PROSPECTUS SUPPLEMENT
(To Prospectus dated March 6, 1997)
$300,000,000
AFC MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 1997-3
SUPERIOR BANK FSB,
DEPOSITOR
----------
The Series 1997-3 AFC Mortgage Loan Asset Backed Certificates will consist
of seven Classes of certificates (collectively, the "Certificates"), Class 1A-1,
Class 1A-2, Class 1A-3, Class 1A-4, Class 1A-5 (collectively, the "Class 1A
Certificates"), Class 2A (together with the Class 1A Certificates, the "Class A
Certificates") and Class R. The Class A Certificates will have the initial
principal balances set forth below. Only the Class A Certificates are offered
hereby.
The Class A Certificates will represent a senior undivided interest in a
trust fund (the "Trust Fund") created by Superior Bank FSB (the "Depositor"),
consisting of two sub-pools of mortgage loans secured by first and second liens
on single-family properties, units in planned unit developments, individual
condominium units, manufactured homes, multifamily properties and mixed
residential and commercial structures (the "Mortgage Loans") originated or
purchased by the Depositor, all proceeds thereof due after the Cut-off Date with
respect to the Initial Mortgage Loans or the Subsequent Cut-off Date with
respect to the Subsequent Mortgage Loans, as such terms are defined herein
(other than the Depositor's Yield as described in the Prospectus), the
certificate insurance (continued on next page)
[LOGO] FINANCIAL GUARANTY INSURANCE
COMPANY
FGIC is a registered mark used by Financial Guaranty Company,
a private company not affiliated with any U.S. Government agency.
----------
PROCEEDS OF THE ASSETS IN THE TRUST FUND, INCLUDING THE CERTIFICATE INSURANCE
POLICY, ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE CLASS A
CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR OR
ANY OF ITS AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE UNDERLYING
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR OR ANY OF ITS AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" ON PAGE S-20 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 9 OF THE
ACCOMPANYING PROSPECTUS.
<TABLE>
<CAPTION>
===============================================================================================================
INITIAL PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE PUBLIC DISCOUNT DEPOSITOR(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Class 1A-1 Certificate.. $35,000,000 Variable 100% 0.2% 99.8%
- ---------------------------------------------------------------------------------------------------------------
Per Class 1A-2 Certificate.. $30,500,000 6.62% 100%(2) 0.25% 99.75%
- ---------------------------------------------------------------------------------------------------------------
Per Class 1A-3 Certificate.. $12,000,000 6.69% 99.984375%(2) 0.30% 99.684375%
- ---------------------------------------------------------------------------------------------------------------
Per Class 1A-4 Certificate.. $22,027,857 7.07% 99.96875%(2) 0.35% 99.61875%
- ---------------------------------------------------------------------------------------------------------------
Per Class 1A-5 Certificate.. $21,000,000 6.90% 99.96875%(2) 0.43% 99.53875%
- ---------------------------------------------------------------------------------------------------------------
Per Class 2A Certificate.... $179,472,143 Variable 100% 0.29% 99.71%
- ---------------------------------------------------------------------------------------------------------------
Total....................... $300,000,000 N/A $299,984,678.79 $870,116.71 $299,114,562.08
================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Depositor estimated to be $295,000.
(2) Plus accrued interest from September 1, 1997.
----------
The Class A Certificates are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Class A Certificates will be made solely in
book-entry form through The Depository Trust Company in the United States or
CEDEL and Euroclear (each as defined herein) in Europe against payment therefor
in immediately available funds in New York, New York, on or about September 25,
1997.
----------
MERRILL LYNCH & CO. J.P. MORGAN & CO.
The date of this Prospectus Supplement is September 12, 1997.
<PAGE>
(continued from preceding page)
policy described herein, funds on deposit in two Pre-Funding Accounts to be
established with the Trustee, certain other accounts and certain other property
(Sub-Pool 1 and Sub-Pool 2, each a "Sub-Pool", and collectively, the "Mortgage
Pool").
Additional Mortgage Loans are intended to be purchased by the Trust Fund from
the Depositor on or before November 21, 1997 from funds on deposit in the
Pre-Funding Accounts. On the Closing Date, the Depositor will pay to the Trustee
$46,413,349 for deposit in the Sub-Pool 1 Pre-Funding Account and $69,619,200
for deposit in the Sub-Pool 2 Pre-Funding Account. Sub-Pool 1 consists of
fixed-rate mortgage loans which are secured by first and second liens and
Sub-Pool 2 consists of adjustable-rate mortgage loans which are secured by first
liens. The Sub-Pool 2 Mortgage Loans will be subject to annual or semiannual
mortgage rate adjustments after an initial six-month, twenty-four month or sixty
month period, based upon changes in either the weekly average yield on United
States Treasury Securities adjusted to a constant maturity of one year (the
"One-Year U.S. Treasury Index"), or six-month London interbank offered rates for
United States dollar-denominated deposits in the London market (the "Six-Month
LIBOR Index") (each, an "Index") as described herein under "The Mortgage
Pool--Sub-Pool 2." The Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be entered into as of the Cut-off Date among the
Depositor, the Lee Servicing Company division of the Depositor, as servicer (the
"Servicer"), and LaSalle National Bank, as trustee (the "Trustee"). To the
extent described herein, the Class 1A and Class 2A Certificates are
cross-collateralized so that, in certain circumstances, Excess Spread and
principal collections on a Sub-Pool will be available to Holders of the Class A
Certificates related to the other Sub-Pool. Credit enhancement with respect to
the Class 1A Certificates will be provided in part by the initial
overcollateralization resulting from the sum of the Original Sub-Pool 1
Principal Balance and the Original Sub-Pool 1 Pre-Funded Amount exceeding the
initial Class 1A Principal Balance as of the Closing Date, and credit
enhancement with respect to the Class 2A Certificates will be provided in part
by the initial overcollateralization resulting from the sum of the Original
Sub-Pool 2 Principal Balance and the Original Sub-Pool 2 Pre-Funded Amount
exceeding the initial Class 2A Principal Balance as of the Closing Date.
The Class A Certificates will be unconditionally and irrevocably guaranteed
as to payment of the related Class A Remittance Amount to the extent described
herein on each Remittance Date pursuant to the terms of the Certificate
Insurance Policy to be issued by Financial Guaranty Insurance Company.
Distributions on the Certificates will be made on the 25th day of each month
or, if such day is not a business day, then on the next business day commencing
on October 27, 1997 (each, a "Remittance Date"), to the extent and in the manner
set forth herein.
The yield to investors on the Class A Certificates will be sensitive in
varying degrees to, among other things, the rate and timing of principal
payments (including prepayments) of the Mortgage Loans and, with respect to
Sub-Pool 2, to the level of the related Index. The yield to maturity of the
Class A Certificates may vary from the anticipated yield to the extent such
Certificates are purchased at a discount or premium and to the extent the rate
and timing of payments thereon is sensitive to prepayments and an increased or
decreased rate of payment of principal. Holders of the Class A Certificates
purchased at a discount should consider the risk that a slower than anticipated
rate of principal payments could result in an actual yield that is lower than
the anticipated yield and Holders of Class A Certificates purchased at a premium
should consider the risk that a faster than anticipated rate of principal
payments could result in an actual yield that is lower than the anticipated
yield.
There is currently no secondary market for the Class A Certificates. Merrill
Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. (the
"Underwriters") intend to make a secondary market in the Class A Certificates,
but are not obligated to do so. There can be no assurance that a secondary
market for the Class A Certificates will develop or, if it does develop, that it
will continue.
As a condition of issuance, the Class 1A and Class 2A Certificates will be
rated Aaa by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's
Ratings Services, A Division of the McGraw-Hill Companies, Inc.
As described herein, a real estate mortgage investment conduit ("REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes, exclusive of the Interest Coverage Accounts (the "Trust Fund REMIC").
The Class A Certificates will constitute "regular interests" and the Class R
Certificates will constitute the sole class of "residual interests" in such
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
S-2
<PAGE>
----------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A
CERTIFICATES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "METHOD OF
DISTRIBUTION" HEREIN.
----------
ADDITIONAL INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Class A Certificates. This Prospectus Supplement
and the Prospectus, which forms a part of the Registration Statement, omit
certain information contained in such Registration Statement pursuant to the
Rules and Regulations of the Commission. The Registration Statement and the
exhibits thereto can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and certain of its Regional Offices located as follows: Midwest Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661;
and Northeast Regional Office, Suite 1300, Seven World Trade Center, New York,
New York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the Trust Fund are required under the
Pooling Agreement to be forwarded to holders of the Certificates ("Holders" or
"Certificateholders"). Such reports will not be examined and reported on by an
independent public accountant. See "Description of the Certificates--Reports to
Certificateholders" in the Prospectus.
THE CLASS A CERTIFICATES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED MARCH 6, 1997, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Certain capitalized terms used in this Prospectus Supplement are
defined elsewhere herein or in the Prospectus. A listing of the pages on which
some of such terms are defined is found in the "Index of Principal Definitions"
herein and in the Prospectus.
Title of Securities................AFC Mortgage Loan Asset Backed Certificates,
Series 1997-3, Class 1A-1, Class 1A-2,
Class 1A-3, Class 1A-4, Class 1A-5, Class
2A and Class R (the Class 1A-1, Class
1A-2, Class 1A-3, Class 1A-4 and Class
1A-5 Certificates are referred to herein
as the "Class 1A Certificates"; the Class
1A and Class 2A Certificates are referred
to herein as the "Class A Certificates";
the Class A and Class R Certificates are
referred to herein as the "Certificates";
each such class, a "Class"). The
Certificates will be issued on the
Closing Date pursuant to the Pooling and
Servicing Agreement (the "Pooling
Agreement"), dated as of the Cut-off
Date, by and among the Depositor, the
Servicer and the Trustee. Only the Class
A Certificates are offered hereby.
Depositor..........................Superior Bank FSB, a federally chartered
stock savings bank (the "Depositor"),
will deposit into the Trust Fund mortgage
loans originated or purchased by the
Depositor. See "The Depositor" herein and
in the Prospectus.
Servicer...........................The Lee Servicing Company division of the
Depositor (the "Servicer" or the "Lee
Servicing Division"). See "Pooling
Agreement--The Servicer" herein and "The
Servicer" in the Prospectus.
Trustee............................LaSalle National Bank, a nationally chartered
bank. See "Pooling Agreement--The
Trustee" herein.
Cut-off Date.......................September 1, 1997.
Distributions......................Distributions on the Certificates will be
made on the 25th day of each month or, if
such day is not a Business Day, on the
first Business Day thereafter commencing
October 27, 1997 (each, a "Remittance
Date"). Distributions on each Remittance
Date will be made to Certificateholders
of record as of the Business Day
immediately preceding such Remittance
Date, in the case of the Class 1A-1
Certificates and the Class 2A
Certificates, and the last Business Day
of the month preceding the month of such
Remittance Date, in the case of all other
Classes of Certificates (each, a "Record
Date"), except that the initial
distribution on all Classes of
Certificates other than the Class 1A-1
Certificates and the Class 2A
Certificates will be made to
Certificateholders of record as of the
Closing Date and the final distribution
on the Certificates will be made only
upon presentment and surrender of the
Certificates at the office or agency of
the Trustee in Chicago, Illinois.
Registration of Offered
Certificates......................Holders of the Certificates may elect to hold
their Certificate interests through The
Depository Trust Company ("DTC"), in the
United States, or Centrale de Livraison
de Valeurs Mobilieres S.A. ("CEDEL") or
the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be in
accordance with the usual rules and
operating procedures of the relevant
system. Cross-market transfers between
persons
S-4
<PAGE>
holding directly or indirectly through
DTC, on the one hand, and counterparties
holding directly or indirectly through
CEDEL or Euroclear, on the other, will be
effected in DTC through Citibank, N.A. or
The Chase Manhattan Bank, the relevant
depositaries (collectively, the
"Depositaries") of CEDEL or Euroclear,
respectively, and each a participating
member of DTC. The Certificates will be
initially registered in the name of CEDE
& Co., the nominee of DTC. The interests
of the Certificateholders will be
represented by book-entries on the
records of DTC, its Participants and
Indirect Participants for the benefit of
the Certificate Owners. Certificates
representing the Class A Certificates
will be issued in definitive form only
under the limited circumstances described
in the Prospectus. In the case of the
Class A Certificates, all references
herein to "Holders" or
"Certificateholders" shall reflect the
rights of Certificate Owners as they may
indirectly exercise such rights through
DTC, CEDEL, Euroclear and participating
members thereof, except as otherwise
specified in the Prospectus. See "Risk
Factors-Difficulty in Pledging" and
"-Potential Delays in Receipt of
Distributions" herein and "Risk Factors"
and "Description of the
Certificates--Book-Entry Registration and
Definitive Certificates" in the
Prospectus.
The Class A Certificates............The Class 1A-1 Certificates will have an
initial principal balance of $35,000,000
(the initial "Class 1A-1 Principal
Balance") as of the date of initial
issuance (the "Closing Date"), and will
accrue interest at the Class 1A-1
Pass-Through Rate. The Class 1A-2
Certificates will have an initial
principal balance of $30,500,000 (the
initial "Class 1A-2 Principal Balance")
as of the Closing Date, and will accrue
interest at the Class 1A-2 Pass-Through
Rate. The Class 1A-3 Certificates will
have an initial principal balance of
$12,000,000 (the initial "Class 1A-3
Principal Balance") as of the Closing
Date, and will accrue interest at the
Class 1A-3 Pass-Through Rate. The Class
1A-4 Certificates will have an initial
principal balance of $22,027,857 (the
initial "Class 1A-4 Principal Balance")
as of the Closing Date, and will accrue
interest at the Class 1A-4 Pass-Through
Rate. The Class 1A-5 Certificates will
have an initial principal balance of
$21,000,000 (the initial "Class 1A-5
Principal Balance") as of the Closing
Date, and will accrue interest at the
Class 1A-5 Pass-Through Rate. The
aggregate initial principal balance of
the Class 1A Certificates is
$120,527,857.
The Class 2A Certificates will have an
initial principal balance of $179,472,143
(the initial "Class 2A Principal
Balance") as of the Closing Date, and
will accrue interest at the Class 2A
Pass-Through Rate.
The sum of the Class 1A-1 Principal Balance,
the Class 1A-2 Principal Balance, the
Class 1A-3 Principal Balance, the Class
1A-4 Principal Balance and the Class 1A-5
Principal Balance is referred to herein
as the "Class 1A Principal Balance." The
Class 1A Principal Balance and the Class
2A Principal Balance are collectively
referred to herein as the "Class A
Principal Balance."
Except to the extent that Sub-Pool 1 and
Sub-Pool 2 are cross-collateralized as
described herein under "Description of
the Certificates--Excess Spread,
Overcollateralization and Cross-
S-5
<PAGE>
Collateralization Provisions", the Class
1A Certificates are related to Sub-Pool 1
and the Class 2A Certificates are related
to Sub-Pool 2. Each Class of the Class A
Certificates will represent a senior
undivided ownership interest in a trust
fund (the "Trust Fund") consisting
initially of two groups of Initial
Mortgage Loans (the "Sub-Pool 1 Initial
Mortgage Loans" and the "Sub-Pool 2
Initial Mortgage Loans") with an
aggregate principal balance of
$75,270,504.81 with respect to Sub-Pool
1, and $115,690,188.57 with respect to
Sub-Pool 2, as of the Cut-off Date, after
giving effect to all payments collected
on or prior to the Cut-off Date (with
respect to Sub-Pool 1, the "Original
Sub-Pool 1 Principal Balance"; with
respect to Sub-Pool 2, the "Original
Sub-Pool 2 Principal Balance";
collectively, the "Original Pool
Principal Balance"), all proceeds thereof
due after the Cut-off Date with respect
to the related Initial Mortgage Loans or
the Subsequent Cut-off Date with respect
to the related Subsequent Mortgage Loans
(other than the related Depositor's Yield
as described in the Prospectus), a
Certificate Insurance Policy, three trust
accounts for each Sub-Pool established
with the Trustee (the Pre-Funding
Accounts, the Reserve Accounts and the
Interest Coverage Accounts), and funds on
deposit in each such account and certain
other property (each such group of
Mortgage Loans and the related assets,
"Sub-Pool 1" and "Sub-Pool 2"; each a
"Sub-Pool" and collectively, the
"Mortgage Pool").
Interest Distributions on the
Class A Certificates............. As described herein, on each Remittance
Date, with respect to the Class 1A-1
Certificates, interest will be paid at
the Class 1A-1 Pass-Through Rate in an
amount equal to interest accrued during
the related Accrual Period on the related
Class 1A-1 Principal Balance prior to
giving effect to principal distributions
to be made on such date.
As described herein, on each Remittance
Date, with respect to each Class of the
Class 1A Certificates, other than the
Class 1A-1 Certificates, interest will be
paid at the related Class 1A Pass-Through
Rate in an amount equal to 30 days'
interest on the related Class 1A
Principal Balance prior to giving effect
to principal distributions to be made on
such date. All calculations of interest
on each Class of Class 1A Certificates,
other than the Class 1A-1 Certificates,
will be computed on the basis of a
360-day year consisting of twelve 30-day
months.
As described herein, on each Remittance
Date, with respect to the Class 2A
Certificates, interest will be paid at
the Class 2A Pass-Through Rate in an
amount equal to interest accrued during
the related Accrual Period on the related
Class 2A Principal Balance prior to
giving effect to principal distributions
to be made on such date.
The Class 1A-1 Certificates will accrue
interest at the Class 1A-1 Pass-Through
Rate which, for a particular Remittance
Date, will be equal to the least of (i)
One-Month LIBOR plus 0.09% per annum,
(ii) the weighted average of the Mortgage
Rates of the Sub-Pool 1 Mortgage Loans
minus, with respect to Sub-Pool 1, the
sum of (a) the Servicing Fee Rate, (b)
the rate at which the monthly premium
payable to the Certificate Insurer is
calculated and (c) the rate at
S-6
<PAGE>
which the Annual Trustee Expense Amount
is calculated and (iii) 10.50% per annum
(the "Class 1A-1 Cap Rate"); provided,
however, that on any Remittance Date on
which the Servicer does not exercise its
option to purchase the Mortgage Loans and
REO Properties as described under
"Pooling Agreement--Termination; Purchase
of the Mortgage Loans" herein, the rate
provided in clause (i) will be One-Month
LIBOR plus 0.49% per annum. For purposes
of calculating the Class 1A-1
Pass-Through Rate for any Remittance
Date, because most of the Sub-Pool 1
Mortgage Loans do not provide for the
calculation of interest on an Actual/360
Basis (which is the basis on which
interest is calculated on the Class 1A-1
Certificates), the basis on which
interest is computed on the Sub-Pool 1
Mortgage Loans will be deemed adjusted to
an Actual/360 Basis that will result in
the same amount of interest being due as
would be due using the method of
computation of interest that is used to
calculate interest on the Sub-Pool 1
Mortgage Loans.
The Class 1A-2 Certificates will accrue
interest at the fixed per annum rate of
6.62% (the "Class 1A-2 Pass-Through
Rate"). The Class 1A-3 Certificates will
accrue interest at the fixed per annum
rate of 6.69% (the "Class 1A-3
Pass-Through Rate"). The Class 1A-4
Certificates will accrue interest at the
fixed per annum rate of 7.07% (the "Class
1A-4 Pass-Through Rate"). The Class 1A-5
Certificates will accrue interest at the
fixed per annum rate of 6.90% (the "Class
1A-5 Pass-Through Rate"). In addition, on
any Remittance Date on which the Servicer
does not exercise its option to purchase
the Mortgage Loans and REO Properties as
described under "Pooling
Agreement--Termination; Purchase of the
Mortgage Loans" herein, the Class 1A-2
Pass-Through Rate, Class 1A-3
Pass-Through Rate, Class 1A-4
Pass-Through Rate and Class 1A-5 Pass
Through Rate will each be increased by
0.40% per annum. The Class 1A-1
Pass-Through Rate, the Class 1A-2
Pass-Through Rate, the Class 1A-3
Pass-Through Rate, the Class 1A-4
Pass-Through Rate and the Class 1A-5
Pass-Through Rate are each referred to
herein as a "Class 1A Pass-Through Rate."
The Class 1A Pass-Through Rate and the
Class 2A Pass-Through Rate are referred
to herein as a "Class A Pass-Through
Rate."
The Class 2A Certificates will accrue
interest at the Class 2A Pass-Through
Rate which, for a particular Remittance
Date will be equal to the least of (i)
One-Month LIBOR plus 0.20% per annum (the
rate described in this clause (i), the
"Class 2A LIBOR Rate"), (ii) the weighted
average of the Mortgage Rates of the
Sub-Pool 2 Mortgage Loans minus, with
respect to Sub-Pool 2, the sum of (a) the
Servicing Fee Rate, (b) the rate at which
the monthly premium payable to the
Certificate Insurer is calculated, (c)
the rate at which the Annual Trustee
Expense Amount is calculated and (d)
0.50% per annum (the rate described in
this clause (ii), the "Available Funds
Cap Rate") and (iii) the weighted average
of the Maximum Mortgage Rates of the
Sub-Pool 2 Mortgage Loans minus, with
respect to Sub-Pool 2, the sum of (a) the
Servicing Fee Rate, (b) the rate at which
the monthly premium payable to the
Certificate Insurer is calculated, (c)
the rate at which the Annual Trustee
Expense Amount is calculated and (d)
0.50% per annum (the rate described in
this clause
S-7
<PAGE>
(iii), "Class 2A Cap Rate"); provided,
however, that on any Remittance Date on
which the Servicer does not exercise its
option to purchase the Mortgage Loans and
REO Properties as described under
"Pooling Agreement--Termination; Purchase
of the Mortgage Loans" herein, the rate
provided in clause (i) will be One-Month
LIBOR plus 0.60% per annum. For purposes
of calculating the Class 2A Pass-Through
Rate for any Remittance Date, because
most of the Sub-Pool 2 Mortgage Loans
provide for the calculation of interest
on a basis other than an Actual/360 Basis
(which is the basis on which interest is
calculated on the Class 2A Certificates),
the basis on which interest is computed
on the Sub-Pool 2 Mortgage Loans will be
deemed adjusted to an Actual/360 Basis
that will result in the same amount of
interest being due as would be due using
the method of computation of interest
that is used to calculate interest on the
Sub-Pool 2 Mortgage Loans.
The Pooling Agreement also provides that on
any Remittance Date on which the Class 2A
Pass-Through Rate is based on the
Available Funds Cap Rate, the excess of
(i) that amount of interest the Holders
of Class 2A Certificates would be
entitled to receive on such Remittance
Date had interest been calculated based
on the Class 2A LIBOR Rate (but in no
event exceeding the Class 2A Cap Rate),
over (ii) the amount of interest such
Class 2A Certificateholders will receive
on such Remittance Date at the Available
Funds Cap Rate, will be carried forward
and paid on a subordinated basis to the
extent of Excess Spread with respect to
Sub-Pool 2, as described below, to the
Holders of Class 2A Certificates on
future Remittance Dates and such amount
shall accrue interest at the then
applicable Class 2A Pass-Through Rate,
until paid or until the Class 2A
Principal Balance has been reduced to
zero (the amount of such excess, together
with such accrued interest, the
"Available Funds Cap Carry Forward
Amount").
