,
multiplied by the applicable percentage of insurance coverage.
Any primary mortgage insurance relating to a pool of Contracts will be
described in the related Prospectus Supplement.
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Claim payments, if any, under each primary mortgage insurance policy
will be required to be remitted by the Servicers to the Administrator and will
be treated in the same manner as a prepayment of a Mortgage Loan.
STANDARD HAZARD INSURANCE
Mortgage Loans
Unless otherwise specified in the Prospectus Supplement, the Servicer
will be required pursuant to a Servicing Agreement to cause to be maintained for
each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions under the terms
and conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any standard hazard insurance policy
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to such Servicer by Mortgagors.
All amounts collected by a Servicer under a standard hazard insurance policy
will be deposited in such Servicer's Custodial Account. Unless otherwise
specified in the related Prospectus Supplement, each Servicing Agreement will
provide that the related Servicer may satisfy its obligation to cause hazard
insurance policies to be maintained by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be under
written by different insurers and, therefore, will not contain identical terms
and conditions, the basic terms thereof are dictated by state law. Such policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mud flow), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, the Agreement will require that flood insurance be maintained in such
amounts as would be required by the Federal National Mortgage Association in
connection with its mortgage loan purchase program. The Administrator may also
purchase special hazard insurance against certain of the uninsured risks
described above. See "Credit Enhancement -- Special Hazard Insurance".
Since the amount of hazard insurance the Administrator is required to
cause to be maintained on the improvements securing the Mortgage Loans declines
as the principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Administrator will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Secured Contracts
Unless otherwise specified in the Prospectus Supplement, the terms of
each Servicing Agreement will require the Servicer to cause to be maintained
with respect to each Secured Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that
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is customary for manufactured housing, issued by a company authorized to issue
such policies in the state in which the Manufactured Home is locate, and in an
amount which is not less than the maximum insurable value of such Manufactured
Home or the principal balance due from the borrower on the related Secured
Contract, whichever is less. When a Manufactured Home's location was, at the
time of origination of the related Secured Contract, within a federally
designated special flood hazard area, the Administrator also shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home, and
shall maintain, to the extent that the related Secured Contract does not require
the borrower to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on the
borrowers' interests in the Secured Contracts resulting from the absence or
insufficiency of individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to
pay all taxes and similar governmental charges when and as due. To the extent
that nonpayment of any taxes or charges would result in the creation of a lien
upon any Manufactured Home having a priority equal or senior to the lien of the
related Secured Contract, the Servicer will pay any such delinquent tax or
charge.
If the Servicer repossesses a Manufactured Home on behalf of the
Trustee, the Servicer will either (i) maintain at its expense hazard insurance
with respect to such Manufactured Home, or (ii) indemnify the Trustee against
any damage to such Manufactured Home prior to resale or other disposition.
Multifamily Loans
Unless otherwise provided in the Prospectus Supplement relating to a
Series of Certificates for which the related Trust Fund includes Multifamily
Loans or relating to a Series for which the related Trust Estate or Trust Fund
includes Non-Agency Certificates backed by Multifamily Loans, the Servicer will
be required to be maintained, for each Multifamily Loan, a standard hazard
insurance policy with extended coverage in an amount which is at least equal to
the lesser of the original principal balance of the Multifamily Loan, or the
replacement cost of the related Multifamily Project. Where any part of any
improvement to the Multifamily Project is located in an area identified by the
Flood Emergency Management Agency as having special flood hazards and flood
insurance has been made available, the Master Servicer is required to cause to
be maintained with a generally acceptable insurance carrier a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration, providing coverage in an amount not less than (i) the
original principal balance of the Multifamily Loan, (ii) the insurable value of
the Multifamily Project, or (iii) the maximum amount of insurance available
under the Flood Disaster Protection Act of 1973, as amended, which ever is less.
Additional insurance coverage for specific properties in a Multifamily
Loan Pool included in the Trust Fund for a Series will be described in the
related Prospectus Supplement.
TITLE INSURANCE POLICIES
The Servicing Agreements will require that a title insurance policy be
in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except those permitted pursuant to the
guidelines heretofore established by FNMA.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOANS
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related Standard Hazard Insurance Policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property) will be remitted to the Trustee.
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If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer will be required to expend its
own funds to restore the damaged property. In the event that a Servicer fails to
make a required expenditure, the Administrator, if any, will be required to make
such expenditure. In either case, the Servicer, the Administrator, if any, will
be required to make such expenditures only to the extent it determines such
expenditures are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer or the
Administrator, if any, as the case may be, will nevertheless be obligated to
attempt to realize upon the defaulted Mortgage Loan. Foreclosure proceedings
will be conducted by the Servicer with the concurrence of the Administrator, if
any. If the proceeds of any liquidation of the Mortgaged Property securing the
defaulted Mortgage Loan are less than the principal balance of the defaulted
Mortgage Loan plus interest accrued thereon, a loss will be realized on such
Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the Agreement. Consequently, any default by an insurer under
any insurance policy or bankruptcy bond, any losses in excess of any insurance
policy or bankruptcy limits, any uninsured loss and any interest shortfalls not
otherwise covered as described herein or in the Prospectus Supplement will
likely result in losses being borne by one or more Holders of the affected
Series.
Because Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by the Servicer, no payments under the related Mortgage Pool
Insurance Policy, if any, will result in a recovery on the Mortgage Loans which
exceeds the principal balance of the defaulted Mortgage Loan together with
accrued interest thereon. In addition, where a Mortgaged Property securing a
defaulted Mortgage Loan can be resold for an amount exceeding the principal
balance of the related Mortgage Loan together with accrued interest and
expenses, it may be expected that, where retention of any such amount is legally
permissible, the Pool Insurer will exercise its right under the related Mortgage
Pool Insurance Policy, if any, to purchase such Mortgaged Property and realize
for itself any excess proceeds.
Liquidation Proceeds and Insurance Proceeds may initially be credited
to a separate account (the "Advance Account") in order to facilitate the
reimbursement of advances made by Servicers, the Administrator or an insurer.
Such proceeds will be held in the Advance Account until the earlier of the date
of final reimbursement to the appropriate parties and the second Remittance Date
after the date on which they were deposited in the Advance Account. Interest
shortfalls may be suffered on Securities if and to the extent that Liquidation
Proceeds and Insurance Proceeds are retained in the Advance Account during a
period in which Servicers are not making Monthly Advances.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Mortgage Loan, Multifamily Loan and Contract, the
Administrator may receive compensation with respect to each interest payment
thereon in an amount specified in the related Prospectus Supplement. As
compensation for its servicing duties, each Servicer will be entitled to a
monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, each Servicer will retain
all assumption underwriting fees and late payment charges, to the extent
collected from Mortgagors.
The Administrator and each Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans, Multifamily Loans and Contracts. No loss will be
suffered on the Securities by reason of such expenses to the extent claims for
such expenses are paid directly under any applicable Mortgage Pool Insurance
Policy, a primary mortgage insurance policy, the special hazard insurance policy
or from other forms of Credit Enhancement. In the event, however, that the
defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance Policy,
Primary Mortgage Insurance Policies, Special Hazard Insurance Policy, Standard
Hazard Insurance Policies or another form of Credit Enhancement, or claims are
either not made or not paid under such policies or Credit Enhancement, or if
coverage thereunder has ceased, a loss will occur on the Securities of the
affected Series to the extent that the proceeds from the liquidation of a
defaulted Mortgage Loan, Multifamily Loan or Contract, after reimbursement of
the Administrator's and the Servicer's expenses, are less than the principal
balance of such defaulted Mortgage Loan, Multifamily Loan or Contract.
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THE INDENTURE
The following summaries describe certain provisions of the Indenture
not described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Bonds to describe the terms and provisions of the
particular Indenture relating to such Series of Bonds.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than two-thirds of the then
aggregate principal amount of the outstanding Bonds of any Series issued under
an Indenture, the related Trustee and the related Issuer may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to such Series or modify
(except as provided below) in any manner the rights of the holders of such
Bonds.
Without the consent of the Holder of each outstanding Bond of such
Series affected thereby, however, no supplemental indenture shall (a) change the
Stated Maturity of the principal of, or any installment of interest on, any Bond
of such Series or reduce the principal amount thereof, the interest rate
specified thereon (except as provided in the related Indenture with respect to
any Class of Bonds which are Variable Interest Rate Securities), the redemption
price with respect thereto or the earliest date on which any Bonds of such
Series may be redeemed at the option of the Issuer, or change any place of
payment where, or the coin or currency in which, any Bond of such Series or any
interest thereon is payable, or impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment, (b) reduce
the percentage of the aggregate principal amount of the outstanding Bonds of
such Series, the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of certain
defaults thereunder and their consequences as provided for in the Indenture, (c)
modify the provisions of the Indenture specifying the circumstances under which
such a supplemental indenture may not change the provisions of the Indenture
without the consent of the Holders of each outstanding Bond of such Series
affected thereby, or the provisions of the Indenture with respect to certain
remedies available in an Event of Default (as described below), except to
increase any percentage specified therein or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Bond affected thereby, (d) modify or alter the
provisions of the Indenture regarding the voting of Bonds held by the Issuer or
an affiliate of the Issuer, (e) permit the creation of any lien ranking prior to
or on the parity with the lien of the Indenture with respect to any part of the
property subject to a lien under the Indenture or terminate the lien of the
Indenture on any property at any time subject thereto or deprive the Holder of
any Bond of such Series of the security afforded by the lien of the Indenture,
or (f) modify any of the provisions of the Indenture in such manner as to affect
the rights of the Holders of Bonds of such Series to the benefits of any
provisions for the redemption at the request of Holders of Bonds of such Series
contained therein.
Each Issuer and the respective Trustee may also enter into supplemental
indentures, without obtaining the consent of Holders of such Series, to cure
ambiguities or make minor corrections, to provide for the issuance of Bonds in
bearer or registered form or for the conversion of any outstanding Bonds to or
from bearer form and to do such other things as would not adversely affect the
interests of the Holders of such Series.
EVENTS OF DEFAULT
An "Event of Default" with respect to any Series of Bonds is defined in
the respective Indenture under which such Bonds are issued as being: (a) unless
otherwise specified in the Prospectus Supplement for such Series, a default in
the payment of principal of any Bond of such Series or a default for ten days or
more in the payment of any interest on any Bond of such Series; (b) a default in
the observance of certain negative covenants in the Indenture or in the
observance of certain covenants relating to redemptions of Bonds of such Series;
(c) a default in the observance of any other covenant of the Indenture, and the
continuation of any such default for a period of sixty days after notice to the
Issuer by the Trustee or to the Issuer and the Indenture Trustee by the Holders
of at least 25% in principal amount of the Bonds of such Series then
outstanding; (d) the failure of the lien of the Indenture to constitute a valid
first priority security interest in the Trust Estate, (e) any representation or
warranty made by the Issuer in the Indenture or in any
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certificate delivered pursuant thereto having been incorrect in a material
respect as of the time made, and the circumstance in respect of which such
representation or warranty is incorrect not having been cured within thirty days
after notice thereof is given to the Issuer by the Trustee or by the Holders of
at least 25% in principal amount of the Bonds of such Series then outstanding;
or (f) certain events of bankruptcy, insolvency, receivership or reorganization
of the Issuer.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect
to a Series of Bonds, the Trustee may, and on request of Holders of more than
50% in principal amount of the Bonds of such Series then outstanding shall,
declare the principal of such Series of Bonds to be due and payable. Such
declaration may under certain circumstances be rescinded by the Holders of a
majority in principal amount of the Bonds of such Series then outstanding.
If, following an Event of Default, a Series of Bonds has been declared
to be due and payable, the Trustee may, in its discretion (provided that the
Holders of the Bonds of such Series have not directed the Trustee to sell the
Assets included in the related Trust Estate), refrain from selling such Assets
and continue to apply all amounts received on such Assets to payments due on the
Bonds of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Bonds. The Trustee, however, must sell the
Assets included in the related Trust Estate for such Series if collections in
respect of such Assets are determined to be insufficient to make all scheduled
payments on Bonds of such Series, in which case payments will be made on the
Bonds in the same manner as described in the next sentence with regard to
instances in which such Assets are sold. In addition, upon an Event of Default
the Trustee may, in its discretion (provided that, unless the Event of Default
relates to a default in payment of principal or interest, the Trustee must
receive the consent of the Holders of all outstanding Bonds of such Series, and
certain other conditions must be met), sell the Assets included in the related
Trust Estate for such Series, in which event the Bonds of such Series will be
payable pro rata, without regard to their Stated Maturities, out of the
collections on, or the proceeds from the sale of, such Assets and any overdue
installments of interest on the Bonds will, to the extent permitted by
applicable law, bear interest at the highest stated interest rate borne by any
Bond of such Series.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee shall be under no obligation to exercise any of the rights and powers
under the Indenture at the request or direction of any of the Holders of Bonds,
unless such Holders have offered to the Trustee reasonable security or indemnity
satisfactory to it against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the Holders of a majority in principal amount of the outstanding
Bonds of a Series shall have the right to direct the time, method, and place of
conducting any proceeding or any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Bonds of such
Series; and the Holders of a majority in principal amount of the Bonds of a
Series then outstanding may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of the Holder of each outstanding Bond affected
thereby.
LIST OF HOLDERS OF BONDS
Three or more Holders of the Bonds of any Series (each of whom has
owned a Bond of such Series for at least six months) may, by written request to
the Trustee, obtain access to the list of all Holders of the Bonds of such
Series maintained by the Trustee for the purpose of communicating with other
Holders with respect to their rights under the Indenture. The Trustee may elect
not to afford the requesting Holders access to the list of Holders if it agrees
to mail the desired communication or proxy, on behalf of the requesting Holders,
to all Holders.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a written
statement as to the fulfillment of its obligations under the Indenture.
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TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Holders a brief
report relating to its eligibility and qualifications to continue as the Trustee
under the Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Issuer to
it in the Trustee's individual capacity, the property and funds physically held
by the Trustee as such, any release, or release and substitution, of property
subject to the lien of the Indenture which has not been previously reported, any
additional Series of Bonds not previously reported and any action taken by it
which materially affects the Bonds and which has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Assets securing
the Bonds of a Series upon the delivery to the Trustee for cancellation of all
of the Bonds of such Series or, with certain limitations, upon deposit with the
Trustee of funds sufficient for the payment in full of all of the Bonds of such
Series.
REPORTS BY TRUSTEE TO BONDHOLDERS
On each Principal Payment Date or Special Redemption Date, the Trustee
will send a report to each Holder setting forth, among other things, the amount
of such payment representing interest, the amount thereof, if any, representing
principal and the outstanding principal amount of an individual Bond of each
Class (or the aggregate principal amount of the Bonds of each Class in the case
of Holders of Bonds on which payments of interest only are then being made)
after giving effect to the payments made on such Principal Payment Date or
Special Redemption Date.
LIMITATION ON SUITS
No Holder of a Bond of any Series will have any right to institute any
proceedings with respect to the Indenture unless (1) such Holder has previously
given written notice to the Trustee of a continuing Event of Default with
respect to such Series; (2) the Holders of at least 25% in principal amount of
the Bonds of such Series then outstanding have made written request to the
Trustee to institute proceedings in respect of such Event of Default in its own
name as Trustee; (3) such Holders have offered to the Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice, request and offer of indemnity the Trustee has failed to institute
any such proceedings; and (5) no direction inconsistent with such written
request has been given to the Trustee during such 60-day period by the Holders
of at least 50% in principal amount of the Bonds of such Series then
outstanding.
THE AGREEMENT
The following summaries describe certain provisions of the Agreement
not described elsewhere in this Prospectus. Where particular provisions or terms
used in the Agreements are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as a part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Certificates to describe the terms and provisions of
the particular Agreement relating to such Series of Certificates.
Generally, the discussion in this section of the Prospectus is
applicable under circumstances when the Administrator is an affiliate of the
Company. If the Administrator is not an affiliate of the Company, the discussion
relating to pooling and administration (or master servicing) as set forth below
may be modified or superseded by any discussion relating to the pooling and
administration (or master servicing) set forth in the Prospectus Supplement. In
addition, certain of the following summaries only apply to an Agreement relating
to series of Certificates for which the related Trust Fund includes Mortgage
Loans, Multifamily Loans or Contracts. Provisions of Agreements relating to
series of Certificates for which the related Trust Fund includes other types of
Mortgage Assets will be summarized and described in the related Prospectus
Supplement.
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ASSIGNMENT OF MORTGAGE ASSETS
Assignment of Mortgage Loans
At the time of issuance of the Certificates of a Series, the Company
will assign the Mortgage Loans to the related Trustee, together with all
principal and interest (subject to exclusions or adjustments specified in the
related Prospectus Supplement received by the Company on or with respect to such
Mortgage Loans on or after the Cut-off Date) other than principal and interest
due and payable on or before the Cut-off Date. The Trustee will, concurrently
with such assignment, execute, countersign and deliver the Certificates to the
Company in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Agreement.
