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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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FUND AMERICA INVESTORS CORPORATION II
(Exact name of Registrant as specified in its Charter)
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6400 S. FIDDLER'S GREEN CIRCLE STEVEN B. CHOTIN
SUITE 1200B 6400 S. FIDDLER'S GREEN CIRCLE
ENGLEWOOD, COLORADO 80111 SUITE 1200B
(303) 290-6025 ENGLEWOOD, COLORADO 80111
(Name and address of agent for service) (Name and address of agent for service)
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Copies to:
DAVID BARBOUR
ANDREWS & KURTH L.L.P.
1717 MAIN STREET
SUITE 2700
DALLAS, TEXAS 75201
(214) 659-4400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. From time
to time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, please check the following box. [X] __________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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Collateralized Mortgage Obligations and
Assets-Backed Certificates (and
certain underlying Non-Agency
Certificates and Private
Mortgage-Backed Securities).......... $1,000,000 100% $1,000,000 $295.00
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*Estimated solely for purposes of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION; DATED SEPTEMBER 30, 1998
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 Asset-Backed 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, which will include
one or more series of Bonds and/or Certificates, will be issued by either the
Company or a separate entity (each a "Trust") formed by the Company solely for
the purpose of issuing the Securities of the related Series (either such entity,
as applicable, the "Issuer"). If a Series of Securities includes Bonds, such
Bonds will be issued pursuant to an Indenture, and will represent indebtedness
of the related Issuer. If a Series of Securities includes Certificates, such
Certificates will evidence a beneficial ownership interest in the related Trust.
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) one or more pools of single family (one- to four-unit)
residential mortgage loans or loans for which the related proceeds were used to
finance property improvements, acquisition of personal property such as home
appliances or furnishings, debt consolidation, or a combination of property
improvements, debt consolidation and other consumer purposes, or participation
interests therein (collectively, "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) 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.
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 25 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 , 1998.
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(Cover continued from previous page)
Each Series will be issued in one 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 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 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 a Trust, to such 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".
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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
Property, 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 Property 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.
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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. Such material may also be accessed electronically by means
of the Commission's home page on the Internet at http://www.sec.gov.
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 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, 1997;
(2) the Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended March 31, 1998; and
(3) the Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended June 30, 1998.
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 I, 6400 S. Fiddler's
Green Circle, Suite 1200B, Englewood, Colorado 80111 (303/290-6025).
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TABLE OF CONTENTS
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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................................................ 25
General................................................... 25
Prepayment and Yield Considerations....................... 25
Risks Associated with Certain Loan Assets................. 26
Limited Liquidity......................................... 27
Limited Assets............................................ 28
Limitations, Reduction and Substitution of Credit
Enhancement............................................ 29
Limitations on FHA Insurance for Title I Loans............ 29
Limited Nature of Ratings................................. 30
Original Issue Discount; Residual Certificates............ 30
Funds Available for Redemptions or Repurchases at the
Request of Holders..................................... 31
Book Entry Registration................................... 31
Nature of Direct or Indirect Backing for Securities....... 32
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
Geographic Concentration.................................. 33
Remedies Following Default................................ 33
Deposits, Substitutions and Withdrawals of Assets......... 33
Other Legal Considerations................................ 34
DESCRIPTION OF THE SECURITIES............................... 34
General................................................... 34
The Bonds -- General...................................... 35
The Certificates -- General............................... 35
Form of Securities; Transfer and Exchange................. 36
REMIC Election............................................ 36
Classes of Securities..................................... 37
Payments or Distributions of Principal and Interest....... 38
Redemption of Bonds; Termination or Repurchase with
Respect to Certificates................................ 41
Book Entry Registration................................... 41
ASSETS SECURING OR UNDERLYING THE SECURITIES................ 42
Mortgage Loans............................................ 42
Agency Securities......................................... 44
Non-Agency Certificates................................... 49
Multifamily Loans......................................... 51
Contracts................................................. 51
Private Mortgage-Backed Securities........................ 52
Characteristics of Agency Securities and Private
Mortgage-Backed Securities............................. 53
Deposit, Substitution and Withdrawal of Assets............ 54
Pre-Funding Arrangements.................................. 54
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CREDIT ENHANCEMENT.......................................... 55
General................................................... 55
Subordination............................................. 56
Overcollateralization..................................... 56
Cross-Support............................................. 57
Pool Insurance............................................ 57
Special Hazard Insurance.................................. 57
FHA Insurance on the Multifamily Loans.................... 58
Bankruptcy Bond........................................... 58
Reserve Funds............................................. 59
Other Insurance, Guarantees and Similar Instruments or
Agreements............................................. 59
SERVICING OF THE MORTGAGE LOANS, MULTIFAMILY LOANS AND
CONTRACTS................................................. 59
Servicing Agreements...................................... 60
Payments on Mortgage Loans................................ 61
Advances.................................................. 61
Servicing Procedures...................................... 62
Primary Mortgage Insurance................................ 64
Standard Hazard Insurance................................. 64
Title Insurance Policies.................................. 66
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other Realization
Upon Defaulted Loans................................... 66
Administration and Servicing Compensation and Payment of
Expenses............................................... 67
THE INDENTURE............................................... 68
Modification of Indenture................................. 68
Events of Default......................................... 68
Rights Upon Event of Default.............................. 69
List of Holders of Bonds.................................. 69
Issuer's Annual Compliance Statement...................... 70
Trustee's Annual Report................................... 70
Satisfaction and Discharge of Indenture................... 70
Reports by Trustee to Bondholders......................... 70
Limitation on Suits....................................... 70
THE POOLING AGREEMENT AND DEPOSIT TRUST AGREEMENT........... 70
Assignment of Mortgage Assets............................. 71
Repurchase or Substitution of Mortgage Loans, Contracts
and Multifamily Loans.................................. 74
Evidence as to Compliance................................. 75
List of Certificateholders................................ 75
Administration of the Certificate Account................. 75
Reports to Holders of Certificates........................ 76
Events of Default......................................... 77
Rights Upon Event of Default.............................. 77
Amendment................................................. 78
Termination............................................... 78
USE OF PROCEEDS............................................. 79
THE ISSUER.................................................. 79
The Company............................................... 79
Owner Trust Issuer........................................ 79
Management Agreement...................................... 80
THE TRUSTEE................................................. 80
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................ 81
The Mortgage Loans and Multifamily Loans.................. 81
Consumer Protection Laws with respect to Contracts........ 88
The Title I Program....................................... 89
LEGAL INVESTMENT MATTERS.................................... 95
ERISA CONSIDERATIONS........................................ 96
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 97
Federal Income Tax Consequences for REMIC Securities...... 98
Federal Income Tax Consequences for Securities as to Which
No REMIC Election Is Made.............................. 116
PLAN OF DISTRIBUTION........................................ 124
LEGAL MATTERS............................................... 124
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION............ 124
EXPERTS..................................................... 125
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INDEX OF PRINCIPAL TERMS
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"Accrued Value"............................................. 33
"Adjustable Multifamily Loan Rates"......................... 20
"Adjustable Rate Multifamily Loans"......................... 21
"Administrator"............................................. 10, 14, 30, 49
"Advance Account"........................................... 67
"Agency Securities"......................................... Cover, 17
"Annual Reduction".......................................... 92
"Applicable Accounting Standards"........................... 75
"APR"....................................................... 21, 52
"Assumed Final Distribution Date"........................... 16
"Bankruptcy Bond"........................................... 58
"Beneficial Owners"......................................... 22, 41
"BIF"....................................................... 75
"Bond Interest Rate"........................................ 14
"Book Entry Securities"..................................... 22, 41
"Certificate Account"....................................... 38
"Certificate Interest Rate"................................. 14
"Certificate Trustee"....................................... 49
"Certificates of Beneficial Ownership"...................... 79
"Class"..................................................... 12
"Clearing Agency"........................................... 22, 41
"Clearing Agency Participants".............................. 22, 41
"Code"...................................................... 22
"Collateral Value".......................................... 52
"Collection Account"........................................ 38
"Commission"................................................ 4
"Committee Report".......................................... 99
"Companion Securities"...................................... 37
"Company"................................................... Cover, 13, 79
"Compound Interest Securities".............................. 13, 37
"Contract Loan Schedule".................................... 72
"Contract Pool"............................................. 17, 51
"Contracts"................................................. Cover, 17, 52
"Conventional Multifamily Loans"............................ 21
"Cooperative Loans"......................................... 42
"Cooperatives".............................................. 20, 42
"CPTs"...................................................... 53
"Credit Enhancement"........................................ Cover, 22, 30, 55
"Custodial Account"......................................... 61
"Cut-off Date".............................................. 37
"Deposit Date".............................................. 74
"Deposit Trust Agreement"................................... 35
"Disqualified Organization"................................. 111
"Distribution Date"......................................... 14
"DOL"....................................................... 96
"ERISA"..................................................... 24, 96
"Event of Default".......................................... 68
"Exchange Act".............................................. 4
"FAMC"...................................................... 80
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"FDIC"...................................................... 61, 75, 95
"FHA"....................................................... 21
"FHA Loans"................................................. 44
"FHA-Insured Multifamily Loans"............................. 21
"FHLMC"..................................................... Cover, 17
"FHLMC Certificate Group"................................... 47
"FHLMC Certificates"........................................ 18
"Final REMIC Regulations"................................... 97
"FLTs"...................................................... 53
"FmHA Loans"................................................ 44
"FNMA"...................................................... Cover, 17
"FNMA Certificates"......................................... 18, 50
"Funding Agreement Trustee"................................. 50
"Funding Agreement"......................................... 49
"Garn-St. Germain Act"...................................... 86
"GNMA"...................................................... Cover, 17