Interest payable with respect to each
Remittance Date on the Class 1A-1 and
the Class 2A Certificates will accrue
during the period commencing on the
Remittance Date of the immediately
preceding month and ending on the day
immediately preceding the related
Remittance Date, except that with respect
to the first Remittance Date interest
payable on the Class 1A-1 and the Class
2A Certificates will accrue during the
period commencing on the Closing Date and
ending on the day immediately preceding
the first Remittance Date (each such
period, an "Accrual Period"). All
calculations of interest on the Class
1A-1 and the Class 2A Certificates will
be computed on the basis of the actual
number of days elapsed in the Accrual
Period and a 360-day year ("Actual/360
Basis"). One-Month LIBOR will be
determined on the second Business Day
preceding the beginning of each Accrual
Period.
Principal Distributions on the
Class A Certificates............ As to any Sub-Pool, Holders of the related
Class A Certificates will be entitled to
receive on each Remittance Date (subject
to the next succeeding paragraph)
distributions in respect of principal
(the "Class A Principal Remittance
Amount") in the respective amounts and
order of priority described herein, to
the extent of the related Amount
Available, if the Remittance Date is
prior to the related
S-8
<PAGE>
Cross-Over Date, or to the extent of the
related Net Excess Amount Available, if
the Remittance Date is on or after the
related Cross-Over Date, remaining after
interest distributions on the related
Classes of Class A Certificates, and to
the extent of the amount required to
reach the related Required
Overcollateralization Amount with respect
to such Sub-Pool and, thereafter, to
maintain the Required
Overcollateralization Amount but not to
exceed the related Class 1A or Class 2A
Principal Balance then outstanding, plus
any amounts described in clauses (iv) (if
such amounts represent prior Insured
Payments with respect to such Sub-Pool or
interest thereon) and (v) below.
The Holders of the Class 1A-5 Certificates
are entitled to receive payments of the
Class 1A-5 Lockout Remittance Amount as
specified below commencing in October
2000. In addition, on any Remittance Date
on which the Class 1A-4 Principal Balance
is zero, the Holders of the Class 1A-5
Certificates will be entitled to receive
the entire Class A Principal Remittance
Amount with respect to Sub-Pool 1
remaining after distribution of the Class
1A-5 Lockout Remittance Amount. The
Certificate Insurer does not guarantee
payment of any portion of the Class 1A-5
Lockout Remittance Amount that is in
excess of the Class A Principal
Remittance Amount with respect to
Sub-Pool 1 for any Remittance Date. See
"Description of the
Certificates--Allocation of Amount
Available" herein.
The "Required Overcollateralization Amount"
for any Sub-Pool is the
Overcollateralization Amount required by
the Certificate Insurer with respect to
such Sub-Pool. As more fully described
herein, distributions allocable to
principal on the Class A Certificates
will generally include (i) the principal
portion of all scheduled and unscheduled
payments received on the Mortgage Loans
in the related Sub-Pool during the period
beginning on the second day of the month
immediately preceding the month of the
Remittance Date and ending on the first
day of the month of the Remittance Date
(the "Due Period"), including
prepayments, the proceeds of any related
insurance policy ("Insurance Proceeds"),
proceeds received in connection with the
liquidation of defaulted Mortgage Loans
in the related Sub-Pool, by foreclosure
or otherwise, net of fees and advances
reimbursable therefrom ("Net Liquidation
Proceeds") and condemnation, eminent
domain and release of lien proceeds
("Released Mortgaged Property Proceeds"),
(ii) the principal portion of all
proceeds deposited into the Principal and
Interest Account with respect to such
Sub-Pool in connection with the
repurchase or substitution of Mortgage
Loans in the related Sub-Pool for which
there is defective loan documentation or
a breach of a representation or warranty,
(iii) the Unrecovered Class A Portion
with respect to such Sub-Pool, (iv) the
Class A Carry-Forward Amount with respect
to such Sub-Pool, (v) any Mortgagor
payments on related Mortgage Loans or
Advances with respect to such Sub-Pool
which are recovered prior to the
expiration date of the Certificate
Insurance Policy from Holders of the
related Class A Certificates as a
voidable preference pursuant to a final,
non-appealable order under the United
States Bankruptcy Code (a "Preference
Amount") and (vi) any additional amount
which may be required so that the related
Class 1A
S-9
<PAGE>
or Class 2A Principal Balance for such
Remittance Date will equal the related
Scheduled Class A Principal Balance. In
addition, on any Remittance Date prior to
the Cross-Over Date, to the extent not
previously distributed as described
herein, Excess Spread, Remaining Net
Excess Spread and Net Excess Principal
will be distributable on account of
principal to Holders of the Class A
Certificates to the extent available and
necessary to reach, and thereafter
maintain, the Required
Overcollateralization Amount with respect
to such Sub-Pool. See "Description of the
Certificates--Allocation of Amount
Available" and "--Excess Spread,
Overcollateralization and
Cross-Collateralization Provisions"
herein.
The Certificate Insurer, as subrogee of the
Class A Certificateholders to the extent
of Insured Payments, will be entitled to
any payments on the related Class A
Certificates in respect of that portion
of the related Class A Carry-Forward
Amount representing amounts previously
covered by Insured Payments and interest
accrued thereon. See "Description of the
Certificates--Allocation of Amount
Available" and "The Certificate Insurer
and the Certificate Insurance Policy"
herein.
The Class A Principal Remittance Amount with
respect to Sub-Pool 1 will be distributed
as follows: (a) to the Holders of the
Class 1A-5 Certificates, an amount equal
to the Class 1A-5 Lockout Remittance
Amount, and (b) the remainder to the
Holders of the Class 1A-1 Certificates
until the Class 1A-1 Principal Balance is
reduced to zero, then to the Holders of
the Class 1A-2 Certificates until the
Class 1A- 2 Principal Balance is reduced
to zero, then to the Holders of the Class
1A-3 Certificates until the Class 1A-3
Principal Balance is reduced to zero,
then to the Holders of the Class 1A-4
Certificates until the Class 1A-4
Principal Balance is reduced to zero and
thereafter to the Holders of the Class
1A-5 Certificates until the Class 1A-5
Principal Balance is reduced to zero.
The Class A Principal Remittance Amount with
respect to Sub-Pool 2 will be distributed
to the Holders of the Class 2A
Certificates until the Class 2A Principal
Balance is reduced to zero.
Mandatory Prepayments on Class A
Certificates.....................Each Class of the Class A Certificates will
be prepaid in part, on a pro rata basis
in proportion to its Principal Balance,
on the November 25, 1997 Remittance Date
in the event that any amount remains on
deposit in the related Pre-Funding
Account on such Remittance Date after the
purchase by the Trust Fund of Subsequent
Mortgage Loans, if any, with respect to
the related Sub-Pool. Although no
assurance can be given, it is anticipated
by the Depositor that the principal
amount of Subsequent Mortgage Loans
purchased by the Trust Fund will require
the application of substantially all of
the Original Pre-Funded Amounts and that
there should be no material amount of
principal prepaid to the related Class A
Certificateholders from the related
Pre-Funding Account. However, it is
unlikely that the Depositor will be able
to deliver Subsequent Mortgage Loans with
an aggregate principal balance identical
to the related Original Pre-Funded
Amount.
S-10
<PAGE>
Excess Spread,
Overcollateralization
and Cross-Collateralization......On any Remittance Date prior to the
Cross-Over Date with respect to a
particular Sub-Pool, Holders of the
related Class 1A and Class 2A
Certificates will have a right to 100% of
the related Excess Spread to fund the
amount by which the related Class A
Remittance Amount with respect to all
Classes of related Class A Certificates
exceeds the related Available Remittance
Amount for such Remittance Date. To the
extent available, the Net Excess Spread
and Excess Principal with respect to a
Sub-Pool will then be applied to cover
any Available Funds Shortfall with
respect to the other Sub-Pool.
In addition, on any Remittance Date prior to
the Cross-Over Date on which the
Overcollateralization Amount for a
Sub-Pool is less than the Required
Overcollateralization Amount for such
Sub-Pool, the Remaining Net Excess Spread
for such Sub-Pool plus the Available
Transfer Cashflow, if any, and the Net
Excess Principal, if any, will be used to
make additional distributions of
principal on the related Classes of Class
A Certificates until such
Overcollateralization Amount equals the
related Required Overcollateralization
Amount for such Sub-Pool.
The Pooling Agreement also provides that, on
each Remittance Date, the balance of the
Excess Spread for Sub-Pool 2 remaining
after all distributions for such
Remittance Date are made, other than the
distribution to the Class R
Certificateholders, will be used to pay
the Available Funds Cap Carry Forward
Amount for such Remittance Date, if any.
Credit enhancement with respect to the Class
1A Certificates will be provided in part
by the initial Overcollateralization
Amount for Sub-Pool 1 resulting from the
sum of the Original Sub-Pool 1 Principal
Balance and the Original Sub-Pool 1
Pre-Funded Amount exceeding the initial
Class 1A Principal Balance as of the
Closing Date. On the Closing Date, the
initial Overcollateralization Amount with
respect to Sub-Pool 1 is expected to be
approximately $1,155,996.61, equal to
0.95% of the sum of the Original Sub-Pool
1 Principal Balance and the Original
Sub-Pool 1 Pre-Funded Amount. See
"Description of the Certificates-Excess
Spread, Overcollateralization and
Cross-Collateralization Provisions"
herein.
Credit enhancement with respect to the Class
2A Certificates will be provided in part
by the initial Overcollateralization
Amount for Sub-Pool 2 resulting from the
sum of the Original Sub-Pool 2 Principal
Balance and the Original Sub-Pool 2
Pre-Funded Amount exceeding the initial
Class 2A Principal Balance as of the
Closing Date. On the Closing Date, the
initial Overcollateralization Amount with
respect to Sub-Pool 2 is expected to be
approximately $5,837,245.74, equal to
3.15% of the sum of the Original Sub-Pool
2 Principal Balance and the Original
Sub-Pool 2 Pre-Funded Amount. See
"Description of the Certificates-Excess
Spread, Overcollateralization and
Cross-Collateralization Provisions"
herein.
Prior to the related Cross-Over Date, Excess
Spread with respect to a Sub-Pool will be
applied first, to cover any Available
Funds Shortfall with respect to such
Sub-Pool, second, to cover any Available
Funds Shortfall with respect to the other
Sub-Pool, third, to pay the amount
S-11
<PAGE>
of any related accrued and unpaid Annual
Trustee Expense Amount, fourth, to reach
and maintain the Required
Overcollateralization Amount for such
Sub-Pool, if necessary, fifth, to reach
and maintain the Required
Overcollateralization Amount for the
other Sub-Pool, if necessary, sixth, with
respect to the related Sub-Pool, to
reimburse the Servicer for amounts to
which it is entitled under the Pooling
Agreement, and seventh, with respect to
Sub-Pool 2 to pay the Available Funds Cap
Carry Forward Amount, if any, to the
Holders of Class 2A Certificates on a pro
rata basis among such Certificateholders,
and to distribute any remaining amounts
to the Class R Certificateholders. After
the Cross-Over Date with respect to a
particular Sub-Pool, related Excess
Spread will be applied first, to cover
any Available Funds Shortfall with
respect to the related Sub-Pool, second,
to cover any Available Funds Shortfall
with respect to the other Sub-Pool,
third, to pay the amount of any related
accrued and unpaid Annual Trustee Expense
Amount, fourth, to reach and maintain the
Required Overcollateralization Amount for
the other Sub-Pool, if necessary, fifth,
with respect to the related Sub-Pool, to
reimburse the Servicer for amounts to
which it is entitled under the Pooling
Agreement, and sixth, with respect to
Sub-Pool 2, to pay the Available Funds
Cap Carry Forward Amount, if any, to the
Holders of Class 2A Certificates on a pro
rata basis among such Certificateholders,
and to distribute any remaining amounts
to the Class R Certificateholders.
The "Net Excess Spread" for a Sub-Pool is the
Excess Spread for such Sub-Pool remaining
after the application thereof to cover
Required Payments with respect to such
Sub-Pool (other than in respect of the
Class A Principal Remittance Amount after
the related Cross-Over Date). An
"Available Funds Shortfall" with respect
to any Sub-Pool means the amount by which
the Available Remittance Amount plus
Excess Spread for such Sub-Pool is less
than the Required Payments (other than in
respect of the Class A Principal
Remittance Amount after the related
Cross-Over Date) for such Sub-Pool. The
"Required Payments" with respect to any
Sub-Pool means the amount required to pay
the related Class A Interest Remittance
Amount with respect to all related
outstanding Classes of Class A
Certificates, the related Class A
Principal Remittance Amount with respect
to all related outstanding Classes of
Class A Certificates, the related Annual
Trustee Expense Amount and the related
monthly premium payable to the
Certificate Insurer. The "Remaining Net
Excess Spread" for a Sub-Pool is the Net
Excess Spread for such Sub-Pool remaining
after the application thereof to cover an
Available Funds Shortfall with respect to
the other Sub-Pool. The "Available
Transfer Cashflow" for each Sub-Pool is
the Remaining Net Excess Spread for the
other Sub-Pool remaining after the
payment, if any, of Additional Principal
on the Classes of Class A Certificates
related to such other Sub-Pool. The "Net
Excess Principal" for a Sub-Pool is the
Excess Principal for such Sub-Pool
remaining after the application thereof
to cover an Available Funds Shortfall
with respect to the other Sub-Pool. The
"Excess Principal" for a Sub-Pool will
equal the lesser of (i) the portion, if
any, of the Available Principal Amount
for such Sub-Pool that is not required to
be included in the related Class A
Principal Remittance Amount for such
Sub-Pool for such Remittance
S-12
<PAGE>
Date as a result of the application of
clause (a) of the related definition of
"Class A Principal Remittance Amount" and
(ii) the amount of such portion described
in clause (i) remaining after the
application of the related Available
Remittance Amount to cover the Required
Payments for such Sub-Pool. The
"Available Principal Amount" for a
Sub-Pool will equal the excess of the
amount described in the related
definition of "Class A Principal
Remittance Amount" without giving effect
to clause (a) thereof over the amount
described in the definition of "Class A
Principal Remittance Amount" after giving
effect to clause (a) thereof. The
"Additional Principal" for the Class 1A
or Class 2A Certificates will equal the
lesser of (i) the amount necessary to
reduce the related Class 1A or Class 2A
Principal Balance so that the
Overcollateralization Amount for the
related Sub-Pool equals the Required
Overcollateralization Amount for such
Sub-Pool and (ii) the sum of (a) the
Remaining Net Excess Spread for such
Sub-Pool, (b) the Available Transfer
Cashflow from the other Sub-Pool and (c)
the Net Excess Principal for such
Sub-Pool.
The "Overcollateralization Amount" for a
Sub-Pool will equal the excess, if any,
of (i) the sum of (a) the related
Sub-Pool Principal Balance, (b) the
related Pre-Funding Amount and (c) the
amount, if any, on deposit in the related
Reserve Account, over (ii) the Class A
Principal Balance with respect to all
related Classes of Class A Certificates,
after giving effect to the distributions
of the related Class A Principal
Remittance Amount on such Remittance
Date. See "Description of the
Certificates--Excess Spread,
Overcollateralization and
Cross-Collateralization Provisions" and
"--Allocation of Amount Available"
herein.
Reserve Account...................If required by the Certificate Insurer for
credit enhancement, on the Closing Date
the Trustee will establish a reserve
account with respect to each Sub-Pool
(with respect to Sub-Pool 1, the
"Sub-Pool 1 Reserve Account"; with
respect to Sub-Pool 2, the "Sub-Pool 2
Reserve Account"; each, a "Reserve
Account") into which it will deposit upon
receipt from the Depositor an amount
specified by the Certificate Insurer.
Prior to the related Cross-Over Date, the
funds on deposit in the Reserve Accounts
will be available for withdrawal to fund
any shortfalls between the funds
available for distribution to Holders of
the related Classes of Class A
Certificates and the related Class A
Remittance Amount with respect to all
related Classes of Class A Certificates.
If the Certificate Insurer has determined
that the entire amount of such funds on
deposit therein is not required for
credit enhancement and has so directed
the Trustee, the portion of the amount on
deposit therein not so required will be
distributed by the Trustee to the Class R
Certificateholders on the November 25,
1997 Remittance Date. In addition, on any
Remittance Date on which the
Overcollateralization Amount for a
Sub-Pool exceeds the Required
Overcollateralization Amount for such
Sub-Pool, an amount equal to the lesser
of (i) the amount, if any, remaining in
the related Reserve Account and (ii) such
excess, will be released to the Class R
Certificateholders. See "Description of
the Certificates--Reserve Account"
herein.
S-13
<PAGE>
Certificate Insurance Policy.......Financial Guaranty Insurance Company, a New
York stock insurance corporation (the
"Certificate Insurer"), will issue a
certificate insurance policy (the
"Certificate Insurance Policy") pursuant
to which it will irrevocably and
unconditionally guarantee payment to the
Holders of the Class A Certificates of
the related Class A Remittance Amount.
The Certificate Insurer only insures the
timely receipt of interest on the Class A
Certificates and the ultimate receipt of
principal on the Class A Certificates.
The Certificate Insurer does not
guarantee (i) any rate of principal
payments on the Class A Certificates,
other than that set forth in the
Principal Payment Tables attached as an
exhibit to the Pooling Agreement and
provided by the Certificate Insurer, (ii)
any recovery of payments deemed voidable
preferences under state law, (iii) the
payment of the purchase price by the
Depositor in connection with the purchase
of Mortgage Loans due to defective
documentation or a breach of
representation or warranty, (iv) payment
of any portion of the Class 1A-5 Lockout
Remittance Amount that is in excess of
the Class A Principal Remittance Amount
with respect to Sub-Pool 1 for any
Remittance Date or (v) the payment of any
Available Funds Cap Carry Forward Amount
with respect to Sub-Pool 2 for any
Remittance Date. The Certificate Insurer
will only be required to make one Insured
Payment with respect to each Sub-Pool
relating to a particular Remittance Date,
and no Holder of a Class A Certificate
shall be entitled to reimbursement for
any payment voided as a preference as to
which the Certificate Insurer made a
payment under the Certificate Insurance
Policy. See "The Certificate Insurer and
the Certificate Insurance Policy" herein.
Pursuant to the Pooling Agreement, the
Certificate Insurer will be subrogated to
the rights of the Holders of the related
Class A Certificates to receive any
payments on such Certificates to the
extent of payments under the Certificate
Insurance Policy which remain
unreimbursed and interest accrued thereon
at the weighted average of the related
Class A Pass-Through Rates in the case of
the Class 1A Certificates and at the
Class 2A Pass-Through Rate in the case of
the Class 2A Certificates.
The Mortgage Pool..................The Mortgage Pool initially will consist
primarily of two sub-pools of
conventional Mortgage Loans (with respect
to Sub-Pool 1, the "Sub- Pool 1 Initial
Mortgage Loans"; with respect to Sub-Pool
2, the "Sub-Pool 2 Initial Mortgage
Loans"; collectively, the "Initial
Mortgage Loans") evidenced by promissory
notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other
similar security instruments (the
"Mortgages") creating a first or second
lien on one- to four-family residential
properties, units in planned unit
developments, individual condominium
units and manufactured homes ("Single
Family Properties"), residential
properties consisting of five or more
dwelling units ("Multifamily Properties")
and mixed residential and commercial
structures ("Mixed Use Properties";
collectively with Single Family
Properties and Multifamily Properties,
the "Mortgaged Properties"). Sub-Pool 1
consists of fixed-rate mortgage loans
which are secured by first and second
liens and Sub-Pool 2 consists of
adjustable-rate mortgage loans which are
secured by first liens. See "The Mortgage
Pool" herein.
S-14
<PAGE>
Pursuant to the Pooling Agreement, the
Depositor has committed to sell, and the
Trust Fund will be obligated to purchase
from the Depositor, on or before November
21, 1997, additional Mortgage Loans (with
respect to Sub-Pool 1, the "Sub-Pool 1
Subsequent Mortgage Loans"; with respect
to Sub-Pool 2, the "Sub-Pool 2 Subsequent
Mortgage Loans"; collectively, the
"Subsequent Mortgage Loans"), subject to
certain conditions described herein. See
"The Mortgage Pool" herein.
Mortgage Rate of Sub-Pool 2
Mortgage Loans...................As described under "The Mortgage
Pool--Sub-Pool 2", the Sub-Pool 2
Mortgage Loans have Mortgage Rates
subject to annual or semiannual
adjustment after an initial six-month,
twenty-four month or sixty month period,
to equal the sum, rounded to the nearest
0.125%, of the related Index and the
Gross Margin for such Mortgage Loan,
subject to the effects of any applicable
Periodic Rate Cap, Maximum Mortgage Rate
or Minimum Mortgage Rate. Approximately
85.73% of the Sub-Pool 2 Mortgage Loans
were originated with an initial Mortgage
Rate below the sum of the related Index
and the Gross Margin, rounded as
described herein.
Pre-Funding Account................The Trustee will establish a Pre-Funding
Account with respect to each Sub-Pool
(with respect to Sub-Pool 1, the
"Sub-Pool 1 Pre-Funding Account"; with
respect to Sub-Pool 2, the "Sub-Pool 2
Pre-Funding Account"; each, a
"Pre-Funding Account") into which it will
deposit upon receipt from the Depositor
$46,413,349 with respect to Sub-Pool 1
(the "Original Sub-Pool 1 Pre-Funded
Amount") and $69,619,200 with respect to
Sub-Pool 2 (the "Original Sub-Pool 2
Pre-Funded Amount", together with the
Original Sub-Pool 1 Pre-Funded Amount,
the "Original Pre-Funded Amounts"). The
Original Pre-Funded Amounts will be
reduced during the Funding Period by the
amount thereof used to purchase the
related Subsequent Mortgage Loans in
accordance with the Pooling Agreement (on
any date of determination, the related
Original Pre-Funded Amount as so reduced,
the "Sub-Pool 1 Pre-Funded Amount" or the
"Sub-Pool 2 Pre-Funded Amount"). See "The
Mortgage Pool--Sub-Pool 1--Conveyance of
Sub-Pool 1 Subsequent Mortgage Loans and
the Sub-Pool 1 Pre-Funding Account",
"--Sub-Pool 2--Conveyance of Sub-Pool 2
Subsequent Mortgage Loans and the
Sub-Pool 2 Pre-Funding Account" herein.
Index..............................The Index applicable to the initial
Adjustment Date and any annual or
semiannual Adjustment Date thereafter for
a Sub-Pool 2 Mortgage Loan will be, (i)
with respect to approximately 18.71% of
the Sub- Pool 2 Mortgage Loans (by
Original Sub-Pool 2 Principal Balance), a
per annum rate equal to the weekly
average yield on United States Treasury
Securities adjusted to a constant
maturity of one year as published in the
Federal Reserve Statistical Release H.15
(519), as most recently announced as of a
date 45 days prior to such Adjustment
Date (the "One-Year U.S. Treasury Index";
such Mortgage Loans, the "One-Year U.S.
Treasury Loans"), and (ii) with respect
to approximately 81.29% of the Sub-Pool 2
Mortgage Loans (by Original Sub-Pool 2
Principal Balance), a per annum rate
equal to the average of interbank offered
rates for six-month U.S.
dollar-denominated deposits in the London
market based on
S-15
<PAGE>
quotations of major banks as published in
The Wall Street Journal and as most
recently available as of the date
specified in the related Mortgage Note
(the "Six-Month LIBOR Index"; such
Mortgage Loans, the "Six-Month LIBOR
Loans"). In the event that the related
Index specified in a Mortgage Note is no
longer available, the Servicer will
select an alternative index for mortgage
loans on Single Family Properties, based
upon comparable information, over which
it has no control and which is readily
verifiable by mortgagors. See "The
Mortgage Pool--Sub-Pool 2" herein.