In addition, as to each Mortgage Loan, the Company will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form, evidence of title
insurance and, if applicable, the certificate of private mortgage insurance. In
instances where recorded documents cannot be delivered due to delays in
connection with recording, the Company may deliver copies thereof and deliver
the original recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Company, as depositor, will cause to be delivered to the Trustee, the related
original Cooperative note endorsed to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Company will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, in the
Agreement the Company generally will represent and warrant to the Trustee, among
other things, that (i) the information set forth in the schedule of Mortgage
Loans attached thereto is correct in all material respects; (ii) a lender's
title insurance policy or binder for each Mortgage Loan subject to the Agreement
was issued on the date of origination thereof and each such policy or binder
assurance is valid and remains in full force and effect; (iii) at the date of
initial issuance of the Certificates, the Company has good title to the Mortgage
Loans and the Mortgage Loans are free of offsets, defenses or counterclaims;
(iv) at the date of initial issuance of the Certificates, each Mortgage is a
valid first lien on the property securing the Mortgage Note (subject only to (a)
the lien of current real property taxes and assessments, (b) covenants,
conditions, and restrictions, rights of way, easements and other matters of
public record as of the date of the recording of such Mortgage, such exceptions
appearing of record being acceptable to mortgage lending institutions generally
in the area wherein the property subject to the Mortgage is located or
specifically reflected in the appraisal obtained by the Company and (c) other
matters to which like properties are commonly subject which do not materially
interfere with the benefits of the security intended to be provided by such
Mortgage) and such property is free of material damage and is in good repair or,
with respect to junior Lien Mortgage Loans, that such Mortgage is a valid junior
lien Mortgage, as the case may be, and specifying the percentage of the Mortgage
Loan Pool comprised of junior Lien Mortgage Loans; (v) at the date of initial
issuance of the Certificates, no Mortgage Loan is 30 or more days delinquent and
there are no delinquent tax or assessment liens against the property covered by
the related Mortgage; (vi) at the date of initial issuance of the Certificates,
the portion of each Mortgage Loan, if any, which in the circumstances set forth
above under "Servicing of the Mortgage Loans, Multifamily Loans and Contracts --
Primary Mortgage Insurance" should be insured with a private mortgage insurer is
so insured; and (vii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including, with out
limitation, usury, equal credit opportunity and disclosure laws.
In the event that the Company has acquired the Mortgage Loans for a
Series, if so specified in the related Prospectus Supplement, the Company may,
in lieu of making the representations set forth in the preceding paragraph,
cause the entity from which such Mortgage Loans were acquired to make such
representations (other than those regarding the Company's title to the Mortgage
Loans, which will in all events be made by the Company), in the sales agreement
pursuant to which such Mortgage Loans are acquired, or if such entity is acting
as a Servicer, in its servicing agreement. In such event such representations,
and the Company's rights against such entity in the event of a breach thereof,
will be assigned to the Trustee for the benefit of the holders of the
Certificates of such Series.
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Assignment of Contracts
The Company will cause the Contracts to be assigned to the Trustee,
together with principal and interest due on or with respect to the Contracts
after the Cut-off Date specified in the related Prospectus Supplement. Each
Contract will be identified in a loan schedule ("Contract Loan Schedule")
appearing as an exhibit to the related Agreement.
In addition, with respect to each Contract, the Company will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Certificateholders to the Contracts, the Company will cause
a UCC-1 financing statement to be filed identifying the Trustee as the secured
party and identifying all Contracts as collateral. Unless otherwise specified in
the related Prospectus Supplement, the Contracts will not be stamped or
otherwise marked to reflect their assignment from the Company to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the Holders of
the Certificates of the applicable Series in the Contracts could be defeated.
See "Certain Legal Aspects of the Mortgage Assets."
Unless otherwise specified in the Prospectus Supplement, the Company
will provide limited representations and warranties to the Trustee concerning
the Contracts. Such representations and warranties will include: (i) that the
information contained in the Contract Loan Schedule provides an accurate listing
of the Contracts and that the information respecting such Contracts set forth in
such Contract Loan Schedule is true and correct in all material respects at the
date or dates respecting which such information is furnished; (ii) that,
immediately prior to the conveyance of the Contracts, the Company had good title
to, and was sole owner of, each such Contract; and (iii) that there has been no
other sale by it of such Contract and that the Contract is not subject to any
lien, charge, security interest or other encumbrance.
Assignment of Multifamily Loans
The Company will cause the Multifamily Loans constituting the
Multifamily Loan Pool to be assigned to the Trustee, together with principal and
interest due on or with respect to the Multifamily Loans after the Cut-off Date
specified in the related Prospectus Supplement. The Trustee will, concurrently
with such assignment, authenticate and deliver the Certificates. Each
Multifamily Loan will be identified in a schedule appearing as an exhibit to the
Agreement (the "Multifamily Loan Schedule").
In addition, the Company, will, as to each Multifamily Loan, deliver or
cause to be delivered to the Trustee, the mortgage note endorsed without
recourse, the mortgage or deed of trust with evidence of recording indicated
thereon and an assignment of the instrument in recordable from (but not
recorded).
The Trustee will review and hold such documents in trust for the
benefit of the Holders of the Certificates of the applicable Series. Unless
otherwise provided in the related Prospectus Supplement, if any such document is
found to be defective in any material respect and the Company, the entity from
which the Company acquired such Multifamily Loan (the "Multifamily Loan Seller")
or the Administrator, as the case may be, does not cure such a defect with 60
days, or within such other period specified in the related Prospectus
Supplement, the Company, the Multifamily Loan Seller or the Administrator, as
the case may be, will, not later than 90 days or within such other period
specified in the related Prospectus Supplement, after the Trustee's notice to
the Company, the Multifamily Loan Seller or the Administrator of the defect,
repurchase the related Multifamily Loan or any property acquired in respect
thereof from the Trustee. Unless otherwise specified in the related Prospectus
Supplement, such repurchase shall be at a price equal to the remaining unpaid
principal balance of such Multifamily Loan (or, in the case of a foreclosed
Multifamily Loan, the unpaid principal balance of such Multifamily Loan
immediately prior to foreclosure), plus accrued but unpaid interest to the date
of the next scheduled payment on such Multifamily Loan at the related Remittance
Rate, less any unreimbursed Advances made with respect to such Multifamily Loan.
Unless otherwise provided in the related Prospectus Supplement, the repurchase
obligation constitutes the sole remedy available to the Holders of the
applicable Series of Certificates or the Trustee for material defect in a
Multifamily Loan document.
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Unless otherwise specified in the related Prospectus Supplement, the
Company will, at the time of delivery of the Certificates of a Series, cause the
assignment to the Trustee of the Multifamily Loans constituting a Multifamily
Loan Pool to be recorded in the appropriate public office for real property
records. If specified in the related Prospectus Supplement, the Company will
cause such assignments to be so recorded within the time after delivery of the
Certificates as is specified in the related Prospectus Supplement, in which
event, the Agreement may, as specified in the Prospectus Supplement, require the
Multifamily Loan Seller or the Administrator to repurchase from the Trustee any
Multifamily Loan required to be recorded but not recorded within such time, at
the price described above with respect to repurchase by any reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the repurchase obligation would constitute the sole remedy to the Holders of the
applicable Series of Certificates or the Trustee for the failure of a
Multifamily Loan to be recorded.
Unless otherwise specified in the related Prospectus Supplement, each
Multifamily Loan Seller will have represented, among other things, that (i)
immediately prior to the transfer and assignment of the Multifamily Loans, such
Multifamily Loan Seller had good title to, and was the sole owner of, each
Multifamily Loan and there has been no other sale or assignment thereof, (ii) as
of the date of such transfer, the Multifamily Loans are subject to no offsets,
defenses or counterclaims, (iii) each Multifamily Loan at the time it was made
complied in all material respects with applicable state and federal laws,
including usury, and disclosure laws, (iv) a lender's policy of title insurance
was issued on the date of the origination of each Multifamily Loan and each such
policy is valid and remains in full force and effect, (v) as of the date of such
transfer, each mortgage note subject to the agreement is a valid first lien on
the related Multifamily Project (subject only to (a) the lien of current real
property taxes and assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
recording of such instrument of indebtedness, such exceptions appearing of
record and either being acceptable to mortgage lending institutions generally or
specifically reflected in the appraisal made in connection with the origination
of the related Multifamily Loan and (c) other matters to which like properties
are commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the instrument of indebtedness) and such
property is free of material damage and is in good repair, (vi) as of the date
of such transfer, no Multifamily Loan is more than 30 days delinquent in payment
and there are no delinquent tax or assessment liens against the related
apartment project, and (vii) with respect to each Multifamily Loan, if the
Multifamily Project is located in an area identified by the Secretary of Housing
and Urban Development as having special flood hazards and subject in certain
circumstances to the availability of flood insurance under the National Flood
Insurance Act of 1968, as amended, such Multifamily Project is covered by flood
insurance if applicable regulations at the time such Multifamily Loan was
originated required that such flood insurance coverage be obtained.
All of the representations and warranties of a Multifamily Loan Seller
in respect of a Multifamily Loan will have been made as of the date on which
such Multifamily Loan Seller sold the Multifamily Loan to the Company or its
affiliate; the date as of which such representations and warranties were made
may be a date prior to the date of the initial issuance of the related Series of
Certificates. A substantial period of time may have elapsed between the date as
of which the representations and warranties were made and the later date of
initial issuance of the related Series of Certificates. Since the
representations and warranties referred to in the preceding paragraph, unless
otherwise specified in the related Prospectus Supplement, are the only
representations and warranties that will be made by a Multifamily Loan Seller,
the Multifamily Loan Seller's repurchase obligations described below will not
arise if, during the period commencing on a date of sale of a Multifamily Loan
by the Multifamily Loan Seller to the Company or its affiliate, the relevant
event occurs that would have given rise to such an obligation had the event
occurred prior to the sale of the affected Multifamily Loan. Nothing, however,
has come to the Company's attention that would cause it to believe that the
representations and warranties referred to in the preceding paragraph will not
be accurate and complete in all material respects in respect of Multifamily
Loans as of the date of initial issuance of the related Series of Certificates.
Assignment of Agency Securities, Non-Agency Certificates, and Private
Mortgage-Backed Securities
With respect to each Series, unless otherwise specified in the related
Prospectus Supplement, the Company will cause any Agency Securities, Non-Agency
Certificates, and Private Mortgage-Backed Securities included in the related
Trust Fund to be registered in the name of the Trustee. The Trustee (or its
custodian) will have possession of any certificated Agency Securities and
Private Mortgage-Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be assignee
of record of any underlying assets for
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an Agency Security, Non-Agency Certificate, or Private Mortgage-Backed Security.
Each Agency Security, Non-Agency Certificate, and Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement. The Company will represent and warrant to the Trustee, among other
things, the information contained in such schedule is true and correct and that
immediately prior to the transfer of the related securities to the Trustee, the
Company had good title to, and was the sole owner of, each such security.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS, CONTRACTS AND MULTIFAMILY LOANS
The Trustee will review the documents delivered to it with respect to
the Mortgage Loans, Contracts and Multifamily Loans included in the related
Trust Fund. Unless otherwise specified in the related Prospectus Supplement, if
any document is not delivered or is found to be defective in any material
respect and the Company cannot deliver such document or cure such defect within
90 days after notice thereof (which the Trustee will undertake to give within 45
days of the delivery of such documents), and if any other party obligated to
deliver such document or cure such defect has not done so and has not
substituted or repurchased the affected Mortgage Loan, Multifamily Loan or
Contract, then the Company will, not later than the first date designated for
the deposit of payments into the Certificate Account (a "Deposit Date") which is
more than ten days after such 90-day period, (a) if so provided in the
Prospectus Supplement remove the affected Mortgage Loan, Multifamily Loan or
Contract from the Trust Fund and substitute one or more other Mortgage Loans,
Multifamily Loans or Contracts therefor or (b) repurchase the Mortgage Loan,
Multifamily Loan or Contract from the Trustee for a price equal to 100% of its
principal balance plus one month's interest thereon at the applicable Remittance
Rate. Such purchase price will be deposited in the Certificate Account on such
Deposit Date. Unless otherwise specified in the Prospectus Supplement, this
repurchase and, if applicable, substitution obligation constitutes the sole
remedy available to Holders of the Certificates of the applicable Series or the
Trustee against the Company for a material defect in a document relating to a
Mortgage Loan, Multifamily Loan or Contract.
Unless otherwise specified in the related Prospectus Supplement, the
Company will agree to either (a) cure any breach of any representation or
warranty that materially and adversely affects the interests of the Holders of
the Certificates of the applicable Series in a Mortgage Loan, Multifamily Loan
or Contract within 90 days of its discovery by the Company or its receipt of
notice thereof from the Trustee, (b) repurchase such Mortgage Loan, Multifamily
Loan or Contract not later than the first Deposit Date which is more than ten
days after such 90-day period for a price equal to 100% of its principal balance
plus one month's interest thereon at the applicable Remittance Rate, or (c) if
so specified in the Prospectus Supplement, remove such Mortgage Loan,
Multifamily Loan or Contract from the Trust Fund and substitute one or more
other mortgage loans or contracts therefor. Such purchase price will be
deposited in the Certificate Account on such Deposit Date. Unless otherwise
specified in the related Prospectus Supplement, this repurchase and, if
applicable, substitution obligation will constitute the sole remedies available
to Holders of the Certificates of the applicable Series or the Trustee for any
such breach.
If the Prospectus Supplement for a Series of Certificates so provides,
then in lieu of agreeing to repurchase or substitute Mortgage Loans, Contracts
or Multifamily Loans as described above, the Company may obtain such an
agreement from the entity which sold such Mortgage Loans, Contracts or
Multifamily Loans to the Company, which agreement will be assigned to the
Trustee for the benefit of the holders of the Certificates of such series.
If a REMIC election is to be made with respect to all or a portion of a
Trust Fund, there may be federal income tax limitations on the right to
substitute Mortgage Loans, Multifamily Mortgage Loans or Contracts as described
above.
EVIDENCE AS TO COMPLIANCE
The related Agreement will provide that on or before a specified date
in each year, beginning the first such date that is at least a specified number
of months after the Cut-off Date, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, based on an examination
of certain specified documents and records relating to the servicing of the
Administrator's mortgage loan portfolio conducted substantially in compliance
with the audit program for mortgages serviced for FNMA or FHLMC, the United
States Department of Housing and Urban Development Mortgage Audit Standards or
the Uniform Single Audit Program for Mortgage Bankers (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has been
conducted in compliance with the
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Applicable Accounting Standards except for (a) such expenses as such firm shall
believe to be immaterial and (b) such other exceptions as shall be set forth in
such statement.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Trustee, the Registrar for a Series of
Certificates will provide to the Trustee, within fifteen days after receipt of
such request, a list of the names and addresses of all Holders of record of such
Series as of the most recent Record Date for payment of distributions to Holders
of that Series. Upon written request of three or more Holders of record of a
Series of Certificates for purposes of communicating with other Holders with
respect to their rights under the Agreement for such Series, the Trustee will
afford such Holders access during business hours to the most recent list of
Holders of that Series held by the Trustee. With respect to Book Entry
Certificates, the only named Holder on the Certificate Register will be the
Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Holders of Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement with respect to a Series will require that the
Certificate Account be any of the following: (i) an account maintained with a
depository institution the debt obligations of which (or, in the case of a
depository institution which is a part of a holding company structure, the debt
obligations of the holding company of which) have a long-term or short-term
rating acceptable to each rating agency that rated the Certificates, (ii) an
account or accounts the deposits in which are fully insured by either the Bank
Insurance Fund (the "BIF") or the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund (as successor to the Federal
Savings and Loan Insurance Corporation) ("SAIF") of the FDIC, (iii) an account
maintained with and in the name of the Trustee, in trust, and in respect of
which the amounts from time to time on deposit therein are insured by the BIF or
the SAIF (to the limits established by the FDIC), provided that all funds in
such account are invested in Permitted Instruments (as defined below) within one
business day of receipt or are remitted to the Holders within one business day
of receipt therein; (iv) a trust account maintained with the corporate trust
department of a federal or state chartered depository institution or trust
company with trust powers and acting in its fiduciary capacity for the benefit
of the Trustee, or (v) an account which will not cause any rating agency rating
the Certificates of such Series to downgrade or withdraw its then-current rating
assigned to the Certificates. The instruments in which amounts in the
Certificate Account may be invested are limited to United States government
securities and other investments acceptable to the rating agencies rating such
series of Certificates, and may include one or more Certificates of a Series
("Permitted Instruments"). Unless otherwise specified in the related Prospectus
Supplement, a Certificate Account may be maintained as an interest bearing
account, or the funds held therein may be invested pending each succeeding
Distribution Date in Permitted Instruments. Unless otherwise specified in the
related Prospectus Supplement, the Administrator or the Trustee will be entitled
to receive any such interest or other income earned on funds in the Certificate
Account as additional compensation. Unless otherwise specified in the related
Prospectus Supplement, the following payments and collections received or made
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received on or before the Cut-off Date)
will be deposited in the Certificate Account:
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties;
(ii) all Mortgagor payments on account of interest, subject to
exclusions or adjustments as described in the related Prospectus Supplement
adjusted to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Servicers or the Administrator, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor and
net of certain amounts reimbursed to the Servicers or the Administrator, as
described above;
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(v) all condemnation awards or settlements which are not released to
the Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of the Mortgage
Loans, Multifamily Loans and Contracts -- Advances" and certain other amounts
required under the Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan, Multifamily Loan or Contract
or property acquired in respect thereof repurchased by the Administrator, the
Company, the Seller or the Servicer or otherwise as described above or under
"Termination" below;
(viii) all amounts, if any, required to be transferred to the
Certificate Account from any Credit Enhancement for the related Series; and
(ix) all other amounts required to be deposited in the Certificate
Account pursuant to the related Agreement.