"GNMA Certificates"......................................... 18
"GNMA Issuer"............................................... 44
"Guaranty Agreement"........................................ 44
"Indenture"................................................. 12
"Initial Depositor"......................................... 79
"Insurance Proceeds"........................................ 60
"Interest Accrual Period"................................... 14
"Interest Only Securities".................................. 12, 37
"INVs"...................................................... 53
"IOs"....................................................... 53
"IRS"....................................................... 100
"Issuer".................................................... Cover, 35
"Liquidation Proceeds"...................................... 60
"Loan-to-Value Ratio"....................................... 43
"Management Agreement"...................................... 80
"Manager"................................................... 80
"Manufactured Home"......................................... 52
"Manufactured Home Loans"................................... 89
"Manufacturer's Invoice Price".............................. 52
"Market Discount"........................................... 102, 106
"Maximum Variable Interest Rate"............................ 15
"Minimum Variable Interest Rate"............................ 15
"Monthly Advance"........................................... 61
"Mortgage Loans"............................................ Cover, 17, 98
"Mortgage Notes"............................................ 42
"Mortgage Pool"............................................. 17
"Mortgage Pool Insurance Policy"............................ 57
"Mortgage Rates"............................................ 43
"Mortgaged Properties"...................................... 42
"Mortgages"................................................. 42
"Mortgagors"................................................ 60
"Multifamily Loan Pool"..................................... 17, 51
"Multifamily Loan Schedule"................................. 72
"Multifamily Loan Seller"................................... 72
"Multifamily Loans"......................................... Cover, 17
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"NCUA"...................................................... 61, 95
"Non-Agency Administrator".................................. 49
"Non-Agency Certificates"................................... Cover, 17
"Non-Agency Pooling and Administration Agreement"........... 49
"Non-Agency Servicers"...................................... 50
"Non-Priority Securities"................................... 38
"Non-REMIC Bonds"........................................... 116
"Notional Principal Balance"................................ 36
"OID Regulations"........................................... 100
"Original Issue Discount"................................... 105, 106
"Original Value"............................................ 43
"OTS"....................................................... 86, 95
"Owner Trust"............................................... 13
"Owner Trustee"............................................. 12, 35
"PACs"...................................................... 53
"Parties in Interest"....................................... 96
"Pass-Through Entity"....................................... 110, 111
"Payment Date".............................................. 14
"Permitted Instruments"..................................... 55
"Plan Asset Regulations".................................... 96
"Plans"..................................................... 96
"PMBS Agreement"............................................ 53
"PMBS Issuer"............................................... 53
"PMBS Servicer"............................................. 53
"PMBS Trustee".............................................. 53
"Pool Insurer".............................................. 57
"Pooling Agreement"......................................... 12
"POs"....................................................... 53
"Premium REMIC Regular Securities".......................... 104
"Prepayment Assumption"..................................... 100
"Pre-Funding Account"....................................... 54
"Pre-Funding Arrangement"................................... 21, 54
"Principal Only Securities"................................. 12, 37
"Principal Prepayments"..................................... 40
"Priority Securities"....................................... 38
"Private Mortgage-Backed Securities"........................ Cover, 18
"Prohibited Transactions"................................... 96
"Property Improvement Loans"................................ 89
"PTC"....................................................... 45
"Record Date"............................................... 38
"Registrar"................................................. 36
"Regular Securityholder".................................... 99
"REIT"...................................................... 98
"Relief Act"................................................ 88
"REMIC"..................................................... 2, 22, 98
"REMIC Pool"................................................ 98
"REMIC Securities".......................................... 98
"Remittance Date"........................................... 61
"Remittance Rate"........................................... 61
"Reports"................................................... 4
"Reserve Fund".............................................. 59
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Residual Holders".......................................... 31
"Residual Securities"....................................... 23, 31, 98
"Residual Securityholders".................................. 107
"Residuals"................................................. 53
"Retail Class Security"..................................... 100
"SAIF"...................................................... 75
"Scheduled Amortization Securities"......................... 37
"Scheduled Principal"....................................... 48
"Secured Contract".......................................... 20, 52
"Seller".................................................... 42
"Senior Securities"......................................... 56
"Servicers"................................................. 60
"Servicing Agreement"....................................... 60
"SMMEA"..................................................... 24, 95
"Special Hazard Insurance Policy"........................... 57
"Standard Indenture Provisions"............................. 12
"Stated Maturity"........................................... 16
"Stripped Certificateholder"................................ 122
"Stripped Certificates"..................................... 118, 120
"Subordinated Securities"................................... 56
"Subsequent Loan Assets".................................... 54
"TACs"...................................................... 53
"TAMRA"..................................................... 97
"Title I Contracts"......................................... 89
"Title I Loans"............................................. 89
"Title I Program"........................................... 89
"Title V"................................................... 88
"TMP"....................................................... 99
"Trust"..................................................... Cover, 13, 35
"Trust Estate".............................................. 12
"Trust Property"............................................ 18
"Trustee"................................................... 12, 59
"U.S. Person"............................................... 112
"UCC"....................................................... 84
"Underlying Mortgage Loans"................................. 25
"Underwriters".............................................. 124
"Unsecured Contract"........................................ 20, 52
"VA Loans".................................................. 44
"Variable Interest Rate Securities"......................... 13
"VA"........................................................ 21
"Window Period Loans"....................................... 86
"Zs"........................................................ 53
</TABLE>
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<PAGE> 13
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, Pooling Agreement or Deposit Trust 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/or 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
either (i) a pooling agreement or a pooling and
administration agreement (each, a "Pooling
Agreement") between the Company, the Administrator,
if any, and the Trustee for such Series or (ii) a
Deposit Trust Agreement (the "Deposit Trust
agreement") between the Company, acting as
depositor, and a bank, trust company or any other
fiduciary, acting or owner trustee (the "Owner
Trustee"). Certificates of a Series will evidence
beneficial interests in the related Trust (as
defined below). 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, Pooling Agreement, and/or Deposit Trust
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;
(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 included in the related Trust
Property (as defined below);
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<PAGE> 14
(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 either the Company or a separate entity (each,
an "Owner Trust") formed by the Company solely for
the purpose of issuing the Securities of one or
more Series. 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.
The Issuer with respect to a Series of Certificates
will be the trust established by the Company
pursuant to a Pooling Agreement or the Owner Trust
established by the Company pursuant to a Deposit
Trust Agreement (each a "Trust").
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 and any other Assets
pledged or otherwise available for the benefit of
Holders of such Series as specified in the related
Prospectus Supplement.
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<PAGE> 15
The Administrator;
Non-Agency Administrator... With respect to a Series of Certificates for which
the related Trust includes Mortgage Loans,
Multifamily Loans, and Contracts, the entity or
entities named as the Administrator in the related
Prospectus Supplement (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 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 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
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<PAGE> 16
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 and/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 and/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 and/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."
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<PAGE> 17
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."
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 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 Assets
(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 Series may be
(i) redeemed at the request of holders of
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<PAGE> 18
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 may, at its option, cause an early
termination of the Trust for such Series by
repurchasing all of the Mortgage Assets from such
Trust, 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 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. 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 loans for which the related proceeds were
used to finance property improvements,
acquisition of personal property such as home
appliances or furnishings, debt consolidation
or a confirmation of property improvements,
debt consolidation and other consumer purposes,
or participation interests therein
(collectively, "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");
-17-
<PAGE> 19
(iii) 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.
Each Series of Certificates will represent
beneficial ownership interests in a Trust. The
Mortgage Assets included in the related Trust 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.
Trust Property 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
(together with the Trust Estate or the assets of
the Trust, as applicable, the "Trust Property").
The Securities of any Series will be entitled to
payment only from the Trust Property.
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
-18-
<PAGE> 20
not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such
distributions) on certain GNMA, FNMA 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 Property, 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
Property 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
Property, 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 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
Se-
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<PAGE> 21
curities 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 Property, 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 Property for a Series, or the Mortgage
Loans included in the Trust Property 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.
The related Prospectus Supplement for a Series will
describe any Mortgage Loans underlying the
Non-Agency Certificates to be included in the
related Property, or the Mortgage Loans included in
the Trust Property 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 Property, for a
Series, or the Contracts included in the Trust
Property for a Series of Certificates 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
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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 Property for a Series, or the
Contracts included in the Trust Property for a
Series of Securities. The Unsecured Contracts
included in the Trust Property for a Series will
not constitute a material concentration of the
assets of such Trust Property. See "Assets Securing
or Underlying the Securities -- Contracts."
F. Multifamily Loans..... Multifamily Loans underlying the Non-Agency
Certificates included in the Trust Property, for a
Series or the Multifamily Loans included in the
Trust Property for a Series of Certificates 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 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 Property, for a Series, or the
Multifamily Loans included in the Trust Property
for a Series of Certificates. See "Assets Securing
or Underlying the Securities -- Multifamily Loans."
G. Pre-Funding
Arrangements.......... If so specified in the related Prospectus
Supplement, the Trust Property may include a
pre-funding account which will be used to acquire
additional Trust Property for a specified period of
time following the date on which the related
Securities are issued. Any such pre-funding
arrangement (a "Pre-Funding Arrangement") will
require that any Trust Property to be so acquired
will conform to the requirements specified in the
related Indenture or Pooling Agreement. See "Assets
Securing or Underlying the
Securities -- Pre-Funding Arrangements."