Optional Termination
by the Servicer..................On any Remittance Date on which the
outstanding aggregate principal balance
of the Mortgage Loans in the Trust Fund
is less than or equal to 5% of the sum of
the Original Pool Principal Balance and
the Original Pre-Funded Amounts, the
Servicer may purchase all of the Mortgage
Loans and REO Properties from the Trust
Fund at a price equal to the Termination
Price. See "Pooling Agreement--
Termination; Purchase of Mortgage Loans"
herein and "Description of the
Certificates--Termination" in the
Prospectus.
Servicing of the Mortgage
Loans............................The Servicer will be responsible for the
servicing of the Mortgage Loans and will,
except as provided below, be entitled to
a fee equal to 0.65% per annum (the
"Servicing Fee Rate") of the principal
balance of each Mortgage Loan (the
"Servicing Fee"), calculated and payable
monthly from interest actually received
by the Servicer on the Mortgage Loans, as
described herein. The Servicer is
obligated to make cash advances (each an
"Advance") in respect of delinquent
payments of interest on the Mortgage
Loans and REO Properties, subject to the
limitations described herein. In
addition, the Servicing Fee will be
reduced in respect of interest shortfalls
resulting from the weighted average of
the Mortgage Rates (net of the fees
payable to the Trustee and the
Certificate Insurer) being less than any
Class A Pass-Through Rate. The Trustee
will be obligated to make Advances if the
Servicer fails in its obligation to do so
to the extent provided in the Pooling
Agreement. See "Description of the
Certificates--Advances" herein.
Certain Legal Aspects of the
Sub-Pool 1 Mortgage Loans
and Sub-Pool 2 Mortgage Loans....Approximately 3.52% and 2.10% of the Sub-Pool
1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance are secured
by Multifamily Properties and Mixed Use
Properties, respectively. For a
discussion of the risks associated with
multifamily properties and mixed use
properties, see "Risk Factors" herein and
in the Prospectus and "Certain Legal
Aspects of Mortgage Loans" in the
Prospectus.
Approximately 2.72% of the Sub-Pool 1 Initial
Mortgage Loans, by Original Sub-Pool 1
Principal Balance and approximately 0.81%
of the Sub-Pool 2 Initial Mortgage Loans
by Original Sub-Pool 2 Principal Balance
are secured by permanently affixed
Manufactured Homes (as defined in the
Prospectus, and the related loans
"Manufactured Home Loans"). For a
discussion of the risks associated with
manufactured homes, see "Risk Factors"
herein and in the Prospectus and "Certain
Legal Aspects of Mortgage Loans" in the
Prospectus.
S-16
<PAGE>
Approximately 38.22% of the Sub-Pool 1
Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, are secured
by second mortgages which are subordinate
to a mortgage lien on such Sub-Pool 1
Mortgage Loan (such senior lien, a "First
Lien"). For a discussion of the risks
associated with second mortgage loans,
see "Risk Factors" herein and in the
Prospectus and "Certain Legal Aspects of
Mortgage Loans" in the Prospectus.
Approximately 35.23% of the Sub-Pool 1
Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, provide for
the payment of the unamortized principal
balance of the Sub-Pool 1 Initial
Mortgage Loan in a single payment at the
maturity of the Sub-Pool 1 Initial
Mortgage Loan that is substantially
greater than the preceding monthly
payment (the "Balloon Loans"). For a
discussion of the risks associated with
Balloon Loans, see "Risk Factors" herein
and in the Prospectus.
Approximately 5.40% of the Sub-Pool 1 Initial
Mortgage Loans, by Original Sub-Pool 1
Principal Balance provide for
substantially equal payments to be made
every 28 days (each, a "Periodic Payment"
and each such loan, a "Periodic Payment
Loan"), each of which may become a
Balloon Loan. For a discussion of the
risks associated with Periodic Payment
Loans, see "Risk Factors" herein.
Ratings............................As a condition of issuance, the Class 1A and
Class 2A Certificates will be rated Aaa
by Moody's Investors Service, Inc.
("Moody's") and "AAA" by Standard &
Poor's Ratings Services, A Division of
the McGraw-Hill Companies, Inc.
("Standard & Poor's"). The security
ratings of the Class 1A and Class 2A
Certificates should be evaluated
independently from similar ratings on
other types of securities. A security
rating is not a recommendation to buy,
sell or hold securities and may be
subject to revision or withdrawal at any
time by the rating agencies. In general,
ratings address credit risk and do not
address the likelihood or rate of
prepayments. In addition, the ratings by
Moody's and S&P will not address the
likelihood of any Available Funds Cap
Carry Forward Amount being paid to the
Class 2A Certificateholders. See
"Ratings" herein and in the Prospectus,
and "Risk Factors--Limited Nature of
Ratings" in the Prospectus.
Certain Federal Income Tax
Consequences.....................On the Closing Date, a real estate mortgage
investment conduit ("REMIC") election
will be made with respect to the Trust
Fund REMIC for federal income tax
purposes. Upon the issuance of the Class
A Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver
its opinion generally to the effect that,
assuming compliance with all provisions
of the Pooling Agreement, for federal
income tax purposes, the Trust Fund REMIC
will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue
Code of 1986 (the "Code").
For federal income tax purposes, the Class R
Certificates will be the sole Class of
"residual interests" and the Class A
Certificates will be the "regular
interests" in such REMIC and will
generally be treated as debt instruments
of the Trust Fund REMIC.
S-17
<PAGE>
For federal income tax information reporting
purposes, the Class A Certificates will
not be treated as having been issued with
original issue discount. With respect to
the Class 1A Certificates, the prepayment
assumptions that will be used in
determining the rate of accrual of market
discount and premium, if any, for federal
income tax purposes will be 2% per annum
of the then outstanding principal balance
of the Sub-Pool 1 Mortgage Loans in the
first month of the life of the Sub-Pool 1
Mortgage Loans and an additional 1.2% per
annum in each month thereafter until the
twenty-first month and in each month
thereafter during the life of the
Sub-Pool 1 Mortgage Loans, 26% per annum
each month. With respect to the Class 2A
Certificates, the prepayment assumption
that will be used in determining the rate
of accrual of market discount and
premium, if any, for federal income tax
purposes will be 28% CPR. No
representation is made that the Mortgage
Loans will prepay at these rates or at
any other rate.
In general, the Class A Certificates will be
treated as assets described in Section
7701(a)(19)(C) of the Code, "real estate
assets" under Section 856(c)(4)(A) of the
Code generally in the same proportion
that the assets of the Trust Fund REMIC
would be so treated. Moreover, if 95% or
more of such assets qualify for any of
the foregoing treatments at all times
during a calendar year, the Class A
Certificates will qualify for the
corresponding status in their entirety
for that calendar year. In addition, the
Class A Certificates will be "qualified
mortgages" within the meaning of Section
860G(a)(3) of the Code. In addition,
interest on the Class A Certificates will
be treated as "interest on obligations
secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code
generally to the extent that such Class A
Certificates are treated as "real estate
assets" under Section 856(c)(4)(A) of the
Code. Amounts held in the Trustee Expense
Accounts, the Reserve Accounts and the
Interest Coverage Accounts may not be
treated as assets described in the
foregoing sections of the Code. In
addition, prior to November 21, 1997 or
any earlier Subsequent Transfer Date on
which the entire balance of the related
Pre-Funded Amount is applied to purchase
the related Subsequent Mortgage Loans,
the related Pre-Funding Account will be
an asset of the Trust Fund REMIC, and may
not be an asset described in certain of
the foregoing sections of the Code.
Moreover, to the extent that the Mortgage
Loans represent loans secured by mixed
residential and commercial structures,
such loans will be treated as assets
described in Section 7701(a)(19)(C) of
the Code only if the residential use of
the property securing such loans exceeds
80% of the property's entire use. See
"Certain Federal Income Tax Consequences
--REMICs--Characterization of Investments
in REMIC Certificates" in the Prospectus.
Prospective investors are advised to consult
their own tax advisors concerning the
federal income tax characterization of an
investment in the Certificates.
For further information regarding the federal
income tax consequences of investing in
the Class A Certificates, see "Certain
Federal Income Tax Consequences" herein
and in the Prospectus.
S-18
<PAGE>
ERISA Considerations...............A fiduciary of any employee benefit plan or
other retirement arrangement, and any
other entity that may be deemed to be
investing plan assets, including
insurance companies, as applicable,
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its legal advisors whether
the purchase or holding of Class A
Certificates could give rise to a
transaction prohibited or not otherwise
permissible under ERISA or the Code. The
U.S. Department of Labor has issued
individual exemptions, Prohibited
Transaction Exemption 90-29 to Merrill
Lynch, Pierce, Fenner & Smith
Incorporated and Prohibited Transaction
Exemption 90-23 to J.P. Morgan Securities
Inc. (the "Exemptions"). It is believed
that the Exemptions would generally
exempt from the application of certain of
the prohibited transaction provisions of
ERISA, and the excise taxes imposed on
such prohibited transactions by Section
4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to
the purchase, sale and holding of
pass-through certificates such as the
Class A Certificates and the servicing
and operation of asset pools such as the
Mortgage Pool, provided that certain
conditions are satisfied. See "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment...................Although at their initial issuance the Class
1A Certificates will be rated Aaa by
Moody's and "AAA" by Standard & Poor's,
the Class 1A Certificates will not
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
because Sub-Pool 1 includes Mortgage
Loans which are secured by second liens.
The Class 2A Certificates will not constitute
"mortgage related securities" for
purposes of SMMEA until such time as the
balance of the Sub-Pool 2 Pre-Funding
Account is reduced to zero. At such time,
the Class 2A Certificates will constitute
"mortgage related securities" for
purposes of SMMEA so long as they are
rated in one of the two highest rating
categories by at least one nationally
recognized statistical rating
organization.
Institutions whose investment activities are
subject to review by federal and state
regulatory authorities should consult
with their counsel or the applicable
authorities to determine whether an
investment in any Class 1A or Class 2A
Certificate complies with applicable
guidelines, policy statements or
restrictions. See "Legal Investment"
herein and in the Prospectus.
S-19
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Class A Certificates:
LIMITED LIQUIDITY
There is currently no secondary market for the Class A Certificates. While
the Underwriters currently intend to make a secondary market in the Class A
Certificates, they are under no obligation to do so. There can be no assurance
that a secondary market for the Class A Certificates will develop or, if it does
develop, that it will provide Holders of Class A Certificates with liquidity of
investment or that it will continue for the life of the Class A Certificates.
The Class A Certificates will not be listed on any securities exchange.
DIFFICULTY IN PLEDGING
Since transactions in Class A Certificates can be effected only through
DTC, CEDEL or Euroclear, their Participants and Indirect Participants, the
ability of a Certificate Owner to pledge a Class A Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear systems, or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing such Certificates. See "Description
of the Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
POTENTIAL DELAYS IN RECEIPT OF DISTRIBUTIONS
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants which will thereafter credit
them to the accounts of Certificate Owners either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
CERTAIN RISKS OF THE MORTGAGE LOANS
Sub-Pool 1
Approximately 24.88%, 10.48%, 8.82%, 5.90% and 5.72% of the Sub-Pool 1
Initial Mortgage Loans, by Original Sub-Pool 1 Principal Balance, are located in
New York, Florida, Pennsylvania, Colorado and Illinois, respectively.
Considerable uncertainty exists with respect to the regional economies and
real estate markets. In addition, regardless of its location, manufactured
housing generally depreciates in value. Accordingly, when coupled with a
deteriorating real estate market in a particular region, the value of the
mortgaged property improved by a manufactured home could be or become lower than
the outstanding principal balance of the mortgage loans it secures.
Approximately 3.52% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, are secured by residential properties consisting
of five or more dwelling units ("Multifamily Properties", and the related loans,
"Multifamily Loans"). Approximately 2.10% of the Sub-Pool 1 Initial Mortgage
Loans are secured by mixed residential and commercial structures ("Mixed Use
Properties", and the related loans, "Mixed Use Loans"). Multifamily Loans and
Mixed Use Loans are generally viewed as exposing the lender to a greater risk of
loss than Mortgage Loans secured by one- to-four family residential properties,
units in planned unit developments, individual condominium units or manufactured
homes ("Single Family Properties", and the related loans, "Single Family
Loans"). Multifamily lending and mixed use lending typically involves larger
loans, and repayment is typically dependent upon the successful operation of the
related mortgaged property. Income from and the market value of the mortgaged
property would be adversely affected if space in the mortgaged property could
not be leased, if tenants were unable to meet their obligations or if for any
other reason rental payments could not be collected. Successful operation of an
income-producing mortgaged property is dependent upon, among other factors,
economic conditions generally and in the geographic area, operating costs and
the performance of the management agent, if any. In some cases, that operation
may be subject to circumstances outside the control of the borrower or lender,
including but not limited to the quality or stability of surrounding
neighborhoods, the development of competing properties or businesses,
maintenance expenses (including energy costs), rent control or stabilization
laws and changes in the tax
S-20
<PAGE>
laws. If the cash flow from a particular mortgaged property is reduced (for
example, if leases are not renewed, if tenants default or if rental rates
decline), the borrower's ability to repay the loan may be impaired and the
resale value of the particular property may decline. For further information
regarding the primary risk to holders of Mortgage Loans secured by multifamily
properties and mixed use properties, see "Risk Factors" and "Certain Legal
Aspects of Mortgage Loans" in the Prospectus.
Approximately 2.72% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance are secured by a lien on real estate to which a
Manufactured Home (as defined in the Prospectus) is deemed permanently affixed.
Under the laws of most states, a Manufactured Home that has been permanently
attached to its site becomes subject to real estate title and recording laws. In
order to perfect a security interest in a Manufactured Home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the Uniform Commercial Code or record a real estate
mortgage or deed of trust under the real estate laws of the state where the home
is located. Such filing or recordation must be made in the real estate records
office of the county where the Manufactured Home is located. With respect to the
Manufactured Home Loans, the Depositor records or causes to be recorded a real
estate mortgage or deed of trust where the related Manufactured Home is located.
The Depositor also obtains a manufactured housing unit (ALTA 7) endorsement from
each title insurer of a Manufactured Home Loan stating that the insurer agrees
that the related manufactured housing unit is included within the term "land"
when used in the title policy. If however, the Manufactured Home is deemed not
permanently attached to the real estate, under the laws of most states, it will
be considered personal property and perfection of a security interest in such
Manufactured Home is effected, depending on applicable state law, either by
noting the security interest on the certificate of title for the Manufactured
Home or by filing a financing statement under the Uniform Commercial Code with
the office of the Secretary of State and, in some states, the office of the
county clerk of the state where the home is located. Consequently, if a
determination is made that the Manufactured Home is considered personal
property, other parties could obtain an interest in the Manufactured Home which
is prior to the security interest retained by the Trust Fund. See "Certain Legal
Aspects of Mortgage Loans - Contracts" in the Prospectus.
Approximately 38.22% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, are secured by second liens, and the related First
Liens are not included in the Mortgage Pool. The weighted average of the Second
Mortgage Ratios for Sub-Pool 1 Initial Mortgage Loans secured by second liens on
real property is approximately 32.00%. The "Second Mortgage Ratio" for each
Sub-Pool 1 Initial Mortgage Loan secured by a second lien is calculated as the
outstanding principal balance of such Sub-Pool 1 Initial Mortgage Loan as of the
Cutoff Date divided by the sum of (i) the outstanding principal balance of the
related First Lien at the time of origination of such Sub-Pool 1 Initial
Mortgage Loan and (ii) the outstanding principal balance as of the Cut-off Date
of such Sub-Pool 1 Initial Mortgage Loan. For further information regarding the
primary risk to holders of Mortgage Loans secured by second liens see "Risk
Factors--Risks Associated with the Mortgage Loans and Mortgaged Properties" and
"Certain Legal Aspects of Mortgage Loans" in the Prospectus.
All of the Sub-Pool 1 Initial Mortgage Loans have been originated since
March 21, 1990. No Sub-Pool 1 Initial Mortgage Loan has an unexpired term to
maturity as of the Cut-off Date of less than approximately 59 months. The
weighted average remaining term to maturity of the Sub-Pool 1 Initial Mortgage
Loans as of the Cut-off Date is approximately 221.18 months. The rate of default
of second mortgage loans may be greater than that of mortgage loans secured by
first liens on comparable properties.
Approximately 35.23% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, are Balloon Loans which provide for equal monthly
payments, consisting of principal and interest, based on either a 25-year or
30-year amortization schedule, and a single payment of the remaining principal
balance of the Balloon Loan at the end of the 15th year following origination.
Approximately 5.40% of the Sub-Pool 1 Initial Mortgage Loans, by Sub-Pool 1
Original Principal Balance, are Periodic Payment Loans (as defined herein). More
specifically, approximately 4.73% of the Sub-Pool 1 Initial Mortgage Loans, by
Sub-Pool 1 Original Principal Balance, are Periodic Payment Loans the Mortgage
Notes of which provide that the Mortgagors have the option, at any time during
the term of the related Periodic Payment Loan, to use a limited number of
payment vouchers provided to them at origination in order to defer payment of
the principal portion of the corresponding Periodic Payment (as defined herein)
and pay only the interest portion due on such payment date. Moreover,
approximately 4.60% of the Sub-Pool
S-21
<PAGE>
1 Initial Mortgage Loans, by Sub-Pool 1 Original Principal Balance, are Periodic
Payment Loans the Mortgage Notes of which provide that the Mortgagor may defer
payment of the first Periodic Payment or the first and second Periodic Payment
due thereon together with interest accrued from the date of origination to the
date the first or the second Periodic Payment, as the case may be, is due and,
under certain limited circumstances, the interest portion of such deferred
payment will be forgiven on the final maturity date of the Mortgage Note. Any
principal and interest deferred in such a manner will not result in an increase
or reduction of the principal balance of the related Periodic Payment Loan on
such payment date and will be due in full on the final maturity date of such
Periodic Payment Loan, thus creating a balloon payment. Accordingly, the final
payment due on the related Mortgage Note may be substantially greater than any
other previous payment (depending on how many interest only vouchers are used by
the Mortgagor). Because borrowers of Balloon Loans are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with Balloon Loans is greater than that associated with
fully-amortizing mortgage loans.
Sub-Pool 2
Approximately 20.94%, 16.70%, 10.45%, 7.44% and 6.51% of the Sub-Pool 2
Initial Mortgage Loans, by Original Sub-Pool 2 Principal Balance, are located in
Illinois, New York, Pennsylvania, New Jersey, and Michigan, respectively.
Several regions of the United States have been affected by a contraction of
economic activity and a deterioration of the real estate market. Considerable
uncertainty exists with respect to the regional economies and real estate
markets.
Approximately 0.81% of the Sub-Pool 2 Initial Mortgage Loans, by Original
Sub-Pool 2 Principal Balance, are secured by a lien on real estate to which a
Manufactured Home is permanently affixed. For a discussion of the risks
associated with multifamily properties and manufactured homes, see "--Certain
Risks of The Mortgage Loans--Sub-Pool 1" above.
All of the Sub-Pool 2 Initial Mortgage Loans have been originated since
November 27, 1991. No Sub-Pool 2 Initial Mortgage Loan has an unexpired term to
maturity as of the Cut-off Date of less than approximately 120 months. The
weighted average remaining term to maturity of the Sub-Pool 2 Initial Mortgage
Loans as of the Cut-off Date is approximately 350.37 months.
UNDERWRITING STANDARDS FOR MULTIFAMILY LOANS, MIXED USE LOANS AND MANUFACTURED
HOME LOANS
Under the Depositor's underwriting standards for Multifamily Loans and
Mixed Use Loans, the critical factors in underwriting a Multifamily Loan or
Mixed Use Loan are the ability of the Mortgaged Property to generate adequate
cash flow to support the mortgage and to a lesser extent, the financial
capabilities and managerial ability of the borrower. Therefore, changes in cash
flow of the Multifamily Properties and Mixed Use Properties may have a greater
effect on the delinquency, foreclosure and loss experience of the Multifamily
Loans and Mixed Use Loans than on residential mortgage loans originated in
accordance with the FNMA or FHLMC underwriting guidelines. No assurance can be
given that the values of the Multifamily Properties and the Mixed Use Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Multifamily Loans and Mixed Use Loans. If the cash flow of the
Multifamily Properties and Mixed Use Properties decline after the dates of
origination of the Multifamily Loans and Mixed Use Loans, then the rates of
delinquencies, foreclosures and losses on the Multifamily Loans and Mixed Use
Loans may increase and such increase may be substantial.
The mortgage loan programs pertaining to Multifamily Loans and Mixed Use
Loans and Manufactured Home Loans described in "Description of the Mortgage
Pool--Underwriting" in this Prospectus Supplement were recently implemented by
the Depositor and have produced a relatively low total volume of mortgage loans.
Because all of the Multifamily Loans, Mixed Use Loans and Manufactured Home
Loans being sold to the Trust Fund were underwritten in accordance with these
programs, the Depositor does not have historical delinquency, foreclosure or
loss experience with respect to its Multifamily Loan, Mixed Use Loan or
Manufactured Home Loan programs that may provide a basis for purposes of
estimating the future delinquency, foreclosure or loss experience on mortgage
loans similar to the Multifamily Loans, Mixed Use Loans and Manufactured Home
Loans included in the Trust Fund.
S-22
<PAGE>
THE SUBSEQUENT MORTGAGE LOANS
The Subsequent Mortgage Loans may have characteristics different from those
of the Initial Mortgage Loans in the related Sub-Pool. However, each Subsequent
Mortgage Loan must satisfy the eligibility criteria referred to herein, as
applicable, under "The Mortgage Pool--Sub-Pool 1--Conveyance of Sub-Pool 1
Subsequent Mortgage Loans and the Sub-Pool 1 Pre-Funding Account" and
"--Sub-Pool 2--Conveyance of Sub-Pool 2 Subsequent Mortgage Loans and the
Sub-Pool 2 Pre-Funding Account" at the time of its conveyance to the Trust Fund
and be underwritten in accordance with the criteria set forth herein, as
applicable, under "The Depositor--Underwriting Criteria--Sub-Pool 1" and
"--Sub-Pool 2".
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the related Pre-Funding Account
have not been fully applied to the purchase of Subsequent Mortgage Loans by the
Trust Fund by the end of the Funding Period, the Holders of the related Class A
Certificates will receive, pro rata, a prepayment of principal in an amount
equal to the related Pre-Funded Amount remaining in the related Pre-Funding
Account on the first Remittance Date following the termination of the Funding
Period. Such prepayment, in general, will have the same effect on Class A
Certificateholders as prepayments on the Mortgage Loans. See "Certain Yield and
Prepayment Considerations" herein and "Yield Considerations" in the Prospectus.
CERTAIN TRUTH-IN-LENDING CONSIDERATIONS
It is possible that some Mortgage Loans included in the Mortgage Pool will
be subject to the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Riegle Act") which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to
Regulation Z, the implementing regulation of the Federal Truth-In-Lending Act.