REPORTS TO HOLDERS OF CERTIFICATES
Concurrently with each distribution on the Certificates of a Series,
unless otherwise specified in the related Prospectus Supplement, the Trustee
will furnish to Holders of such Certificates a statement generally setting
forth, to the extent applicable to such Series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
(iii) the aggregate principal balance of each Class of the
Certificates after giving effect to distributions on such Distribution Date;
(iv) the aggregate principal balance of any Class Certificates which
are Compound Interest Securities after giving effect to any increase in such
principal balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to Holders of
any Class of Certificates that was distributed to Holders of other Classes of
Certificates;
(vi) if any Class of Certificates has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in respect of
the related Mortgage Assets;
(vii) the aggregate principal balance and number of Mortgage Loans,
Multifamily Loans and Contracts which were delinquent as to a total of two
installments of principal and interest; and
(viii) as of the most recent date for which information was available,
the aggregate principal balances of Mortgage Loans, Multifamily Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more,
and (b) were in foreclosure; and
(ix) the amount of coverage then remaining under any Credit
Enhancement.
The Administrator or the Trustee will also furnish annually customary
information deemed necessary for Holders of such Certificates to prepare their
tax returns.
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EVENTS OF DEFAULT
"Events of Default" under the Agreement with respect to a Series will
consist of (i) any failure by the Administrator to duly observe or perform in
any material respect any of its covenants or agreements in such Agreement
materially affecting the rights of Holders of the Certificates of such Series
which continues unremedied for 60 days after the giving of written notice of
such failure to the Company by the Trustee or to the Administrator and the
Trustee by the Holders of such Certificates evidencing interests aggregating not
less than 25% of the affected Class of Certificates; and (ii) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain actions by the Administrator indicating its
insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under an Agreement remains unremedied by
the Administrator, the Trustee, or Holders of Certificates of each Class of
Certificates affected thereby evidencing, as to each such Class interests
aggregating not less than 51%, may terminate all of the rights and obligations
of the Administrator under the Agreement, whereupon the Trustee, or a new
Administrator appointed pursuant to the Agreement, will succeed to all the
responsibilities, duties and liabilities of the Administrator under the
Agreement and will be entitled to similar compensation arrangements.
Notwithstanding its termination as Administrator, the Administrator will be
entitled to receive amounts earned by it under the Agreement prior to such
termination. Following such termination, the Company shall appoint any
established housing finance institution having a net worth of not less than
$10,000,000 to act as successor to the Administrator under such Agreement. If no
such successor shall have been appointed within 30 days following such
termination, then either the Company or the Trustee may petition a court of
competent jurisdiction for the appointment of a successor Administrator. Pending
the appointment of a successor Administrator, the Trustee shall act as
Administrator. The Trustee, the Company and such successor Administrator may
agree upon the compensation to be paid to such successor Administrator, which in
no event may be greater than the compensation previously paid to the terminated
Administrator under such Agreement.
No Holder of Certificates will have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless such Holder
previously has given to the Trustee written notice of default and unless the
Holders of Certificates as specified in the Prospectus Supplement have made
written request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for 60 days has neglected or refused to institute any such proceedings.
However, the Trustee is under no obligation to exercise any of the trusts or
powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the Holders,
unless such Holders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
The Agreement with respect to a Series may be amended by the Company,
the Administrator and the Trustee without the consent of the Holder of the
Certificates of such Series, to cure any ambiguity, to correct or supplement any
provision therein which may be defective or inconsistent with any other
provision therein or to add any other provisions with respect to matters or
questions arising under the Agreement provided that such amendment is not
materially inconsistent with the provisions of the Agreement and that in each
case, subject as stated in the next sentence, such action will not adversely
affect in any material respect the interests of any Holders of that Series. An
amendment described above shall not be deemed to adversely affect in any
material respect the interests of the Holders of that Series if either (a) an
opinion of counsel satisfactory to the Trustee is obtained to such effect, or
(b) the person requesting the amendment obtains a letter from the rating agency
then rating the Certificates of that Series that the amendment would not result
in a downgrading or withdrawal of the rating then assigned by it to such
Certificates. Notwithstanding the foregoing, the Company, the Administrator and
the Trustee may amend each Agreement without the consent of the Holders of the
Certificates of the relevant Series in order to modify, eliminate or add to any
of its provisions to such extent as may be appropriate or necessary to maintain
REMIC status of all or any portion of any Trust Fund as to which a REMIC
election has been made with respect to the applicable Certificates or to avoid
or minimize the risk of the imposition of any tax on the Trust Fund created by
such Agreement that would be a claim against the Trustee at any time
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prior to final redemption of the Certificates, provided that the Trustee has
obtained the opinion of independent counsel to the effect that such action is
necessary or appropriate to maintain REMIC status or to avoid or minimize the
risk of the imposition of such a tax. Unless otherwise specified in the
Prospectus Supplement, the Agreement may also be amended by the Company, the
Administrator, and the Trustee with the consent of the Holders of Certificates
evidencing interests aggregating not less than 66% of the aggregate principal
balance of the Certificates of the applicable Series for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such Agreement or of modifying in any manner the rights of Holders of
Certificates of that Series; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments received on the related Mortgage Assets or distributions which are
required to be made on any Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
Holders of any Class of Certificates in any manner other than as described in
clause (i), without the consent of the Holders of Certificates of such Class
evidencing at least 66% of the interests of such Class or (iii) reduce the
aforesaid percentage of Certificates of any Class required to consent to any
such amendment, without the consent of the Holders of all Certificates of such
Class then outstanding.
TERMINATION
Unless otherwise specified in the related Prospectus Supplement, the
obligations of the Company, as depositor, the Administrator, as servicer, and
the Trustee created by the Agreement with respect to a Series will terminate
upon the payment to Holders of the Certificates of such series of all amounts
held by the Administrator or in the Certificate Account and required to be paid
to them pursuant to the Agreement after the later of (i) the maturity or other
liquidation of the last Mortgage Loan, Multifamily Loan or Contract subject
thereto or the disposition of all property acquired upon foreclosure of any such
Mortgage Loan, Multifamily Loan or Contract or (ii) the repurchase by the
Company from the Trust Fund of all the outstanding Certificates or all remaining
Assets in the Trust Fund. The Agreement will establish the repurchase price for
the Assets in the Trust Fund and the allocation of such purchase price among the
Classes of Certificates. The exercise of such right will effect early retirement
of the Certificates of that Series, but the Company's right so to repurchase
will be subject to the conditions set forth in the related Prospectus
Supplement. If a REMIC election is to be made with respect to all or a portion
of a Trust Fund, there may be additional conditions to the termination of such
Trust Fund which will be described in the related Prospectus Supplement. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the survivor of certain persons named
in the Agreement. The Trustee will give written notice of termination of the
Agreement to each Holder of Certificates of the applicable Certificates, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency of the Trustee specified in such notice of
termination.
USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series or to reimburse the amounts previously
used to effect such a purchase, the costs of carrying such Mortgage Assets until
sale of the Certificates and other expenses connected with pooling the Mortgage
Assets and issuing the Securities.
THE ISSUER
THE COMPANY
Fund America Investors Corporation II (the "Company") was incorporated
in the State of Delaware on December 14, 1992 as a limited purpose finance
corporation. All of its outstanding capital stock is owned by Steven B. Chotin.
The Company maintains its principal office at 6400 S. Fiddler's Green Circle,
Suite 1200B, Englewood, Colorado 80111. Its telephone number is (303) 290-6025.
As specified in the related Prospectus Supplement, the Administrator,
if any, with respect to any series of Securities evidencing interests in
Mortgage Loans, Multifamily Loans or Contracts, and the Non-Agency Administrator
with respect to any Non-Agency Certificate, may be an affiliate of the Company.
The Company anticipates that it will acquire Mortgage Loans, Multifamily Loans,
Agency Securities, Non-Agency Certificates, Private Mortgage-Backed
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Securities and Contracts in the open market or in privately negotiated
transactions, which may be through or from an affiliate.
Neither the Company nor any of its affiliates will insure or guarantee
the Securities of any Series. See "Special Considerations -- Limited Assets."
OWNER TRUST ISSUER
Any Owner Trust established to act as an Issuer of one or more Series
of Bonds will be created pursuant to a Deposit Trust Agreement between Steven B.
Chotin or the Company (the "Initial Depositor"), acting as depositor, and the
related Owner Trustee. The Initial Depositor (if Steven B. Chotin) will transfer
all of the certificates representing beneficial ownership of each such Owner
Trust ("Certificates of Beneficial Ownership") to the Company prior to any
issuance of Bonds by such Owner Trust. The Company may sell or assign such
Certificates of Beneficial Ownership, in whole or in part, to another entity or
entities at the time of, or subsequent to, the issuance of any Bonds by such
Owner Trust.
The Owner Trust issuing a Series of Bonds will pledge the Assets
securing such Series of Bonds to the Trustee under the Indenture for such
Series. Each Indenture will prohibit such Owner Trust from incurring debt
obligations other than Bonds and similar Series of Bonds unless (i) the
debtholder's sole recourse with respect to such obligations is to collateral
other than the Assets pledged to secure such Bonds or (ii) such obligations are
subordinate to the Bonds.
Each Deposit Trust Agreement will provide that the Owner Trust created
under such agreement may not engage in any activities other than (i) issuing and
selling one or more series of Bonds and other similar series of bonds, (ii)
purchasing, owning, holding, pledging, or selling Mortgage Assets; provided,
however, that any indebtedness incurred in connection with such transactions
shall be secured only by collateral other than the Assets pledged to secure the
Bonds or shall be subordinate to the Bonds, and (iii) other activities which are
necessary or convenient to accomplish the foregoing and are incidental thereto.
No Deposit Trust Agreement will be subject to amendment without the
prior written consent of the related Owner Trustee and holders representing 50%
of the Certificates of Beneficial Ownership of the Owner Trust. In addition, the
amendment of certain provisions of a Deposit Trust Agreement may require the
consent of the Trustee with respect to each Series of Bonds issued by the
related Owner Trust. The holders of Certificates of Beneficial Ownership of an
Owner Trust will not be liable for payment of principal or interest on the Bonds
of any series issued by such Owner Trust and each of the holders of the Bonds of
such series will be deemed to have released such holders of Certificates of
Beneficial Ownership from any such claim, liability or obligation on or with
respect to such Bonds.
Each Deposit Trust Agreement will provide that the holders of
Certificates of Beneficial Ownership of the Owner Trust created under such
agreement shall indemnify the related Owner Trustee against all losses and
liability suffered by it in acting upon the holders' instructions, except in the
case of willful misconduct or gross negligence on the part of such Owner
Trustee. The Owner Trustee will have no liability for action taken by it in good
faith in reliance upon direction to it for the disposition of monies or
collateral pursuant to a Deposit Trust Agreement.
MANAGEMENT AGREEMENT
The Issuer with respect to a Series of Bonds may enter into a
management agreement (the "Management Agreement") with Fund America Management
Corporation ("FAMC") or another entity (FAMC or such other entity which has
entered into a Management Agreement with the Issuer being referred to herein as
the "Manager"), pursuant to which the Manager will, among other things, prepare
and make such reports as are required to be delivered by the Issuer to the
Trustee and provide advisory, accounting, administrative, clerical and other
services required in the conduct of the Issuer's business. As compensation for
its services, the Issuer will pay the Manager a management fee. The Manager will
not assume any responsibility under the Management Agreement other than to
render services called for thereunder and may subcontract to a third party all
or a portion of its duties thereunder. The Manager and its affiliates,
shareholders, directors, officers and employees will not be liable to the
Issuer, the Holders of Bonds or others, except by reason of acts constituting
bad faith, gross negligence or willful misconduct. The Manager and its
affiliates will be
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indemnified with respect to all expenses, losses, damages, liabilities, demands,
charges and claims of any nature in respect of acts or omissions performed or
omitted by it in accordance with the standards set forth in the preceding
sentence.
All of the outstanding common stock of the FAMC is owned by Steven B.
Chotin, who also owns all of the outstanding common stock of the Company and who
may act as Initial Depositor with respect to the formation of any Trust Issuers.
See "The Issuer -- The Company" and "-- Owner Trust Issuer."
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Company or the Administrator. In addition, the
Trustee will have the power and the responsibility for appointing co-trustees or
separate trustees of all or any part of the Trust Estate or Trust Fund relating
to a particular Series of Securities. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the Indenture or Agreement, as applicable, shall be conferred or imposed upon
the Trustee and such separate trustee or co-trustee jointly, or in any
jurisdiction in which the Trustee shall be incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee who shall exercise
and perform such rights, powers, duties and obligations solely at the direction
of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the applicable Indenture or Agreement, the related Securities or
of any Mortgage Loan, Agency Security, Contract, Multifamily Loan or related
document, and will not be accountable for the use or application by the Company
or an Issuer of any funds paid to the Company or such Issuer in respect of the
Securities or the related Assets, or amounts deposited in the related Collection
Account, Certificate Account or deposited into any other account for purposes of
making payments or distributions to Holders. If no Event of Default has
occurred, the Trustee will be required to perform only those duties specifically
required of it under the applicable Indenture or Agreement. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the applicable Indenture or
Agreement.
The Trustee may resign at any time and the Company or the Issuer, as
applicable, may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the applicable Indenture or Agreement, if the Trustee
becomes insolvent or in such other instances, if any, as are set forth in the
applicable Indenture or Agreement. Following any resignation or removal of the
Trustee, the Company, the Issuer or Administrator, as applicable, will be
obligated to appoint a successor Trustee. Any resignation or removal of the
Trustee and appointment of a successor Trustee does not become effective until
acceptance of the appointment by the successor Trustee.
Pursuant to the Trust Indenture Act of 1939, as amended, the Trustee
may have a "conflicting interest" if any Event of Default occurs with respect to
one or more Classes of Bonds which are Special Allocation Securities issued
under the Indenture. In such event, the Trustee may be required to resign its
trusteeship with respect to one or more Classes of such Bonds and a successor
Trustee would be appointed for such Classes.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
residential and multi-family mortgage loans which are general in nature. Because
such legal aspects are governed primarily 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 security for the Mortgage Loans or Multifamily Loans is
situated. The summaries are qualified in their entirety be reference to the
applicable federal and state laws governing the Mortgage Loans and Multifamily
Loans.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Mortgage Loans,
Multifamily Loans and Contracts. With respect to each Series for which the
related Trust Estate or Trust Fund includes Non-Agency Certificates backed by
Contracts or for which the related Trust Fund
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includes Contracts, the related Prospectus Supplement will contain a discussion
of certain legal aspects of manufactured housing contracts.
THE MORTGAGE LOANS AND MULTIFAMILY LOANS
General
Mortgages. The Mortgage Loans and Multifamily Loans will be secured
either by deeds of trust or mortgages. A mortgage creates a lien upon the real
property encumbered by the mortgage. It is not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of filing with a state or county office. There are two
parties to a mortgage: the mortgagor, who is the borrower and homeowner or the
land trustee (as described below), 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/homeowner 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 formally 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 and 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. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and/or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a pool of Mortgage Loans including
Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by a security interest in the occupancy agreement or proprietary lease
and in the related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
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Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by
a non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lien holders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees, which
may be recovered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In 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 foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
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. Any
loss may be reduced by the receipt of any mortgage insurance proceeds.
When the beneficiary under a junior deed of trust cures the default and
state law allows the beneficiary to reinstate or redeem by paying the full
amount of the senior deed of trust, then in those states the amount paid by the
beneficiary to so cure or redeem generally becomes a part of the indebtedness
secured by the junior deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgages or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
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The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may be
available to satisfy claims of the holders of junior mortgages or deeds of trust
and other junior liens and claims in order of their priority, whether or not the
mortgagor or trustee is in default, while in some states, any surplus money
remaining may be payable directly to the mortgagor or trustor. Any balance
remaining is generally payable to the mortgagor or trustor. Following the sale,
in some states the mortgagee or beneficiary following a foreclosure of a
mortgage or deed of trust may not obtain a deficiency judgment against the
mortgagor or trustor. A junior lienholder whose rights in the property are
terminated by the foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of the
cooperative 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.
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Junior Liens; Rights of Senior Mortgagees or Beneficiaries
Certain of the Mortgage Loans, including Title I Loans, may be secured
by mortgages or deeds of trust providing for junior (i.e. second, third, etc.)
liens on the related Mortgaged Properties which are junior to the other
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the beneficiary under a junior deed of trust or as mortgagee under
a junior mortgage are subordinate to those of the mortgagee or beneficiary under
the senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Mortgage Loans to be sold upon default of
the mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states may satisfy a defaulted senior loan in full and in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or 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 mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligates the mortgagor or
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 mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust.
Right of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
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 or sale
under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount due
to the lender. 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
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the full debt before bringing a personal action against the borrower. Finally,
other statutory provisions limit any deficiency judgment against the former
borrower following a judicial sale to the excess of the outstanding debt over
the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, 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 fact 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 have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage. 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 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. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions
Certain of the Mortgage Loans will contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of a loan if the borrower
sells, transfers, or conveys the property. The enforceability of these clauses
was 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 prohibiting 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.