Advances................... Unless otherwise specified in the Prospectus
Supplement for a Series, the Servicers (in the case
of a Series of Certificates) and the Non-Agency
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<PAGE> 23
Servicers (in the case of Non-Agency Certificates)
of the related Mortgage Loans, Contracts and
Multifamily Loans 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 (in the case of a Series of
Certificates) and the related Non-Agency
Administrator (in the case of Non-Agency
Certificates) shall be obligated to make the
advance. Any such obligation to make advances may
be limited to amounts due holders of the related
Certificates 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 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 Property 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 Pro-
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<PAGE> 24
spectus 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 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 real
property loans" for mutual savings banks and
domestic building and loan associations, "loans
secured by an interest in real property" for
domestic building and loan associations and "real
estate assets" for 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) except in certain circumstances with respect to
a Holder classified as a thrift institution under
the Code, 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
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<PAGE> 25
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.
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 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 Property 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> 26
RISK FACTORS
Prospective investors in the Securities should consider, among other
things, the following factors in connection with the purchase of the
Certificates:
GENERAL
An investment in Securities secured by or evidencing interests in a
Mortgage Pool may be affected by, among other things, 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 the Trust Property or underlying the Non-Agency
Certificates included in the Trust Property, 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 the Trust Property 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
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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 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.
RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
No Hazard Insurance for Title I Mortgage Loans. With respect to any Title I
Loans, the FHA Regulations do not require that a borrower obtain title or fire
and casualty insurance as a condition to obtaining a property improvement loan.
With respect to both manufactured home contracts that are Title I Contracts and
property improvement loans that are Title I Loans, if the related Mortgage
Property is located in a flood hazard area, however, flood insurance in an
amount at least equal to the loan amount is required. In addition, the FHA
Regulations do not require that the borrower obtain insurance against physical
damage arising from earth movement (including earthquakes, landslides and
mudflows) as a condition to obtaining a property improvement loan insured under
the Title I Program. Accordingly, if a Mortgaged Property that secures a Title I
Loan suffers any uninsured hazard or casualty losses, holders of any Securities
secured in whole or in part by Title I Loans may bear the risk of loss resulting
from a default by the borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA claims payments. Such loss
may be otherwise covered by amounts available from the credit enhancement
provided for the Securities, as specified in the related Prospectus Supplement.
Contracts Secured by Manufactured Homes. The Contracts will be secured by
security interests in Manufactured Homes that are not considered to be real
property because they are not permanently affixed to real estate. Perfection of
security interests in such Manufactured Homes and enforcement of rights to
realize upon the value of such 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 of a Secured Contract will
not amend any certificate of title to change the lienholder specified therein
from such Servicer to the Issuer or the applicable Trustee and will not deliver
any certificate of title to such Issuer or Trustee or note thereon such Issuer's
or Trustee's interest. Consequently, in some states, in the absence of such an
amendment, the assignment to such Issuer or 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 Issuer or
Trustee, the assignment of the security interest in the Manufactured Home may
not be effective against creditors of the Servicer or a trustee in bankruptcy of
the Servicer. If any related Credit Enhancement is exhausted and a Secured
Contract is in default, then recovery of amounts due on such Secured Contracts
is dependent on repossession and resale of the Manufactured Home securing such
Secured Contract. Certain other factors may limit the ability of the Servicer to
realize upon the Manufactured Homes or may limit the amount realized to less
than the amount due.
Unsecured Contracts. The obligations of the borrower under any Unsecured
Contract included as part of the related Trust Property will not be secured by
an interest in the related real estate or otherwise, and the related Issuer, as
the owner of such Unsecured Contract and the related Trustee, as assignee for
the benefit of the Holders of Bonds, of the Issuer's interest in such Unsecured
Contract, will be a general unsecured creditor
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<PAGE> 28
as to such obligations. As a consequence, in the event of a default under an
Unsecured Contract, the related Issuer or Trustee, as applicable, will have
recourse only against the borrower's assets generally, along with all other
general unsecured creditors of the borrower. In a bankruptcy or insolvency
proceeding relating to an borrower on an Unsecured Contract, the obligations of
the borrower under such Unsecured Contract may be discharged in their entirety,
notwithstanding the fact that the portion of such borrower's assets made
available to the related Trustee as a general unsecured creditor to pay amounts
due and owing thereunder are insufficient to pay all such amounts. A borrower on
an Unsecured Contract may not demonstrate the same degree of concern over
performance of its obligations under such Unsecured Contract as if such
obligations were secured by a single family residence owned by such borrower.
Consumer Protection Laws related to Contracts. Numerous federal and state
consumer protection laws impose requirements on lending under retail installment
sales contracts and installment loan agreements such as the Contracts, and the
failure by the lender or seller of goods to comply with such requirements could
give rise to liabilities of assignees for amounts due under such agreements and
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 as an assignee of
Contracts. The Company will warrant that each Contract complies with all
requirements of law and, with respect to any Secured Contract, will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing such Secured Contract. A
breach of any such warranty that materially adversely affects the interests of
the Securityholders in any Contract would create an obligation of the Seller to
repurchase or replace such Contract unless such breach is cured.
Reliance on Management of Timeshare Units. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to make
payments under their Mortgage Loans irrespective of any defect in, damage to or
change in conditions (such as poor management, faulty construction or physical,
social or environmental conditions) relating to the timeshare properties, any
such defect, damage or change in conditions could result in delays in payment or
in defaults by borrowers whose timeshare units are affected.
Mortgaged Properties Not Located in the United States. If so provided in
the related Prospectus Supplement, the Trust Property 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.
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.
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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 related Trust Property. 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 Property 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 Property 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 Pooling Agreement, as
applicable, if not required to be deposited in any related Reserve Fund or
otherwise applied pursuant to the related Indenture or Pooling 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 Pooling 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 Pooling 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 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 Property 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
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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.
LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS.
The related Prospectus Supplement will specify the number and percentage of
the Title I Loans and/or Title I Contracts, if any, included in the related
Trust Property that are partially insured by the FHA pursuant to Title I
Program. Since the FHA Insurance Amount for the Title I Loans and Title I
Contracts is limited as described herein and in the related Prospectus
Supplement, and since the adequacy of such FHA Insurance Amount is dependent
upon future events, including reductions for the payment of FHA claims, no
assurance can be given that the FHA insurance amount is or will be adequate to
cover 90% of all potential losses on the Title I Loans and Title I Contracts
included in the related Trust Property. If the FHA insurance amount for the
Title I Loans and Title I Contracts is reduced to zero, such loans and contracts
will be effectively uninsured from and after the date of such reduction. Under
the Title I Program, until a claim for insurance reimbursement is submitted to
the FHA, the FHA does not review or approve for qualification for insurance the
individual Title I Loan or Title I Contract insured thereunder (as is typically
the case with other federal loan insurance programs). Consequently, the FHA has
not acknowledged that any of the Title I Loans and Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Loans and Title I Contracts. See "Certain Legal Aspects of the Loan
Assets -- The Title I Program".
The availability of FHA Insurance reimbursement following a default on a
Title I Loan or Title I Contract is subject to a number of conditions, including
strict compliance by the originating lender of such loan, the Company, the FHA
Claims Administrator, the Servicer and any subservicer with the FHA Regulations
in originating and servicing such Title I Loan or Title I Contract, and limits
on the aggregate insurance coverage available in the Company's FHA Reserve. For
example, the FHA Regulations provide that, prior to originating a Title I Loan
or Title I Contract, a Title I lender must exercise prudence and diligence in
determining whether the borrower and any co-maker or co-signer is solvent and an
acceptable credit risk with a reasonable ability to make payments on the loan.
Although the related Seller will represent and warrant that the Title I Loans
and Title I Contracts have been originated and serviced in compliance with all
FHA Regulations, these regulations are susceptible to substantial
interpretation. Failure to comply with all FHA Regulations may result in a
denial of FHA Claims, and there can be no assurance that the FHA's enforcement
of the FHA Regulations will not become stricter in the future. See "Certain
Legal Aspects of the Loan Assets -- The Title I Program -- General".
The FHA will not recognize any Issuer or any Securityholders as the owners
of the Title I Loans or Title I Contracts, or any portion thereof, entitled to
submit FHA Claims. Accordingly, neither the Issuer nor the Securityholders will
have a direct right to receive insurance payments from the FHA. The Company will
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contract with a Servicer specified in the Prospectus Supplement to serve as the
Administrator for FHA Claims (the "FHA Claims Administrator") pursuant to an FHA
claims administration agreement (the "FHA Claims Administration Agreement"),
which will provide for the FHA Claims Administrator to handle all aspects of
administering, processing and submitting FHA Claims with respect to the Title I
Loans or Title I Contracts, in the name and on behalf of the Company. The
Securityholders will be dependent on the FHA Claims Administrator to (i) make
claims on the Title I Loans or Title I Contracts in accordance with FHA
Regulations and (ii) remit all FHA Insurance proceeds received from the FHA in
accordance with the related Pooling Agreement. The Securityholders' rights
relating to the receipt of payment from and the administration, processing and
submission of FHA Claims by the Company or any FHA Claims Administrator are
limited and governed by the related Pooling Agreement, and the FHA Claims
Administration Agreement and these functions are obligations of the Company and
the FHA Claims Administrator, but not the FHA. See "Certain Legal Aspects of the
Loan Assets -- The Title I Program -- Claims Procedures under Title I".
LIMITED NATURE OF RATINGS
Any rating assigned by a rating agency to a Class of Securities will
reflect only its assessment of the likelihood that holders of such Securities
will receive payments or distributions to which such Securityholders are
entitled under the related Indenture, Deposit Trust Agreement or Pooling
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional redemption or termination of the Securities.
Furthermore, such rating will not address the possibility that prepayment of the
Mortgage Assets at a higher or lower rate than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor that purchases a Security at a significant premium might fail to
recover its initial investment under certain prepayment scenarios. Hence, a
rating assigned by a rating agency does not guarantee or ensure the realization
of any anticipated yield on a Class of Securities.