These provisions impose additional disclosure and other requirements on
creditors with respect to non-purchase money mortgage loans with high interest
rates or high up-front fees and charges. In general, mortgage loans within the
purview of the Riegle Act have annual percentage rates over 10 percentage points
greater than the yield on Treasury Securities of comparable maturity and/or fees
and points which exceed the greater of 8% of the total loan amount or $400 (the
$400 amount is adjusted annually based on changes in the Consumer Price Index
for the prior year). The provisions of the Riegle Act apply on a mandatory basis
to all mortgage loans originated on or after October 1, 1995. These provisions
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all claims
and defenses that the consumer could assert against the creditor, including,
without limitation, the right to rescind the mortgage loan. The Depositor will
represent and warrant in the Pooling Agreement that each of the Mortgage Loans
was originated in compliance with all applicable laws, including the
Truth-in-Lending Act as amended. The Depositor, upon breaching any such
representation and warranty, will be required by the Pooling Agreement to
repurchase the related Mortgage Loan at a price equal to the principal amount
thereof plus accrued interest thereon. The amount of such purchase price will be
treated as a Principal Prepayment of the related Mortgage Loan.
S-23
<PAGE>
THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the Initial Mortgage Loans for each Sub-Pool (and not the
Subsequent Mortgage Loans) and is based on the related Sub-Pool as of the
Cut-off Date.
Subsequent Mortgage Loans are intended to be purchased by the Trust Fund
from the Depositor from time to time on or before November 21, 1997, from funds
on deposit in the related Pre-Funding Account. The Initial Mortgage Loans and
the Subsequent Mortgage Loans, if available, will be originated or purchased by
the Depositor, and sold by the Depositor to the Trust Fund. The Pooling
Agreement will provide that the Mortgage Loans in the related Sub-Pools,
following the conveyance of the related Subsequent Mortgage Loans, must conform
to certain specified characteristics described below under "--Sub-Pool
1--Conveyance of Sub-Pool 1 Subsequent Mortgage Loans and the Sub-Pool 1
Pre-Funding Account" and "--Sub-Pool 2--Conveyance of Sub-Pool 2 Subsequent
Mortgage Loans and the Sub-Pool 2 Pre-Funding Account". Funds on deposit in the
Sub-Pool 1 Pre-Funding Account will only be used to purchase Sub-Pool 1
Subsequent Mortgage Loans and funds on deposit in the Sub-Pool 2 Pre-Funding
Account will only be used to purchase Sub-Pool 2 Subsequent Mortgage Loans. In
the sole discretion of the Certificate Insurer, Subsequent Mortgage Loans with
characteristics varying from those described herein may be purchased by the
Trust Fund; provided, however, that the addition of such Mortgage Loans will not
materially affect the aggregate characteristics of the entire Mortgage Pool.
Prior to the issuance of the Certificates, Mortgage Loans may be removed
from the Mortgage Pool as a result of incomplete documentation or otherwise, if
the Depositor deems such removal necessary or appropriate, and may be prepaid at
any time. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Certificates unless including such
mortgage loans would materially alter the characteristics of the Mortgage Pool
as described herein. The Depositor believes that the information set forth
herein will be representative of the characteristics of the Mortgage Pool as it
exists at the time the Certificates are issued, although the range of interest
rates borne by the related Mortgage Notes ("Mortgage Rates") and maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary as described herein.
SUB-POOL 1
PAYMENTS ON THE SUB-POOL 1 MORTGAGE LOANS
Approximately 88.98% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, provide for substantially equal monthly payments
(except, in the case of a Balloon Loan, for the final monthly payment) that are
allocated to principal and interest according to the daily simple interest
method (the "Simple Interest Loans"). Each monthly payment with respect to
substantially all of the Simple Interest Loans consists of an installment of
interest which is calculated according to the simple interest method on the
basis of the outstanding principal balance of the Simple Interest Loan
multiplied by the stated note rate and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator of which is 365 days
(the "Simple Interest Method"), as opposed to the customary method, on which 30
days of interest is owed each month irrespective of the day on which the payment
is received. As payments are received, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a Mortgagor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. However, if the next succeeding payment is made on the
due date, a greater amount will be allocated to interest than would be the case
if the previous payment had also been on the due date.
Conversely, if a Mortgagor pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
S-24
<PAGE>
scheduled due date, the principal balance of the Simple Interest Loan will
amortize in the manner described in the preceding paragraph. However, if the
Mortgagor consistently makes scheduled payments after the scheduled due date the
Simple Interest Loan will amortize more slowly than scheduled. Any remaining
unpaid principal is payable on the final maturity date of the Simple Interest
Loan.
With respect to the Simple Interest Loans, the Mortgagor is required to pay
interest only to the date of prepayment in the case of Principal Prepayments and
Curtailments.
Approximately 5.40% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance provide for substantially equal payments to be made
every 28 days (each, a "Periodic Payment" and each such loan, a "Periodic
Payment Loan"). Each Periodic Payment consists of an installment of interest
which is calculated according to the customary method, applied on a 28/364 day
basis, so that each payment is applied first to accrued and unpaid interest as
if the payment were made on its due date, regardless of when the payment is
actually received, and the remainder, if any, to the unpaid principal balance.
Although partial prepayments of principal on Periodic Payment Loans are applied
on scheduled Periodic Payment dates, with no resulting reduction in interest
payable for the period in which the partial prepayment is made, the related
Mortgagors are required to pay interest only to the date of prepayment if
accompanied by a prepayment of principal in full. In addition, approximately
4.73% of the Sub-Pool 1 Initial Mortgage Loans, by Sub-Pool 1 Original Principal
Balance, are Periodic Payment Loans the Mortgage Notes of which provide that the
Mortgagors have the option at any time during the term of the related Periodic
Payment Loan, to use a limited number of payment vouchers provided to them at
origination in order to defer payment of the principal portion of the
corresponding Periodic Payment and pay only the interest portion due on such
payment date. Approximately 4.60% of the Sub-Pool 1 Initial Mortgage Loans, by
Sub-Pool 1 Original Principal Balance, are Periodic Payment Loans the Mortgage
Notes of which provide that the Mortgagor may defer payment of the first
Periodic Payment or the first and second Periodic Payment due thereon together
with interest accrued from the date of origination to the date the first or the
second Periodic Payment, as the case may be, is due and, under certain limited
circumstances, the interest portion of such deferred payment will be forgiven on
the final maturity date of the Mortgage Note. Any principal and interest
deferred in such a manner will not result in an increase or reduction of the
principal balance of the related Periodic Payment Loan on such payment date and
will be due and payable in full on the final maturity date of such Periodic
Payment Loan. In addition, a Periodic Payment will be due after the Cutoff Date
with respect to each of the Periodic Payment Loans included in the Initial
Sub-Pool 1.
The initial Sub-Pool 1 (the "Initial Sub-Pool 1") consists of the Sub-Pool
1 Initial Mortgage Loans with an aggregate principal balance outstanding as of
the Cut-off Date, after deducting all payments of principal due on or before
such date, of $75,270,504.81 (the "Original Sub-Pool 1 Principal Balance"). The
Sub-Pool 1 Initial Mortgage Loans consist of conventional, fixed-rate Mortgage
Loans secured by first or second liens on one- to four-family residential
properties, units in planned unit developments, individual condominium units and
manufactured homes ("Single Family Properties"), residential properties
consisting of five or more dwelling units ("Multifamily Properties") and mixed
residential and commercial structures ("Mixed Use Properties"; collectively with
Single Family Properties and Multifamily Properties, the "Mortgaged
Properties"), with original terms to maturity of up to 360 months. Approximately
73.59% of the Sub-Pool 1 Initial Mortgage Loans, by Original Sub-Pool 1
Principal Balance, were originated and underwritten by the Depositor and the
remainder of the Sub-Pool 1 Initial Mortgage Loans were purchased and
re-underwritten by the Depositor. In each case the underwriting was performed in
accordance with the criteria set forth under "The Depositor--Underwriting
Criteria--Sub-Pool 1" herein. The predecessor of the Depositor began originating
and purchasing mortgage loans pursuant to its Fixed Rate Mortgage Program in
1985, pursuant to its Fixed Rate Mortgage Program-Multifamily and Mixed Use
Properties in September 1994 and pursuant to its Manufactured Home Loan Program
in March 1997. See "The Depositor--Loan Origination History" herein.
Approximately 38.22% of the Sub-Pool 1 Initial Mortgage Loans, by Original
Sub-Pool 1 Principal Balance, are secured by second liens with a First Lien on
the related underlying Mortgaged Property. The related First Liens are not
included in Sub-Pool 1. With respect to the remainder of the Sub-Pool 1 Initial
Mortgage Loans there exists no other mortgage lien senior to that of such
Sub-Pool 1 Initial Mortgage Loans.
S-25
<PAGE>
As of the Cut-off Date, none of the Sub-Pool 1 Initial Mortgage Loans were
contractually delinquent for thirty or more days (two or more payments missed).
Since the origination of the Sub-Pool 1 Mortgage Loans, six Sub-Pool 1 Initial
Mortgage Loans secured by Single Family Properties have been contractually
delinquent for thirty days (two payments missed) on one occasion prior to the
Cut-off Date. As of the Cut-off Date, all of the Sub-Pool 1 Initial Mortgage
Loans are current.
Each Sub-Pool 1 Initial Mortgage Loan was originated on or after March 21,
1990.
The Sub-Pool 1 Initial Mortgage Loans have the following characteristics as
of the Cut-off Date (expressed, where applicable, as a percentage of the
Original Sub-Pool 1 Principal Balance):
The weighted average Mortgage Rate of the Sub-Pool 1 Initial Mortgage
Loans as of the Cut-off Date is approximately 11.558% per annum. All the
Sub-Pool 1 Initial Mortgage Loans have Mortgage Rates as of the Cut-off
Date ranging from approximately 8.580% per annum to 17.900% per annum.
No Sub-Pool 1 Initial Mortgage Loan has a Combined Loan-to-Value
Ratio, calculated for each Sub-Pool 1 Initial Mortgage Loan using the
related original principal balance of such Initial Mortgage Loan and the
then outstanding principal balance of any related First Lien, exceeding
91.90%. The weighted average Combined Loan-to-Value Ratio of the Sub-Pool 1
Initial Mortgage Loans as of the Cut-off Date is approximately 77.70%.
The weighted average remaining term to maturity of the Sub-Pool 1
Initial Mortgage Loans will be approximately 221.18 months. None of the
Sub-Pool 1 Initial Mortgage Loans will have had a first payment date prior
to April 26, 1990 and none of the Sub-Pool 1 Initial Mortgage Loans will
have a remaining term to maturity of less than approximately 59.00 months.
The latest maturity date of any of the Sub-Pool 1 Initial Mortgage Loans
will be September 1, 2027.
The Sub-Pool 1 Initial Mortgage Loans will each have a principal
balance of not less than approximately $9,631.44 or more than approximately
$574,000.00. The Sub-Pool 1 Initial Mortgage Loans will have an average
principal balance of approximately $57,634.38.
Approximately 18.48% of the Sub-Pool 1 Initial Mortgage Loans will be
Mortgage Loans the proceeds of which were used to purchase a Mortgaged
Property. The proceeds of not more than approximately 9.92% of the Sub-Pool
1 Initial Mortgage Loans will be used to refinance an existing mortgage
loan and not more than approximately 71.60% of the Sub-Pool 1 Initial
Mortgage Loans will be cash-out loans.
No more than approximately 0.76% of the Sub-Pool 1 Initial Mortgage
Loans will be secured by Mortgaged Properties located in any one zip code
area.
Approximately 78.65% of the Sub-Pool 1 Initial Mortgage Loans will be
secured by attached or detached one-family dwelling units. Approximately
0.23% of the Sub-Pool 1 Initial Mortgage Loans will be secured by units in
condominiums. Approximately 2.72% of the Sub-Pool 1 Initial Mortgage Loans
will be secured by Manufactured Homes. Approximately 1.57% of the Sub-Pool
1 Initial Mortgage Loans will be secured by units in planned unit
developments. No more than approximately 11.21% of the Sub-Pool 1 Initial
Mortgage Loans will be secured by units in properties consisting of two- to
four-family dwelling units. Approximately 3.52% of the Sub-Pool 1 Initial
Mortgage Loans will be secured by Multifamily Properties, and no more than
approximately 2.10% of the Sub-Pool 1 Initial Mortgage Loans will be
secured by Mixed Use Properties.
Based on representations of Mortgagors at origination, approximately
18.22% of the Sub-Pool 1 Initial Mortgage Loans will be secured by investor
properties and approximately 93.28% of the Sub-Pool 1 Initial Mortgage
Loans will be secured by owner-occupied properties. The apparent
discrepancy in these percentages results from there being approximately
11.50% of the Sub-Pool 1 Initial Mortgage Loans that are secured by units
in properties consisting of two- to four-family dwelling units, Multifamily
Properties and Mixed Use Properties partially occupied by the Mortgagor as
the Mortgagor's primary residence and partially rented out as investor
property.
S-26
<PAGE>
Approximately 35.23% of the Sub-Pool 1 Initial Mortgage Loans are
Balloon Loans.
Approximately 5.40% of the Sub-Pool 1 Initial Mortgage Loans are
Periodic Payment Loans which may become Balloon Loans.
None of the Sub-Pool 1 Initial Mortgage Loans provide for negative
amortization.
Except for certain of the Periodic Payment Loans, none of the Sub-Pool
1 Initial Mortgage Loans provide for deferred interest.
None of the Sub-Pool 1 Initial Mortgage Loans will be subject to any
buydown agreement.
None of the Sub-Pool 1 Initial Mortgage Loans will be insured by any
primary mortgage insurance policy.
S-27
<PAGE>
The following table sets forth the Range of Principal Balances of the
Sub-Pool 1 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF PRINCIPAL BALANCES BALANCE BALANCE LOANS
- --------------------------- --------- ---------- ---------
$ 0.00 - $ 10,000.00.......... $ 59,557.11 0.08% 6
$ 10,000.01 - $ 20,000.00.......... 3,148,592.17 4.18 193
$ 20,000.01 - $ 30,000.00.......... 5,545,993.65 7.37 222
$ 30,000.01 - $ 40,000.00.......... 6,393,311.31 8.49 182
$ 40,000.01 - $ 50,000.00.......... 7,034,437,88 9.35 154
$ 50,000.01 - $ 60,000.00.......... 7,542,120.74 10.02 136
$ 60,000.01 - $ 70,000.00.......... 4,996,044.91 6.64 76
$ 70,000.01 - $ 80,000.00.......... 5,715,328.75 7.59 76
$ 80,000.01 - $ 90,000.00.......... 3,866,932.88 5.14 45
$ 90,000.01 - $ 100,000.00.......... 4,557,191.89 6.06 48
$100,000.01 - $ 110,000.00.......... 3,555,999.35 4.72 34
$110,000.01 - $ 120,000.00.......... 2,687,930.30 3.57 23
$120,000.01 - $ 130,000.00.......... 2,260,366.02 3.00 18
$130,000.01 - $ 140,000.00.......... 2,295,746.12 3.05 17
$140,000.01 - $ 150,000.00.......... 2,330,170.54 3.10 16
$150,000.01 - $ 160,000.00.......... 1,559,134.63 2.07 10
$160,000.01 - $ 170,000.00.......... 1,814,656.57 2.41 11
$170,000.01 - $ 180,000.00.......... 871,556.26 1.16 5
$180,000.01 - $ 190,000.00.......... 552,594.55 0.73 3
$190,000.01 - $ 200,000.00.......... 1,971,550.41 2.62 10
$200,000.01 - $ 250,000.00.......... 2,031,159.18 2.70 9
$250,000.01 - $ 300,000.00.......... 784,400.00 1.04 3
$300,000.01 - $ 350,000.00.......... 1,318,966.65 1.75 4
$350,000.01 - $ 400,000.00.......... 380,000.00 0.51 1
$400,000.01 - $ 450,000.00.......... 430,000.00 0.57 1
$450,000.01 - $ 500,000.00.......... 992,762.94 1.32 2
$550,000.01 - $ 600,000.00.......... 574,000.00 0.76 1
--------------- ------ -----
Totals......................... $ 75,270,504.81 100.00% 1,306
=============== ====== =====
S-28
<PAGE>
The following table sets forth the Geographic Distribution of the Sub-Pool
1 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
GEOGRAPHIC DISTRIBUTION BALANCE BALANCE LOANS
----------------------- --------- ---------- ---------
Arizona........................ $ 2,133,026.16 2.83% 37
California..................... 1,683,826.47 2.24 31
Colorado....................... 4,437,810.51 5.90 90
Connecticut.................... 2,359,616.61 3.13 37
Delaware....................... 167,405.41 0.22 4
District of Columbia........... 100,000.00 0.13 1
Florida........................ 7,886,305.47 10.48 185
Georgia........................ 2,405,342.49 3.20 37
Idaho.......................... 189,727.00 0.25 4
Illinois....................... 4,302,300.02 5.72 65
Indiana........................ 728,155.50 0.97 16
Kentucky....................... 1,335,227.57 1.77 27
Maryland....................... 1,589,829.62 2.11 25
Massachusetts.................. 832,849.43 1.11 13
Michigan....................... 653,108.30 0.87 15
Minnesota...................... 1,447,946.60 1.92 29
Missouri....................... 804,792.49 1.07 15
Nevada......................... 398,196.62 0.53 9
New Hampshire.................. 549,100.00 0.73 4
New Jersey..................... 3,557,623.30 4.73 46
New Mexico..................... 226,394.00 0.30 7
New York....................... 18,727,846.81 24.88 206
North Carolina................. 1,986,874.69 2.64 38
Ohio........................... 1,865,787.53 2.48 34
Oregon......................... 1,484,328.10 1.97 34
Pennsylvania................... 6,641,520.82 8.82 154
Rhode Island................... 901,750.00 1.20 13
South Carolina................. 891,855.65 1.19 17
Utah........................... 2,472.193.08 3.28 63
Virginia....................... 465,074.59 0.62 6
Washington..................... 1,975,089.97 2.62 42
Wisconsin...................... 69,600.00 0.09 2
--------------- ------ -----
Totals........ $ 75,270,504.81 100.00% 1,306
=============== ====== =====
S-29
<PAGE>
The following table sets forth the original Combined Loan-to-Value Ratios
(as defined below) of the Sub-Pool 1 Initial Mortgage Loan as of the Cut-off
Date:
SUB-POOL 1
PERCENT BY NUMBER OF
ORIGINAL COMBINED PRINCIPAL PRINCIPAL MORTGAGE
LOAN-TO-VALUE RATIO BALANCE BALANCE LOANS
- ------------------- --------- ---------- ---------
5.01% - 10.00%......... $ 15,000.00 0.02% 1
15.01% - 20.00%......... 71,922.68 0.10 3
20.01% - 25.00%......... 208,981.19 0.28 7
25.01% - 30.00%......... 342,499.99 0.46 6
30.01% - 35.00%......... 337,541.42 0.45 6
35.01% - 40.00%......... 332,220.04 0.44 10
40.01% - 45.00%......... 692,965.56 0.92 14
45.01% - 50.00%......... 1,218,593.29 1.62 19
50.01% - 55.00%......... 980,355.15 1.30 16
55.01% - 60.00%......... 2,057,972.17 2.73 32
60.01% - 65.00%......... 3,038,247.95 4.04 56
65.01% - 70.00%......... 9,819,055.62 13.04 122
70.01% - 75.00%......... 6,132,514.95 8.15 98
75.01% - 80.00%......... 13,977,264.03 18.57 250
80.01% - 85.00%......... 19,317,645.64 25.66 357
85.01% - 90.00%......... 16,403,029.69 21.79 304
90.01% - 92.00%......... 324,695.44 0.43 5
--------------- ------ -----
Totals........... $ 75,270,504.81 100.00% 1,306
=============== ====== =====
S-30
<PAGE>
The original "Combined Loan-to-Value Ratios" shown on the previous page are
equal, with respect to each Sub-Pool 1 Initial Mortgage Loan, to (i) the sum of
(a) the original principal balance of such Mortgage Loan at the date of
origination plus (b) the then outstanding principal balance of any related First
Lien, divided by (ii) the Collateral Value of the related Mortgaged Property.
The "Collateral Value" of a Mortgaged Property is the lesser of (x) the
appraised value based on an appraisal made by or for the originator of the
Initial Mortgage Loan of the related Sub-Pool by an independent fee appraiser
(or, in certain instances, by a licensed in-house appraiser of the Depositor) at
the time of the origination of the related Initial Mortgage Loan and (y) the
sales price of such Mortgaged Property at such time of origination. With respect
to an Initial Mortgage Loan for which the proceeds were used to refinance an
existing mortgage loan, the Collateral Value is the appraised value of the
related Mortgaged Property based upon the appraisal obtained at the time of
refinancing.