Exempted from the general rule of enforceability of due-on-sale clauses
were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale clauses
and ending on October 15, 1982 ("Window Period Loans"). However, this exception
applied only to transfers of property underlying Window Period Loans occurring
between October 15, 1982 and October 15, 1985 and does not restrict enforcement
of a due-on-sale clause in connection with current transfers of property
underlying
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Window Period Loans. Due-on-sale clauses contained in mortgage loans originated
by federal savings and loan associations or federal savings banks are fully
enforceable pursuant to regulations of the Office of Thrift Supervision (the
"OTS"), as successor to the Federal Home Loan Bank Board which preempt state law
restrictions on the enforcement of due-on-sale clauses.
The Garn-St. Germain Act also sets forth nine instances in which a
mortgage lender covered by the Garn-St. Germain Act (including federal savings
and loan associations and federal savings banks) 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. German Act by the
Federal Home Loan Bank Board as succeeded by the OTS, also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. If interest rates were to rise above the interest rates on
the Mortgage Loans, then any inability of the Servicer or the Administrator to
enforce due-on-sale clauses may result in the related Trust Estate or Trust Fund
including a greater number of loans bearing below-market interest rates than
would otherwise be the case, since a transferee of the property underlying a
Mortgage Loan would have a greater incentive in such circumstances to assume the
transferor's Mortgage Loan. Any inability to enforce due-on-sale clauses may
affect 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 are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include 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.
The standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges (to the extent permitted by law and not waived) will be
retained by the Administrator , the Non-Agency Administrator, the Servicer or
the Non-Agency Servicer as additional servicing compensation.
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be deemed to be a "holder
in due course" within the meaning of the Uniform Commercial Code and may take
such a mortgage note subject to certain restrictions on its ability to foreclose
and to certain contractual defenses available to a mortgagor.
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 will generally 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 addition, under federal environmental
legislation and under
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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 secured lender (such as a Certificate
Trustee, a PMBS Trustee, or a Trust Estate or Trust Fund) to homeowners. In the
event that title to a property securing a Mortgage Loan or Multifamily Loan in a
pool of Mortgage Loans was acquired by a Certificate trustee, a PMBS Trustee, or
a Trust Estate or Trust Fund and cleanup costs were incurred in respect of the
property, the Holders of the related Securities might realize a loss if such
costs were required to be paid. In addition, the presence of certain
environmental contamination, including, but not limited to, lead-based paint,
asbestos and leaking underground storage tanks could result in the holders of
the related Securities realizing a loss if associated costs were required to be
paid. The Company, the Administrator, the Underwriters, the Sellers, the
Servicers, the Non-Agency Administrator, the Non-Agency Servicers and any of
their respective affiliates (i) have not caused any environmental site
assessments or evaluations to be conducted with respect to any properties
securing the Mortgage Loans or Multifamily Loans, (ii) are not required to make
any such assessments or evaluations and (iii) make no representations or
warranties and assume no liability with respect to the absence or effect of
hazardous wastes or hazardous substances on any property or any casualty
resulting from the presence or effect of hazardous wastes or hazardous
substances.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The OTS, as successor
to the Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized 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. Certain states have enacted legislation
rejecting 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.
With respect to Title I Loans, Section 529 of the National Housing Act
(12 U.S.C. -- 1735f-7) provides that state usury limitations are not applicable
to any loan, mortgage or advance which is insured under Title I. The statute
authorized any state to reimpose interest rate limits by adopting a provision of
law. No state has enacted any reported statute to reimpose interest rate limits
with respect to any loan, mortgage or advance that is insured under Title I.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation or similar
limitations under state law could have an effect, for an indeterminate period of
time, on the ability of the Servicers to collect full amounts of interest on
certain of the Mortgage Loans. In addition, the Relief Act imposes limitations
which would impair the ability of the Servicers to foreclose on an affected
Mortgage Loan during the borrower's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default there may be delays and losses
occasioned by the inability to realize upon the related Mortgaged Property in a
timely fashion.
Unless otherwise specified in the Prospectus Supplement for a Series of
Securities, any shortfalls in interest collections resulting from application of
the Relief Act to the related Mortgage Loans would result in losses to the
holders of such Certificates.
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CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of a Contract to all claims and defenses which the debtor could
assert against the related contractor. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trust against such obligor.
The obligations of the obligor under each Unsecured Contract are not
secured by an interest in the related real estate or otherwise, and the related
Trust Estate or Trust Fund, as the owner of an Unsecured Contract, will be a
general unsecured creditor as to such obligations. As a consequence, in the
event of a default under an Unsecured Contract, the related Trust Estate or
Trust Fund will have recourse only against the obligor's assets generally, along
with all other general unsecured creditors of the obligor. In a bankruptcy or
insolvency proceeding relating to an obligor on an Unsecured Contract, the
obligations of the obligor under such Unsecured Contract may be discharged in
their entirety, notwithstanding the fact that the portion of such obligor's
assets made available to the Trust Estate or Trust Fund as a general unsecured
creditor to pay amounts due and owing thereunder are insufficient to pay all
such amounts.
THE TITLE I PROGRAM
Certain of the Mortgage Loans or Contracts contained in a Trust Fund
may be loans insured under the FHA Title I credit insurance program created
pursuant to Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title
I Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up to
90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of loans, which are eligible for insurance by the FHA under
the Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan is a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a property and includes: (1) single family,
multifamily and nonresidential property improvement loans; (2) manufactured home
improvement loans, where the home is classified as personalty; (3) historic
preservation loans; and (4) fire safety equipment loans in existing health care
facilities. A Manufactured Home Loan or Title I Contract is a loan for the
purchase or refinancing of a
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manufactured home and/or the lot on which to place such home and includes: (1)
manufactured home purchase loans; (2) manufactured home lot loans; and (3)
combination loans.
In addition to these types of loans, there are two basic methods of
lending or originating loans which include a "direct loan" or a "dealer loan".
With respect to a direct loan, the borrower makes application directly to a
lender without any assistant from a dealer, which application may be filled out
by the borrower or by a person acting at the direction of the borrower who does
not have a financial interest in the loan transaction, and the lender may
disburse the loan proceeds solely to the borrower or jointly to the borrower and
other parties to the transaction. With respect to a dealer loan, the dealer, who
has a direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower in
obtaining the loan from the lender and the lender may disburse proceeds solely
to the dealer or the borrower or jointly to the borrower and the dealer or other
parties. With respect to a dealer Title I Loan, a dealer may include a seller, a
contractor or supplier of goods or services, and with respect to a dealer Title
I Contract, a dealer is a person engaged in the business of manufactured home
retail sales.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly, or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's irregular
flow of income. The first or last payments (or both) may vary in amount but may
not exceed 150% of the regular installment payment, and the first payment may be
due no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable Federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatement of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans
The maximum principal amounts for Title I Loans must not exceed the
actual cost of the project plus any applicable fees and charges allowed under
the Title I Program; provided that such maximum principal amount does not exceed
the following loan amounts: (i) $25,000 for a single family property improvement
loan and nonresidential property improvement loans; (ii) the lesser of $60,000
or an average of $12,000 per dwelling unit for multifamily property improvement
loans; and (iii) $17,500 for a manufactured home improvement loan when the
manufactured home qualifies as real property. Generally, the term of a Title I
Loan may not be less than six months nor greater than 20 years and 32 days,
except that the maximum term of a single family property improvement loan on a
manufactured home is limited to 15 years and 32 days and the maximum term of a
manufactured home improvement loan is limited to 12 years and 32 days. A
borrower may obtain multiple Title I Loans with respect to multiple properties,
and a borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total
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outstanding balance of all Title I Loans on the same property does not exceed
the maximum loan amount for the type of Title I Loan thereon having the highest
permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan where
the borrower fails to submit a completion certificate.
Requirements for Title I Contracts
The maximum principal amount for any Title I Contract must not exceed
the sum of certain itemized amounts, which include a specified percentage of the
purchase price of the manufactured home depending on whether it is a new or
existing home; provided that such maximum amount does not exceed the following
loan amounts: (i) $48,600 for a new or existing manufactured home purchase loan;
(ii) $16,200 for a manufactured home lot purchase; and (iii) $64,800 for a
combination loan (i.e. a loan to purchase a new or existing manufactured home
and the lot for such home). Generally, the term of a Title I Contract may not be
less than six months nor greater than 20 years and 32 days, except that the
maximum term of a manufactured home lot loan is limited to 15 years and 32 days
and the maximum term of a multimodule manufactured home and lot in combination
is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the borrower
become the owner of the property to be financed with such loan and occupy the
manufactured home as the borrower's principal residence, except for a
manufactured home lot loan which allows six months from the date of the loan to
occupy the home as the borrower's principal residence. If a manufactured home is
classified as realty, then ownership of the home must be in fee simple, and
also, the ownership of the manufactured home lot must be in fee simple, except
for a lot which consists of a share in a cooperative association that owns and
operates a manufactured home park. The borrower's minimum cash down payment
requirement to obtain financing through a Title I Contract is as follows: (i) at
least 5% of the first $5,000 and 10% of the balance of the purchase price of a
new manufactured home and at least 10% of the purchase price of an existing
manufactured home for a manufactured home purchase loan, or in lieu of a full or
partial cash down payment, the trade-in of the borrower's equity in an existing
manufactured home; (ii) at least 10% of the purchase price and development costs
of a lot for a manufactured home lot loan; and (iii) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of the manufactured home and
lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
ss.ss. 5401-5426), so as to conform to all applicable Federal construction and
safety standards, and with respect to the purchase of a new manufactured home,
the manufacturer must furnish the borrower with a one year written warranty on a
HUD approved form which obligates the manufacturer to correct any nonconformity
with all applicable Federal construction and safety standards or any defects in
materials or workmanship which become evident within one year after the date of
delivery. The regulations under the Title I Program set forth certain additional
requirements relating to the construction, transportation and installation of
any manufactured home and standards for the manufactured homesite financed by
any Title I Contract. The proceeds from a Title I Contract may be used as
follows:
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the purchase or refinancing of a manufactured home, a suitably developed lot for
a manufactured home already owned by the borrower or a manufactured home and
suitably developed lot for the home in combination; or the refinancing of an
existing manufactured home already owned by the borrower in connection with the
purchase of a manufactured home lot or an existing lot already owned by the
borrower in connection with the purchase of a manufactured home. In addition,
the proceeds for a Title I Contract which is a manufactured home purchase loan
may be used for the purchase, construction or installation of a garage, carport,
patio or other comparable appurtenance to the manufactured home, and the
proceeds for a Title I Contract which is a combination loan may be used for the
purchase, construction or installation of a foundation, garage, carport, patio
or other comparable appurtenance to the manufactured home. The proceeds from a
Title I Contract cannot be used for the purchase of furniture or the financing
of any items and activities which are set forth on the list published by the
Secretary of HUD as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the
manufactured home (or lot or home and lot, as appropriate), its furnishings,
equipment, accessories and appurtenance, which lien must be a first lien,
superior to any other lien on the property which is evidenced by a properly
recorded financing statement, a properly recorded security instrument executed
by the borrower and any other owner of the property or other acceptable
instrument. With respect to any Title I Contract involving a manufactured home
purchase loan or combination loan and the sale of the manufactured home by a
dealer, the lender or its agent (other than a manufactured home dealer) must
conduct a site-of-placement inspection within 60 days after the date of the loan
to verify that the terms and conditions of the purchase contract have been met,
the manufactured home and any options and appurtenances included in the purchase
price or financed with the loan have been delivered and installed and the
placement certificate executed by the borrower and the dealer is in order.
FHA Insurance Coverage
Under the Title I Program the FHA establishes an insurance coverage
reserve account for each lender which has been granted a Title I insurance
contract. The amount of insurance coverage in this account is a maximum of 10%
of the amount disbursed, advanced or expended by the lender in originating or
purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments permitted or required by the Title I regulations. The
balance in the insurance coverage reserve account is the maximum amount of
insurance claims the FHA is required to pay to the related lender. Loans to be
insured under the Title I Program will be registered for insurance by the FHA,
and the increase in Title I insurance coverage to which the lender is entitled
by reason of the reporting of such loans under the lender's contract of
insurance will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
The FHA charges a fee, which is the equivalent of an insurance premium, of 0.50%
of the related loan amount, multiplied by the number of years of the loan term.
Although the total insurance premium charged by the FHA is 0.50%, the annual
installment varies depending upon the type and maturity of the loan. Thus, the
effective cost of the insurance premium charge may vary between 0.50% and 1.0%
per annum, unless the loan is held to maturity. The FHA bills the related lender
in advance for the applicable insurance premium charge on each loan insured
under the Title I Program, on approximately the anniversary date of the date the
Secretary of HUD acknowledges the loan report. If a loan insured under the Title
I Program is prepaid during the year, the FHA will not refund or abate the
insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans, (ii)
prior to October 1, 1995, the amount of the Annual Reductions attributable to
the contract of insurance and (iii) the amount of reduction of the lender's FHA
insurance coverage reserve account by reason of the sale, assignment or transfer
of loans registered under the lender's contract of insurance. Such insurance
coverage also may be reduced for any FHA insurance claims previously disbursed
to the lender that are subsequently rejected by the FHA. After a lender has held
its Title I contract of insurance for five years, the lender's FHA insurance
coverage reserve account is subject to an annual reduction (the "Annual
Reduction") on each October 1 in an amount equal to 10% of the insurance
coverage reserves available on such date with respect to such contract of
insurance; provided that such Annual Reduction shall not reduce the insurance
coverage to an amount less than $50,000. On June 5, 1995 the FHA announced the
elimination of such annual reductions, effective as of October 1, 1995.
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Upon the receipt and acknowledgment by the FHA of a loan report,
originations of new loans will increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A lender is permitted to sell or otherwise transfer loans reported for
insurance under the Title I Program only to another lender. Upon any such
transfer, except a transfer with recourse or under a guaranty or repurchase
agreement, the seller is required to file a transfer report with the FHA
reporting the transfer of such loans. Upon notification and approval of such
transfer, the insurance coverage reserve account of the selling lender is
reduced, and the insurance coverage reserve account of the purchasing lender is
increased, by an amount equal to the lesser of 10% of the actual purchase price
of the loans or the net unpaid principal balance of the loans, up to the total
amount of the selling lender's insurance coverage reserve account. Thus, in the
event the selling lender's insurance coverage reserve account was less than 10%
of the unpaid principal balance of its portfolio of loans reported for insurance
under the Title I Program prior to the sale, the seller's insurance coverage
reserve account may be exhausted as the result of a sale of only a portion of
its total portfolio, with the result that its remaining Title I Program
portfolio may be ineligible for Title I Program benefits until the lender
originates or otherwise acquires additional loans reported for insurance under
the Title I Program. Accordingly, the insurance coverage reserves transferred to
the purchasing lender in such case will be less than 10% of the lesser of the
purchase price or the principal balance of the portfolio of loans purchased.
Additionally, pursuant to FHA regulations, not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 fiscal year without the approval of
the Secretary of HUD. Such HUD approval is generally viewed as automatic,
provided the formal requirements for transfer are satisfied, but HUD does have
the right under FHA regulations to withhold approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a lender for losses in the portfolio of insured loans held by such
lender is limited to the amount in an insurance coverage reserve account
maintained on a lender-by-lender basis and not on a loan-by-loan basis. Except
when to do so would be in HUD's best interest (for instance, to prevent HUD from
paying out claims in excess of 10% of the aggregate original loan balance for a
pool of poorly underwritten loans), the FHA does not track or "earmark" the
loans within a lender's portfolio to determine whether the lender's insurance
coverage reserve account, reduced as the result of an insurance claim by the
lender, are, in fact, attributable to the insured loan with respect to which the
claim was made. For this reason, if a lender is holding insured loans as a
fiduciary on behalf of multiple non-affiliated beneficiaries, in order for such
a lender to cause its insurance coverage reserve account to be reduced only by
an amount to which a particular beneficiary is entitled by reason of the insured
loans beneficially held by it, the lender must segregate or "earmark" its
insurance coverage reserve account on its own books and records according to
which beneficiary is entitled to what portion of the insurance coverage in the
lender's insurance coverage reserve account as if the insurance coverage were
not commingled by the FHA in such insurance coverage reserve account. In this
way the lender can determine at what point the portion of insurance coverage in
such insurance coverage reserve account "earmarked" for a given beneficiary has
been exhausted and stop submitting additional insurance claims on behalf of such
beneficiary. In the event that, for any reason, such lender continues to submit
claims with respect to loans held on behalf of a beneficiary whose portion of
insurance coverage in its insurance coverage reserve account has been exhausted,
the FHA will continue to honor such claims until all insurance coverage in such
lender's insurance coverage reserve account has been exhausted, even though such
insurance coverage reserve account may, in fact, be held by the lender for the
benefit of a different beneficiary than the beneficiary of the insured loans to
which the claims relate under a separate contractual agreement.