The amount, type and nature of credit enhancement, if any, provided with
respect to a Series of Securities will be determined on the basis of criteria
established by each rating agency rating a Class of Securities of such Series.
Those criteria are sometimes based upon an actuarial analysis of the behavior of
similar types of loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of similar
types of assets will accurately predict the delinquency, default or loss
experience of any particular pool of Mortgage assets. In other cases, such
criteria may be based upon determination of the values of the Mortgaged
Properties or other properties, if any, that provide security for the Mortgage
Assets. However, no assurance can be given that those values will not decline in
the future. As a result, the Credit Enhancement required in respect of the
Securities of any Series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Assets. See "-- Limitations,
Reductions and Substitutions of Credit Enhancement" and "Credit Enhancement".
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"
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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 the Trust Property with respect to
a Series 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 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
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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
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 Property 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 Issuers (if other than the Company), 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
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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.
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 the related Trust Property are relatively small, realizations net of
liquidation expenses may also be relatively small as a percentage of the
principal amount of the Mortgage Loans.
GEOGRAPHIC CONCENTRATION
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on mortgage
loans generally. Any concentration of Mortgage Assets in such a region may
present risk considerations in addition to those generally present for similar
mortgage-backed or asset-backed securities without such concentration.
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.
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
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included in the related Trust Property 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 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 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 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 Pooling Agreement, as applicable, and the Prospectus Supplement
relating to each Series. When particular provisions or terms used or referred to
in an Indenture or Pooling Agreement are referred to herein, such provisions or
terms shall be as used or referred to in such Indenture or Pooling 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
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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 Property 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 Property
includes Mortgage Assets other than Mortgage Loans, late payments on such
Mortgage Assets may result in delays in payments and/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 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 is incorporated by
reference by a Series Supplement 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 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 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 a Deposit Trust
Agreement or a Pooling Agreement a form of each of which has been filed as an
Exhibit to the Registration Statement of which this Prospectus forms a part. The
Deposit Trust Agreement or Pooling 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 established by the Company pursuant to the related Deposit Trust Agreement
or Pooling Agreement. Each Series of Certificates will be entitled to
distributions only from the Assets included in the related Trust Property 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
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determined by the Assets included in the related Trust Property. 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 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 Pooling
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 Pooling
Agreement.
REMIC ELECTION
As to each Series, one or more elections may be made to treat all or
specified portions of the related Trust Property 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 Pooling 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,
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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 Property 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 Property
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
Property as of the close of business on the first day of the month of creation
of the related Trust (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 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
Property, (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
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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 Property 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
Property 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 interest from Assets
included in the related Trust Property 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 Pooling 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
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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.
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.
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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 Certificates 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 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 Property. 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
Pooling 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
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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 for such Series by repurchasing all of the Mortgage
Assets from such Trust, 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
may be terminated will be described in the related Prospectus Supplement.
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
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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 related Issuer 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 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
Property 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 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 Property of each Series. 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 Pooling 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 Pooling Agreement delivered to the Trustee
upon delivery of such Series.
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 the
Trust Property of a Series 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 Property for a Series or underlying a
Non-Agency Certificate included in the Trust Property 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
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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 the Trust
Property for a Series or underlying a Non-Agency Certificate included in the
Trust Property 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 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 Property includes
Mortgage Loans, or for which Mortgage Loans underlie the Non-Agency Certificates
included in the related Trust Property, 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
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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 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.
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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 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 Property for a Series or underlying a
Non-Agency Certificate included in the Trust Property for a Series may be held
in book-entry form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property 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
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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 Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property 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 Property with respect to a
Series or underlying a Non-Agency Certificate included in the Trust Property 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 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 Property with respect to a
Series or underlying a Non-Agency Certificate included in the Trust Property 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
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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 Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property 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 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
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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 Property includes FHLMC Certificates or for
which the related Trust Property 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 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.
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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 Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property 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, the Trust Property of a
Series may include, or Non-Agency Certificates included in the Trust Property of
a Series 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 the Trust Property of a Series 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 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 Non-Agency 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
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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 Property with respect
to a Series or underlying a Non-Agency Certificate included in the Trust
Property 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 Property with respect to a
Series or underlying a Non-Agency Certificate included in the Trust Property for
a Series (the "Contract Pool") will consist of
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manufactured housing conditional sales contracts and installment loan agreements
or participation interests therein (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
Property 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 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 Property includes Contracts or with respect
to which the related Trust Property 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 Property for a Series of
Securities will not constitute a material concentration of the assets of such
Trust Property.
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
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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 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 Property
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 Property includes such securities.
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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.
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 Pooling 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 Property or for
Assets deposited in a Reserve Fund for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a Series,
the related Pooling Agreement will provide for a commitment by the related
Issuer to subsequently purchase additional Loan Assets ("Subsequent Loan
Assets") following the date on which the related Securities are issued (a
"Pre-Funding Arrangement"). With respect to a Series, the Pre-Funding
Arrangement will require that any Subsequent Loan Assets included in the Trust
Property conform to the requirements and conditions provided in the related
Pooling Agreement. If a Pre-Funding Arrangement is utilized in connection with
the issuance of the Series of Securities, on the closing date for the issuance
of such Series the related Trustee will be required to deposit in a segregated
account (a "Pre-Funding Account") all or a portion of the proceeds received by
such Trustee in connection with the sale of one or more Classes of Securities of
such Series; and, subsequently, the Issuer will acquire Subsequent Loan Assets
in exchange for the release of money from the Pre-Funding Account for such
Series. In addition, the Pre-Funding Arrangement will be limited to a specified
period, not to exceed three months, during which time any transfers of
Subsequent Loan Assets must occur and to a maximum deposit to
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the related Pre-Funding Account of no more than twenty-five percent (25%) of the
aggregate proceeds received from the sale of all Classes of Securities of such
Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Securities as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Loan Assets to be included as
Trust Property after the closing date for the issuance of any particular Series
will require application of substantially all of the Pre-Funding Account, and it
is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any Securities, no assurance can be given
that such a distribution with respect to the Securities will not occur on the
Distribution Date or Payment Date following the termination of the Pre-Funding
Arrangement. In any event, it is unlikely that the Issuer will be able to
deliver Subsequent Loan Assets with aggregate principal balances that exactly
equal the Pre-Funding Account, and the portion of the Pre-Funding Account
remaining at the end of the Pre-Funding Arrangement, if any, will be distributed
in reduction of the principal balance of the Securities of the related Series,
as set forth in related Prospectus Supplement.
As may be further specified in the related Prospectus Supplement, amounts
on deposit in the Pre-Funding Account will be invested in short-term debt
obligations of, or debt obligations guaranteed by, the United States, repurchase
agreements that satisfy the criteria specified in the applicable Indenture or
Pooling Agreement, certificates of deposit, time deposits and bankers
acceptances of any United States depository institution or trust company, FDIC
insured deposits, including deposits with the related Trustee, commercial paper,
debt obligations, and money market funds; provided such investments are
acceptable to each rating agency rating the Series of Securities at the time at
which the investments are made (collectively "Permitted Instruments"); and
provided further that an investment in such Permitted Instruments will not
require the Issuer for a Series to be registered as an "investment company"
under the Investment Company Act of 1940, as amended. Permitted Instruments will
consist of short term investments that convert into cash or mature within a
short period of time, have minimal or no exposure to fluctuations in value as a
result of market changes in prevailing interest rates and are acceptable to each
rating agency rating the applicable Series of Securities.
The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a Series of Securities and the sale and assignment
of the Loan Assets to the related Issuer through the incremental delivery of the
Loan Assets on the closing date and during the three month period following the
closing date for such Series, which allows for a more even accumulation of the
Assets by the Issuer and the issuance of a larger principal amount of Securities
for such Series than would be the case without a Pre-Funding Arrangement.
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 Property. 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.
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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 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.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate principal
balance of the Mortgage Assets included in the Trust Property may exceed the
aggregate original principal balance of the Securities of a Series thereby
creating "Excess Collateral" on each Distribution Date or Payment Date. If
provided in the related Prospectus Supplement, such Excess Collateral may be
distributed to holders of Senior Securities to produce and maintain a specified
level of overcollateralization. With respect to a Series of Securities, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors, caps and triggers, as set forth in the related
Prospectus Supplement and the related Indenture or Pooling Agreement.
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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 Property
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. 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 Trusts for a separate Series of Securities. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
POOL INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a Series
for which the related Trust Property 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 under the related Indenture
or Pooling 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 Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Property 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,
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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 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.
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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 Property, to pay the expenses of the related Trust
Estate or Trust 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 Property may also include or the Securities of such Series may
also have the benefits of, assets such as insurance, guarantees, surety 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 Property, (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 and Multifamily Loans is applicable to Mortgage Loans and
Multifamily Loans (i) included in the Trust Property with respect to a Series of
Securities that includes Certificates 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 Certificates for which the related Trust Property
includes Mortgage Loans, Multifamily Loans and Contracts included in the Trust
Property for a Series of Certificates and Mortgage Loans and Multifamily Loans
underlying Non-Agency Certificates 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 the Administrator acts as the sole
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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 Property includes Mortgage Loans, Multifamily Loans or Contracts,
and for each Series for which the related Trust Property includes Non-Agency
Certificates, will specify whether the Administrator or another institution will
act as sole servicer or master servicer. If the 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 Pooling Agreement and
Deposit Trust 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 the 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 Pooling Agreement and
Deposit Trust 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 the
Administrator, pursuant to servicing agreements between each Servicer and the
Administrator (each, a "Servicing Agreement").
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 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
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Trustee, or in the event of a monetary default, by the Administrator, on behalf
of the Trustee. Upon termination of a Servicing Agreement, 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 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,
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. 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 will be obligated pursuant to the related Indenture or
Pooling Agreement to advance on or before the applicable
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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 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 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.