The following table sets forth the Mortgage Rates borne by the Mortgage
Notes relating to the Sub-Pool 1 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MORTGAGE RATES BALANCE BALANCE LOANS
- --------------- --------- ---------- ---------
8.500 - 8.749%.......... $ 42,531.05 0.06% 1
8.750 - 8.999%.......... 410,771.59 0.55 4
9.000 - 9.249%.......... 1,109,025.88 1.47 16
9.250 - 9.499%.......... 1,363,245.83 1.81 17
9.500 - 9.749%.......... 2,254,701.23 3.00 32
9.750 - 9.999%.......... 2,886,744.94 3.84 48
10.000 - 10.249%.......... 2,381,881.78 3.16 43
10.250 - 10.499%.......... 3,890,703.73 5.17 62
10.500 - 10.749%.......... 5,346,919.38 7.10 78
10.750 - 10.999%.......... 5,316,111.03 7.06 84
11.000 - 11.249%.......... 5,690,561.29 7.56 81
11.250 - 11.499%.......... 6,335,743.12 8.42 88
11.500 - 11.749%.......... 6,321,074.98 8.40 102
11.750 - 11.999%.......... 4,804,683.85 6.38 114
12.000 - 12.249%.......... 4,642,522.94 6.17 76
12.250 - 12.499%.......... 4,249,939.13 5.65 87
12.500 - 12.749%.......... 3,907,480.20 5.19 84
12.750 - 12.999%.......... 4,071,547.24 5.41 77
13.000 - 13.249%.......... 2,554,879.37 3.39 47
13.250 - 13.499%.......... 2,059,354.09 2.74 35
13.500 - 13.749%.......... 2,021,599.46 2.69 39
13.750 - 13.999%.......... 1,701,936.05 2.26 37
14.000 - 14.249%.......... 391,472.68 0.52 14
14.250 - 14.499%.......... 465,871.26 0.62 13
14.500 - 14.749%.......... 326,806.57 0.43 9
14.750 - 14.999%.......... 387,342.61 0.52 9
15.000 - 15.249%.......... 10,880.00 0.01 1
15.250 - 15.499%.......... 190,926.45 0.25 4
15.500 - 15.749%.......... 54,782.59 0.07 2
16.500 - 16.749%.......... 17,489.92 0.02 1
17.750 - 17.999%.......... 60,974.57 0.08 1
--------------- ------ -----
Totals............. $ 75,270,504.81 100.00% 1,306
=============== ====== =====
S-31
<PAGE>
The following table sets forth the number of Remaining Months to Maturity
of the Sub-Pool 1 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
REMAINING MONTHS TO MATURITY BALANCE BALANCE LOANS
- ---------------------------- --------- ---------- ---------
48.01 - 60.00.......... $ 148,562.25 0.20% 6
84.01 - 96.00.......... 174,519.86 0.23 5
96.01 - 108.00.......... 71,100.00 0.09 2
108.01 - 120.00.......... 2,297,131.17 3.05 69
120.01 - 132.00.......... 163,000.00 0.22 3
132.01 - 144.00.......... 286,700.00 0.38 5
144.01 - 156.00.......... 115,532.62 0.15 4
156.01 - 168.00.......... 129,726.28 0.17 4
168.01 - 180.00.......... 43,921,598.48 58.35 797
180.01 - 192.00.......... 145,100.00 0.19 2
192.01 - 204.00.......... 87,256.81 0.12 1
204.01 - 216.00.......... 86,200.00 0.11 1
216.01 - 228.00.......... 394,831.05 0.53 10
228.01 - 240.00.......... 11,734,491.04 15.59 220
276.01 - 288.00.......... 313,000.00 0.42 4
288.01 - 300.00.......... 1,737,095.39 2.31 13
348.01 - 360.00.......... 13,464,659.86 17.89 160
--------------- ------ -----
Totals.......... $ 75,270,504.81 100.00% 1,306
=============== ====== =====
The following table sets forth the distribution of the Sub-Pool 1 Initial
Mortgage Loans by the Depositor's Underwriting Class as of the Cut-off Date:
SUB-POOL 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
UNDERWRITING CLASS BALANCE BALANCE LOANS
------------------ --------- ---------- ---------
AA.......................... $ 13,364,602.92 17.76% 192
ANIV........................ 16,469,659.08 21.88 263
I........................... 21,398,259.91 28.43 383
II.......................... 7,951,867.23 10.56 156
IIB......................... 741,102.57 0.98 15
III......................... 5,857,020.49 7.78 100
III-SE...................... 2,905,833.27 3.86 56
IV.......................... 5,724,916.12 7.61 120
IV-PI....................... 358,799.77 0.48 10
V........................... 498,443.45 0.66 11
--------------- ------ -----
Totals................ $ 75,270,504.81 100.00% 1,306
=============== ====== =====
S-32
<PAGE>
The following table sets forth the Property Types of the Sub-Pool 1 Initial
Mortgage Loans:
SUB-POOL 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
PROPERTY TYPES BALANCE BALANCE LOANS
-------------- --------- ---------- ---------
One Family (attached/detached).... $ 59,201,715.46 78.65% 1,106
Condominium....................... 169,500.00 0.23 3
Two-to-Four Family................ 8,435,701.22 11.21 98
Planned Unit Development.......... 1,178,345.28 1.57 23
Manufactured Homes................ 2,050,148.78 2.72 50
MultiFamily....................... 2,652,661.13 3.52 17
Mixed Use......................... 1,582,432.94 2.10 9
--------------- ------ -----
Totals............. $ 75,270,504.81 100.00% 1,306
=============== ====== =====
CONVEYANCE OF SUB-POOL 1 SUBSEQUENT MORTGAGE LOANS AND THE SUB-POOL 1
PRE-FUNDING ACCOUNT
Under the Pooling Agreement, following the initial issuance of the
Certificates, the Depositor has committed to sell, and the Trust Fund will be
obligated to purchase from the Depositor, on or before November 21, 1997,
subject to the availability thereof, additional conventional, fixed-rate
residential Mortgage Loans (the "Sub-Pool 1 Subsequent Mortgage Loans") secured
by first or second liens on Single Family Properties, Multifamily Properties and
Mixed Use Properties which will be originated and underwritten or purchased and
re-underwritten by the Depositor. In each case the underwriting will be
performed in accordance with the criteria set forth herein under "The
Depositor--Underwriting Criteria--Sub-Pool 1". Sub-Pool 1 Subsequent Mortgage
Loans will be transferred to the Trust Fund pursuant to Subsequent Transfer
Instruments (the "Sub-Pool 1 Subsequent Transfer Instruments") between the
Depositor and the Trustee. In connection with the purchase of Sub-Pool 1
Subsequent Mortgage Loans on such dates of transfer (the "Sub-Pool 1 Subsequent
Transfer Dates"), the Trust Fund will be required to pay the Depositor from
amounts on deposit in the Sub-Pool 1 Pre-Funding Account a cash purchase price
of 100% of the principal balance thereof. The Depositor will designate the close
of business on the day prior to the Sub-Pool 1 Subsequent Transfer Date as the
cut-off date (the "Sub-Pool 1 Subsequent Cut-off Date") with respect to the
related Subsequent Mortgage Loans purchased on such date and, as a result, the
Trust Fund will not be required to pay accrued interest with respect thereto.
Therefore, the aggregate principal balance of Sub-Pool 1 after the Closing Date
will increase by an amount equal to the aggregate principal balance of the
Sub-Pool 1 Subsequent Mortgage Loans so purchased and the amount in the Sub-Pool
1 Pre-Funding Account will decrease accordingly.
The Trustee will establish a Pre-Funding Account (the "Sub-Pool 1
Pre-Funding Account") into which it will deposit upon receipt from the Depositor
$46,413,349 (the "Original Sub-Pool 1 Pre-Funded Amount") to be used to purchase
the Sub-Pool 1 Subsequent Mortgage Loans. The Original Sub-Pool 1 Pre-Funded
Amount will be reduced during the Funding Period by the amount thereof used to
purchase Sub-Pool 1 Subsequent Mortgage Loans in accordance with the Pooling
Agreement (on any date of determination, the Original Sub-Pool 1 Pre-Funded
Amount as so reduced, the "Sub-Pool 1 Pre-Funded Amount"). During the period
(the "Sub-Pool 1 Funding Period") from the Closing Date until the earlier of (i)
the date on which the amount on deposit in the Sub-Pool 1 Pre-Funding Account is
zero or (ii) November 21, 1997, the Sub-Pool 1 Pre-Funded Amount will be
maintained in the Sub-Pool 1 Pre-Funding Account.
Any conveyance of Sub-Pool 1 Subsequent Mortgage Loans on a Sub-Pool 1
Subsequent Transfer Date is subject to certain conditions including, but not
limited to: (a) each such Sub-Pool 1 Subsequent Mortgage Loan must satisfy the
representations and warranties specified in the Sub-Pool 1 Subsequent Transfer
Instrument and the Pooling Agreement; (b) the Depositor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (c) the Depositor will deliver certain
opinions of counsel with respect to the validity of the conveyance of such
Subsequent Mortgage Loans; (d) as of the respective Subsequent Cut-off Date, the
Sub-Pool 1 Subsequent Mortgage Loans will satisfy the following criteria: (i)
such Subsequent Mortgage Loan may
S-33
<PAGE>
not be 30 or more days contractually delinquent as of the related Subsequent
Cut-off Date; (ii) the original term to maturity of such Subsequent Mortgage
Loan will not be less than 60 months and will not exceed 360 months; (iii) such
Subsequent Mortgage Loan may not provide for negative amortization; (iv) such
Subsequent Mortgage Loan will have a Mortgage Rate not less than 8.50%; (v) such
Subsequent Mortgage Loan will be underwritten in accordance with the criteria
set forth under "The Depositor--Underwriting Criteria--Sub-Pool 1" herein; (vi)
such Subsequent Mortgage Loan will have been serviced by the Servicer since
origination or purchase by the Depositor; (vii) such Subsequent Mortgage Loan
will not have a Combined Loan-to-Value Ratio greater than 91%; and (viii) such
Subsequent Mortgage Loans will have (A) as of the end of the Sub-Pool 1 Funding
Period, a weighted average number of months since origination of not over 4
months and (B) not over 20% by aggregate principal balance with a first payment
date in January 1998. In addition, following the purchase of any Sub-Pool 1
Subsequent Mortgage Loan by the Trust Fund, the Sub-Pool 1 Mortgage Loans
(including the Sub-Pool 1 Subsequent Mortgage Loans) as of the end of the
Sub-Pool 1 Funding Period will: (i) have a weighted average Mortgage Rate of at
least 10.96%; (ii) have a weighted average remaining term to stated maturity of
not more than 275 months and not less than 180 months; (iii) have a weighted
average Combined Loan-to-Value Ratio of not more than 83%; (iv) have not in
excess of 50% by aggregate principal balance of Sub-Pool 1 Mortgage Loans that
are Balloon Loans; (v) have no Sub-Pool 1 Mortgage Loan with a principal balance
in excess of $850,000; (vi) not have in excess of 15% by aggregate principal
balance of Sub-Pool 1 Mortgage Loans secured by non-owner occupied Mortgaged
Properties; (vii) not have a concentration of Mortgaged Properties in a single
zip code in excess of 4% by aggregate principal balance of Sub-Pool 1 Mortgage
Loans; (viii) not have in excess of 5% by aggregate principal balance of
Sub-Pool 1 Mortgage Loans secured by Mortgaged Properties that are condominiums;
(ix) have at least 74% by aggregate principal balance of Sub-Pool 1 Mortgage
Loans secured by fee simple interests in attached or detached Single Family
Properties (including units in planned unit developments); (x) not have in
excess of 10% by aggregate principal balance of Sub-Pool 1 Mortgage Loans
secured by Multifamily Properties and Mixed Use Properties; and (xi) not have in
excess of 5% by aggregate principal balance of Sub-Pool 1 Mortgage Loans secured
by Manufactured Homes. In the sole discretion of the Certificate Insurer,
Sub-Pool 1 Subsequent Mortgage Loans with characteristics varying from those set
forth in this paragraph may be purchased by the Trust Fund; provided, however,
that the addition of such Mortgage Loans will not materially affect the
aggregate characteristics of Sub-Pool 1.
SUB-POOL 2
Payments on the Sub-Pool 2 Mortgage Loans
The initial Sub-Pool 2 (the "Initial Sub-Pool 2") consists of the Sub-Pool
2 Initial Mortgage Loans with an aggregate principal balance outstanding as of
the Cut-off Date, after deducting all payments of principal due on or before
such date, of $115,690,188.57 (the "Original Sub-Pool 2 Principal Balance"). The
Sub-Pool 2 Initial Mortgage Loans consist of conventional, adjustable-rate
Mortgage Loans secured by first liens on Single Family Properties with original
terms to maturity of up to 360 months. Approximately 60.02% of the Sub-Pool 2
Initial Mortgage Loans, by Original Sub-Pool 2 Principal Balance, were
originated and underwritten by the Depositor, and the remainder of the Sub-Pool
2 Initial Mortgage Loans were purchased and re-underwritten by the Depositor. In
each case the underwriting was performed in accordance with the criteria set
forth herein under "The Depositor--Underwriting Criteria--Sub-Pool 2". The
Depositor began originating and purchasing mortgage loans pursuant to its
Adjustable Rate First Mortgage Program in the fourth calendar quarter of 1992.
The Sub-Pool 2 Initial Mortgage Loans have Mortgage Rates subject to annual
or semiannual adjustment after an initial six-month, twenty-four month or sixty
month period on the day of the month specified in the related Mortgage Note
(each such date, an "Adjustment Date") to equal the sum, rounded to the nearest
0.125%, of (i)(A) with respect to 18.71% of the Sub-Pool 2 Mortgage Loans, by
Original Sub-Pool 2 Principal Balance, the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year, as published in
the Federal Reserve Statistical Release H.15 (519), as most recently announced
as of a date 45 days prior to such Adjustment Date (the "One-Year U.S. Treasury
Index"; such Mortgage Loans, the "One-Year U.S. Treasury Loans"), and (B) with
respect to 81.29% of the Sub-Pool 2 Mortgage Loans, by Original Sub-Pool 2
Principal Balance, the Six-Month LIBOR Index (as defined below; such Mortgage
Loans, the "Six-Month LIBOR Loans"; the One-Year U.S. Treasury Index and the
Six-Month LIBOR Index, each, an "Index") and (ii) a fixed percentage amount
specified in
S-34
<PAGE>
the related Mortgage Note (the "Gross Margin"); provided, however, that the
Mortgage Rate will not increase or decrease on any Adjustment Date by more than
(i) 2% with respect to the One-Year U.S. Treasury Loans or (ii) 1% with respect
to the Six-Month LIBOR Loans, or, with respect to the initial Adjustment Date,
not increase by more than 2%, with respect to the Six-Month LIBOR Loans that are
subject to an adjustment after an initial twenty-four month period (each, a
"Periodic Rate Cap"). All the Sub-Pool 2 Initial Mortgage Loans provide that
over the life of the Mortgage Loan the Mortgage Rate will in no event be more
than the fixed percentage set forth in the Mortgage Note (such rate, the
"Maximum Mortgage Rate"). Each Sub-Pool 2 Initial Mortgage Loan provides that in
no event will the Mortgage Rate be less than the initial Mortgage Rate, except
with respect to approximately 61.48% of the Sub-Pool 2 Initial Mortgage Loans
which are Six-Month LIBOR Loans that are subject to an adjustment after an
initial twenty-four month period, all of which provide that the Mortgage Rate
may be 1% lower than the initial Mortgage Rate (such rate, the "Minimum Mortgage
Rate") and except with respect to approximately 14.27% of the Sub-Pool 2 Initial
Mortgage Loans which are One-Year U.S. Treasury Loans that are subject to an
adjustment after an initial sixty month period, all of which provide for no
minimum Mortgage Rate. Effective with the first payment due on a Sub-Pool 2
Initial Mortgage Loan after each related Adjustment Date, the monthly payment
will be adjusted to an amount which will fully amortize the outstanding
principal balance of such Sub-Pool 2 Initial Mortgage Loan over its remaining
term, and pay interest at the Mortgage Rate as so adjusted. Approximately 85.73%
of the Sub-Pool 2 Initial Mortgage Loans were originated with a Mortgage Rate
less than the sum of (i) the related Index at the time the initial Mortgage Rate
was established and (ii) the Gross Margin, such sum rounded as described above.
The Index applicable with respect to approximately 81.29% of the Mortgage
Loans, by Original Sub-Pool 2 Principal Balance, will be a per annum rate equal
to the average of interbank offered rates for six-month U.S. dollar-denominated
deposits in the London market based on quotations of major banks (the "Six-Month
LIBOR Index") as published in The Wall Street Journal and as most recently
available as of the date specified in the related Mortgage Note.
If an Index ceases to be published or is otherwise unavailable, the
Servicer will select an alternative index for mortgage loans on comparable
properties, based upon comparable information, over which it has no control and
which is readily verifiable by Mortgagors.
As of the Cut-off Date, none of the Sub-Pool 2 Initial Mortgage Loans were
contractually delinquent for thirty or more days (two or more payments missed).
Since the origination of the Sub-Pool 2 Mortgage Loans, five of the Sub-Pool 2
Initial Mortgage Loans secured by Single Family Properties have been
contractually delinquent for thirty days (two payments missed) on one occasion
prior to the Cut-off Date. As of the Cut-off Date, all of the Sub-Pool 2 Initial
Mortgage Loans are current.
Each Sub-Pool 2 Initial Mortgage Loan was originated on or after November
27, 1991, and has an initial or next Adjustment Date on or before September 1,
1999.
The Sub-Pool 2 Initial Mortgage Loans have the following characteristics as
of the Cut-off Date (expressed, where applicable, as a percentage of the
Original Sub-Pool 2 Principal Balance):
The weighted average Mortgage Rate of the Sub-Pool 2 Initial Mortgage Loans
will be approximately 10.026%. The Sub-Pool 2 Initial Mortgage Loans will
have Mortgage Rates ranging from approximately 6.750% to 13.875% and Gross
Margins ranging from approximately 2.750% to 9.00%. The weighted average
Gross Margin will be approximately 5.731%.
The Sub-Pool 2 Initial Mortgage Loans will have Minimum Mortgage Rates
ranging from approximately 0.000% to 12.875% and Maximum Mortgage Rates
ranging from approximately 12.750% to 19.875%. The weighted average Minimum
Mortgage Rate of the Sub-Pool 2 Initial Mortgage Loans will be
approximately 8.368% and the weighted average Maximum Mortgage Rate of the
Sub-Pool 2 Initial Mortgage Loans will be approximately 16.007%.
The weighted average remaining term to maturity of the Sub-Pool 2 Initial
Mortgage Loans will be approximately 350.37 months. None of the Sub-Pool 2
Initial Mortgage Loans will have had a first payment date prior to January
1, 1992 and none of the Sub-Pool 2 Initial Mortgage Loans will have a
remaining term
S-35
<PAGE>
to maturity of less than approximately 120 months. The latest maturity date
of any of the Sub-Pool 2 Initial Mortgage Loans will be September 1, 2027.
The Sub-Pool 2 Initial Mortgage Loans will each have a principal balance of
not less than approximately $16,796.05 or more than approximately
$577,500.00. The Sub-Pool 2 Initial Mortgage Loans will have an average
principal balance of approximately $117,810.78.
The weighted average Loan-to-Value Ratio at origination of the Sub-Pool 2
Initial Mortgage Loans (weighted based upon the Original Sub-Pool 2
Principal Balance) will be approximately 79.36%, and no Sub-Pool 2 Initial
Mortgage Loan will have a Loan-to-Value Ratio at origination exceeding
92.40%.
Approximately 49.61% of the Sub-Pool 2 Initial Mortgage Loans will be
Mortgage Loans the proceeds of which were used to purchase a Mortgaged
Property. The proceeds of not more than approximately 6.82% of the Sub-Pool
2 Initial Mortgage Loans will be used to refinance an existing mortgage
loan and the proceeds of not more than approximately 43.57% of the Sub-Pool
2 Initial Mortgage Loans will be cash-out mortgage loans.
No more than approximately 1.19% of the Sub-Pool 2 Initial Mortgage Loans
will be secured by Mortgaged Properties located in any one zip code area.
Approximately 83.03% of the Sub-Pool 2 Initial Mortgage Loans will be
secured by attached or detached one-family dwelling units (not including
Manufactured Homes). Approximately 2.07% of the Sub-Pool 2 Initial Mortgage
Loans will be secured by units in condominiums. Approximately 2.34% of the
Sub-Pool 2 Initial Mortgage Loans will be secured by units in planned unit
developments. Approximately 0.81% of the Sub-Pool 2 Initial Mortgage Loans
will be secured by Manufactured Homes. No more than approximately 11.75% of
the Sub-Pool 2 Initial Mortgage Loans will be secured by units in
properties consisting of two- to four-family dwelling units. None of the
Sub-Pool 2 Initial Mortgage Loans will be secured by Multifamily Properties
or Mixed Use Properties.
Based on representations of Mortgagors at origination, approximately 13.40%
of the Sub-Pool 2 Initial Mortgage Loans will be secured by investor
properties and approximately 96.83% of the Sub-Pool 2 Initial Mortgage
Loans will be secured by owner-occupied properties. The apparent
discrepancy in these percentages results from there being approximately
10.35% of the Sub-Pool 2 Initial Mortgage Loans that are secured by units
in properties consisting of two- to four-family dwelling units partially
occupied by the Mortgagor as the Mortgagor's primary residence and
partially rented out as investor property.
None of the Sub-Pool 2 Initial Mortgage Loans provide for deferred interest
or negative amortization.
None of the Sub-Pool 2 Initial Mortgage Loans will be subject to any
buydown agreement.
None of the Sub-Pool 2 Initial Mortgage Loans will be insured by any
primary mortgage insurance policy.
S-36
<PAGE>
The following table sets forth the Range of Principal Balances of the
Sub-Pool 2 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF PRINCIPAL BALANCES BALANCE BALANCE LOANS
- --------------------------- --------- ---------- ---------
$ 10,000.01 - $ 20,000.00........ $ 76,391.34 0.07% 4
$ 20,000.01 - $ 30,000.00........ 444,351.95 0.38 17
$ 30,000.01 - $ 40,000.00........ 1,723,623.71 1.49 48
$ 40,000.01 - $ 50,000.00........ 3,305,247.05 2.86 73
$ 50,000.01 - $ 60,000.00........ 4,377,846.06 3.78 79
$ 60,000.01 - $ 70,000.00........ 4,637,909.44 4.01 71
$ 70,000.01 - $ 80,000.00........ 4,462,861.74 3.86 59
$ 80,000.01 - $ 90,000.00........ 5,687,865.61 4.92 67
$ 90,000.01 - $ 100,000.00........ 7,744,816.13 6.69 81
$ 100,000.01 - $ 110,000.00........ 5,862,815.50 5.07 56
$ 110,000.01 - $ 120,000.00........ 8,162,325.43 7.05 71
$ 120,000.01 - $ 130,000.00........ 5,646,398.79 4.88 45
$ 130,000.01 - $ 140,000.00........ 6,799,632.88 5.88 50
$ 140,000.01 - $ 150,000.00........ 6,094,606.68 5.27 42
$ 150,000.01 - $ 160,000.00........ 5,607,322.78 4.85 36
$ 160,000.01 - $ 170,000.00........ 3,776,258.74 3.26 23
$ 170,000.01 - $ 180,000.00........ 3,337,369.44 2.88 19
$ 180,000.01 - $ 190,000.00........ 2,233,955.94 1.93 12
$ 190,000.01 - $ 200,000.00........ 3,932,202.10 3.40 20
$ 200,000.01 - $ 250,000.00........ 11,444,785.01 9.89 52
$ 250,000.01 - $ 300,000.00........ 5,445,167.43 4.71 20
$ 300,000.01 - $ 350,000.00........ 3,535,171.98 3.06 11
$ 350,000.01 - $ 400,000.00........ 3,419,878.64 2.96 9
$ 400,000.01 - $ 450,000.00........ 3,402,218.85 2.94 8
$ 450,000.01 - $ 500,000.00........ 2,848,165.35 2.46 6
$ 500,000.01 - $ 550,000.00........ 526,500.00 0.45 1
$ 550,000.01 - $ 600,000.00........ 1,154,500.00 1.00 2
---------------- ------ ---
Totals....................... $ 115,690,188.57 100.00% 982
================ ====== ===
S-37
<PAGE>
The following table sets forth the Geographic Distribution of the Sub-Pool
2 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
GEOGRAPHIC DISTRIBUTION BALANCE BALANCE LOANS
- ----------------------- --------- ---------- ---------
Arizona............................ $ 2,259,766.92 1.95% 18
California......................... 643,991.86 0.56 4
Colorado........................... 7,416,200.48 6.41 49
Connecticut........................ 5,873,291.69 5.08 42
Delaware........................... 683,937.55 0.59 6
District of Columbia............... 171,986.83 0.15 2
Florida............................ 2,835,804.71 2.45 29
Georgia............................ 1,909,313.21 1.65 18
Idaho.............................. 48,287.99 0.04 1
Illinois........................... 24,226,904.39 20.94 191
Indiana............................ 3,236,433.36 2.80 36
Maryland........................... 1,955,357.09 1.69 12
Massachusetts...................... 952,458.38 0.82 6
Michigan........................... 7,533,680.05 6.51 77
Minnesota.......................... 259,988.42 0.23 2
Nevada............................. 729,098.49 0.63 7
New Jersey......................... 8,611,923.94 7.44 62
New Mexico......................... 126,504.86 0.11 2
New York........................... 19,314,778.08 16.70 134
North Carolina..................... 589,412.69 0.51 10
Ohio............................... 3,900,426.17 3.37 40
Oregon............................. 498,628.47 0.43 5
Pennsylvania....................... 12,089,832.42 10.45 144
Rhode Island....................... 264,500.00 0.23 3
South Carolina..................... 647,203.09 0.56 8
Texas.............................. 327,986.38 0.28 6
Utah............................... 1,880,837.02 1.63 15
Virginia........................... 1,832,244.92 1.58 8
Washington......................... 3,759,212.05 3.25 32
Wisconsin.......................... 1,110,197.06 0.96 13
---------------- ------ ---
Totals............. $ 115,690,188.57 100.00% 982
================ ====== ===
S-38
<PAGE>
The following table sets forth the Original Combined Loan-to-Value Ratios
(as defined below) of the Sub-Pool 2 Initial Mortgage Loans as of the Cut-off
Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
ORIGINAL COMBINED LOAN-TO-VALUE RATIO BALANCE BALANCE LOANS
- ------------------------------------- --------- ---------- ---------
10.01% - 15.00%......................... $ 27,500.00 0.02% 1
20.01% - 25.00%......................... 30,000.00 0.03 1
30.01% - 35.00%......................... 424,461.87 0.37 2
35.01% - 40.00%......................... 389,652.00 0.34 7
40.01% - 45.00%......................... 890,928.26 0.77 7
45.01% - 50.00%......................... 1,506,548.95 1.30 16
50.01% - 55.00%......................... 471,657.52 0.41 6
55.01% - 60.00%......................... 3,320,504.02 2.87 31
60.01% - 65.00%......................... 5,262,693.65 4.55 38
65.01% - 70.00%......................... 9,278,956.65 8.02 67
70.01% - 75.00%......................... 9,549,588.85 8.25 90
75.01% - 80.00%......................... 29,746,760.89 25.71 264
80.01% - 85.00%......................... 25,755,301.21 22.26 212
85.01% - 90.00%......................... 28,504,386.63 24.64 236
90.01% - 93.00%......................... 531,248.07 0.46 4
---------------- ------ ---
Totals........................... $ 115,690,188.57 100.00% 982
================ ====== ===
The original "Loan-To-Value Ratios" shown on the previous table are equal,
with respect to each Sub-Pool 2 Initial Mortgage Loan, to (i) the principal
balance of such Sub-Pool 2 Initial Mortgage Loan at the date of origination,
divided by (ii) the Collateral Value of the related Mortgaged Property.