Claims Procedures Under Title I
The term "default" is defined under FHA regulations as the failure of
the borrower to make any payment due under the note for a period of 30 days
after such payment is due. The "date of default" is considered to be the date 30
days after the borrower's first failure to make an installment payment on the
note that is not covered by subsequent payments applied to overdue installments
in the order they became due. When a loan reported for insurance under the Title
I Program goes into default, the lender is required to contact the borrower and
any co-maker and co-signer by telephone or in person to determine the reasons
for the default and to seek a cure. If such lender is not able to effect a cure
after diligent efforts, it may provide the borrower with a notice of default
stating that the loan will be accelerated in 30 days if the loan is not brought
current or the borrower does not enter into a loan modification agreement or
repayment plan. The notice of default must meet certain requirements set forth
in the FHA regulations and must conform to applicable state law provisions. Such
lender is permitted to rescind the acceleration of maturity of the loan
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only if the borrower brings the loan current, executes a modification agreement
or agrees to an acceptable repayment plan.
Following acceleration of maturity of a secured property improvement
loan, the lender has the option to proceed against the security or make a claim
under its contract of insurance. If the lender chooses to proceed against the
mortgaged property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the mortgaged property), (i) the lender must proceed
against the loan security by foreclosure and acquire good, marketable title to
the property securing the loan and (ii) the lender must take all actions
necessary under applicable law to preserve its rights, if any, to obtain a
deficiency judgment against the borrower, provided however, the lender may still
file an FHA insurance claim, but only with the prior approval of the Secretary
of HUD.
If a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession and, where the borrower is in bankruptcy or deceased, evidence
that the lender has properly filed proofs of claims. Generally, a lender must
file its claim of insurance with the FHA no later than (i) for any Title I Loan,
nine months after the date of default of such loan or (ii) for any Title I
Contract, three months after the date of sale of the property securing the loan,
but not to exceed 18 months after the date of default of such loan. Concurrently
with filing the insurance claim, the lender is required to assign to the United
States of America it's entire interest in the note (or a judgment in lieu of the
note), in any securities held and in any claims filed in any legal proceedings.
If, at the time the note is assigned to the United States, the Secretary of HUD
has reason to believe that the note is not valid or enforceable against the
borrower, the FHA may deny the claim and reassign the note to the lender. If
either such defect is discovered after the FHA has paid a claim, the FHA may
require the lender to repurchase the paid claim and to accept an assignment of
the loan note. If the lender subsequently obtains a valid and enforceable
judgment against the borrower, the lender may resubmit a new insurance claim
with an assignment of the judgment. The FHA may contest any insurance claim
previously paid by it and make a demand for repurchase of the loan with respect
to which the claim was paid at any time up to two years from the date the claim
was certified for payment and may do so thereafter in the event of fraud or
misrepresentation on the part of the lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the lender and must be accompanied
by copies of certain relevant documents and documentation specified in the FHA
regulations to support the claim. The lender is required, among other things, to
document its efforts to effect recourse against any dealer in accordance with
any recourse agreement with such dealer. If the loan is subject to an
unsatisfied dealer recourse Agreement claim, the lender is also required to
assign its rights under such recourse agreement. The FHA has the right to deny
any claim for insurance in whole or in part based upon a violation of the FHA
regulations unless a waiver of compliance is granted. The lender is permitted to
appeal any such claim denial and resubmit the claim within six months of the
date of the claim denial, subject to a reprocessing fee.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "Claimable
Amount" is equal to 90% of the sum of: (a) the unpaid loan obligation (net
unpaid principal and the uncollected interest earned to the date of default)
with adjustments thereto if the lender has proceeded against property securing
such loan; (b) the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for payment plus
15 calendar days (the total period not to exceed nine months from the date of
default), calculated at the rate of 7% per annum; (c) the uncollected court
costs; (d) the attorneys' fees not to exceed $500; (e) the expenses for
recording the assignment of the security to the United States; and (f) if the
loan is a Title I Contract, certain costs incurred in connection with the
foreclosure or repossession of the manufactured home and/or lot.
LEGAL INVESTMENT MATTERS
Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they
are rated in one of the two highest rating categories established for such
Securities by at least one nationally
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recognized statistical rating organization. As "mortgage related securities,"
such Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including but not limited to state-chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or any State (including the District of
Columbia and Puerto Rico) 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. Pursuant
to SMMEA, Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia,
Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska, New
Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia, and
West Virginia each enacted legislation prior to the October 4, 1991 deadline for
such enactments, limiting to varying extends the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities," in
most cases by requiring the affected investors to rely upon existing state law,
and not SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in the Securities only to the extent provided in such
legislation.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain Classes of the Securities.
Any financial institution which is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the National Credit Union Administration ("NCUA"), or other
federal or state agencies with similar authority should review any applicable
rules, guidelines and regulations prior to purchasing the Securities. The
Federal Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement"). The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS, and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain Classes of Securities), except under
limited circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
Notwithstanding SMMEA, there may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase
Securities or to purchase Securities representing more than a specified
percentage of the investors' assets.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
If specified in the related Prospectus Supplement, other Classes of
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
Securities under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the Securities, may be
subject to significant interpretive uncertainties. No representation is made as
to the proper characterization of Securities not qualifying as "mortgage related
securities" for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase such Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determination concerning legal investment or financial
institution regulatory characteristics of such Certificates) may adversely
affect the liquidity of such Securities.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
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ERISA CONSIDERATIONS
In considering an investment in a Security of the assets of any
employee benefit plan or retirement arrangement, including individual retirement
accounts and annuities, Keogh plans, and collective investment funds in which
such plans, accounts, annuities or arrangements are invested, that are described
in or subject to the Plan Asset Regulations, ERISA, or corresponding provisions
of the Code (each hereinafter referred to as a Plan), a fiduciary should
consider, among other things, (i) the purposes, requirements, and liquidity
needs of such Plan; (ii) the impact of the plan asset provisions of ERISA and
DOL regulations concerning the definition of plan assets; (iii) whether the
investment satisfies the diversification requirements of section 404(a)(1)(C) of
ERISA; and (iv) whether the investment is prudent, considering the nature of an
investment in a Security and the fact that no market in which such fiduciary can
sell or otherwise dispose of Securities may be created or, if created, will
continue to exist for the life of the Securities. The prudence of a particular
investment must be determined by the responsible fiduciary (usually the trustee
or investment manager) with respect to each Plan taking into account all of the
facts and circumstances of the investment.
Sections 406 and 407 of ERISA and section 4975 of the Code prohibit
certain transactions that involve (i) a Plan and any "party in interest" or
"disqualified person" with respect to such Plan, and (ii) plan assets. The Plan
Asset Regulations issued by the DOL define "plan assets" to include not only
securities (such as the Securities) held by a Plan but also the underlying
assets of the issuer of any equity securities, unless one or more exceptions
specified in those Regulations are satisfied. Thus, under the Plan Asset
Regulations, a Plan that acquires a Security could be treated for ERISA purposes
as having acquired a direct interest in some or all of the assets in the related
Trust. Such treatment could cause certain transactions with respect to such
assets to be deemed "prohibited transactions" under ERISA and, in addition,
could result in a finding of an improper delegation by the plan fiduciary of its
duty to manage plan assets.
The DOL has issued several exemptions from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of section 4975
of the Code. Those exemptions include, but are not limited to: (1) Prohibited
Transaction Class Exemption 95-6 ("PTCE 95-6"), regarding investments by
insurance company general accounts; (2) Prohibited Transaction Class Exemption
91-38, regarding investment by bank collective investment funds; (3) Prohibited
Transaction Class Exemption 90-1, regarding investments by insurance company
pooled separate accounts; (4) Prohibited Transaction Class Exemption 83-1,
regarding acquisitions by Plans of interests in mortgage pools; and (5) various
underwriter exemptions. Before purchasing any Securities, a Plan subject to the
fiduciary responsibility provisions of ERISA or described in section 4975(e)(1)
of the Code should consult with its counsel to determine whether the conditions
of any exemption would be met. A purchaser of Securities should be aware,
however, that certain of the exemptions do not apply to the purchase, sale, and
holding of subordinated certificates. In addition, PTCE 83-1 will not apply to
Securities evidencing interests in a Trust or Trust Fund that contains
Contracts. Moreover, even if the conditions specified in one or more exemptions
are met, the scope of the relief provided by an exemption might not cover all
acts that might be construed as prohibited transactions.
The Plan Asset Regulations will not apply to a Security if (1) the
Security is registered under the Securities Exchange Act of 1934, is freely
transferable and is part of a class of Securities than is held by more than 100
unrelated investors (the "Publicly Offered Exception") or (2) immediately after
the most recent acquisition of a Security of the same Series, benefit plan
investors do not own 25% or more of the value of any class of Securities in that
Series (the "Insignificant Participation Exception"). A purchaser of Securities
should be aware, however, that determining whether the Insignificant
Participation Exception applies is administratively impracticable in many
situations. Prior to purchasing a Security, a Plan should consult with its
counsel to determine whether the Publicly Offered Exception, the Insignificant
Participation Exception, or any other exception to the Plan Asset Regulations
would apply to the purchase of the Security.
Section 403 of ERISA requires that all plan assets be held in trust.
However, under regulations that became effective on June 17, 1982, even if the
underlying assets of an issuer of securities (such as the Securities) are deemed
to be plan assets of a Plan investing in such securities, the "holding in trust"
requirement of section 403 of ERISA will be satisfied if such securities are
held in trust on behalf of the Plan.
Because the purchase or holding of Securities may result in unfavorable
consequences for a Plan or its fiduciaries under the Plan Asset Regulations or
the prohibited transaction provisions of ERISA or the Code, (i) certain
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classes of Securities will not be offered for sale to, and are not transferable
to, any Plan Investor and (ii) certain Classes of Securities will not be offered
for sale to, and are not transferable to, any Plan Investor unless such Plan
Investor provides the Company with a Benefit Plan Opinion (i.e., an opinion of
counsel satisfactory to the Company and the Servicer (and upon which the
Company, the Servicer, the Trustee, the TMP, and their respective counsel are
authorized to rely) generally to the effect that the ownership of a Security of
such class will not (1) cause any of the assets in the related Trust Estate or
Trust Fund to be regarded as plan assets for purposes of the Plan Asset
Regulations; (2) give rise to any fiduciary duty under ERISA on the part of the
Company, the Trustee, a Servicer, or the TMP; or (3) be treated as, or result
in, a prohibited transaction under sections 406 and 407 of ERISA or section 4975
of the Code.) The Prospectus Supplement for an affected Series will indicate
which classes of Securities are restricted in their availability to benefit plan
investors.
In considering the possible application of the Plan Asset Regulations,
potential Plan Investors should be aware that, with respect to certain Series
and under certain circumstances, the Servicer and the holders of a majority in
interest of the related Residual Securities may have a right to redeem the
Securities of such Series, at its option. In such cases, the Servicer's purpose
for the retention of such a redemption right is to enable the Servicer to
terminate its administration obligations with respect to the Securities in the
event such obligations become unprofitable. The Servicer undertakes no
obligation to consider the interests of Securityholders in deciding whether to
exercise any redemption right.
As described in "Federal Income Tax Consequences" above, an investment
in a Security may produce UBTI for tax-exempt employee benefit plans. Potential
investors also should be aware that ERISA requires that the assets of a Plan be
valued at their fair market value as of the close of the plan year. Neither the
Company, the Servicer nor the Underwriters currently intend to provide
valuations to Securityholders.
Prospective purchasers of Securities that are insurance companies
should be aware that the United States Supreme Court interpreted the fiduciary
responsibility rules of ERISA in John Hancock Mutual Life Insurance Co. v.
Harris Bank and Trust. In John Hancock, the Supreme Court rules 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 of Securities
that are insurance companies should consult with their counsel with respect to
the application of the John Hancock case and PTCE 95-60 to their purchase of
Securities, and should be aware that certain restrictions may apply to their
purchase of Securities.
Due to the complexity of the rules applicable to Plans and Plan
fiduciaries, and the considerable uncertainty that exists with respect to many
aspects of those rules, Plan Investors contemplating the acquisition of
Securities should consult their legal advisors with respect to the ERISA, Code,
and other consequences of an investment in the Securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of Securities
of any Series, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Company with
respect to that Series on the material matters associated with such
consequences, subject to any qualifications set forth herein. Counsel to the
Company for each Series will be Andrews & Kurth L.L.P. or Hunton & Williams, as
specified in the Prospectus Supplement ("Counsel to the Company"). The
discussion below does not purport to address all federal income tax consequences
that may be applicable to particular categories of investors, some of which may
be subject to special rules. The authorities on which this discussion is based
are subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the enactment
of the Tax Reform Act of 1986 (the "1986 Act"), the Technical and Miscellaneous
Revenue Act of 1988 ("TAMRA") and the Revenue Reconciliation Act of 1993, as
well as final Treasury regulations concerning REMICs ("REMIC Regulations")
promulgated by the U.S. Department of the Treasury. The discussion focuses
primarily on investors who will hold the Securities as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code, although much of the discussion is applicable to
other investors as well. Investors should note that, although the Treasury has
issued the REMIC Regulations, no currently effective regulations or other
administrative guidance has been issued with respect to certain provisions of
the Code that are or may be applicable to Securityholders, particularly the
provisions dealing
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with market discount and stripped debt securities. Although the Treasury
recently issued final regulations dealing with original issue discount and
premium, those regulations do not address directly the treatment of REMIC
Regular Securities and certain other types of securities. Furthermore, the REMIC
Regulations do not address many of the issues that arise in connection with the
formation and operation of a REMIC. Hence, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of Securityholders,
particularly Residual Securityholders (as described below). Moreover, this
summary and the opinion referred to below are based on current law, and there
can be no assurance that the Service will not take positions that would be
materially adverse to investors. Finally, the summary does not purport to
address the anticipated state income tax consequences to investors of owning and
disposing of the Securities. Consequently, investors should consult their own
tax advisors in determining the federal, state, foreign, and any other tax
consequences to them of the purchase, ownership, and disposition of the
Securities.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Loans, Agency Securities, Private Mortgage-Backed Securities, Multifamily Loans
or Contracts underlying a Series of Securities, references to the Mortgage
Loans, Agency Securities, Private Mortgage-Backed Securities, Multifamily Loans
or Contracts will be deemed to refer to that portion of the Mortgage Loans,
Agency Securities, Private Mortgage-Backed Securities, Multifamily Loans or
Contracts held by the Trust Fund or Trust Estate which does not include the
fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC SECURITIES
GENERAL
With respect to a particular Series of Securities, an election may be
made to treat the Trust Fund, Trust Estate or one or more trusts or segregated
pools of assets therein as one or more REMICs within the meaning of Code Section
860D. A Trust Fund, Trust Estate or a portion or portions thereof as to which a
REMIC election will be made will be referred to as a "REMIC Pool." For purposes
of this discussion, Securities of a Series as to which one or more REMIC
elections are made are referred to as "REMIC Securities" and will consist of one
or more Classes of "Regular Securities" and one Class of "Residual Securities"
in the case of each REMIC Pool. Qualification as a REMIC requires ongoing
compliance with certain conditions. Upon the issuance of each Series of REMIC
Securities, counsel to the Company will give its opinion generally to the effect
that, assuming (i) the making of an appropriate election, (ii) compliance with
the Agreement or Indenture, as applicable, and (iii) continuing compliance with
the applicable provisions of the Code, as it may be amended from time to time,
and any applicable Treasury regulations adopted thereunder, each REMIC Pool will
qualify as a REMIC. The following general discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of REMIC
Securities, to the extent it relates to matters of law or legal conclusions with
respect thereto, represents the opinion of counsel to the Company, subject to
any qualifications set forth herein. In addition, counsel to the Company has
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
REMIC Securities," and is of the opinion that such statements are correct in all
material respects. Such statements are intended as an explanatory discussion of
the possible effects of the classification of any Trust Fund or Trust Estate (or
applicable portion thereof) as a REMIC for federal income tax purposes on
investors generally and of related tax matters affecting investors generally,
but do not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided by
an investor's own tax advisor. Accordingly, each investor is advised to consult
its own tax advisors with regard to the tax consequences to it of investing in
REMIC Securities. With respect to each Series of REMIC Securities, the Regular
Securities will be considered to be "regular interests" in the REMIC Pool and
generally will be treated for federal income tax purposes as if they were newly
originated debt instruments, and the Residual Securities will be considered to
be "residual interests" in the REMIC Pool. The Prospectus Supplement for each
Series of Securities will indicate whether one or more REMIC elections with
respect to the related Trust Fund or Trust Estate will be made, in which event
references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to each
such REMIC Pool. For purposes of this discussion, unless otherwise specified
herein or in the applicable Prospectus Supplement, the term "Mortgage Loans"
will be used to refer to Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities (other than residual interests and collateralized
mortgage loans), Multifamily Loans and Contracts.