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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.
Contracts. With respect to Trust Property 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 Pooling 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 Pooling 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
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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.
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.
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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 Pooling 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 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.
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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 Property includes Multifamily Loans
or relating to a Series for which the related Trust Property 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 Property 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.
If any Mortgage 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 will be required to make such
expenditure. In either case, the Servicer and the Administrator 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, 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 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 Pooling
Agreement. Consequently, any default by an insurer under any insurance policy or
bankruptcy bond, any
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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
Certificates 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
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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 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.
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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.
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 POOLING AGREEMENT AND DEPOSIT TRUST AGREEMENT
The following summaries describe certain provisions of the Pooling
Agreement and the Deposit Trust Agreement not described elsewhere in this
Prospectus. Where particular provisions or terms used in the Pooling Agreement
or Deposit Trust Agreement 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 Pooling Agreement or Deposit Trust 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
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Prospectus Supplement. In addition, certain of the following summaries only
apply to a Pooling Agreement relating to series of Certificates for which the
related Trust Property includes Mortgage Loans, Multifamily Loans or Contracts.
Provisions of Pooling Agreements or Deposit Trust Agreements relating to series
of Certificates for which the related Trust Property includes other types of
Mortgage Assets will be summarized and described in the related Prospectus
Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of Mortgage Loans
At the time of issuance of the Certificates of a Series, the Issuer 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 Issuer 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 Issuer in
exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the related pooling or sale agreement.
In addition, as to each Mortgage Loan, the Issuer 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 Issuer may deliver copies thereof and deliver the
original recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the Issuer,
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 Issuer 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
Pooling Agreement or Deposit Trust Agreement the Issuer 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 included in the Trust Property 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 Issuer 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.
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In the event that the Issuer has acquired the Mortgage Loans for a Series,
if so specified in the related Prospectus Supplement, the Issuer 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 Issuer's title to the Mortgage Loans, which will
in all events be made by the Issuer), 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 Issuer'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.
Assignment of Contracts
The Issuer 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 pooling or sale agreement.
In addition, with respect to each Contract, the Issuer 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 Issuer 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 Issuer 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 Issuer 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 Issuer 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 Issuer 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 pooling or sale
agreement (the "Multifamily Loan Schedule").
In addition, the Issuer, 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 Issuer, 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
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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.
Unless otherwise specified in the related Prospectus Supplement, the Issuer
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 Issuer 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 Pooling Agreement or Deposit Trust 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
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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 Issuer will cause any Agency Securities, Non-Agency
Certificates, and Private Mortgage-Backed Securities included in the related
Trust Property 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 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 pooling or sale agreement.
The Issuer 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 Issuer 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
Property. 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 Issuer 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 Issuer 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 Property 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 Issuer 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 Issuer
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 Property 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 Issuer may obtain such an agreement
from the entity which sold such Mortgage Loans, Contracts or Multifamily Loans
to
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the Issuer, 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 the
Trust Property, 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
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 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 Pooling Agreement or the Deposit Trust
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.
Neither the Pooling Agreement or the Deposit Trust Agreement will provide
for the holding of any annual or other meetings of Holders of Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Pooling Agreement or the Deposit Trust 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
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
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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;
(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 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 Pooling Agreement or Deposit Trust
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;
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(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.
EVENTS OF DEFAULT
"Events of Default" 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 the Pooling Agreement or Deposit Trust
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 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,
whereupon the Trustee, or a new Administrator appointed pursuant to the Pooling
Agreement or Deposit Trust Agreement, will succeed to all the responsibilities,
duties and liabilities of the Administrator under the Pooling Agreement or
Deposit Trust Agreement, as applicable, 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 Pooling
Agreement or Deposit Trust 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. 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 Pooling Agreement or Deposit
Trust Agreement.
No Holder of Certificates will have any right under the Pooling Agreement
or Deposit Trust Agreement to institute any proceeding with respect to the
Pooling Agreement or Deposit Trust 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 Pooling Agreement or Deposit Trust 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.
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AMENDMENT
The Pooling Agreement or Deposit Trust 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 Pooling Agreement or
Deposit Trust Agreement provided that such amendment is not materially
inconsistent with the provisions of the Pooling Agreement or Deposit Trust
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 Pooling Agreement and Deposit
Trust 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 the Trust Property 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 created by such agreement that would be a
claim against the Trustee at any time 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 Pooling Agreement
and Deposit Trust 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 Pooling Agreement or Deposit Trust 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 Pooling
Agreement or Deposit Trust 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 of all the outstanding Certificates or all remaining
Assets in the Trust Property. The pooling or sales agreement will establish the
repurchase price for the Assets in the Trust 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 Trust Property, there may be additional conditions to the
termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the Trust created by the Pooling
Agreement or Deposit Trust Agreement continue beyond the expiration of 21 years
from the death of the survivor of certain persons named in such agreement. The
Trustee will give written
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notice of termination of the Trust 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 with
respect to any series of Certificates 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 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
Securities 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 Securities 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 Securities 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 Securities and other similar series of securities,
(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 Securities or shall be subordinate to the Securities, 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
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Trust. In addition, the amendment of certain provisions of a Deposit Trust
Agreement may require the consent of the Owner Trustee with respect to each
Series of Securities 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 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 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 Property 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 Pooling 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 Pooling 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 Pooling Agreement. However,
upon receipt of the various certificates, reports or other instruments required
to be
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furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the applicable Indenture or Pooling
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 Pooling Agreement, if the
Trustee becomes insolvent or in such other instances, if any, as are set forth
in the applicable Indenture or Pooling 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
Property includes Non-Agency Certificates backed by Contracts or for which the
related Trust 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
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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.
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.
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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.
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
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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.
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
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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 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.
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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 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 Administrator to enforce due-on-sale clauses may result in
the Trust Property 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
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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 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) 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 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
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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. sec. 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.
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
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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
Issuer, 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 Issuer 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 Issuer as a general
unsecured creditor to pay amounts due and owing thereunder are insufficient to
pay all such amounts.
THE TITLE I PROGRAM
General
Certain of the Mortgage Loans or Contracts contained in Trust Property with
respect to a Series 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 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
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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 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.
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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.
Sections 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: 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
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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.
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
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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
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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 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.
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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 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.
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
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose requirements on employee benefit plans (and
on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested) (collectively, "Plans") subject to ERISA and Section 4975 of the Code
and on persons who are fiduciaries with respect to such Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant). In addition to the imposition of general
fiduciary standards of investment prudence and diversification, ERISA prohibits
a broad range of transactions ("Prohibited Transactions") involving Plan assets
and persons ("Parties in Interest") having certain specified relationships to a
Plan and imposes additional prohibitions where Parties in Interest are
fiduciaries with respect to such Plan. Section 4975 of the Code provides many
requirements and prohibitions similar to those under ERISA and applies excise
taxes on persons engaged in Prohibited Transactions.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan (DOL Reg.
Section 2510.3-101, the "Plan Asset Regulations") Under the Plan Asset
Regulations, the underlying assets and properties of corporations, partnerships
and certain other entities in which a Plan makes an "equity" investment could be
deemed for purposes of ERISA to be assets of the investing Plan in certain
circumstances. In such case, the fiduciary making such an investment for the
Plan could be deemed to have delegated his or her asset management
responsibility, and the underlying assets and properties could be subject to
ERISA reporting and disclosure. The Certificates of a Series will, and the Bonds
of a Series could, be treated as "equity" for purposes of ERISA. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Securities that constitute "equity" investments, but the Company cannot predict
in advance whether such exceptions apply due to the factual nature of the
conditions to be met. Accordingly, because the Mortgage Loans or Agency
Securities may be deemed Plan assets of each Plan that purchases such
Securities, an investment in such Securities by a Plan might give rise to a
prohibited transaction under ERISA Sections 406 and 407 and be subject to an
excise tax under Code Section 4975 unless a statutory or administrative
exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTCE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payments retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Mortgage Pool.
Although the Trustee for any series of Certificates will be unaffiliated
with the Company, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to
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above. In addition, the nature of a Trust's assets or the characteristics of one
or more classes of the related series of Certificates may not be included within
the scope of PTCE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTCE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a Series of Securities,
the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Securities must make its
own determination as to whether the general and the specific conditions of PTCE
83-1 have been satisfied, or as to the availability of any other prohibited
transaction exemptions. Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Any Plan proposing to invest in Securities should consult with its counsel
to confirm that such investment will not result in a Prohibited Transaction and
will satisfy the other requirements of ERISA and the Code.
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. 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 1986 Act,
including, where applicable, the intended meaning ascribed to the provisions of
the 1986 Act by the Committee Report accompanying the 1986 Act, the Technical
and Miscellaneous Revenue Act of 1988, the Revenue Reconciliation Act of 1993,
and the Small Business Job Protection Act of 1996. The discussion also reflects
certain final Treasury regulations issued December 23, 1992, concerning REMICs
("Final REMIC Regulations"). The discussion below does not purport to address
federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the federal, state, local and other tax consequences to
them of the purchase, ownership and disposition of Securities. The Prospectus
Supplement for each series of Securities will discuss any special tax
consideration applicable to any Class or Classes of Securities of such Series,
and the discussion below is qualified by any such discussion in the related
Prospectus Supplement.
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
included as Trust Property which does not include the fixed retained yield.
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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 Property or one or more trusts or segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. Trust
Property 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 Pooling 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 Property (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 Property 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.