S-39
<PAGE>
The following table sets forth the Mortgage Rates borne by the Mortgage
Notes relating to the Sub-Pool 2 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MORTGAGE RATES BALANCE BALANCE LOANS
-------------- --------- --------- ---------
6.750 - 6.999%.............. $ 5,687,929.66 4.92% 39
7.000 - 7.249%.............. 6,740,828.79 5.83 43
7.250 - 7.499%.............. 1,366,883.37 1.18 9
7.500 - 7.749%.............. 732,808.09 0.63 7
7.750 - 7.999%.............. 1,169,607.23 1.01 10
8.000 - 8.249%.............. 445,747.40 0.39 5
8.250 - 8.499%.............. 1,897,315.80 1.64 15
8.500 - 8.749%.............. 2,910,898.62 2.52 29
8.750 - 8.999%.............. 3,613,115.79 3.12 27
9.000 - 9.249%.............. 2,792,348.45 2.41 20
9.250 - 9.499%.............. 4,777,912.31 4.13 36
9.500 - 9.749%.............. 7,407,860.45 6.40 57
9.750 - 9.999%.............. 10,528,443.63 9.10 87
10.000 - 10.249%.............. 8,146,569.32 7.04 66
10.250 - 10.499%.............. 7,514,224.01 6.49 66
10.500 - 10.749%.............. 9,657,774.82 8.35 89
10.750 - 10.999%.............. 8,875,339.92 7.67 77
11.000 - 11.249%.............. 7,031,155.68 6.08 65
11.250 - 11.499%.............. 6,579,817.68 5.69 53
11.500 - 11.749%.............. 2,883,902.09 2.49 24
11.750 - 11.999%.............. 2,903,344.07 2.51 25
12.000 - 12.249%.............. 2,650,660.69 2.29 27
12.250 - 12.499%.............. 2,516,786.68 2.18 24
12.500 - 12.749%.............. 2,402,600.13 2.08 24
12.750 - 12.999%.............. 2,906,121.01 2.51 41
13.000 - 13.249%.............. 359,049.67 0.31 5
13.250 - 13.499%.............. 241,470.10 0.21 2
13.500 - 13.749%.............. 674,092.20 0.58 7
13.750 - 13.999%.............. 275,580.91 0.24 3
---------------- ------ ---
Totals................. $ 115,690,188.57 100.00% 982
================ ====== ===
S-40
<PAGE>
The following table sets forth the number of Remaining Months to Maturity
of the Sub-Pool 2 Initial Mortgage Loans as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
REMAINING MONTHS TO MATURITY BALANCE BALANCE LOANS
- ---------------------------- --------- ---------- --------
109 - 120.99.................. $ 51,153.82 0.04% 1
121 - 132.99.................. 76,356.30 0.07 1
169 - 180.99.................. 226,653.88 0.20 4
229 - 240.99.................. 404,561.26 0.35 7
289 - 300.99.................. 1,800,585.17 1.56 24
301 - 312.99.................. 14,582,101.88 12.60 101
337 - 348.99.................. 510,266.28 0.44 4
349 - 357.99.................. 6,837,990.11 5.91 61
358 - 358.99.................. 28,211,327.11 24.38 241
359 - 359.99.................. 45,915,045.67 39.69 386
360 .......................... 17,074,147.09 14.76 152
---------------- ------ ---
Totals.................. $ 115,690,188.57 100.00% 982
================ ====== ===
The following tables set forth the distribution of the Sub-Pool 2 Initial
Mortgage Loans by Month of Next Rate Adjustment as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
REMAINING MONTHS TO MATURITY BALANCE BALANCE LOANS
- ---------------------------- --------- ---------- --------
October 1997.................... $ 136,547.38 0.63% 3
November 1997................... 511,782.94 2.37 6
December 1997................... 794,427.28 3.67 8
January 1998.................... 2,104,469.93 9.72 17
February 1998................... 3,027,775.04 13.99 19
March 1998...................... 1,298,731.06 6.00 12
April 1998...................... 1,132,263.24 5.23 6
May 1998........................ 2,358,243.02 10.90 20
June 1998....................... 604,705.99 2.79 6
July 1998....................... 2,404,347.22 11.11 16
August 1998..................... 3,282,919.47 15.17 22
September 1998.................. 3,987,520.56 18.42 31
--------------- ------ ---
Totals........... $ 21,643,733.13 100.00% 166
=============== ====== ===
S-41
<PAGE>
SUB-POOL 2
PERCENT BY NUMBER OF
MONTH OF NEXT RATE ADJUSTMENT PRINCIPAL PRINCIPAL MORTGAGE
FOR SIX-MONTH LIBOR LOANS BALANCE BALANCE LOANS
- ----------------------------- --------- ---------- ----------
October 1997.................. $ 434,181,23 0.46% 4
November 1997................. 501,822.04 0.53 3
December 1997................. 672,303.93 0.72 6
January 1998.................. 6,353,257.82 6.76 42
February 1998................. 11,147,960.08 11.85 90
March 1998.................... 3,804,252.71 4.05 30
January 1999.................. 98,407.86 0.10 2
February 1999................. 200,628.48 0.21 3
March 1999.................... 497,912.72 0.53 2
April 1999.................... 464,098.47 0.49 5
May 1999...................... 901,378.17 0.96 6
June 1999..................... 2,677,816.99 2.85 26
July 1999..................... 20,992,072.89 22.32 194
August 1999................... 32,315,144.96 34.36 280
September 1999................ 12,985,217.09 13.81 123
--------------- ------ ---
Totals......... $ 94,046,455.44 100.00% 816
=============== ====== ===
The following tables set forth the distribution of the Gross Margins set
forth in the Mortgage Notes relating to the Sub-Pool 2 Initial Mortgage Loans as
of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
GROSS MARGIN FOR PRINCIPAL PRINCIPAL MORTGAGE
ONE-YEAR U.S. TREASURY LOANS BALANCE BALANCE LOANS
- ---------------------------- --------- ----------- ----------
2.750 - 2.999%................ $ 16,510,197.17 76.28% 127
3.750 - 3.999%................ 419,500.00 1.94 2
5.000 - 5.249%................ 269,006.36 1.24 2
5.250 - 5.499%................ 440,943.26 2.04 5
5.500 - 5.749%................ 262,661.86 1.21 2
5.750 - 5.999%................ 496,468.63 2.29 4
6.000 - 6.249%................ 732,919.39 3.39 5
6.250 - 6.499%................ 811,713.60 3.75 6
6.500 - 6.749%................ 631,480.83 2.92 5
6.750 - 6.999%................ 555,784.59 2.57 4
7.250 - 7.499%................ 128,080.00 0.59 1
7.500 - 7.749%................ 384,977.44 1.78 3
--------------- ------ ---
Totals................... $ 21,643,733.13 100.00% 166
=============== ====== ===
S-42
<PAGE>
SUB-POOL 2
PERCENT BY NUMBER OF
GROSS MARGIN FOR PRINCIPAL PRINCIPAL MORTGAGE
SIX-MONTH LIBOR LOANS BALANCE BALANCE LOANS
- --------------------- --------- ---------- ----------
3.500 - 3.749%.......... $ 316,690.04 0.34% 2
3.750 - 3.999%.......... 1,070,522.28 1.14 9
4.000 - 4.249%.......... 188,454.83 0.20 2
4.250 - 4.499%.......... 1,048,314.50 1.11 6
4.500 - 4.749%.......... 2,785,711.59 2.96 26
4.750 - 4.999%.......... 2,225,944.60 2.37 15
5.000 - 5.249%.......... 6,695,775.01 7.12 57
5.250 - 5.499%.......... 5,771,607.46 6.14 45
5.500 - 5.749%.......... 4,458,259.58 4.74 45
5.750 - 5.999%.......... 14,570,428.53 15.49 120
6.000 - 6.249%.......... 7,140,819.32 7.59 67
6.250 - 6.499%.......... 7,442,964.14 7.91 64
6.500 - 6.749%.......... 8,490,300.17 9.03 71
6.750 - 6.999%.......... 8,216,339.57 8.74 61
7.000 - 7.249%.......... 3,340,375.18 3.55 32
7.250 - 7.499%.......... 4,777,393.66 5.08 45
7.500 - 7.749%.......... 9,182,583.58 9.76 93
7.750 - 7.999%.......... 978,313.63 1.04 8
8.000 - 8.249%.......... 1,320,131.93 1.40 11
8.250 - 8.499%.......... 1,380,438.42 1.47 13
8.500 - 8.749%.......... 2,299,987.42 2.45 20
8.750 - 8.999%.......... 291,200.00 0.31 3
9.000 - 9.249%.......... 53,900.00 0.06 1
--------------- ------ ---
Totals....... $ 94,046,455.44 100.00% 816
=============== ====== ===
S-43
<PAGE>
The following tables set forth the distribution of the Maximum Mortgage
Rates set forth in the Mortgage Notes relating to the Sub-Pool 2 Initial
Mortgage Loans as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
MAXIMUM MORTGAGE RATES FOR PRINCIPAL PRINCIPAL MORTGAGE
ONE-YEAR U.S. TREASURY LOANS BALANCE BALANCE LOANS
- ---------------------------- --------- ----------- ---------
12.750 -- 12.999% ........ $ 5,687,929.66 26.28% 39
13.000 -- 13.249% ........ 6,332,828.79 29.26 42
13.250 -- 13.499% ........ 1,366,883.37 6.32 9
13.500 -- 13.749% ........ 901,463.20 4.16 11
13.750 -- 13.999% ........ 1,141,674.18 5.27 10
14.000 -- 14.249% ........ 642,774.12 2.97 6
14.250 -- 14.499% ........ 821,485.50 3.80 11
14.500 -- 14.749% ........ 317,858.35 1.47 3
14.750 -- 14.999% ........ 457,443.22 2.11 5
15.000 -- 15.249% ........ 199,693.67 0.92 1
15.250 -- 15.499% ........ 221,037.08 1.02 3
15.500 -- 15.749% ........ 944,558.71 4.36 7
15.750 -- 15.999% ........ 791,613.70 3.66 4
16.000 -- 16.249% ........ 381,331.96 1.76 3
16.250 -- 16.499% ........ 757,147.80 3.50 5
16.500 -- 16.749% ........ 162,053.59 0.75 2
16.750 -- 16.999% ........ 116,000.00 0.54 1
17.000 -- 17.249% ........ 328,456.23 1.52 3
17.250 -- 17.499% ........ 71,500.00 0.33 1
--------------- ------ ---
Totals ......... $ 21,643,733.13 100.00% 166
=============== ====== ===
S-44
<PAGE>
SUB-POOL 2
PERCENT BY NUMBER OF
MAXIMUM MORTGAGE RATES FOR PRINCIPAL PRINCIPAL MORTGAGE
SIX-MONTH LIBOR LOANS BALANCE BALANCE LOANS
- --------------------------- --------- ---------- ---------
13.000 - 13.249% ............ $ 408,000.00 0.43% 1
13.250 - 13.499% ............ 109,490.04 0.12 1
13.500 - 13.749% ............ 92,133.26 0.10 1
13.750 - 13.999% ............ 86,700.00 0.09 1
14.000 - 14.249% ............ 410,796.88 0.44 4
14.250 - 14.499% ............ 1,034,686.15 1.10 6
14.500 - 14.749% ............ 1,812,410.53 1.93 14
14.750 - 14.999% ............ 3,187,568.11 3.39 22
15.000 - 15.249% ............ 2,592,654.78 2.76 19
15.250 - 15.499% ............ 4,737,179.07 5.04 35
15.500 - 15.749% ............ 6,784,767.39 7.21 53
15.750 - 15.999% ............ 9,817,105.94 10.44 84
16.000 - 16.249% ............ 7,765,237.36 8.26 63
16.250 - 16.499% ............ 6,576,772.37 6.99 59
16.500 - 16.749% ............ 9,429,451.85 10.02 86
16.750 - 16.999% ............ 8,588,401.42 9.13 74
17.000 - 17.249% ............ 6,702,699.45 7.13 62
17.250 - 17.499% ............ 6,508,317.68 6.92 52
17.500 - 17.749% ............ 2,472,377.70 2.63 21
17.750 - 17.999% ............ 2,903,344.07 3.09 25
18.000 - 18.249% ............ 2,650,660.69 2.82 27
18.250 - 18.499% ............ 2,516,786.68 2.67 24
18.500 - 18.749% ............ 2,402,600.13 2.55 24
18.750 - 18.999% ............ 2,906,121.01 3.09 41
19.000 - 19.250% ............ 1,550,192.88 1.65 17
--------------- ------ ---
Totals ............... $ 94,046,455.44 100.00% 816
=============== ====== ===
S-45
<PAGE>
The following tables set forth the distribution of Minimum Mortgage Rates
set forth in the Mortgage Notes relating to the Sub-Pool 2 Initial Mortgage
Loans as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
MINIMUM MORTGAGE RATES FOR PRINCIPAL PRINCIPAL MORTGAGE
ONE-YEAR U.S. TREASURY LOANS BALANCE BALANCE LOANS
- ---------------------------- --------- ---------- ----------
No Minimum Rate.................. $ 16,510,197.17 76.28% 127
7.250 - 7.499%................. 258,300.00 1.19 1
7.500 - 7.749%................. 161,200.00 0.75 1
8.500 - 8.749%................. 283,200.00 1.31 2
8.750 - 8.999%................. 457,443.22 2.11 5
9.000 - 9.249%................. 199,693.67 0.92 1
9.250 - 9.499%................. 221,037.08 1.02 3
9.500 - 9.749%................. 944,558.71 4.36 7
9.750 - 9.999%................. 791,613.70 3.66 4
10.000 - 10.249%................. 381,331.96 1.76 3
10.250 - 10.499%................. 757,147.80 3.50 5
10.500 - 10.749%................. 162,053.59 0.75 2
10.750 - 10.999%................. 116,000.00 0.54 1
11.000 - 11.249%................. 328,456.23 1.52 3
11.250 - 11.499%................. 71,500.00 0.33 1
--------------- ------ ---
Totals.................... $ 21,643,733.13 100.00% 166
=============== ====== ===
S-46
<PAGE>
SUB-POOL 2
PERCENT BY NUMBER OF
MINIMUM MORTGAGE RATES FOR PRINCIPAL PRINCIPAL MORTGAGE
SIX-MONTH LIBOR LOANS BALANCE BALANCE LOANS
- -------------------------- --------- --------- --------
7.000 - 7.249%............... $ 408,000.00 0.43% 1
7.250 - 7.499%............... 166,190.04 0.18 2
7.500 - 7.749%............... 812,255.35 0.86 8
7.750 - 7.999%............... 1,197,641.41 1.27 9
8.000 - 8.249%............... 1,907,032.85 2.03 16
8.250 - 8.499%............... 4,116,624.72 4.38 28
8.500 - 8.749%............... 5,925,989.56 6.30 43
8.750 - 8.999%............... 9,915,715.68 10.54 81
9.000 - 9.249%............... 6,434,631.40 6.84 53
9.250 - 9.499%............... 6,900,647.13 7.34 61
9.500 - 9.749%............... 10,664,445.42 11.34 98
9.750 - 9.999%............... 9,315,443.39 9.91 79
10.000 - 10.249%............... 6,630,427.58 7.05 61
10.250 - 10.499%............... 6,802,877.35 7.23 52
10.500 - 10.749%............... 2,516,514.68 2.68 22
10.750 - 10.999%............... 3,771,965.19 4.01 33
11.000 - 11.249%............... 4,670,074.03 4.97 40
11.250 - 11.499%............... 3,197,392.75 3.40 32
11.500 - 11.749%............... 3,020,635.85 3.21 27
11.750 - 11.999%............... 3,288,474.88 3.50 45
12.000 - 12.249%............... 838,932.97 0.89 10
12.250 - 12.499%............... 540,970.10 0.58 4
12.500 - 12.749%............... 727,992.20 0.77 8
12.750 - 12.999%............... 275,580.91 0.29 3
--------------- ------ ---
Totals.................. $ 94,046,455.44 100.00% 816
=============== ====== ===
S-47
<PAGE>
The following table sets forth the distribution of the Sub-Pool 2 Initial
Mortgage Loans by Underwriting Class as of the Cut-off Date:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
UNDERWRITING CLASS BALANCE BALANCE LOANS
------------------ --------- ---------- ---------
AA................................... $ 9,299,234.15 8.04% 71
A.................................... 16,510,197.17 14.27 127
ANIV................................. 22,461,238.76 19.42 162
I.................................... 25,861,926.73 22.35 227
II................................... 10,099,287.08 8.73 104
IIB.................................. 509,241.29 0.44 4
III.................................. 9,309,568.44 8.05 74
SE................................... 4,674,183.94 4.04 32
IV................................... 14,870,592.57 12.85 163
V.................................... 2,094,718.44 1.81 18
---------------- ------ ---
Totals................ $ 115,690,188.57 100.00% 982
================ ====== ===
The following table sets forth the Number of Months Since Origination of
the Sub-Pool 2 Initial Mortgage Loans:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
NUMBER OF MONTHS SINCE ORIGINATION BALANCE BALANCE LOANS
- ---------------------------------- --------- ---------- ---------
0.......................... $ 17,273,797.09 14.93% 156
0.01 - 1.......................... 46,013,670.67 39.77 388
1.01 - 2.......................... 28,494,782.38 24.63 245
2.01 - 12.......................... 7,116,081.50 6.15 64
12.01 - 24.......................... 281,659.76 0.24 2
36.01 - 48.......................... 3,748,807.95 3.24 26
48.01 - 60.......................... 11,148,362.84 9.64 81
60.01 - 72.......................... 1,613,026.38 1.40 20
---------------- ------ ---
Totals........................ $ 115,690,188.57 100.00% 982
================ ====== ===
The following table sets forth the Property Types of the Sub-Pool 2 Initial
Mortgage Loans:
SUB-POOL 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
PROPERTY TYPES BALANCE BALANCE LOANS
-------------- --------- ---------- --------
Single Family (attached/detached).... $ 96,057,145.32 83.03% 815
Condominium.......................... 2,393,990.16 2.07 30
Two-to-Four Family................... 13,598,474.94 11.75 104
Planned Unit Development............. 2,702,013.01 2.34 18
Manufactured Homes................... 938,565.14 0.81 15
---------------- ------ ---
Totals................ $ 115,690,188.57 100.00% 982
================ ====== ===
S-48
<PAGE>
CONVEYANCE OF SUB-POOL 2 SUBSEQUENT MORTGAGE LOANS AND THE SUB-POOL 2
PRE-FUNDING ACCOUNT
Under the Pooling Agreement, following the initial issuance of the
Certificates, the Depositor has committed to sell, and the Trust Fund will be
obligated to purchase from the Depositor, on or before November 21, 1997,
subject to the availability thereof, additional conventional, adjustable-rate
residential Mortgage Loans (the "Sub-Pool 2 Subsequent Mortgage Loans", together
with the Sub-Pool 1 Subsequent Mortgage Loans, the "Subsequent Mortgage Loans")
secured by first liens on Single Family Properties which will be originated and
underwritten or purchased and re-underwritten by the Depositor. In each case the
underwriting will be performed in accordance with the criteria set forth herein
under "The Depositor--Underwriting Criteria--Sub-Pool 2". Sub-Pool 2 Subsequent
Mortgage Loans will be transferred to the Trust Fund pursuant to Sub-Pool 2
Transfer Instruments (the "Sub-Pool 2 Transfer Instruments", together with the
Sub-Pool 1 Transfer Instruments, the "Subsequent Transfer Instruments") between
the Depositor and the Trustee. In connection with the purchase of Sub-Pool 2
Subsequent Mortgage Loans on such dates of transfer (the "Sub-Pool 2 Transfer
Dates", together with the Sub-Pool 1 Transfer Dates, the "Subsequent Transfer
Dates"), the Trust Fund will be required to pay to the Depositor from amounts on
deposit in the Sub-Pool 2 Pre-Funding Account a cash purchase price of 100% of
the principal balance thereof. The Depositor will designate the close of
business on the day prior to the Sub-Pool 2 Transfer Date as the cut-off date
(the "Sub-Pool 2 Subsequent Cut-off Date", together with the Sub-Pool 1
Subsequent Cut-off Date, the "Subsequent Cut-off Dates") with respect to the
related Sub-Pool 2 Subsequent Mortgage Loans purchased on such date and, as a
result, the Trust Fund will not be required to pay accrued interest with respect
thereto. Therefore, the aggregate principal balance of Sub-Pool 2 after the
Closing Date will increase by an amount equal to the aggregate principal balance
of the Sub-Pool 2 Subsequent Mortgage Loans so purchased and the amount in the
Sub-Pool 2 Pre-Funding Account will decrease accordingly.
The Trustee will establish a Pre-Funding Account (the "Sub-Pool 2
Pre-Funding Account", together with the Sub-Pool 1 Pre-Funding Account, the
"Pre-Funding Accounts") into which it will deposit upon receipt from the
Depositor $69,619,200 (the "Original Sub-Pool 2 Pre-Funded Amount", together
with the Original Sub-Pool 1 Pre-Funded Amount, the "Original Pre-Funded
Amounts") to be used to purchase Sub-Pool 2 Subsequent Mortgage Loans. The
Original Sub-Pool 2 Pre-Funded Amount will be reduced during the Funding Period
by the amount thereof used to purchase Sub-Pool 2 Subsequent Mortgage Loans in
accordance with the Pooling Agreement (on any date of determination, the
Original Sub-Pool 2 Pre-Funded Amount as so reduced, the "Sub-Pool 2 Pre-Funded
Amount", together with the Sub-Pool 1 Pre-Funded Amount, the "Pre-Funded
Amounts"). During the period (the "Sub-Pool 2 Funding Period", together with the
Sub-Pool 1 Funding Period, the "Funding Periods") from the Closing Date until
the earlier of (i) the date on which the amount on deposit in the Sub-Pool 2
Pre-Funding Account is zero and (ii) November 21, 1997, the Sub-Pool 2
Pre-Funded Amount will be maintained in the Sub-Pool 2 Pre-Funding Account.