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STATUS OF REMIC SECURITIES
REMIC Securities held by a thrift institution taxed as a mutual savings
bank or a domestic building and loan association (a "Thrift Institution") would
be treated as "loans... secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v) or as other assets described in Code
Section 7701(a)(19)(C) in the same proportion that the assets of the related
REMIC Pool would so qualify. REMIC Securities held by a real estate investment
trust (a "REIT") will constitute "real estate assets" within the meaning of Code
Section 856(c)(5)(A), and interest on the REMIC Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. However, if at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Securities will be treated entirely as qualifying assets for such entities (and
the income will be treated entirely as qualifying income). Moreover, the REMIC
Regulations provide that, for purposes of Code Section 856(c)(5)(A), payments of
principal and interest on the Mortgage Loans that are reinvested pending
distribution to holders of REMIC Securities constitute qualifying assets for
such entities. Where two REMIC Pools are part of a tiered structure they will be
treated as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. Notwithstanding the foregoing, however,
REMIC income received by a REIT owning a residual interest in a REMIC Pool could
be treated in part as non-qualifying REIT income if the REMIC Pool holds
Mortgage Loans with respect to which income is contingent on mortgagor profits
or property appreciation. In addition, if the assets of the REMIC include
buy-down Mortgage Loans, it is possible that the percentage of such assets
constituting "loans . . . secured by an interest in real property" for purposes
of Code Section 7701(a)(19)(C)(v), may be required to be reduced by the amount
of the related buy-down funds. REMIC Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of Code
Section 851(b)(4)(A)(i). REMIC Securities held by certain financial institutions
will constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1) and REMIC Securities will not constitute "Government securities"
within the meaning of Code Section 851(b)(4)(A)(i). However, Regular Securities
acquired by another REMIC on its Startup Day (as defined below) in exchange for
regular or residual interests in the REMIC will constitute "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis amount of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Securities) and
at all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a "safe harbor"
pursuant to which the de minimis requirement will be met if at all times the
aggregate adjusted basis of any nonqualified assets (i.e. , assets other than
qualified mortgages and permitted investments) is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Securities as to Which No
REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Securities may continue to
be treated as debt instruments for federal income tax purposes; but the REMIC
Pool could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (i.e., income from the
Mortgage Loans less interest and original issue discount expense allocable to
the Regular Securities and any administrative expenses of the REMIC Pool) would
be subject to corporate income tax at the REMIC Pool level. On the other hand,
an entity with multiple classes of ownership interests may be treated as a
separate association taxable as a corporation under Treasury regulations, and
the Regular Securities may be treated as equity interests therein. The Code,
however, authorizes the Treasury Department to issue regulations that address
situations where failure to meet one or more of the requirements for REMIC
status occurs inadvertently and in good faith, and disqualification of the REMIC
Pool would occur absent regulatory relief. Investors should be aware, however,
that the Conference Committee Report to the 1986 Act (the "Committee Report")
indicates that the
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relief may be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the REMIC Pool's income for the period of time in
which the requirements for REMIC status are not satisfied.
TAXATION OF REGULAR SECURITIES
General
Payments received by holders of Regular Securities generally should be
accorded the same tax treatment under the Code as payments received on ordinary
taxable corporate debt instruments. In general, interest, original issue
discount and market discount on a Regular Security will be treated as ordinary
income to a holder of the Regular Security (the "Regular Securityholder") as
they accrue, and principal payments on a Regular Security will be treated as a
return of capital to the extent of the Regular Securityholder's basis in the
Regular Security allocable thereto. Regular Securityholders must use the accrual
method of accounting with regard to Regular Securities, regardless of the method
of accounting otherwise used by such Regular Securityholders.
Original Issue Discount
Regular Securities may be issued with "original issue discount" within
the meaning of Code Section 1273(a). Holders of any class of Regular Securities
having original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash or a portion of the cash
attributable to such income. Based in part on Treasury regulations governing
original issue discount (the "OID Regulations") and in part on the provisions of
the 1986 Act, the Company anticipates that the amount of original issue discount
required to be included in a Regular Securityholder's income in any taxable year
will be computed in a manner substantially as described below. Regular
Securityholders should be aware, however, that the OID Regulations either do not
address, or are subject to varying interpretations with regard to, several
issues relevant to securities, such as the Regular Securities, that are subject
to prepayment. The 1986 Act requires that the amount and rate of accrual of
original issue discount be calculated based on a reasonable assumed prepayment
rate for the Mortgage Loans in a manner prescribed by regulations not yet issued
("Prepayment Assumption") and provides for adjusting the amount and rate of
accrual of such discount where the actual prepayment rate differs from the
Prepayment Assumption. The Committee Report indicates that the regulations will
require that the Prepayment Assumption be the prepayment assumption that is used
in determining the initial offering price of such Securities. The Prospectus
Supplement for each Series of such Securities will specify the Prepayment
Assumption determined by the Company for the purposes of determining the amount
and rate of accrual of original issue discount. No representation is made that
the Securities will prepay at the Prepayment Assumption or at any other rate.
Moreover, the OID Regulations include an anti-abuse rule allowing the Internal
Revenue Service ("IRS") to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion herein and the appropriate
method for reporting interest and original issue discount with respect to the
Regular Securities.
Under the OID Regulations, each Regular Security (except to the extent
described below with respect to a Regular Security on which distributions of
principal are made in a single installment or upon an earlier distribution by
lot of a specified principal amount upon the request of a Regular Securityholder
or by random lot (a "Retail Class Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includible in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Regular Security is the first price at which a substantial amount of
Regular Securities of that class are first sold (other than to bond houses,
brokers, underwriters and wholesalers). Unless specified otherwise in the
Prospectus Supplement, the Company will determine original issue discount by
including the amount paid by an initial Regular Securityholder for accrued
interest that relates to a period prior to the issue date of the Regular
Security in the issue price of a Regular Security and will include in the stated
redemption price at maturity any interest paid on the first Distribution Date
(or Payment Date) to the extent such interest is attributable to a period in
excess of the number of days between the issue date and such first Distribution
Date (or Payment Date). The stated redemption price at maturity of a Regular
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Security always includes the original principal amount of the Regular Security,
but generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest." Under the OID Regulations,
qualified stated interest generally means stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer), or that will be constructively received, at least annually at a
single fixed rate. Special rules apply for variable rate Regular Securities as
described below. Any stated interest in excess of the qualified stated interest
is included in the stated redemption price at maturity. If the amount of
original issue discount is "de minimis" as described below, the amount of
original issue discount is treated as zero, and all stated interest is treated
as qualified stated interest. Distributions of interest on Regular Securities
with respect to which deferred interest will accrue may not constitute qualified
stated interest, in which case the stated redemption price at maturity of such
Regular Securities includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first
Distribution Date (or Payment Date) on a Regular Security is longer than the
interval between subsequent Distribution Dates (or Payment Dates) (and interest
paid on the first Distribution Date (or Payment Date) is less than would have
been earned if the stated interest rate were applied to outstanding principal
during each day in such interval), the stated interest distributions on such
Regular Security technically do not constitute qualified stated interest. The
OID Regulations provide that in such case a special rule, applying solely for
the purpose of determining whether original issue discount is de minimis,
provides that the interest shortfall for the long first period (i.e., the
interest that would have been earned if interest had been paid on the first
Distribution Date (or Payment Date) for each day the Regular Security was
outstanding) is treated as original issue discount assuming the stated interest
would otherwise be qualified stated interest. Also in such case the stated
redemption price at maturity is treated as equal to the issue price plus the
greater of the amount of foregone interest or the excess, if any, of the
Security's stated principal amount over its issue price. The OID Regulations
indicate that all interest on a long first period Regular Security that is
issued with non-de minimis original issue discount will be included in the
Regular Security's stated redemption price at maturity. Regular Securityholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the Prepayment Assumption. In addition,
if the original issue discount is de minimis all stated interest (including
stated interest that would otherwise be treated as original issue discount) is
treated as qualified stated interest. Unless the Holder of a Regular Security
elects to accrue all discount under a constant yield to maturity method, as
described below, the holder of a debt instrument includes any de minimis
original issue discount in income pro rata as capital gain recognized on
retirement of the Regular Security as stated principal payments are received. If
a subsequent Holder of a Regular Security issued with de minimis original issue
discount purchases the Regular Security at a premium, the subsequent Holder does
not include any original issue discount in income. If a subsequent Holder
purchases such Regular Security at a discount all discount is reported as market
discount, as described below.
Of the total amount of original issue discount on a Regular Security,
the Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which he holds the Regular Security, including the date of purchase but
excluding the date of disposition. Although not free from doubt, the Company
intends to treat the monthly period ending on the day before each Distribution
Date or Payment Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Security, a calculation will be made of the original issue discount that accrues
during each successive full accrual period (or shorter period from the date of
original issue) that ends on the day before the related Distribution Date or
Payment Date for the Regular Security. The original issue discount accruing in a
full accrual period would be the excess, if any, of (i) the sum of (a) the
present value of all of the remaining distributions to be made on the Regular
Security as of the end of that accrual period that are included in the Regular
Security's stated redemption price at maturity and (b) the distributions made on
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the Regular Security during the accrual period that are included in the Regular
Security's stated redemption price at maturity, over (ii) the adjusted issue
price of the Regular Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Security at the issue date giving the effect to the Prepayment Assumption, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. The effect of these rules is
to adjust the rate of original issue discount accrual to correspond to the
actual prepayment experience. For these purposes, the adjusted issue price of a
Regular Security at the beginning of any accrual period equals the issue price
of the Regular Security, increased by the aggregate amount of original issue
discount with respect to the Regular Security that accrued in all prior accrual
periods and reduced by the amount of distributions included in the Regular
Security's stated redemption price at maturity that were made on the Regular
Security in such prior periods. The original issue discount accruing during any
accrual period (as determined in this paragraph) will then be divided by the
number of days in the period to determine the daily portion of original issue
discount for each day in the period. With respect to an initial accrual period
shorter than a full accrual period, the daily portions of original issue
discount must be determined using a reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. To the extent
specified in the applicable Prospectus Supplement, an increase in prepayments on
the Mortgage Loans with respect to a Series of Regular Securities can result in
both a change in the priority of principal payments with respect to certain
Classes of Regular Securities and either an increase or decrease in the daily
portions of original issue discount with respect to such Regular Securities.
In the case of a Retail Class Security, the yield to maturity of such
Security will be determined based upon the anticipated payment characteristics
of the Class as a whole under the Prepayment Assumption. In general, the
original issue discount accruing on each Retail Class Security in a full accrual
period would be its allocable share of the original issue discount with respect
to the entire Class, as determined in accordance with the preceding paragraph.
However, in the case of a distribution of the entire principal amount of any
Retail Class Security (or portion thereof), (a) the remaining unaccrued original
issue discount allocable to such Security (or to such portion) will accrue at
the time of such distribution, and (b) the accrual of original issue discount
allocable to each remaining Security of such Class (or the remaining principal
amount of a Retail Class Security after a distribution in reduction of a portion
of its principal amount has been received) will be adjusted by reducing the
present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the principal
amount thereof that was distributed.
A subsequent holder of a Security issued with original issue discount
who purchases the Security at a cost less than the remaining stated redemption
price at maturity will also be required to include in gross income the sum of
the daily portions of original issue discount on the Security. In computing the
daily portions of original issue discount for a subsequent purchaser (as well as
an initial purchaser who purchases a Security at a price higher than the issue
price but less than the stated redemption price at maturity), however, the daily
portion for any day is reduced by the amount that would be the daily portion for
such day (computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such purchaser for the Regular Security exceeds the excess of (i) the sum of
its issue price and the aggregate amount of original issue discount that would
have been includible in the gross income of an original holder of the Regular
Security who purchased the Regular Security at its issue price, over (ii) the
amount of any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for such
Regular Security (computed in accordance with the rules set forth above) for all
days beginning on the date after the date of purchase and ending on the date on
which the remaining principal amount of such Regular Security is expected to be
reduced to zero under the Prepayment Assumption. Alternatively, such a
subsequent holder may accrue original issue discount by treating the purchase as
a purchase at original issuance and applying the constant yield to maturity
method.
The OID Regulations provide that a holder that acquires a Regular
Security may elect to include in gross income all stated interest, original
issue discount, de minimis original issue discount, market discount (as
described
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below under "Market Discount"), de minimis market discount and unstated interest
(as adjusted for any amortizable bond premium or acquisition premium) currently
as it accrues using the constant yield to maturity method. If such an election
were made with respect to a Regular Security with market discount, the Regular
Securityholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Regular Securityholder acquires during the year of the
election or thereafter. Similarly, a Regular Securityholder that makes this
election for a Regular Security that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Regular Securityholder
owns or acquires. The election to accrue interest, discount and premium on a
constant yield method with respect to a Regular Security can not be revoked
without the consent of the IRS.
Regular Securities may provide for interest based on a variable rate.
The OID Regulations provide special rules for variable rate instruments that
meet three requirements. First, the issue price must not exceed the
noncontingent principal payments by more than the lesser of (i) 1.5% of the
product of the noncontingent principal payments and the weighted average
maturity or (ii) 15% of the noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
and a single objective rate that is a qualified inverse floating rate, (iii) a
single fixed rate and one or more qualified floating rates; or (iv) a single
objective rate. Third, the instrument must provide that each qualified floating
rate or objective rate in effect during the term of the Regular Security is set
at a current value of that rate (one occurring in the interval beginning three
months before and ending one year after the rate is first in effect on the
Regular Security). If interest on a Regular Security is stated at a fixed rate
for an initial period of less than 1 year followed by a variable rate that is
either a qualified floating rate or an objective rate and the value of the
variable rate on the issue date is intended to approximate the fixed rate, the
fixed rate and the variable rate together constitute a single qualified floating
rate or objective rate. A rate is a qualified floating rate if variations in the
rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds in the Regular Security's currency denomination. A
multiple of a qualified floating rate is not a qualified floating rate unless it
is a rate equal to (i) the product of a qualified floating rate as described in
the previous sentence and a fixed multiple that is greater than 0.65 but no
greater than 1.35, or (ii) a product described in clause (i) increased or
decreased by a fixed rate. A variable rate is not a qualified floating rate if
it is subject to a cap, floor or a restriction on the amount of increase or
decrease in stated interest rate (governor) unless: (i) the cap, floor or
governor is fixed throughout the Regular Security's term, (ii) the cap or floor
is not reasonably expected to cause the yield on the Regular Security to be
significantly less or more, respectively, than the expected yield without the
cap or floor, or (iii) the governor is not reasonably expected to cause the
yield to be significantly more or less than the expected yield without the
governor. An objective rate is a rate (other than a qualified floating rate)
that (i) is determined using a single fixed formula (ii) is based on objective
financial or economic information, and (iii) is not based on information that
either is within the control of the issuer (or a related party) or is unique to
the circumstances of the issuer (or related party), such as dividends, profits,
or the value of the issuer's (or related party's) stock. That definition is
broader than the former definition of objective rate set forth in the OID
Regulations and would include, in addition to a rate that is based on one or
more qualified floating rates or on the yield of actively traded personal
property, a rate that is based on changes in a general inflation index. In
addition, a rate would not fail to be an objective rate merely because it is
based on the credit quality of the issuer.
If a variable rate Regular Security provides for stated interest at a
single qualified floating rate or objective rate that is unconditionally payable
in cash or property at least annually (i) all stated interest is qualified
stated interest, (ii) the amount of original issue discount, if any, is
determined as if the Regular Security had a fixed rate equal to (A) in the case
of a qualified floating rate or qualified inverse floating rate, the value on
the issue date of the qualified floating rate or qualified inverse floating rate
or (B) in the case of any other objective rate, a fixed rate that reflects the
yield that is reasonably expected for the Regular Security. If a variable rate
Regular Security is not described in the previous sentence, the Regular Security
is treated as a fixed rate Regular Security with a fixed rate substitute or
substitutes equal to the value of the qualified floating rates or qualified
inverse floating rate at the date of issue or, in the case of a Regular Security
having an objective rate at a fixed rate that reflects the yield reasonably
expected for the Regular Security. Qualified stated interest or original issue
discount allocable to an accrual period is adjusted to reflect differences in
the interest actually accrued or paid compared to the interest accrued or paid
at the fixed rate substitute. If a variable rate Regular Security provides for
stated interest either at one or more qualified floating rates or at a qualified
inverse floating rate and also provides for interest at an initial fixed rate
that is not intended to approximate the related floating
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rate or is fixed for a period of one year or more, original issue discount is
determined as described in the previous two sentences except that the Regular
Security is treated as if it provided for a qualified floating rate or qualified
inverse floating rate, as applicable, rather than a fixed rate. The substitute
rate must be one such that the fair market value of the Regular Security would
be approximately the same as the fair market value of the hypothetical security.
A variable rate Regular Security not qualifying for treatment under the
variable rate rules described above (a "Contingent Payment Obligation" is
subject to the contingent payment provisions of the OID Regulations (the
"Contingent Payment Regulations"). The Contingent Payment Regulations, by their
terms do not apply to REMIC regular interests and other instruments that are
subject to section 1272(a)(6) of the Code. However, in the absence of further
guidance, the Administrator will account for securities that are Contingent
Payment Obligations in accordance with Code section 1272(a)(6) and the
accounting methodology described in this paragraph. Income will be accrued on
such securities based on a constant yield that is derived from a projected
payment schedule as of the Closing Date. The projected payment schedule will
take into account the Pricing Prepayment Assumptions and the interest payments
that are expected to be made based on the value of any relevant indices on the
issue date. To the extent that actual payments differ from projected payments
for a particular taxable year, appropriate adjustments to interest income and
expense accruals will be made for that year.
The method described in the foregoing paragraph for accounting for
Contingent Payment Obligations is consistent with Code section 1272(a)(6) and
the legislative history thereto. Because of the uncertainty with respect to the
treatment of such securities under the OID Regulations, however, there can be no
assurance that the Service will not assert successfully that a method less
favorable to Certificateholders should apply. In view of the complexities and
the current uncertainties as to income inclusions with respect to Contingent
Payment obligations, each investor should consult his or her own tax advisor to
determine the appropriate amount and method of income inclusion on such
securities for federal income tax purposes.