STATUS OF REMIC SECURITIES
REMIC Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool 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). REMIC Securities held by a real
estate investment trust (a "REIT") will constitute "real estate assets" within
the meaning of Code Section 856(c)(4)(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 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, for
purposes of Code Section 856(c)(4)(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
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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)(3)(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, REMIC 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 Final 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. The Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 (the "1986 Act")
indicates that the 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
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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 issued on
January 27, 1994, as amended on June 14, 1996, under Code Sections 1271 through
1273 and 1275 (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 or 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
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
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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
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
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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
on or after April 4, 1994 may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated
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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
four 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). Fourth, the
debt instrument must not provide for contingent principal payments. 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 positive number not greater than 1.35 but greater than 0.65 or (ii) a
product described in (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 is determined using a single
fixed formula and that is based on objective financial or economic information.
An objective rate is a qualified inverse floating rate if the rate is equal to a
fixed rate minus a qualified floating rate in which the variations of such rate
can reasonably be expected to inversely reflect contemporaneous variations in
the qualified floating rate. However, a variable rate is not an objective rate
if it is reasonably expected that the average value of the rate during the first
half of the Regular Security's term will be significantly less or greater than
the average value of the rate during the final half of the Regular Security's
term.
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 qualified stated interest and original issue
discount, if any, that accrues 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, and (iii) the qualified stated interest that accrues
is adjusted for the interest actually paid. 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
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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 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.
Under the OID Regulations, a variable rate Regular Security not qualifying
for treatment under the variable rate rules described above is subject to the
contingent payment rules. Regulations dealing with contingent payment debt
obligations were issued June 11, 1996 (the "Contingent Debt Regulations"), and
are generally effective August 13, 1996. The Contingent Debt Regulations by
their terms do not apply to REMIC regular interests. However, the following
paragraph describes the applicable Contingent Debt Regulations as a method that
may be considered reasonable.
The Contingent Debt Regulations apply a "noncontingent bond method" to a
debt instrument that is publicly traded or that is issued for cash or publicly
traded property. Under the noncontingent bond method, the issuer is required to
determine the comparable yield for the instrument and to construct a projected
payment schedule for the Regular Security consisting of all noncontingent
payments and a projected amount for each contingent payment. The issuer is
required to determine interest expense, and a holder is required to determine
interest income, according to the projected payment schedule formulated by the
issuer. Interest generally is accrued under the noncontingent bond method
according to generally applicable rules of the OID Regulations as described
above. Adjustments in the instrument's issue price and the holder's basis are
determined as if the projected payment schedule were the actual payment schedule
for the instrument. If the actual amount of a contingent payment differs from
the projected amount of the payment, adjustments to interest accrual are
generally taken into account at the time the payment is made in order to reflect
this difference. Gain or loss recognized by a holder on the sale, exchange, or
retirement of the instrument generally will be treated as interest income or
ordinary loss to the holder. A loss will be treated as ordinary, however, only
up to the amount of the holder's total interest inclusions with respect to the
Regular Security that were not offset by previous adjustments. Any additional
loss generally will be a capital loss. Investors are urged to consult their tax
advisors as to the proper accrual of original issue discount (including stated
interest) on the Regular Securities, including Regular Securities which may be
subject to the contingent payment rules.
Although unclear at present, the Company intends to treat Securities
bearing an interest rate that is a weighted average of the net interest rates on
the Mortgage Loans or the mortgage loans underlying the Mortgage Assets as
having qualified stated interest if the Mortgage Loans or the underlying
mortgage loans are adjustable rate mortgage loans. In such case, the applicable
index used to compute interest on the Mortgage Loans in effect on the issue date
(or possibly the pricing date) will be deemed to be in effect beginning with the
period in which the first weighted average adjustment date occurring after the
issue date occurs. If the Security interest rate for one or more periods is less
than it would be based upon the fully indexed rate, the excess of the interest
payments projected at the assumed index over interest projected at such initial
rate will be tested under the de minimis rules as described above. Adjustments
will be made in each accrual period increasing or decreasing the amount of
ordinary income reportable to reflect the actual interest rate on the
Securities. It is possible, however, that the IRS may treat some or all of the
interest on Securities with a weighted average rate as taxable under the rules
relating to obligations providing for contingent payments. Such treatment may
affect the timing of income accruals on such Securities.
It is not clear how income should be accrued with respect to Regular
Securities issued at a significant premium and with respect to REMIC Securities
the payments on which consist primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC ("Premium REMIC Regular
Securities"). One method of income accrual would be to treat the Premium REMIC
Regular Security as a Security having qualified stated interest purchased at a
premium equal to the excess of the price paid by such holder for the Premium
REMIC Regular Security over its stated principal amount. Under this approach, a
holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the
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Code with respect to all bonds held by such holder, as described below.
Alternatively, all of the income derived from a Premium REMIC Regular Security
could be reported as original issue discount by treating all future payments
under the Prepayment Assumption as fixed payments, in which case the amount and
rate of accrual of original issue discount would be computed by treating the
Premium REMIC Regular Security as a Security which has no qualified stated
interest, as described above. Finally, the IRS could assert that the Premium
REMIC Regular Securities should be taxable under the contingent payment rules
governing securities issued with contingent payments.
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 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.
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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
irrevocable except with the approval of the IRS. 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. The Treasury
Department has issued final regulations concerning the amortization of premium
but by their terms, the regulations do not apply to REMIC Regular Securities or
securities like the Regular Securities.
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 (currently more than one year). 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 noncorporate 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 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). In the
case of a Regular Security subject to the Contingent Debt Regulations as
described above under "Original Issue Discount," any gain on the sale or
exchange of such Security is treated as interest income.
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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.
A portion of such income may be ineligible for offset by such investor's
unrelated deductions. See the discussion of "excess inclusions" below under
"-- Treatment of Certain Items of REMIC Income and Expense -- Limitations on
Offset or Exemption of REMIC Income; Excess Inclusions." The timing of such
mismatching of income and
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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. Applicable Treasury
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. Existing
Treasury 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. 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 borrowers 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. Members of an affiliated group are
treated as one corporation for purposes of applying the limitations on offset of
excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," 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.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this
respect. The Small Business Job Protection Act
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("SBJPA") of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Securities that have "significant value", effective for taxable years beginning
after December 31, 1995, except with respect to Residual Securities continuously
held by thrift institutions since November 1, 1995.
In addition, the SBJPA provides three rules for determining the effect of
excess inclusions on the alternative minimum taxable income of a Residual
Securityholder. First, alternative minimum taxable income for a Residual
Securityholder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions. Second, a
Residual Securityholder's alternative minimum taxable income for a taxable year
cannot be less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
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. Existing Treasury regulations do not
provide guidance on this issue.
Mark to Market Rules
A REMIC residual interest acquired after January 3, 1995 cannot be
marked-to-market.
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 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,
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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 Pooling 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 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 Pooling 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 Pooling 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.
The Taxpayer Relief Act of 1997 provides, for taxable years beginning after
December 31, 1997, that if an "electing large partnership" holds a Residual
Security, all interests in the electing large partnership are treated as held by
disqualified organizations for purposes of the tax imposed upon a pass-through
entity by Section 860(E)(e) of the Code. An exception to this tax, otherwise
available to a pass-through entity that is furnished certain affidavits by
record holders of interests in the entity that does not know such affidavits are
false, is not available to an electing large partnership. An "electing large
partnership" is a partnership that had 100 or more partners during the preceding
taxable year and that has filed an election with the IRS to be so treated.
Noneconomic Residual Interests. Certain transfers of Residual Securities
are disregarded, in which case the transferor will continue to be treated as the
owner of the Residual Securities and thus will continue to be subject to tax on
its allocable portion of the net income of the REMIC Pool. 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
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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. 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 the residual interest as they become due. The Pooling 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 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 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 (except in the case of a partnership as otherwise
provided by regulations), an estate, the income of which is includible in gross
income for U.S. federal income tax purposes regardless of its source or a trust
whose administration is subject to the primary supervision of a United States
court and has one or more United States persons who have authority to control
all substantial decisions of the trust.
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
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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.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, 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 any 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 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
borrower pursuant to the terms of a convertible adjustable rate Mortgage Loan.
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.
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
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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 a specified amount and adjusted yearly for
inflation, or (ii) 80% of the amount of itemized 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,
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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 such Non-U.S. Person (i) is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (ii) 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 Property 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 "Treatment of Certain Items of REMIC
Income and Expense -- 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. 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 "-- 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.
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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. Final regulations dealing with withholding tax on
income paid to foreign persons and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective Non-U.S.
Persons are strongly urged to consult their own tax advisors with respect to the
New Withholding Regulations.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the IRS and to individuals, estates, nonexempt 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, noncalendar 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 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
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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 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); (ii) 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); (iii) 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)(4)(A); and
(iv) Non-REMIC Bonds held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(3)(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 income reportable
on Non-REMIC Bonds is not required to be reported under the accrual method
unless the Holder otherwise uses the accrual method.
STANDARD CERTIFICATES
General
With respect a Series of Certificates issued under a Pooling Agreement for
which no election is made to treat the related Trust Property (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 Pooling Agreement, the related Trust 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 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 Property 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 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 Certificate-
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holder generally will be able to deduct its share of servicing fees and all
administrative and other expenses of the Trust in accordance with his method of
accounting, provided that such amounts are reasonable compensation for services
rendered to that Trust. 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, 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 a specified amount, adjusted
yearly for inflation, 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
To the extent 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
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 consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the immediately preceding
paragraph. Code Section 593(d)(1)(C) provides that the term "qualifying real
property loan" does not include a loan "to the extent secured by a deposit in or
share of the taxpayer." The application of this provision to a buy-down fund
with respect to a buy-down Mortgage Loan is uncertain, but may require that a
taxpayer's investment in a buy-down Mortgage Loan be reduced by the buy-down
fund. As to the treatment of buy-down Mortgage Loans as "loans . . . secured by
an interest in real property" under Code Section 7701(a)(19)(C)(v), as "real
estate assets" under Code Section 856(c)(5)(A), and as
"obligations . . . principally secured by an interest in real property" under
Code Section 860G(a)(3)(A), there is indirect authority supporting treatment of
an investment in a buy-down Mortgage Loan as entirely secured by real property
if the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the case
may be. There is no assurance that the treatment described above is proper.