Any conveyance of Sub-Pool 2 Subsequent Mortgage Loans on a Sub-Pool 2
Subsequent Transfer Date is subject to certain conditions including, but not
limited to: (a) each such Subsequent Mortgage Loan must satisfy the
representations and warranties specified in the Sub-Pool 2 Subsequent Transfer
Instrument and the Pooling Agreement; (b) the Depositor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (c) the Depositor will deliver certain
opinions of counsel with respect to the validity of the conveyance of such
Subsequent Mortgage Loans; (d) as of the respective Subsequent Cut-off Date the
Sub-Pool 2 Subsequent Mortgage Loans will satisfy the following criteria: (i)
such Sub-Pool 2 Subsequent Mortgage Loan may not be 30 or more days
contractually delinquent as of the related Sub-Pool 2 Subsequent Cut-off Date;
(ii) the original term to maturity of such Sub-Pool 2 Subsequent Mortgage Loan
will not be less than 180 months and will not exceed 360 months; (iii) such
Subsequent Mortgage Loan may not provide for negative amortization; (iv) such
Subsequent Mortgage Loan will have a Gross Margin not less than 2.75%; (v) such
Subsequent Mortgage Loan will be underwritten in accordance with the criteria
set forth under "The Depositor--Underwriting Criteria--Sub-Pool 2" herein; (vi)
such Subsequent Mortgage Loan will have been serviced by the Servicer since
origination or purchase by the Depositor; (vii) such Subsequent Mortgage Loan
will not have a Loan-to-Value Ratio greater than 91%; (viii) such Subsequent
Mortgage Loan will have a Maximum Mortgage Rate not less than 13.50%; and (ix)
such Subsequent Mortgage Loans will have (A) as of the end of the Sub-Pool 2
Funding Period, a weighted average number of months since origination of not
over 4 months and (B) not over 20% by aggregate principal balance with a first
payment date in January 1998. In addition, following the purchase of any
Sub-Pool 2 Subsequent Mortgage Loan by the Trust Fund,
S-49
<PAGE>
the Sub-Pool 2 Mortgage Loans (including the Sub-Pool 2 Subsequent Mortgage
Loans) as of the end of the Sub-Pool 2 Funding Period will: (i) have a weighted
average Gross Margin of at least 5.27% and a weighted average coupon of at least
9.47%; (ii) have a weighted average remaining term to stated maturity of not
more than 356 months and not less than 348 months; (iii) have a weighted average
Loan-to-Value Ratio of not more than 83%; (iv) have no Sub-Pool 2 Mortgage Loan
with a principal balance in excess of $850,000; (v) not have in excess of 10% by
aggregate principal balance of Sub-Pool 2 Mortgage Loans secured by non-owner
occupied Mortgaged Properties; (vi) not have a concentration of Mortgaged
Properties in a single zip code in excess of 5% by aggregate principal balance
of Sub-Pool 2 Mortgage Loans; (vii) not have in excess of 6% by aggregate
principal balance of Sub-Pool 2 Mortgage Loans secured by Mortgaged Properties
that are condominiums; (viii) have at least 76% by aggregate principal balance
of Sub-Pool 2 Mortgage Loans secured by fee simple interests in attached or
detached Single Family Properties (including units in planned unit
developments); (ix) not be secured by Multifamily Properties; (x) not be secured
by Mixed Use Properties; and (xi) not have in excess of 5% by aggregate
principal balance of the Sub-Pool 2 Mortgage Loans secured by Manufactured
Homes. In the sole discretion of the Certificate Insurer, Sub-Pool 2 Subsequent
Mortgage Loans with characteristics varying from those set forth in this
paragraph may be purchased by the Trust Fund; provided, however, that the
addition of such Sub-Pool 2 Mortgage Loans will not materially affect the
aggregate characteristics of Sub-Pool 2.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
DELAY IN DISTRIBUTIONS
The effective yield to the Class 1A Certificateholders will be slightly
lower than the yield otherwise produced by the related Class 1A Pass-Through
Rate because the distribution of such interest will not be made until the 25th
day (or, if such day is not a Business Day, on the first Business Day
thereafter) of the month following the month in which interest accrues on the
Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay). A "Business Day" is any day other than
Saturday or Sunday, or a day on which banking institutions in the States of New
York, Illinois or New Jersey are authorized or obligated by law or executive
order to be closed. See "Description of the Certificates" herein.
PREPAYMENT CONSIDERATIONS AND RISKS
Substantially all of the Mortgage Loans may be prepaid by the Mortgagors at
any time without a prepayment penalty. Any prepayment charges collected shall be
retained by the Servicer.
Interest shortfalls on the Mortgage Loans due to principal prepayments
("Principal Prepayments") and curtailments ("Curtailments") will be covered to
the extent described herein and in the Prospectus by payments of Compensating
Interest by the Servicer and any shortfalls not covered by such payments that
would otherwise be borne by the Class A Certificates will be covered by
distributions of Excess Spread from the related Sub-Pool, Net Excess Spread and
Excess Principal from the other Sub-Pool (prior to the related Cross-Over Date),
any amounts withdrawn from the related Reserve Account and payments pursuant to
the Certificate Insurance Policy, subject to the limitations described herein.
Because in the absence of such shortfalls the Excess Spread will be, prior to
the related Cross-Over Date, used to accelerate payments of principal on the
related Class A Certificates, and in certain circumstances, the Class A
Certificates with respect to the other Sub-Pool, application of Excess Spread to
cover any interest shortfalls will reduce accelerated payments of principal to
the Class A Certificates.
To the extent that the Original Pre-Funded Amount with respect to a
Sub-Pool has not been fully applied to the purchase of related Subsequent
Mortgage Loans by the Trust Fund by the end of the related Funding Period, the
Holders of the related Class A Certificates will receive, pro rata, a prepayment
of principal in an amount equal to (a) the lesser of (i) the Pre-Funded Amount
remaining in the related Pre-Funding Account on the first Remittance Date
following the termination of the Funding Period and (ii) the related outstanding
Class A Principal Balance. Although no assurance can be given, it is anticipated
by the Depositor that the principal amount of Subsequent Mortgage Loans sold to
the Trust Fund will require the application of substantially all of the Original
Pre-Funded Amounts and that there should be no material amount of principal
prepaid to the related Class A Certificateholders from the related Pre-Funding
Account. However, it is unlikely that the Depositor will be able to deliver
Subsequent Mortgage Loans with
S-50
<PAGE>
an aggregate principal balance identical to the related Original Pre-Funded
Amounts, with the result that some prepayment of the related Class A
Certificates will occur on the November 25, 1997 Remittance Date.
In addition, the yield to maturity of the Class A Certificates will depend
on whether, to what extent, and the timing with respect to which, Excess Spread,
Available Transfer Cashflow and Net Excess Principal is used to accelerate
payments of principal on such Class A Certificates. With respect to any
Sub-Pool, on any Remittance Date on which the Overcollateralization Amount
equals the Required Overcollateralization Amount, Excess Spread, Available
Transfer Cashflow and Net Excess Principal will not be applied to accelerate
payments of principal on such Class A Certificates. In addition, on any such
date, distributions in respect of principal to the related Class A Certificates
may only equal that amount necessary to maintain the Required
Overcollateralization Amount with respect to a Sub-Pool, which amount may be
zero, therefore reducing the rate of principal payments allocated to the related
Class A Certificates.
Greater than anticipated prepayments of principal will increase the yield
on Class A Certificates purchased at a price less than par. Greater than
anticipated prepayments of principal will decrease the yield on Class A
Certificates purchased at a price greater than par. The effect on an investor's
yield due to principal prepayments on the Mortgage Loans occurring at a rate
that is faster (or slower) than the rate anticipated by the investor in the
period immediately following the issuance of the Class A Certificates will not
be entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted average life of the Class A Certificates will
also be affected by the amount and timing of delinquencies and defaults on the
Mortgage Loans and the recoveries, if any, on defaulted Mortgage Loans and
foreclosed properties.
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates is directly related to the rate of payments of
principal on the Mortgage Loans in the related Sub-Pool, which may be in the
form of scheduled and unscheduled payments. In particular, a reduction in the
rate of principal payments will occur when interest only vouchers are used to
defer principal payments and interest only payments are made under the Periodic
Payment Loans. In general, when the level of prevailing interest rates for
similar loans significantly declines, the rate of prepayment is likely to
increase, although the prepayment rate is influenced by a number of other
factors, including general economic conditions and homeowner mobility. The rate
of principal payments will in turn be affected by the amortization schedules
(which will change periodically to accommodate adjustments to the Mortgage Rates
on Sub-Pool 2 Mortgage Loans) and by the rate of Principal Prepayments and
Curtailments on the related Mortgage Loans (including, for this purpose,
prepayments resulting from (i) refinancings, (ii) liquidations due to defaults,
casualties and condemnations and (iii) repurchases by the Depositor or the
Servicer). The rate of default on second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions to
related Class A Certificateholders of amounts of principal which would otherwise
be distributed over the remaining terms of the related Mortgage Loans. The
Mortgage Loans may be prepaid by the Mortgagors at any time without a prepayment
penalty and the Mortgagor is required to pay interest only to the date of
prepayment.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Although the Servicer has no obligation to do so, the Servicer may purchase
from the Trust Fund a Mortgage Loan which is delinquent in payment 90 days or
more. The purchase price for such Mortgage Loan will be equal to 100% of the
Principal Balance thereof plus accrued and unpaid interest thereon.
In addition, the Servicer may, at its option, with written notice to the
Certificateholders and the Trustee, purchase from the Trust Fund all of the
outstanding Mortgage Loans and REO Properties, and thus effect the early
retirement of the related Class A Certificates, on any Remittance Date on which
the outstanding aggregate principal balance of the Mortgage Loans is less than
or equal to 5% of the sum of the Original Pool Principal Balance and the
Original Pre-Funded Amounts. See "Pooling Agreement--Termination; Purchase of
Mortgage Loans" herein and "Description of the Certificates--Termination" in the
Prospectus.
S-51
<PAGE>
CLASS 1A CERTIFICATES
PREPAYMENT CONSIDERATIONS
The Class 1A-1 Pass-Through Rate for each Remittance Date will be equal to
the least of (i) One-Month LIBOR plus 0.09% per annum, (ii) the weighted average
of the Mortgage Rates of the Sub-Pool 1 Mortgage Loans minus, with respect to
Sub-Pool 1, the sum of (a) the Servicing Fee Rate, (b) the rate at which the
monthly premium payable to the Certificate Insurer is calculated and (c) the
rate at which the Annual Trustee Expense Amount is calculated and (iii) 10.50%
per annum (the "Class 1A-1 Cap Rate"); provided, however, that on any Remittance
Date on which the Servicer does not exercise its option to purchase the Mortgage
Loans and REO Properties as described under "Pooling Agreement--Termination;
Purchase of the Mortgage Loans" herein, the rate provided in clause (i) will be
One-Month LIBOR plus 0.49% per annum. Disproportionate principal payments
(whether resulting from Principal Prepayments or Curtailments) on Sub-Pool 1
Mortgage Loans having Mortgage Rates higher or lower than the then current Class
1A-1 Pass-Through Rate may also affect the yield on the Class 1A-1 Certificates.
The yield to maturity of the Class 1A-1 Certificates may be lower than that
otherwise produced if disproportionate principal payments (including Principal
Prepayments) are made on Sub-Pool 1 Mortgage Loans having Mortgage Rates that
exceed the Class 1A-1 Pass-Through Rate.
EFFECT OF MORTGAGE LOAN YIELD ON CLASS 1A-1 PASS-THROUGH RATE
The Class 1A-1 Pass-Through Rate is based upon, among other factors as
described above, the value of an index ("One-Month LIBOR") which is different
from the fixed rates applicable to the Sub-Pool 1 Mortgage Loans, as described
under "The Mortgage Pool-Sub-Pool 1" herein. See "Description of the
Certificates- Calculation of One-Month LIBOR" herein. Each Mortgage Loan bears a
fixed rate whereas the Class 1A-1 Pass-Through Rate with respect to Class 1A-1
Certificates adjusts monthly and may be based upon One-Month LIBOR. Because the
Mortgage Rates on the Sub-Pool 1 Mortgage Loans are fixed, such rates will not
change in response to changes in market interest rates. Accordingly, if mortgage
market interest rates or market yields for securities similar to the Class 1A-1
Certificates were to rise, the market value of the Class 1A-1 Certificates may
decline in cases where the Class 1A-1 Pass-Through Rate did not increase
accordingly. One-Month LIBOR may respond to economic and market factors, while
the Mortgage Rate on the Sub-Pool 1 Mortgage Loans will be fixed. One-Month
LIBOR may increase to a level at which the amount of interest collected on all
the Sub-Pool 1 Mortgage Loans during the related Accrual Period may be
insufficient to pay interest on the Class 1A-1 Certificates at the Class 1A-1
Pass-Through Rate calculated using One-Month LIBOR. The Class 1A-1 Certificates
do not contain any "carry-forward" or "catch-up" feature if the amount of
interest paid is so limited.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement with
respect to Sub-Pool 1 is based on a constant annual rate of prepayment relative
to the then outstanding principal balance of the related Mortgage Loans applied
monthly during the period indicated of the life of the Sub-Pool 1 Mortgage Loan.
The prepayment model does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Sub-Pool 1 Mortgage Loans. The Depositor does not make any representation about
the appropriateness of any prepayment model.
The percentages and weighted average lives in the second through seventh
following tables were determined assuming that (i) scheduled interest and
principal payments (including balloon payments) on the Sub-Pool 1 Mortgage Loans
are received in a timely manner and prepayments of Sub-Pool 1 Mortgage Loans in
full are made at the indicated scenario level (each, a "Prepayment Model") set
forth in the tables; (ii) the Servicer exercises its right of optional
termination described above; (iii) distributions are made on the 25th day of
each calendar month regardless of the day on which the Remittance Date actually
occurs, commencing in October 1997; (iv) the Sub-Pool 1 Mortgage Loans have been
aggregated into five hypothetical Initial Mortgage Loans and four hypothetical
Subsequent Mortgage Loans with the characteristics set forth in the first
following table; (v) losses on the Sub-Pool 1 Mortgage Loans for each Due Period
will be realized in an amount equal to the product of (a) the principal balance
of each hypothetical Sub-Pool 1 Mortgage Loan (prior to giving effect to the
payment of principal received in such Due Period) and (b)
S-52
<PAGE>
one-twelfth of 0.50% (such losses do not separately reduce the principal balance
of a hypothetical Sub-Pool 1 Mortgage Loan but instead are assumed to comprise a
portion of the payment of principal for which liquidation proceeds are not
received); (vi) the sum of the Servicing Fee and fees payable out of the Trust
Fund to the Trustee and the Certificate Insurer, respectively, equals
approximately 0.81% per annum of the scheduled principal balance of the Sub-Pool
1 Mortgage Loans for each Remittance Date; (vii) no interest shortfalls will
arise in connection with prepayment in full of the Sub-Pool 1 Mortgage Loans;
(viii) the initial Class 1A-1 Pass-Through Rate is equal to 5.74625% per annum,
the Class 1A-2 Pass-Through Rate is equal to 6.62% per annum, the Class 1A-3
Pass-Through Rate is equal to 6.69% per annum, the Class 1A-4 Pass-Through Rate
is equal to 7.07% per annum, the Class 1A-5 Pass-Through Rate is equal to 6.90%
per annum, the initial Class 1A-1 Principal Balance is equal to $35,000,000, the
initial Class 1A-2 Principal Balance is equal to $30,500,000, the initial Class
1A-3 Principal Balance is equal to $12,000,000, the initial Class 1A-4 Principal
Balance is equal to $22,027,857, the initial Class 1A-5 Principal Balance is
equal to $21,000,000, (ix) the Class A Principal Remittance Amount with respect
to each of the Class 1A Certificates on each Remittance Date occurring prior to
the Step-Down Date is equal to principal received plus the related Unrecovered
Class A Portion for such Remittance Date and on each Remittance Date occurring
on or after the Step-Down Date is equal to that amount required to reach or
maintain the Required Overcollateralization Amount; (x) the related Excess
Spread is applied in an amount required to reach or maintain the Required
Overcollateralization Amount to reduce the principal balance of the Class 1A
Certificates on each Remittance Date that is prior to the CrossOver Date to the
extent that the amount of such current application plus such amounts applied on
all prior Remittance Dates does not exceed $16,865,382; (xi) each Remittance
Date is deemed to occur before the Cross-Over Date; (xii) the Class 1A
Certificates are purchased on September 25, 1997; (xiii) no Available Funds
Shortfall with respect to Sub-Pool 1 exists and Available Transfer Cashflow and
Net Excess Principal is applied to reach or maintain the Required
Overcollateralization Amount as described in the Pooling Agreement; and (xiv)
the Required Overcollateralization Amount for Sub-Pool 1 is the
Overcollateralization Amount required by the Certificate Insurer at any time as
set forth in the Insurance Agreement with respect to Sub-Pool 1 among the
Depositor, the Servicer, the Certificate Insurer and the Trustee. The third
through eighth following tables assume that there are no delinquencies on the
Sub-Pool 1 Mortgage Loans and that the Sub-Pool 1 Interest Coverage Account has
sufficient funds on deposit to cover shortfalls in interest of the Class 1A
Certificates during the Funding Period attributable to the pre-funding feature.
The "Step-Down Date" will be the Remittance Date following the later to occur of
(i) the thirtieth Remittance Date and (ii) the date on which the then
outstanding Sub-Pool 1 Principal Balance is equal to 50% of the sum of the
Original Sub-Pool 1 Pre-Funded Amount and the Original Sub-Pool 1 Principal
Balance.
In addition to the assumptions listed in the preceding paragraph, the third
through eighth following tables have been prepared assuming that (i) the first
through fifth hypothetical Sub-Pool 1 Mortgage Loans set forth in the first
following table comprise the Sub-Pool 1 Initial Mortgage Loans, (ii) the sixth
through ninth hypothetical Sub-Pool 1 Mortgage Loans set forth in the first
following table comprise the Sub-Pool 1 Subsequent Mortgage Loans and (iii) the
Sub-Pool 1 Subsequent Mortgage Loans are purchased by November 21, 1997,
resulting in no mandatory prepayment of the Class 1A Certificates on November
25, 1997.
<TABLE>
<CAPTION>
SUB-POOL 1
HYPOTHETICAL MORTGAGE LOANS
REMAINING
ORIGINAL REMAINING MONTHS TO
MORTGAGE AMORTIZATION AMORTIZATION BALLOON
INTEREST TERM TERM PAYMENT
PRINCIPAL BALANCE RATE (IN MONTHS) (IN MONTHS) (IN MONTHS)
----------------- -------- ------------ ------------ -----------
Sub-Pool 1 Initial Mortgage Loans:
<S> <C> <C> <C> <C>
$ 26,515,373.71........................................... 11.843% 360 359 179
$ 18,101,183.67........................................... 11.593% 179 178 N/A
$ 12,447,878.90........................................... 11.276% 239 237 N/A
$ 15,514,755.25........................................... 11.311% 352 351 N/A
$ 2,691,313.28........................................... 11.241% 118 114 N/A
</TABLE>
S-53
<PAGE>
<TABLE>
<CAPTION>
Subsequent Mortgage Loans (first subsequent
transfer balance as of October 1, 1997):
<S> <C> <C> <C> <C>
$ 8,174,963.73 .......................................... 11.843% 360 360 180
$ 15,031,710.77 .......................................... 11.403% 252 252 N/A
<CAPTION>
Subsequent Mortgage Loans (second subsequent
transfer balance as of November 1, 1997):
<S> <C> <C> <C> <C>
$ 8,174,963.73 .......................................... 11.843% 360 360 180
$ 15,031,710.77 .......................................... 11.403% 252 252 N/A
</TABLE>
Since the following tables were prepared on the basis of the assumptions in
the preceding paragraphs, there are discrepancies between the characteristics of
the actual Sub-Pool 1 Mortgage Loans and the characteristics of the mortgage
loans assumed in preparing such tables. Any such discrepancy may have an effect
upon the percentages of the Principal Balance outstanding of each Class of the
Class 1A Certificates and the weighted average life of the Class 1A Certificates
set forth in the tables. In addition, since the actual Sub-Pool 1 Mortgage Loans
and the Trust Fund have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Class 1A Certificates may be made earlier or later than as indicated in the
tables.
It is not likely that the Sub-Pool 1 Mortgage Loans will prepay to maturity
at any of the Prepayment Models specified in the tables below or that all
Sub-Pool 1 Mortgage Loans will prepay at the same rate. In addition, the diverse
remaining terms to maturity of the Sub-Pool 1 Mortgage Loans (which include
recently originated Sub-Pool 1 Mortgage Loans) could produce slower or faster
distributions of principal than are indicated in the following tables at the
Prepayment Model specified even if the weighted average of the remaining terms
to maturity of the Sub-Pool 1 Mortgage Loans equals those assumed.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
The model used in this Prospectus Supplement with respect to the Class 1A
Certificates is the prepayment assumption (the "Prepayment Assumption") which
represents the assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. With respect to the Class 1A Certificates, a 100% Prepayment
Assumption assumes a constant prepayment rate of 2% per annum of the then
outstanding principal balance of such Mortgage Loans in the first month of the
life of the Mortgage Loans and an additional 1.2% per annum in each month
thereafter until the twenty-first month. Beginning in the twenty-first month and
in each month thereafter during the life of the Mortgage Loans, a 100%
Prepayment Assumption assumes a constant prepayment rate of 26% per annum. As
used in the table entitled "Prepayment Scenarios", 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption i.e., no
prepayments. Correspondingly, 100% Prepayment Assumption assumes prepayment
rates equal to 100% of the Prepayment Assumption and so forth. In comparison,
the model used in this Prospectus Supplement with respect to Sub-Pool 2 (a
"Prepayment Model") is based on a Constant Prepayment Rate more fully defined
herein under the caption "Certain Yield and Prepayment Considerations--Class 2A
Certificates--Prepayment Model". A "Constant Prepayment Rate" or "CPR"
represents a constant annual rate of payment relative to the then outstanding
principal balance of the related Mortgage Loans applied monthly during the
indicated portion of the life of the Sub-Pool 2 Mortgage Loan.
PREPAYMENT SCENARIOS
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
---------- ---------- ---------- ---------- ----------
Sub-Pool 1(1) 0% 50% 100% 150% 200%
Sub-Pool 2(2) 0% 14% 28% 42% 56%
- ----------
(1) As a percentage of the Prepayment Assumption.
(2) As a conditional prepayment rate (CPR).
Based on the foregoing assumptions, the following tables indicate the
projected weighted average life of each Class of the Class 1A Certificates.