Market Discount
A purchaser of a Regular Security also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which a subsequent purchaser's
initial basis in the Regular Security (i) is exceeded by the stated redemption
price at maturity of the Regular Security or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the sum of the issue
price of such Regular Security plus any original issue discount that would have
previously accrued thereon if held by an original Regular Securityholder (who
purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received, in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Committee Report provides that until such regulations are issued, such market
discount would accrue either (i) on the basis of a constant interest rate or
(ii) in the ratio of stated interest allocable to the relevant period to the sum
of the interest for such period plus the remaining interest as of the end of
such period, or in the case of a Regular Security issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the 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
as partial distributions in reduction of the stated redemption price at maturity
were received. Such purchaser will be required to defer deduction of a portion
of the excess of the interest paid or accrued on indebtedness incurred to
purchase or carry a Regular Security over the interest distributable thereon.
The deferred portion of such interest expense in any taxable year generally will
not exceed the accrued market discount on the Regular Security for such year.
Any such deferred interest expense is, in general, allowed as a deduction not
later than the year in which the related market discount income is recognized or
the Regular Security is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular Securityholder may
elect to include market discount in income currently as it accrues on all market
discount instruments acquired by
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such Regular Securityholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the IRS
set forth procedures for taxpayers (1) electing under Section 1278(b) of the
Code to include market discount in income currently, (2) electing under rules of
Section 1276(b) of the Code to use a constant interest rate to determine accrued
market discount on a security where the holder of the security is required to
determine the amount of accrued market discount at a time prior to the holder's
disposition of the security, and (3) requesting consent to revoke an election
under Section 1278(b) of the Code.
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Securities. The Committee Report indicates a Congressional intent that
the same rules that apply to the accrual of market discount on installment
obligations will also apply to amortizing bond premium under Code Section 171 on
installment obligations such as the Regular Securities, although it is unclear
whether the alternatives to the constant interest method described above under
"Market Discount" are available. Except as otherwise provided in Treasury
regulations yet to be issued, such amortizable bond premium will be treated as
an offset to interest income on a Regular Security rather than as a separate
deduction item. This election, once made, applies to all taxable obligations
held by the taxpayer at the beginning of the first taxable year to which such
election applies and to all taxable debt obligations thereafter acquired and is
binding on such taxpayer in all subsequent years. Purchasers who pay a premium
for their Regular Securities should consult their tax advisors regarding the
election to amortize premium and the method to be employed.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and his adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the cost of the
Regular Security to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount"
and under "Market Discount," any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period. Gain from the disposition of a Regular Security
that might otherwise be capital gain will be treated as ordinary income (i) if a
Regular Security is held as part of a "conversion transaction" as defined in
Code Section 1258(c), up to the amount of interest that would have accrued on
the Regular Securityholder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate under Code Section 1274(d) in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) in the case of a Regular Security (issued by a
REMIC) to the extent that such gain does not exceed the excess, if any, of (a)
the amount that would have been includible in the gross income of the holder if
his yield on such Regular Security were 110% of the applicable Federal rate
under Code Section 1274(d) as of the date of purchase, over (b) the amount of
income actually includible in the
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gross income of such holder with respect to the Regular Security. Although the
legislative history to the 1986 Act indicates that the portion of the gain from
disposition of a Regular Security that will be recharacterized as ordinary
income under clause (iii) is limited to the amount of original issue discount
(if any) on the Regular Security that was not previously includible in income,
the applicable Code provision contains no such limitation. In addition, gain or
loss recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c).
TAXATION OF RESIDUAL SECURITIES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Securityholders"), and will
not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Securityholder are determined by allocating the
REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Securityholders in proportion to their respective holdings of Residual
Securities in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using a
calendar year and the accrual method of accounting, except that (i) the
limitation on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts and (iii) the limitation on the deductibility of interest and
expenses related to tax-exempt income will apply. REMIC taxable income generally
means the REMIC Pool's gross income, including interest, original issue discount
income and market discount income, if any, on the Mortgage Loans, plus income on
reinvestment of cash flows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Securities,
servicing fees on the Mortgage Loans and other administrative expenses of the
REMIC Pool, amortization of premium, if any, with respect to the Mortgage Loans,
and any tax imposed on the REMIC's income from foreclosure property. The
requirement that Residual Securityholders report their pro rata share of taxable
income or net loss of the REMIC Pool will continue until there are no Securities
of any Class of the related Series outstanding.
The taxable income recognized by a Residual Securityholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Securities, on the other hand. Because of the way
REMIC taxable income is calculated, a Residual Securityholder may recognize
"phantom" income (i.e., income recognized for tax purposes in excess of income
as determined under financial accounting or economic principles) which will be
matched in later years by a corresponding tax loss or reduction in taxable
income, but which could lower the yield to Residual Securityholders due to the
lower present value of such loss or reduction. For example, if an interest in
the Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more
of such Mortgage Loans is prepaid, the Residual Securityholder may recognize
taxable income without being entitled to receive a corresponding amount of cash
because (i) the prepayment may be used in whole or in part to make distributions
in reduction of principal on the Regular Securities and (ii) the discount income
on the Mortgage Loans which is includible in the REMIC's taxable income may
exceed the interest and discount deduction allowed to the REMIC upon such
distributions on the Regular Securities. When there is more than one class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier maturing classes of Regular
Securities to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Securities are made. Taxable income may also be greater in
earlier years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a Series of Regular Securities, may increase over time as distributions in
reduction of principal are made on the lower yielding classes of Regular
Securities, whereas interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount of
that loan. Consequently, Residual Securityholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income.
Prospective investors should be aware, however, that a portion
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of such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon the Residual Securityholder's after-tax rate of return. In addition, a
Residual Securityholder's taxable income during certain periods may exceed the
income reflected by such Residual Securityholder for such periods in accordance
with generally accepted accounting principles. Investors should consult their
own advisors concerning the proper tax and accounting treatment of their
investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Securityholder is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of the
Residual Security if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Security is the amount paid for such Residual Security. Such adjusted basis will
be increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Securityholder and decreased by the amount of loss of the REMIC Pool
reportable by the Residual Securityholder. A cash distribution from the REMIC
Pool also will reduce such adjusted basis (but not below zero). Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Securityholder as to whom such loss was disallowed and
may be used by such Residual Securityholder only to offset any income generated
by the same REMIC Pool. The ability of a Residual Securityholder to deduct net
losses with respect to a Residual Security may be subject to additional
limitations under the Code, as to which Residual Securityholders should consult
their tax advisors.
A Residual Securityholder will not be permitted to amortize directly
the cost of its Residual Security as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not include
cash received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Securities over their
life. However, in view of the possible acceleration of the income of Residual
Securityholders described above under "Taxation of REMIC Income," the period of
time over which such issue price is effectively amortized may be longer than the
economic life of the Residual Securities.
If a Residual Security has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The Final REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Company does not intend to treat a Class
of Residual Securities as having a value of less than zero for purposes of
determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Securityholder (other than an original holder) in the Residual Security is
greater that the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans or the Mortgage Loans underlying the Agency Securities, the Residual
Securityholder will not recover a portion of such basis until termination of the
REMIC Pool unless Treasury regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The Final
REMIC Regulations do not so provide. See "Treatment of Certain Items of REMIC
Income and Expense -- Market Discount" below regarding the basis of Mortgage
Loans to the REMIC Pool and "Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Securities as described above under "Taxation of
Regular Securities -- Original Issue Discount", without regard to the de minimis
rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances.
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The REMIC Pool's basis in such Mortgage Loans is generally the fair market value
of the Mortgage Loans immediately after the transfer thereof to the REMIC Pool.
The Final REMIC Regulations provide that such basis is equal in the aggregate to
the issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Loans that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of Regular
Securities -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the amount
of such excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the
fair market value of the Mortgage Loans, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Securities -- Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September 27,
1985 under a constant yield method. Amortizable bond premium will be treated as
an offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the mortgagors with respect to the
Mortgage Loans are expected to be individuals, Code Section 171 will not be
available for premium on Mortgage Loans originated on or prior to September 27,
1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the IRS may argue that such premium
should be allocated in a different manner, such as allocating such premium
entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions
A portion of the income allocable to a Residual Security (referred to
in the Code as an "excess inclusion") for any calendar quarter will be subject
to federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot, be offset by any unrelated losses or loss carryovers of a Residual
Securityholder, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Securityholder is a
pension fund or any other organization that is subject to tax only on its
unrelated business taxable income and (iii) is not eligible for any reduction in
the rate of withholding tax in the case of a Residual Securityholder that is a
foreign investor, as further discussed in "Taxation of Certain Foreign Investors
- -- Residual Securities" below.
For any Residual Securityholder, the excess inclusion for any calendar
quarter is the excess, if any, of (i) the income of such Residual Securityholder
for that calendar quarter from its Residual Security, over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Securityholder holds such Residual Security. For this
purpose, the daily accruals with respect to a Residual Security are determined
by allocating to each day in the calendar quarter its ratable portion of the
product of the "adjusted issue price" (as defined below) of the Residual
Security at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Security is issued.
For this purpose, the "adjusted issue price" of a Residual Security at the
beginning of any calendar quarter equals the issue price of the Residual
Security (adjusted for contributions), increased by the amount of daily accruals
for all prior quarters, and decreased (but not below zero) by the aggregate
amount of payments made on the Residual Security before the beginning of such
quarter. 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.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Security are to be designated as
excess inclusions in an amount corresponding to the Residual Security's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Security will be subject to the
limitations on excess inclusions described above. The Final REMIC Regulations do
not provide guidance on this issue.
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Mark to Market Rules
Residual Securityholders that are dealers in securities should be aware
that, under Treasury regulations (the "Mark-to-Market Regulations") relating to
the requirement under section 475 of the Code that dealers in securities use
mark-to-market accounting for federal income tax purposes, dealers in securities
are not permitted to mark to market any REMIC residual interests acquired on or
after January 4, 1995. Prospective purchasers of Residual Certificates should
consult with their tax advisors regarding the possible application of the
Mark-to-Market Regulations to such Certificates.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value discount rate equals the applicable
Federal rate under Code Section 1274(d) that would apply to a debt instrument
that was issued on the date the Disqualified Organization acquired the Residual
Security and whose term ended on the close of the last quarter in which excess
inclusions were expected to accrue with respect to the Residual Security. Such a
tax generally would be imposed on the transferor of the Residual Security,
except that where such transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. However, a transferor of a 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. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Security and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Security is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement or the Indenture, as applicable, with respect to a Series
of Securities will provide that neither legal title nor beneficial interest in a
Residual Security may be transferred or registered unless (i) the proposed
transferee
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provides to the Company and the Trustee an affidavit to the effect that such
transferee is not a Disqualified Organization, is not purchasing such Residual
Securities on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and is not an entity that holds REMIC residual securities
as nominee to facilitate the clearance and settlement of such securities through
electronic book-entry changes in accounts of participating organizations and
(ii) the transferor provides a statement in writing to the Company and the
Trustee that it has no actual knowledge that such affidavit is false. Moreover,
the Agreement or Indenture, as applicable, will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual Security
with respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Securityholder will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related Agreement or
Indenture, as applicable, required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the IRS and to the
requesting party within 60 days of the request, and the Company or the Trustee
may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (defined below) to a Residual Securityholder (other than a Residual
Securityholder who is not a U.S. Person, as defined below under "Foreign
Investors") is disregarded for all federal income tax purposes unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "noneconomic residual
interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. Under
the REMIC Regulations, a transferor is presumed not to have improper knowledge
if (i) the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a result of
the investigation, the transferor found that the transferee had historically
paid its debts as they came due and found no significant evidence to indicate
that the transferee will not continue to pay its debts as they come due in the
future; and (ii) the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, the transferee may
incur tax liabilities in excess of any cash flows generated by the residual
interest and that the transferee intends to pay taxes associated with holding of
residual interest as they become due. The Agreement or Indenture, as applicable,
will require the transferee of a Residual Security to state as part of the
affidavit described above under the heading "Disqualified Organizations" that
such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a noneconomic Residual Security, it may incur
tax liabilities in excess of any cash flows generated by the Residual Security,
and (iv) intends to pay any and all taxes associated with holding the Residual
Security as they become due. The transferor must have no reason to believe that
such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
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continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a Series of Securities may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
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 that is
subject to U.S. federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual
Securityholder will recognize gain or loss equal to the excess, if any, of the
amount realized over the adjusted basis (as described above under "Basis and
Losses") of such Residual Securityholder in such Residual Security at the time
of the sale or exchange. In addition to reporting the taxable income of the
REMIC Pool, a Residual Securityholder will have taxable income to the extent
that any cash distribution to him from the REMIC Pool exceeds such adjusted
basis on that Distribution Date or Payment Date. Such income will be treated as
gain from the sale or exchange of the Residual Security. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Securityholder's Residual Security, in which case, if the Residual
Securityholder has an adjusted basis in his Residual Security remaining when his
interest in the REMIC Pool terminates, and if he holds such Residual Security as
a capital asset under Code Section 1221, then he will recognize a capital loss
at that time in the amount of such remaining adjusted basis.
A special version of the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Securities. Consequently, losses on
dispositions of Residual Securities will be disallowed where the seller of the
Residual Security, during the period beginning six months before the sale or
disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security. In the event, any loss realized
by a Residual Securityholder on the sale will not be deductible, but, instead,
will increase such Residual Securityholder's adjusted basis in the newly
acquired assets.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Securityholders, but rather will be taxed directly to the REMIC Pool at a 100%
rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Securities is outstanding). The REMIC Regulations indicate that the modification
of a Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or encumbrance clause or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan. The REMIC Regulations also provide
that the modification of mortgage loans underlying pass-through certificates
will not be treated as a modification of the Agency Securities, provided that
the trust issuing the pass-through certificates was not created to avoid
prohibited transaction rules.
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Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Securityholder,
(iii) in the nature of a guarantee, (iv) made to facilitate a qualified
liquidation or clean-up call and (v) as otherwise permitted in Treasury
regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of two years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, any gain on the sale of its assets will
not result in a prohibited transaction tax, provided that the REMIC Pool credits
or distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Securityholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. Treasury regulations provide that, except where there is a single
Residual Securityholder for an entire taxable year, the REMIC Pool generally
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination by the IRS of any
adjustments to, among other things, items of REMIC income, gain, loss, deduction
or credit in a unified administrative proceeding. Generally, the Company or the
Trustee will be obligated to act as "tax matters person," as defined in
applicable Treasury regulations, with respect to the REMIC Pool, in its capacity
as either Residual Securityholder or agent of the Residual Securityholders. If
the Code or applicable Treasury regulations do not permit the Company or the
Trustee to act as tax matters person in its capacity as agent of the Residual
Securityholders, the Residual Securityholder chosen by the Residual
Securityholders or such other person specified pursuant to Treasury regulations
will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Security is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The IRS may assess a
deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC Pool level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $114,700 for 1995 and adjusted yearly for
inflation ($57,350 for 1995 and adjusted yearly for inflation, in the case of a
married individual filing a separate return), or (ii) 80% of the amount of
itemized
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deductions otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for servicing fees and
all administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Securityholder's income, determined on a daily basis, bears to the income of all
holders of Regular Securities and Residual Securities with respect to a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate or Bond interest rate on Regular
Securities that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are nonresident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest" and
therefore, generally will not be subject to 30% United States withholding tax,
provided that (i) such interest is not effectively connected with a trade or
business in the United States of the securityholder and (ii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
Payments on Regular Securities may subject a Non-U.S. Person to U.S. federal
income and withholding tax where such foreign person also owns, actually or
constructively, Residual Securities issued by the same REMIC, notwithstanding
compliance with the certification requirements discussed above.
Residual Securities
The Committee Report indicates that amounts paid to Residual
Securityholders who are Non-U.S. Persons are treated as interest for purposes of
the 30% (or lower treaty rate) United States withholding tax. Treasury
regulations provide that amounts distributed to Residual Securityholders qualify
as "portfolio interest," subject to the conditions described in "Regular
Securities" above, but only to the extent that (i) the Mortgage Loans were
issued after July 18, 1984 and (ii) the Trust Fund, Trust Estate or segregated
pool of assets therein (as to which a separate REMIC election will be made), to
which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but certificated regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore, a
Residual Securityholder will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "Taxation of Residual
Securities -- Limitations on Offset or Exemption of REMIC Income; Excess
Inclusions." If the amounts paid to Residual Securityholders who are Non-U.S.
Persons are effectively connected with the conduct of a trade or business within
the United States by such Non-U.S.
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Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition of
debt instruments that have original issue discount. See "Taxation of Residual
Securities -- Tax-Related Restrictions on Transfer of Residual Securities --
Foreign Investors" above concerning the disregard of certain transfers having
"tax avoidance potential." Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular
Securityholder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Securityholder is otherwise an exempt recipient under applicable provisions of
the Code. Any amounts to be withheld from distribution on the Regular Securities
would be refunded by the IRS or allowed as a credit against the Regular
Securityholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the IRS and to individuals, estates, non-exempt and non-charitable
trusts, and partnerships who are either holders of record of Regular Securities
or beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in IRS Publication 938 with respect to a
particular Series of Regular Securities. Holders through nominees must request
such information from the nominee. Treasury regulations provide that information
necessary to compute the accrual of any market discount on the Regular
Securities must also be furnished.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Securityholder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Securityholders, furnished annually, if applicable, to holders of Regular
Securities, and filed annually with the IRS concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Securityholders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Status of REMIC Securities."