Accordingly, Certificateholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Certificateholder's investment for federal income tax purposes.
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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 original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969, mortgages
of noncorporate borrowers (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
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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
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 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
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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
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
containing variable-rate Mortgage Loans, the Company has been advised by counsel
that (i) the Trust 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.
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Status of Stripped Certificates
Even if Strip Certificates evidence an interest in a Trust 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.
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
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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.
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."
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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.
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 Andrews & Kurth L.L.P., Dallas, Texas.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust will be formed with respect to each Series of Certificates and,
unless otherwise specified in the Prospectus Supplement, a new Owner Trust will
be formed with respect to each Series of Bonds issued by an Owner Trust. Unless
otherwise specified in the Prospectus Supplement for a Series of Securities, no
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 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
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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, 1997,
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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities, other than underwriting
discounts and commissions*.
<TABLE>
<S> <C>
Filing Fee for Registration Statement....................... $ 295
Legal Fees and Expenses..................................... 696,000
Accounting Fees and Expenses................................ 240,000
Trustee's Fees and Expenses (including counsel fees)........ 150,000
Printing and Engraving Fees................................. 265,000
Blue Sky Fees and Expenses.................................. 60,000
Rating Agency Fees.......................................... 150,000
Miscellaneous............................................... 75,000
----------
Total............................................. $1,636,295
==========
</TABLE>
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* Provided for each Series of Securities on the cover page of the related
Prospectus Supplement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The form of Underwriting Agreement filed as Exhibit 1.1 hereto will provide
for indemnification by each Underwriter named in the related Terms Agreement of
any officer, director or controlling person of the Company who becomes subject
to liability arising out of an untrue or alleged untrue statement of a material
fact contained in this Registration Statement, the Prospectus filed herewith or
any Preliminary Prospectus, related Prospectus Supplement or related Preliminary
Prospectus Statement, or omission or alleged omission, that was made in reliance
on written information provided to the Issuer by such Underwriter.
The Certificate of Incorporation and Bylaws for Fund America Investors
Corporation II (Exhibit 3.1 and 3.2) provide for indemnification of directors
and officers to the full extent permitted by Delaware law. Section 145 of the
Delaware General Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in the right of
the corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding.
The Bylaws also provide that the Company may, to the full extent permitted
by law, purchase and maintain insurance on behalf of any corporate agent against
any liability which may be asserted against him.
See Item 17(b) below.
ITEM 16. EXHIBITS.
Exhibits --
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement.(1)
3.1 -- Certificate of Incorporation of Fund America Investors
Corporation II.(2)
3.2 -- Bylaws of Fund America Investors Corporation II.(2)
3.3 -- Form of Deposit Trust Agreement for Trust Issuer.(1)
4.1 -- Standard Provisions for Pooling and Administration
Agreement.(2)
4.2 -- Standard Provisions for Pooling and Administration
Agreement (Senior Subordinated Structure).(2)
</TABLE>
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<TABLE>
<C> <S>
4.3 -- Pooling and Administration Agreement (Series Provisions).(2)
4.4 -- Pooling and Administration Agreement (Series Provisions for Senior/Subordinated
Structure).(2)
4.5 -- Standard Indenture Provisions.(1)
4.6 -- Form of Terms Indenture.(1)
5.1* -- Opinion of Andrews & Kurth L.L.P. regarding the legality of the Securities (Asset-
Backed Certificates).
5.2* -- Opinion of Andrews & Kurth L.L.P. regarding the legality of the Securities (Bonds).
8.1** -- Opinion of Andrews & Kurth L.L.P. regarding tax matters.
10.1 -- Representative Form(s) of Mortgage Note(s).(3)
10.2 -- Representative Form of Mortgage.(3)
10.3 -- Specimen of Mortgage Pool Insurance Policy.(2)
10.4 -- Specimen of Special Hazard Insurance Policy.(2)
10.5 -- Specimen of Primary Mortgage Insurance Policy.(3)
10.6 -- Specimen of Standard Hazard Insurance Policy.(3)
10.7 -- Specimen of Bankruptcy Bond.(2)
10.8 -- Form of Servicing Agreement.(2)
10.9 -- Form of Loan Sale Agreement.(2)
10.10 -- Form of Agreement with Clearing Agency.(2)
10.11 -- Representative Form of Note -- Title I Loan.(3)
10.12 -- Representative Form of Contract and Trust Deed -- Title I Loan.(3)
10.13 -- Form of Management Agreement for Owner Trust.(4)
10.14 -- Form of Funding Agreement.(1)
10.15 -- Form of Management Agreement for Fund America Investors Corporation II.(1)
23.1* -- Consent of Andrews & Kurth L.L.P. (included as part of Exhibits 5.1, 5.2 and 8.1).
23.2** -- Consent of Deloitte & Touche LLP.
24.1* -- Powers of Attorney (included on signature page hereto).
25.1 -- Form T-1 Statement of Eligibility (bound separately and filed with the Commission on
October 5, 1995).
27.1* -- Financial Data Schedule.
99.1 -- Form of Senior/Subordinate Prospectus Supplement.(5)
99.2 -- Form of Agency Prospectus Supplement (Pass-Through Certificates).(1)
99.3 -- Form of Agency Prospectus Supplement (Bonds).(1)
99.4 -- Form of Whole Loan Prospectus Supplement.(1)
99.5 -- Prospectus Supplement dated April 22, 1996, delivered in connection with the
Registrant's Series 1996-A Certificates issued pursuant to Registration Statement No.
33-73748.(6)
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(1) Previously filed with the Commission as an exhibit to Amendment No. 3 to the
Registrant's Form S-11 Registration Statement (File No. 33-73748) on October
13, 1994 and incorporated herein by reference.
II-2
<PAGE> 129
(2) Previously filed with the Commission as an exhibit to the Registrant's Form
S-11 Registration Statement (File No. 33-56776) on January 7, 1993, and
incorporated herein by reference.
(3) Previously filed with the Commission as an exhibit to Amendment No. 1 to the
Registrant's Form S-11 Registration Statement (File No. 33-56776) on April
6, 1993, and incorporated herein by reference.
(4) Previously filed with the Commission as an exhibit to Amendment No. 4 to the
Registrant's Form S-3 Registration Statement (File No. 33-73748) on July 14,
1995, and incorporated herein by reference.
(5) Previously filed with the Commission as an exhibit to Amendment No. 1 to the
Registrant's Form S-11 Registration Statement (File No. 33-67202) on
September 7, 1993, and incorporated therein by reference.
(6) Previously filed with the Commission pursuant to Rule 424(b) on April 24,
1996, and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of this
Registration Statement (or the more recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that no such post-effective amendment shall be required
if the information which would be required to be included in such post-
effective amendment by clauses (i) and (ii) above is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Company's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in this Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
hereby, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(5) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Company pursuant to rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 130
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 (notwithstanding the fact that a security
rating pursuant to Transaction Requirement B.5. has not yet been obtained, which
security rating requirement, in the reasonable belief of the Company, will be
met by the time of sale) and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Denver, State of Colorado, on the 30th day of September, 1998.
FUND AMERICA INVESTORS CORPORATION II
By: /s/ STEVEN B. CHOTIN
-------------------------------------
Steven B. Chotin
President
Each person whose signature appears below does hereby make, constitute and
appoint Steven B. Chotin, Helen M. Dickens and Howard J. Glicksman and each of
them his or her true and lawful attorney with full power of substitution to
execute, deliver and file with the Securities and Exchange Commission, for and
on his or her behalf, and in his or her capacity or capacities as stated below,
any amendment (including post-effective amendments) to the Registration
Statement with all exhibits thereto, making such changes in the Registration
Statement as the Registrant deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ STEVEN B. CHOTIN Director, Chairman, Chief September 30, 1998
- ----------------------------------------------------- Executive Officer and
Steven B. Chotin President (Principal
Executive Officer)
/s/ ANNEL HENDERSON Controller (Principal September 30, 1998
- ----------------------------------------------------- Accounting Officer and
Annel Henderson Principal Financial
Officer)
/s/ HOWARD J. GLICKSMAN Director September 30, 1998
- -----------------------------------------------------
Howard J. Glicksman
/s/ M. GARRETT SMITH Director September 25, 1998
- -----------------------------------------------------
M. Garrett Smith
/s/ HELEN M. DICKENS Director, Vice President September 30, 1998
- -----------------------------------------------------
Helen M. Dickens
</TABLE>
II-5
<PAGE> 132
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.(1)
3.1 -- Certificate of Incorporation of Fund America Investors
Corporation II.(2)
3.2 -- Bylaws of Fund America Investors Corporation II.(2)
3.3 -- Form of Deposit Trust Agreement for Trust Issuer.(1)
4.1 -- Standard Provisions for Pooling and Administration
Agreement.(2)
4.2 -- Standard Provisions for Pooling and Administration
Agreement (Senior Subordinated Structure).(2)
4.3 -- Pooling and Administration Agreement (Series
Provisions).(2)
4.4 -- Pooling and Administration Agreement (Series Provisions
for Senior/Subordinated Structure).(2)
4.5 -- Standard Indenture Provisions.(1)
4.6 -- Form of Terms Indenture.(1)
5.1* -- Opinion of Andrews & Kurth L.L.P. regarding the legality
of the Securities (Asset-Backed Certificates).
5.2* -- Opinion of Andrews & Kurth L.L.P. regarding the legality
of the Securities (Bonds).
8.1** -- Opinion of Andrews & Kurth L.L.P. regarding tax matters.
10.1 -- Representative Form(s) of Mortgage Note(s).(3)
10.2 -- Representative Form of Mortgage.(3)
10.3 -- Specimen of Mortgage Pool Insurance Policy.(2)
10.4 -- Specimen of Special Hazard Insurance Policy.(2)
10.5 -- Specimen of Primary Mortgage Insurance Policy.(3)
10.6 -- Specimen of Standard Hazard Insurance Policy.(3)
10.7 -- Specimen of Bankruptcy Bond.(2)
10.8 -- Form of Servicing Agreement.(2)
10.9 -- Form of Loan Sale Agreement.(2)
10.10 -- Form of Agreement with Clearing Agency.(2)
10.11 -- Representative Form of Note -- Title I Loan.(3)
10.12 -- Representative Form of Contract and Trust Deed -- Title I
Loan.(3)
10.13 -- Form of Management Agreement for Owner Trust.(4)
10.14 -- Form of Funding Agreement.(1)
10.15 -- Form of Management Agreement for Fund America Investors
Corporation II.(1)
23.1* -- Consent of Andrews & Kurth L.L.P. (included as part of
Exhibits 5.1, 5.2 and 8.1).
23.2** -- Consent of Deloitte & Touche LLP.
24.1* -- Powers of Attorney (included on signature page hereto).
25.1 -- Form T-1 Statement of Eligibility (bound separately and
filed with the Commission on October 5, 1995).
27.1* -- Financial Data Schedule.
99.1 -- Form of Senior/Subordinate Prospectus Supplement.(5)
99.2 -- Form of Agency Prospectus Supplement (Pass-Through
Certificates).(1)
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
99.3 -- Form of Agency Prospectus Supplement (Bonds).(1)
99.4 -- Form of Whole Loan Prospectus Supplement.(1)
99.5 -- Prospectus Supplement dated April 22, 1996, delivered in
connection with the Registrant's Series 1996-A
Certificates issued pursuant to Registration Statement
No. 33-73748.(6)
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(1) Previously filed with the Commission as an exhibit to Amendment No. 3 to the
Registrant's Form S-11 Registration Statement (File No. 33-73748) on October
13, 1994 and incorporated herein by reference.
(2) Previously filed with the Commission as an exhibit to the Registrant's Form
S-11 Registration Statement (File No. 33-56776) on January 7, 1993, and
incorporated herein by reference.
(3) Previously filed with the Commission as an exhibit to Amendment No. 1 to the
Registrant's Form S-11 Registration Statement (File No. 33-56776) on April
6, 1993, and incorporated herein by reference.
(4) Previously filed with the Commission as an exhibit to Amendment No. 4 to the
Registrant's Form S-3 Registration Statement (File No. 33-73748) on July 14,
1995, and incorporated herein by reference.
(5) Previously filed with the Commission as an exhibit to Amendment No. 1 to the
Registrant's Form S-11 Registration Statement (File No. 33-67202) on
September 7, 1993, and incorporated therein by reference.
(6) Previously filed with the Commission pursuant to Rule 424(b) on April 24,
1996, and incorporated herein by reference.
<PAGE> 1
Exhibit 5.1
September 30, 1998
Fund America Investors Corporation II
6400 S. Fiddler's Green Circle, Suite 1200B
Englewood, Colorado 80111
Re: Fund America Investors Corporation II
Registration Statement on Form S-3
Dear Gentlemen:
We have acted as counsel for Fund America Investors Corporation II, a
corporation organized under the laws of the State of Delaware (the "Issuer"),
in connection with the proposed issuance by the Issuer of its asset-backed
certificates (the "Certificates"). The Certificates of a Series are to be
issued pursuant to the Standard Provisions for Pooling and Administration
Agreement or Standard Provisions for Pooling and Administration Agreement
(Senior/Subordinated Structure), as applicable, as supplemented by one or more
supplemental Pooling and Administration Agreements (Series Provisions) or
Pooling and Administration Agreements (Series Provisions for
Senior/Subordinated Structure), as applicable, between the Issuer, the
administrator (the "Administrator") and the trustee (the "Trustee") authorizing
such series (the "Series Provisions"). The applicable Standard Provisions for
Pooling and Administration Agreement and the applicable Series Provisions, each
in the form previously filed with the Securities and Exchange Commission on
January 7, 1993 as an exhibit to the Issuer's Registration Statement on Form
S-11 (File No. 33-56776) are herein referred to collectively as the "Pooling and
Administration Agreement." This opinion is to be filed as Exhibit 5.1 to the
Issuer's Registration Statement relating to the Certificates on Form S-3 (the
"Registration Statement") filed on the date hereof with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "1933
Act").
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Issuers' organizational documents, the
form of Pooling and Administration Agreement and the form of Certificates
included therein and such other documents, records, certificates of the Issuer
and public officials and other instruments as we have deemed necessary for the
purposes of rendering this opinion. In addition, we have assumed that the
Pooling and Administration Agreement as completed for each series will be duly
executed and delivered; that the Certificates as completed for each series will
be duly executed and delivered substantially in the forms contemplated by the
Pooling and Administration Agreement; and that the Certificates for each series
will be sold as described in the Registration Statement.
<PAGE> 2
Fund America Investors Corporation II
September 30, 1998
Page 2
Based upon the foregoing, we are of the opinion that the Certificates
are in due and proper form, and assuming the due authorization, execution and
delivery of the Pooling and Administration Agreement for each series by the
Issuer, the Administrator and the Trustee and the due authorization of the
Certificates for each series by all necessary action on the part of the Issuer,
when validly executed, authenticated and issued in accordance with the
applicable Pooling and Administration Agreement delivered against payment
therefor, the Certificates for each series will be validly issued and
outstanding, fully paid and non-assessable, and entitled to the benefits of the
related Pooling and Administration Agreement in accordance with their terms.
The opinion expressed above is subject to the qualification that we do
not purport to be experts as to the laws of any jurisdiction other than the
United States, the States of Texas and New York and the General Corporate Law
of the State of Delaware, and we express no opinion herein as to the effect
that the laws and decisions of courts of any such other jurisdiction may have
upon such opinions.
We consent to the use and filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are within the category
of persons whose consent is required under Section 7 of the 1933 Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
Exhibit 5.2
September 30, 1998
Fund America Investors Corporation II
6400 S. Fiddler's Green Circle, Suite 1200B
Englewood, Colorado 80111
Re: Fund America Investors Corporation II
Registration Statement on Form S-3
Dear Gentlemen:
We have acted as counsel for Fund America Investors Corporation II, a
corporation organized under the laws of the State of Delaware (the "Company"),
and certain trusts, all of the beneficial ownership of which will be owned by
the Company (together with the Company, each an "Issuer"), in connection with
the proposed issuance by each Issuer of its asset-backed bonds (the "Bonds").
The Bonds are to be issued pursuant to the Standard Indenture Provisions and a
Terms Indenture for each series, each between the applicable Issuer and the
Indenture Trustee (as defined therein). The Standard Indenture Provisions and
the applicable Terms Indenture, each in the form previously filed with the
Securities and Exchange Commission on October 13, 1994 as an exhibit to
Amendment No. 3 to the Company's Registration Statement on Form S-11 (File No.
33-73748) are herein referred to collectively as the "Indenture." This opinion
is to be filed as Exhibit 5.2 to the Company's Registration Statement relating
to the Bonds on Form S-3 (the "Registration Statement") filed on the date
hereof with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act").
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Issuers' organizational documents, the
Indenture and form of Bonds included therein and such other documents, records,
certificates of the Company and public officials and other instruments as we
have deemed necessary for the purposes of rendering this opinion. In addition,
we have assumed that the Indenture as completed for each series will be duly
executed and delivered; that the Bonds as completed for each series will be
duly executed and delivered substantially in the forms contemplated by the
Indenture; and that the Bonds for each series will be sold as described in the
Registration Statement.
Based upon the foregoing, we are of the opinion that the Bonds are in
due and proper form, and assuming the due authorization, execution and delivery
of the Indenture for each series by the applicable Issuer and the Indenture
Trustee and the due authorization of the Bonds for each series
<PAGE> 2
Fund America Investors Corporation II
September 30, 1998
Page 2
by all necessary action on the part of the applicable Issuer, when validly
executed, authenticated and issued in accordance with the applicable Indenture
delivered against payment therefor, the Bonds for each series will be valid and
binding obligations of the applicable Issuer, enforceable against the
applicable Issuer in accordance with their terms, except that the
enforceability thereof may be subject to (a) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent or preferential conveyance
or other similar laws now or hereinafter in effect relating to creditors'
rights generally, and (b) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
The opinion expressed above is subject to the qualification that we do
not purport to be experts as to the laws of any jurisdiction other than the
United States, the States of Texas and New York and the General Corporate Law
of the State of Delaware, and we express no opinion herein as to the effect
that the laws and decisions of courts of any such other jurisdiction may have
upon such opinions.
We consent to the use and filing of this opinion as Exhibit 5.2 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are within the category
of persons whose consent is required under Section 7 of the 1933 Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 444,105
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 444,105
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 673,484
<CURRENT-LIABILITIES> 171
<BONDS> 0
0
0
<COMMON> 3,490
<OTHER-SE> 669,823
<TOTAL-LIABILITY-AND-EQUITY> 673,484
<SALES> 0
<TOTAL-REVENUES> 363,510
<CGS> 0
<TOTAL-COSTS> 156,676
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 206,834
<INCOME-TAX> 0
<INCOME-CONTINUING> 206,834
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206,834
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not presented, as all shares of common stock are held by a sole shareholder.
</FN>
</TABLE>