FEDERAL INCOME TAX CONSEQUENCES FOR SECURITIES AS TO
WHICH NO REMIC ELECTION IS MADE
NON-REMIC BONDS
With respect to each Series of Bonds for which the Issuer does not make
a REMIC election, ("Non-REMIC Bonds"), no regulations, published rulings, or
judicial decisions exist that discuss the characterization for federal income
tax purposes of securities with terms substantially the same as the Non-REMIC
Bonds. Counsel to the Company, however, will deliver their opinion that the
Non-REMIC Bonds will be treated for federal income tax purposes as
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indebtedness, and not as an ownership interest in the Mortgage Assets, or as an
equity interest in the Issuer or in a separate association taxable as a
corporation. The following general discussion of the anticipated federal income
tax consequences of the purchase, ownership and disposition of Non-REMIC Bonds,
to the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of counsel to the Company, subject to any
qualifications set forth herein. In addition, counsel to the Company has
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
Securities as to Which No REMIC Election Is Made - Non-REMIC Bonds," and is of
the opinion that such statements are correct in all material respects. Such
statements do not purport to furnish information in the level of detail or with
the attention to an investor's specific tax circumstances that would be provided
by an investor's own tax advisor. Accordingly, each investor is advised to
consult its own tax advisors with regard to the tax consequences to it of
investing in Non-REMIC Bonds.
For federal income tax purposes, (i) Non-REMIC Bonds held by a thrift
institution taxed as a "mutual savings bank" or "domestic building and loan
association" will not represent interests in "qualifying real property loans"
within the meaning of Code Section 593(d)(1); (ii) Non-REMIC Bonds held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); (iii) interest on Non-REMIC Bonds
held by a real estate investment trust will not be treated as "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B); (iv) Non-REMIC Bonds
held by a real estate investment trust will not constitute "real estate assets"
or "Government securities" within the meaning of Code Section 856(c)(5)(A); and
(v) Non-REMIC Bonds held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
Non-REMIC Bonds will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Non-REMIC Bonds is not required to be reported under the accrual
method unless the Holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is not applicable to Non-REMIC Bonds.
STANDARD CERTIFICATES
General
With respect to a Series of Certificates issued under an Agreement for
which no election is made to treat the related Trust Fund (or a segregated pool
of assets therein) as a REMIC, counsel to the Company will deliver its opinion
to the effect that, assuming compliance with all provisions of the related
Agreement, the related Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle A of the Code and not
as an association taxable as a corporation. The following general discussion of
the anticipated federal income tax consequences of the purchase, ownership and
disposition of Standard Certificates, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the Company, subject to any qualifications set forth herein. In addition,
counsel to the Company has prepared or reviewed the statements in this
Prospectus under the heading "Certain Federal Income Tax Consequences - Federal
Income Tax Consequences for Securities as to Which No REMIC Election is Made -
Standard Certificates," and is of the opinion that such statements are correct
in all material respects. Such statements are intended as an explanatory
discussion of the possible effects of the classification of any Trust Fund as a
grantor trust for federal income tax purposes on investors generally and of
related tax matters affecting investors generally, but do not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's own tax
advisor. Accordingly, each investor is advised to consult its own tax advisors
with regard to the tax consequences to it of investing in Standard Certificates.
Where there is no fixed retained yield with respect to the Mortgage Loans
underlying the Certificates of such a Series, and where such Certificates are
not designated as "Stripped Securities," the holder of each such Certificates in
such Series will be treated as the owner of a pro rata undivided interest in the
ordinary income and corpus portions of the Trust Fund represented by his
Certificate and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"Premium and Discount -- Recharacterization of Servicing Fees." Accordingly, the
holder of a Certificate of a particular Series will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans represented
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by its Certificate, including interest at the coupon rate on such Mortgage
Loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the Company or another service provider, in
accordance with such Certificateholder's method of accounting. A
Certificateholder generally will be able to deduct its share of servicing fees
and all administrative and other expenses of the Trust Fund in accordance with
his method of accounting, provided that such amounts are reasonable compensation
for services rendered to that Trust Fund. However, investors who are
individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will be subject to limitation
with respect to certain itemized deductions described in Code Section 67,
including deductions under Code Section 212 for servicing fees and all such
administrative and other expenses of the Trust Fund, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $121,200 for 1997, adjusted yearly for inflation ($60,600 for 1997,
adjusted yearly for inflation, in the case of a married individual filing a
separate return), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. As a result such investors holding Certificates,
directly or indirectly through a pass-through entity, may have aggregate taxable
income in excess of the aggregate amount of cash received on such Certificates
with respect to interest at the pass-through rate on such Certificates or
discount thereon. In addition, such expenses are not deductible at all for
purposes of computing the alternative minimum tax, and may cause such investors
to be subject to significant additional tax liability. Moreover, where there is
fixed retained yield with respect to the Mortgage Loans underlying a Series of
Certificates or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Premium and Discount -- Recharacterization of
Servicing Fees," respectively.
Tax Status
Unless otherwise disclosed in the related Prospectus Supplement,
counsel for the Company will deliver its opinion with respect to Certificates
described under this subsection "Standard Certificates" that:
1. A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to represent
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such section
of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(5)(A) to the extent that the assets of the related Trust Fund consist of
qualified assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B).
3. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial ownership
therein) which is principally secured by an interest in real property" within
the meaning of Code Section 860G(a)(3)(A) to the extent that the assets of the
related Trust Fund consist of "qualified mortgages" within the meaning of Code
Section 860G(a)(3).
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Securities -- Taxation of Residual Securities
- --Treatment of Certain Items of REMIC Income and Expense -- Premium."
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the original issue discount
rules will be applicable to a Certificateholder's interest in those Mortgage
Loans as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of
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original issue discount income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such original issue discount could arise by the
charging of points by the originator of the mortgages in an amount greater than
a statutory de minimis exception, to the extent that the points are not for
services provided by the lender. It is generally not anticipated that adjustable
rate Mortgage Loans will be treated as issued with original issue discount.
However, the application of the OID Regulations to adjustable rate mortgage
loans with incentive interest rates or annual or lifetime interest rate caps may
result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Loans
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Residual Securities -- Treatment of Certain Items of REMIC Income and Expense
- --Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan- by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Recently issued IRS guidance indicates that a servicing fee in excess of
reasonable compensation ("excess servicing") will cause the Mortgage Loans to be
treated under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the IRS's approach is upheld, a servicer that receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Loans. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the
- 113 -
<PAGE> 197
Certificate was acquired at a discount, at par, or at a premium. Under this
alternative, Certificateholders may also be entitled to a deduction for unstated
interest with respect to each deferred payment. The Internal Revenue Service may
take the position that the specific statutory provisions of Code Section 1286
described above override the alternative described in this paragraph.
Certificateholders are advised to consult their tax advisors as to the proper
treatment of the amounts paid to the servicers as set forth herein as servicing
compensation or under either of the alternatives set forth above.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the amount
of any income previously reported with respect to the Certificate and decreased
by the amount of any losses previously reported with respect to the Certificate
and the amount of any distributions received thereon. Except as provided above
with respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Certificate was held as a
capital asset.
STRIPPED CERTIFICATES
General
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of Stripped
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Company, subject
to any qualifications set forth herein. In addition, counsel to the Company has
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
Securities as to Which No REMIC Election is Made - Stripped Certificates," and
is of the opinion that such statements are correct in all material respects.
Such statements are intended as an explanatory discussion of the possible
effects of the classification of any Trust Fund as a grantor trust for federal
income tax purposes on investors generally and of related tax matters affecting
investors generally, but do not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's own tax advisor. Accordingly, each investor
is advised to consult its own tax advisors with regard to the tax consequences
to it of investing in Stripped Certificates.
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates for which no REMIC election is made and that are subject to those
rules will be referred to as "Stripped Certificates." The Certificates will be
subject to those rules if (i) the Company or any of its affiliates retains (for
its own account or for purposes of resale), in the form of fixed retained yield
or otherwise, an ownership interest in a portion of the payments on the Mortgage
Loans, (ii) the Company, any of its affiliates or a servicer is treated as
having an ownership interest in the Mortgage Loans to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Loans (see "Standard Certificates --
Premium and Discount -- Recharacterization of the Servicing Fees" above) or
(iii) Classes of Certificates are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to
own "stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. See discussion above under "Standard
Certificates -- Premium and Discount -- Recharacterization of Servicing Fees."
For this purpose the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective offering price of each class (or
subclass) of Stripped Certificates. The holder of a Stripped Certificate
- 114 -
<PAGE> 198
generally will be entitled to a deduction each year in respect of the servicing
fees, as described above under "Standard Certificates -- General," subject to
the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects at
this time, particularly where such Stripped Certificates are issued with respect
to a Trust Fund containing variable-rate Mortgage Loans, the Company has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle A of the Code
and not as an association taxable as a corporation, and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286 and the
regulations thereunder, Code Sections 1272 through 1275, and the OID
Regulations. While under Code Section 1286 computations with respect to Stripped
Certificates arguably should be made in one of the ways described below under
"Taxation of Stripped Certificates -- Possible Alternative Characterizations,"
the OID Regulations state, in general, that all debt instruments issued in
connection with the same transaction must be treated as a single debt
instrument. The Trustee will make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, final Treasury regulations issued December 28, 1992
support the treatment of a Stripped Certificate as a single debt instrument
issued on the date it is originated for purposes of calculating any original
issue discount. The preamble to such regulations states that such regulations
are premised on the assumption that an aggregation approach is appropriate in
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis. In addition, under these regulations, a Stripped
Certificate that represents a right to payments of both interest and principal
may be viewed either as issued with original issue discount or market discount
(as described below), at a de minimis original issue discount, or, presumably,
at a premium. The preamble to such regulations also provide that such
regulations are premised on the assumption that generally the interest component
of such a Stripped Certificate would be treated as stated interest under the OID
Regulations. Further, the regulations provide that the purchaser of such a
Stripped Certificate may be required to account for any discount as market
discount rather than original issue discount if either (i) the initial discount
with respect to the Stripped Certificate was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Loans. Any such market discount
would be reportable as described above under "Federal Income Tax Consequences
for REMIC Securities -- Taxation of Regular Securities -- Market Discount,"
without regard to the de minimis rule therein.
Status of Stripped Certificates
Even if Strip Certificates evidence an interest in a Trust Fund
consisting of Mortgage Loans that are "real estate assets" within the meaning of
Code Section 856(c)(A), and "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and the interest
(including original issue discount) income on which is an "interest on
obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B), it is unclear whether the Strip Certificates, and the
income therefrom, will be so characterized. However, the policies underlying
such sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Company will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Strip Certificates in material should
consult their tax advisors regarding whether the Strip Certificates, and the
income therefrom, will be so characterized.
The Strip Certificates 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.
- 115 -
<PAGE> 199
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General,"
each Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, counsel has advised the Company that the amount of original issue discount
required to be included in the income of a holder of a Stripped Certificate
(referred to in this discussion as a "Stripped Certificateholder") in any
taxable year likely will be computed generally as described above under "Federal
Income Tax Consequences for REMIC Securities -- Taxation of Regular Securities
- -- Original Issue Discount." However, with the apparent exception of a Stripped
Certificate issued with de minimis original issue discount, as described above
under "General," the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at maturity
will include the aggregate amount of the payments to be made on the Stripped
Certificate to such Stripped Certificateholder, presumable under the Prepayment
Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis in
such Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
Possible Alternative Characterizations. As an alternative to the method
described above, the fact that some or all of the interest payments with respect
to the Stripped Certificates will not be made if the Mortgage Loans are prepaid
could lead to the interpretation that such interest payments are "contingent"
within the meaning of the OID Regulations. Under the rules of the OID
Regulations relating to contingent payments, a projected payment schedule for
the Stripped Certificates would be constructed by the Company. Interest accrual
and adjustments relating to the Stripped Certificates would be determined under
the general rules of the noncontingent bond method described above. While not
free from doubt, counsel for the Company believes that uncertainty as to the
payment of interest arising as a result of the possibility of prepayment of the
Mortgage Loans should not cause the contingent payment rules under the OID
Regulations to apply to interest with respect to the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Regular Securities -- Sale or Exchange of Regular Securities." To the extent
that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
- 116 -
<PAGE> 200
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
IRS. If a Certificateholder fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a Certificateholder
has not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "Federal Income Tax
Consequences for REMIC Securities -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Certificateholder on the sale or exchange of such a
Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under "Federal
Income Tax Consequences for REMIC Securities -- Taxation of Certain Foreign
Investors -- Regular Securities."
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Securities, including the public offering or purchase price of each Class of
Securities of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Issuer (in the case of a
Series of Bonds) or to the Company (in the case of a Series of Certificates)
from the sale of each such Class. 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. 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 related Issuer or the Company 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 Certificates, and any discounts or
commissions received by them from the related Issuer or the Company 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 related
Issuer or the Company.
- 117 -
<PAGE> 201
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 and that the related Issuer or the Company will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
LEGAL MATTERS
The legality of the Securities and certain federal income tax matters
will be passed upon for the Company by Counsel to the Company.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and, unless otherwise specified in the Prospectus Supplement for a
Series of Bonds, a new Owner Trust will be formed with respect to each Series of
Bonds issued by an Owner Trust. No Trust Fund or, unless otherwise specified in
the Prospectus Supplement for a Series of Securities, Owner Trust will engage in
any business activities or have any assets or obligations prior to the issuance
of the related Series of Securities. Accordingly, no financial statements with
respect to any Trust Fund or Owner Trust will be included in this Prospectus or
in the related Prospectus Supplement.
Copies of the Registration Statement to which this Prospectus forms a
part and the exhibits thereto 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 inspected, without charge,
at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's Information Statement and most recent Supplement thereto and any
quarterly report made available by FHLMC can be obtained in writing or calling
FHLMC's Investor Relations Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (800-336- FMPC). The Company did not participate in the
preparation of FHLMC's Offering Circular, Information Statement or any
Supplement thereto or any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7585). The Company did not participate in the preparation of FNMA's
Prospectus or any such report, financial statement or other financial
information.
EXPERTS
The financial statements incorporated in this prospectus by reference
from the Company's Annual Report (Form 10-K) for the year ended December 31,
1996, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report which is incorporated herein by reference and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
- 118 -
<PAGE> 202
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No dealer, salesman, or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the accompanying Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Issuer, the Company or the Underwriters. Neither this Prospectus
Supplement nor the accompanying Prospectus constitutes an offer to sell or a
solicitation of an offer to buy any of the Bonds 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 the
accompanying Prospectus nor any sale made hereunder shall, under any
circumstances, create an 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 Issuer or the Company since such date.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms............................. S-1
Risk Factors................................. S-14
Description of the Bonds..................... S-18
The Issuer................................... S-34
National Mortgage Corporation................ S-34
Description of the Mortgage Pool............. S-34
Certain Prepayment and Yield
Considerations............................. S-49
Servicing of the Mortgage Loans.............. S-56
The Bond Insurance........................... S-64
ERISA Considerations......................... S-68
Use of Proceeds.............................. S-69
Legal Investment Considerations.............. S-69
Underwriting................................. S-70
Report of Experts............................ S-70
Legal Matters................................ S-71
Rating of the Bonds.......................... S-71
Index of Principal Terms..................... S-72
Global Clearance, Settlement and Tax
Documentation Procedures..................Annex A
PROSPECTUS
Prospectus Supplement and Current Report on
Form 8-K................................... 3
Available Information........................ 4
Incorporation of Certain Documents by
Reference.................................. 4
Table of Contents............................ 5
Index of Principal Terms..................... 8
Summary of Prospectus........................ 12
Risk Factors................................. 27
Description of the Securities................ 34
Assets Securing or Underlying the
Securities................................. 41
Credit Enhancement........................... 53
Servicing of the Mortgage Loans, Multifamily
Loans and Contracts........................ 57
The Indenture................................ 65
The Agreement................................ 67
Use of Proceeds.............................. 75
The Issuer................................... 75
The Trustee.................................. 77
Certain Legal Aspects of the Mortgage
Assets..................................... 77
Legal Investment Matters..................... 90
ERISA Considerations......................... 92
Certain Federal Income Tax Consequences...... 93
Plan of Distribution......................... 117
Legal Matters................................ 118
Financial Information and Additional
Information................................ 118
Experts...................................... 118
</TABLE>
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$120,000,000
(APPROXIMATE)
FUND AMERICA INVESTORS
TRUST 1997-NMC1
COLLATERALIZED MORTGAGE
OBLIGATIONS,
SERIES 1997-NMC1
DUE APRIL 25, 2029
NATIONAL MORTGAGE CORPORATION
SELLER AND SERVICER
[NATIONAL MORTGAGE CORP. LOGO]
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PROSPECTUS SUPPLEMENT
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[GREENWICH CAPITAL MARKETS LOGO]
[CONTIFINANCIAL LOGO]
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SEPTEMBER 17, 1997
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