S-54
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 1A-1
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 1998........................ 78 64 50 36 21
September 25, 1999........................ 73 21 0 0 0
September 25, 2000........................ 68 0 0 0 0
September 25, 2001........................ 62 0 0 0 0
September 25, 2002........................ 56 0 0 0 0
September 25, 2003........................ 50 0 0 0 0
September 25, 2004........................ 44 0 0 0 0
September 25, 2005........................ 40 0 0 0 0
September 25, 2006........................ 35 0 0 0 0
September 25, 2007........................ 30 0 0 0 0
September 25, 2008........................ 24 0 0 0 0
September 25, 2009........................ 16 0 0 0 0
September 25, 2010........................ 7 0 0 0 0
September 25, 2011........................ 0 0 0 0 0
September 25, 2012........................ 0 0 0 0 0
September 25, 2013........................ 0 0 0 0 0
September 25, 2014........................ 0 0 0 0 0
September 25, 2015........................ 0 0 0 0 0
September 25, 2016........................ 0 0 0 0 0
September 25, 2017........................ 0 0 0 0 0
September 25, 2018........................ 0 0 0 0 0
September 25, 2019........................ 0 0 0 0 0
September 25, 2020........................ 0 0 0 0 0
September 25, 2021........................ 0 0 0 0 0
September 25, 2022........................ 0 0 0 0 0
September 25, 2023........................ 0 0 0 0 0
September 25, 2024........................ 0 0 0 0 0
September 25, 2025........................ 0 0 0 0 0
September 25, 2026........................ 0 0 0 0 0
September 25, 2027........................ 0 0 0 0 0
Weighted Average Life (1)(2) years... 6.39 1.38 1.01 0.85 0.75
- ----------
</TABLE>
(1) The weighted average life of a Class 1A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 1A-1 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 1A-1 Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
S-55
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 1A-2
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage......................... 100% 100% 100% 100% 100%
September 25, 1998......................... 100 100 100 100 100
September 25, 1999......................... 100 100 69 17 0
September 25, 2000......................... 100 77 0 0 0
September 25, 2001......................... 100 41 0 0 0
September 25, 2002......................... 100 11 0 0 0
September 25, 2003......................... 100 0 0 0 0
September 25, 2004......................... 100 0 0 0 0
September 25, 2005......................... 100 0 0 0 0
September 25, 2006......................... 100 0 0 0 0
September 25, 2007......................... 100 0 0 0 0
September 25, 2008......................... 100 0 0 0 0
September 25, 2009......................... 100 0 0 0 0
September 25, 2010......................... 100 0 0 0 0
September 25, 2011......................... 96 0 0 0 0
September 25, 2012......................... 29 0 0 0 0
September 25, 2013......................... 0 0 0 0 0
September 25, 2014......................... 0 0 0 0 0
September 25, 2015......................... 0 0 0 0 0
September 25, 2016......................... 0 0 0 0 0
September 25, 2017......................... 0 0 0 0 0
September 25, 2018......................... 0 0 0 0 0
September 25, 2019......................... 0 0 0 0 0
September 25, 2020......................... 0 0 0 0 0
September 25, 2021......................... 0 0 0 0 0
September 25, 2022......................... 0 0 0 0 0
September 25, 2023......................... 0 0 0 0 0
September 25, 2024......................... 0 0 0 0 0
September 25, 2025......................... 0 0 0 0 0
September 25, 2026......................... 0 0 0 0 0
September 25, 2027......................... 0 0 0 0 0
Weighted Average Life (1)(2) years.... 14.87 3.85 2.29 1.77 1.51
</TABLE>
(1) The weighted average life of a Class 1A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 1A-2 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 1A-2 Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
S-56
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 1A-3
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage .......................... 100% 100% 100% 100% 100%
September 25, 1998 .......................... 100 100 100 100 100
September 25, 1999 .......................... 100 100 100 100 21
September 25, 2000 .......................... 100 100 86 0 0
September 25, 2001 .......................... 100 100 0 0 0
September 25, 2002 .......................... 100 100 0 0 0
September 25, 2003 .......................... 100 75 0 0 0
September 25, 2004 .......................... 100 36 0 0 0
September 25, 2005 .......................... 100 29 0 0 0
September 25, 2006 .......................... 100 12 0 0 0
September 25, 2007 .......................... 100 0 0 0 0
September 25, 2008 .......................... 100 0 0 0 0
September 25, 2009 .......................... 100 0 0 0 0
September 25, 2010 .......................... 100 0 0 0 0
September 25, 2011 .......................... 100 0 0 0 0
September 25, 2012 .......................... 100 0 0 0 0
September 25, 2013 .......................... 48 0 0 0 0
September 25, 2014 .......................... 21 0 0 0 0
September 25, 2015 .......................... 0 0 0 0 0
September 25, 2016 .......................... 0 0 0 0 0
September 25, 2017 .......................... 0 0 0 0 0
September 25, 2018 .......................... 0 0 0 0 0
September 25, 2019 .......................... 0 0 0 0 0
September 25, 2020 .......................... 0 0 0 0 0
September 25, 2021 .......................... 0 0 0 0 0
September 25, 2022 .......................... 0 0 0 0 0
September 25, 2023 .......................... 0 0 0 0 0
September 25, 2024 .......................... 0 0 0 0 0
September 25, 2025 .......................... 0 0 0 0 0
September 25, 2026 .......................... 0 0 0 0 0
September 25, 2027 .......................... 0 0 0 0 0
Weighted Average Life (1)(2) years ..... 16.11 7.10 3.38 2.41 1.96
</TABLE>
- ----------
(1) The weighted average life of a Class 1A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 1A-3 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 1A-3 Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
S-57
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 1A-4
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage .......................... 100% 100% 100% 100% 100%
September 25, 1998 .......................... 100 100 100 100 100
September 25, 1999 .......................... 100 100 100 100 100
September 25, 2000 .......................... 100 100 100 67 5
September 25, 2001 .......................... 100 100 93 21 0
September 25, 2002 .......................... 100 100 56 0 0
September 25, 2003 .......................... 100 100 37 0 0
September 25, 2004 .......................... 100 100 27 0 0
September 25, 2005 .......................... 100 100 27 0 0
September 25, 2006 .......................... 100 100 26 0 0
September 25, 2007 .......................... 100 94 0 0 0
September 25, 2008 .......................... 100 82 0 0 0
September 25, 2009 .......................... 100 70 0 0 0
September 25, 2010 .......................... 100 58 0 0 0
September 25, 2011 .......................... 100 48 0 0 0
September 25, 2012 .......................... 100 27 0 0 0
September 25, 2013 .......................... 100 15 0 0 0
September 25, 2014 .......................... 100 0 0 0 0
September 25, 2015 .......................... 95 0 0 0 0
September 25, 2016 .......................... 76 0 0 0 0
September 25, 2017 .......................... 57 0 0 0 0
September 25, 2018 .......................... 40 0 0 0 0
September 25, 2019 .......................... 36 0 0 0 0
September 25, 2020 .......................... 32 0 0 0 0
September 25, 2021 .......................... 28 0 0 0 0
September 25, 2022 .......................... 24 0 0 0 0
September 25, 2023 .......................... 20 0 0 0 0
September 25, 2024 .......................... 14 0 0 0 0
September 25, 2025 .......................... 7 0 0 0 0
September 25, 2026 .......................... 0 0 0 0 0
September 25, 2027 .......................... 0 0 0 0 0
Weighted Average Life (1)(2) years ..... 21.86 13.53 6.20 3.47 2.53
</TABLE>
- ----------
(1) The weighted average life of a Class 1A-4 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 1A-4 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 1A-4 Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
S-58
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 1A-5
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage .......................... 100% 100% 100% 100% 100%
September 25, 1998 .......................... 100 100 100 100 100
September 25, 1999 .......................... 100 100 100 100 100
September 25, 2000 .......................... 100 100 100 100 100
September 25, 2001 .......................... 99 93 87 80 49
September 25, 2002 .......................... 98 85 75 61 0
September 25, 2003 .......................... 96 75 58 36 0
September 25, 2004 .......................... 94 63 42 0 0
September 25, 2005 .......................... 85 38 22 0 0
September 25, 2006 .......................... 76 22 9 0 0
September 25, 2007 .......................... 67 13 0 0 0
September 25, 2008 .......................... 58 7 0 0 0
September 25, 2009 .......................... 50 4 0 0 0
September 25, 2010 .......................... 41 2 0 0 0
September 25, 2011 .......................... 32 1 0 0 0
September 25, 2012 .......................... 0 0 0 0 0
September 25, 2013 .......................... 0 0 0 0 0
September 25, 2014 .......................... 0 0 0 0 0
September 25, 2015 .......................... 0 0 0 0 0
September 25, 2016 .......................... 0 0 0 0 0
September 25, 2017 .......................... 0 0 0 0 0
September 25, 2018 .......................... 0 0 0 0 0
September 25, 2019 .......................... 0 0 0 0 0
September 25, 2020 .......................... 0 0 0 0 0
September 25, 2021 .......................... 0 0 0 0 0
September 25, 2022 .......................... 0 0 0 0 0
September 25, 2023 .......................... 0 0 0 0 0
September 25, 2024 .......................... 0 0 0 0 0
September 25, 2025 .......................... 0 0 0 0 0
September 25, 2026 .......................... 0 0 0 0 0
September 25, 2027 .......................... 0 0 0 0 0
Weighted Average Life (1)(2) years ..... 11.59 7.56 6.43 5.14 3.91
</TABLE>
- ----------
(1) The weighted average life of a Class 1A-5 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 1A-5 Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 1A-5 Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
S-59
<PAGE>
As with fixed-rate obligations generally, the rate of prepayment on a pool
of mortgage loans is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
mortgage loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. The Depositor
makes no representation as to the particular factors that will affect the
prepayment of the Sub-Pool 1 Mortgage Loans, as to the relative importance of
such factors, as to the percentage of the principal balance of the Sub-Pool 1
Mortgage Loans that will be paid as of any date or as to the overall rate of
prepayment on the Sub-Pool 1 Mortgage Loans.
CLASS 2A CERTIFICATES
PREPAYMENT CONSIDERATIONS
The Class 2A Pass-Through Rate for each Remittance Date will be equal to
the least of (i) One-Month LIBOR plus 0.20% per annum, (ii) the weighted average
of the Mortgage Rates of the Sub-Pool 2 Mortgage Loans minus, with respect to
Sub-Pool 2, the sum of (a) the Servicing Fee Rate, (b) the rate at which the
monthly premium payable to the Certificate Insurer is calculated, (c) the rate
at which the Annual Trustee Expense Amount is calculated and (d) 0.50% per annum
and (iii) the weighted average of the Maximum Mortgage Rates of the Sub-Pool 2
Mortgage Loans minus, with respect to Sub-Pool 2, the sum of (a) the Servicing
Fee Rate, (b) the rate at which the monthly premium payable to the Certificate
Insurer is calculated, (c) the rate at which the Annual Trustee Expense Amount
is calculated and (d) 0.50% per annum; provided, that on any Remittance Date on
which the Servicer does not exercise its option to purchase the Mortgage Loans
and REO Properties as described under "Pooling Agreement-Termination; Purchase
of the Mortgage Loans" herein, the rate provided in clause (i) will be One-Month
LIBOR plus 0.60% per annum. Disproportionate principal payments (whether
resulting from Principal Prepayments or Curtailments) on Sub-Pool 2 Mortgage
Loans having Mortgage Rates higher or lower than the then current Class 2A
Pass-Through Rate may also affect the yield on the Class 2A Certificates. The
yield to maturity of the Class 2A Certificates will be lower than that otherwise
produced if disproportionate principal payments (including Principal
Prepayments) are made on Sub-Pool 2 Mortgage Loans having Mortgage Rates that
exceed the Class 2A Pass-Through Rate.
EFFECT OF MORTGAGE LOAN YIELD ON CLASS 2A PASS-THROUGH RATE
The Class 2A Pass-Through Rate is based upon, among other factors as
described above, the value of an index ("One-Month LIBOR") which is different
from the value of the Indices applicable to the Sub-Pool 2 Mortgage Loans, as
described under "The Mortgage Pool-Sub-Pool 2" herein. See "Description of the
Certificates-Calculation of One-Month LIBOR" herein. Each Sub-Pool 2 Mortgage
Loan adjusts annually or semiannually based upon the related Index whereas the
Class 2A Pass-Through Rate on the Class 2A Certificates adjusts monthly and may
be based upon One-Month LIBOR. One-Month LIBOR and the Indices applicable to the
Mortgage Loans may respond differently to economic and market factors, and there
is not necessarily any correlation between them. In addition, the Mortgage Loans
are subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage
Rates. Thus, it is possible, for example, that One-Month LIBOR may rise during
periods in which the Indices on the Mortgage Loans are stable or are falling or
that, even if both One-Month LIBOR and such Indices rise during the same period,
One-Month LIBOR may increase to a level at which the amount of interest
collected on all Sub-Pool 2 Mortgage Loans during the related Accrual Period may
be insufficient to pay interest on the Class 2A Certificates at the Class 2A
Pass-Through Rate calculated using One-Month LIBOR. In such an event, the
resulting interest differential amount will be borne by the Class 2A
Certificates by operation of the Available Funds Cap Rate.
In addition, a number of factors affect the performance of One-Month LIBOR
and may cause One-Month LIBOR to move in a different manner from other indices.
To the extent that One-Month LIBOR may reflect changes in the general level of
interest rates less quickly than other indices, in a period of rising interest
rates, increases in the yield to Class 2A Certificateholders due to such rising
interest rates may occur later than that which would be produced by other
indices, and in a period of declining rates, One-Month LIBOR may remain higher
than other market interest rates.
S-60
<PAGE>
All of the Sub-Pool 2 Mortgage Loans are adjustable-rate mortgage loans
("ARMs"). As is the case with conventional fixed-rate mortgage loans, ARMs may
be subject to a greater rate of principal prepayments in a declining interest
rate environment. For example, if prevailing interest rates were to fall
significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates were to remain constant because the availability of
fixed-rate mortgage loans at competitive interest rates may encourage mortgagors
to refinance their ARMs to "lock in" lower fixed interest rates. The rate of
payments (including prepayments) on pools of mortgage loans is influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. No assurances can be given
as to the rate of prepayments on the Sub-Pool 2 Mortgage Loans in stable or
changing interest rate environments and the Depositor makes no representations
as to the particular factors that will affect the prepayment of the Sub-Pool 2
Mortgage Loans.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. As described above, the Prepayment Model with
respect to Sub-Pool 2 is based on a CPR. The Prepayment Model does not purport
to be either a historical description of the prepayment experience of any pool
of mortgage loans or a prediction of the anticipated rate of prepayment of any
pool of mortgage loans, including the Sub-Pool 2 Mortgage Loans. The Depositor
does not make any representation about the appropriateness of any Prepayment
Model.
The percentages and weighted average lives in the third following table
were determined assuming that (i) scheduled interest and principal payments on
the Sub-Pool 2 Mortgage Loans are received in a timely manner and prepayments of
Sub-Pool 2 Mortgage Loans in full are made at the indicated CPR set forth in the
table entitled "Prepayment Scenarios"; (ii) the Servicer exercises its right of
optional termination on the earliest permissible date as described above; (iii)
distributions are made on the 25th day of each calendar month regardless of the
day on which the Remittance Date actually occurs, commencing in October, 1997;
(iv) the Sub-Pool 2 Mortgage Loans have been aggregated into fourteen
hypothetical Sub-Pool 2 Initial Mortgage Loans and six hypothetical Sub-Pool 2
Subsequent Mortgage Loans with the characteristics set forth in the first and
second following tables; (v) losses on the Sub-Pool 2 Mortgage Loans for each
Due Period will be realized in an amount equal to the product of (a) the
principal balance of each hypothetical Sub-Pool 2 Mortgage Loan (prior to giving
effect to the payment of principal received in such Due Period) and (b)
one-twelfth of 0.50% (such losses do not separately reduce the principal balance
of a hypothetical Sub-Pool 2 Mortgage Loan but instead are assumed to comprise a
portion of the payment of principal for which liquidation proceeds are not
received); (vi) the sum of the Servicing Fee and the fees payable to the Trustee
and the Certificate Insurer, respectively, equals approximately 0.81% per annum
of the scheduled principal balance of the Sub-Pool 2 Mortgage Loans for each
Remittance Date; (vii) no interest shortfalls will arise in connection with
prepayment in full of the Sub-Pool 2 Mortgage Loans; (viii) the initial Class 2A
Pass-Through Rate is equal to 5.85625% per annum and the initial Class 2A
Principal Balance is equal to $179,472,143; (ix) the Class A Principal
Remittance Amount with respect to the Class 2A Certificates on each Remittance
Date occurring prior to the Sub-Pool 2 Step-Down Date is equal to principal
received plus the related Unrecovered Class A Portion for such Remittance Date
and on each Remittance Date occurring on or after the Sub-Pool 2 Step-Down Date
is equal to that amount required to reach or maintain the Required
Overcollateralization Amount; (x) the Excess Spread is applied in an amount
required to reach or maintain the Required Overcollateralization Amount to
reduce the principal balance of the Class 2A Certificates on each Remittance
Date that is prior to the Cross-Over Date to the extent that the amount of such
current application plus such amounts applied on all prior Remittance Dates does
not exceed $19,198,053; (xi) each Remittance Date is deemed to occur before the
Cross-Over Date; (xii) the Class 2A Certificates are purchased on September 25,
1997 (xiii) the One-Year U.S. Treasury Index remains at a constant rate equal to
5.60% and the Six-Month LIBOR Index remains at a constant rate equal to
5.84375%, with respect to any Adjustment Date; and (xiv) no Available Funds
Shortfall with respect to Sub-Pool 2 exists and Available Transfer Cashflow and
Net Excess Principal is applied to reach or maintain the Required
Overcollateralization Amount as described in the Pooling Agreement. The third
following table also assumes that (i) there are no delinquencies on the Sub-Pool
2 Mortgage Loans; (ii) the Sub-Pool 2 Interest Coverage Account has sufficient
funds on deposit to cover shortfalls in interest on the Class 2A Certificates
during the Funding Period attributable to the pre-funding feature; and (iii) the
Required Overcollateralization Amount for each Sub-Pool is the
Overcollateralization Amount required by the Certificate
S-61
<PAGE>
Insurer at any time as set forth in the Insurance Agreement with respect to
Sub-Pool 2 among the Depositor, the Servicer, the Certificate Insurer and the
Trustee.
The "Step-Down Date" will be the Remittance Date following the later to
occur of (i) the thirtieth Remittance Date and (ii) the date on which the then
outstanding Sub-Pool 2 Principal Balance is equal to 50% of the sum of the
Sub-Pool 2 Original Pre-Funded Amount and the Original Sub-Pool 2 Principal
Balance.
In addition to the assumptions listed in the preceding paragraph, the third
following table has been prepared assuming that (i) the first through seventh
hypothetical Sub-Pool 2 Mortgage Loans set forth in the first following table
and the first through seventh hypothetical Sub-Pool 2 Mortgage Loans set forth
in the second following table comprise the Sub-Pool 2 Initial Mortgage Loans,
(ii) the eighth and ninth hypothetical Mortgage Loans set forth in the first
following table and the eighth through eleventh hypothetical Sub-Pool 2 Mortgage
Loans set forth in the second following table comprise the Sub-Pool 2 Subsequent
Mortgage Loans and (iii) the Sub-Pool 2 Subsequent Mortgage Loans are purchased
by November 21, 1997, resulting in no mandatory prepayment of the Class 2A
Certificates on November 25, 1997.
<TABLE>
<CAPTION>
SUB-POOL 2
HYPOTHETICAL ONE-YEAR U.S. TREASURY LOANS
MONTHS ORIGINAL REMAINING
TO MORTGAGE MAXIMUM MINIMUM TERM TO TERM TO
RATE INTEREST GROSS INTEREST INTEREST MATURITY MATURITY
PRINCIPAL BALANCE CHANGE RATE MARGIN RATE RATE (IN MONTHS) (IN MONTHS)
- ----------------- ------ -------- ------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sub-Pool 2 Initial Mortgage Loans:
$ 136,547.38 1 7.811% 2.750% 13.811% 0.000% 360 301
$ 511,782.94 2 7.423% 2.773% 13.423% 0.000% 360 302
$ 794,427.28 3 7.778% 3.009% 13.742% 0.637% 360 305
$ 2,104,469.93 4 9.409% 5.057% 15.210% 6.833% 360 339
$ 3,027,775.04 5 9.572% 5.674% 15.572% 8.350% 360 350
$ 1,298,731.06 6 9.082% 4.954% 14.660% 7.207% 360 347
$13,769,999.50 10 7.096% 2.785% 13.069% 0.000% 358 307
Subsequent Mortgage Loans (first subsequent transfer balance as of October 1,
1997):
$ 1,801,737.74 6 9.786% 5.987% 15.648% 9.648% 360 360
Subsequent Mortgage Loans (second subsequent transfer balance as of November 1,
1997):
$ 1,801,737.74 6 9.786% 5.987% 15.648% 9.648% 360 360
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
HYPOTHETICAL SIX-MONTH LIBOR LOANS
MONTHS ORIGINAL REMAINING
TO MORTGAGE MAXIMUM MINIMUM TERM TO TERM TO
RATE INTEREST GROSS INTEREST INTEREST MATURITY MATURITY
PRINCIPAL BALANCE CHANGE RATE MARGIN RATE RATE (IN MONTHS) (IN MONTHS)
- ----------------- ------ -------- ------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sub-Pool 2 Initial Mortgage Loans:
$ 434,181.23 1 10.937% 6.844% 16.495% 10.495% 360 352
$ 501,822.04 2 10.168% 6.205% 15.873% 9.873% 360 354
$ 672,303.93 3 10.559% 6.921% 16.559% 10.559% 360 357
$ 6,353,257.82 4 9.928% 6.334% 15.872% 9.872% 360 358
$11,147,960.08 5 9.982% 6.365% 15.982% 9.982% 359 358
$ 3,804,252.71 6 9.802% 6.249% 15.752% 9.752% 357 357
$71,132,677.63 23 10.712% 6.192% 16.712% 9.712% 359 358
Subsequent Mortgage Loans (first subsequent transfer balance as of October 1,
1997):
$ 8,042,140.66 6 9.976% 6.359% 15.938% 9.938% 360 360
$24,965,721.60 24 10.712% 6.192% 16.712% 9.712% 360 360
Subsequent Mortgage Loans (second subsequent transfer balance as of November 1,
1997):
$ 8,042,140.66 6 9.976% 6.359% 15.938% 9.938% 360 360
$24,965,721.60 24 10.712% 6.192% 16.712% 9.712% 360 360
</TABLE>
Since the following table was prepared on the basis of the assumptions in
the preceding paragraphs, there are discrepancies between the characteristics of
the actual Sub-Pool 2 Mortgage Loans and the characteristics of the mortgage
loans assumed in preparing such table. Any such discrepancy may have an effect
upon the percentages of the Class 2A Principal Balance outstanding and the
weighted average life of the Class 2A Certificates set forth in the tables. In
addition, since the actual Sub-Pool 2 Mortgage Loans and the Trust Fund have
characteristics which differ from those assumed in preparing the table set forth
below, the distributions of principal on the Class 2A Certificates may be made
earlier or later than as indicated in the table.
It is not likely that the Sub-Pool 2 Mortgage Loans will prepay to maturity
at the Prepayment Model specified in the table below or that all Sub-Pool 2
Mortgage Loans will prepay at the same rate. In addition, the diverse remaining
terms to maturity of the Sub-Pool 2 Mortgage Loans (which include recently
originated Sub-Pool 2 Mortgage Loans) could produce slower or faster
distributions of principal than are indicated in the table at the various
percentages of the Prepayment Model specified even if the weighted average of
the remaining terms to maturity of the Sub-Pool 2 Mortgage Loans equals those
assumed.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
The model used in this Prospectus Supplement with respect to the Class 2A
Certificates is based on a percentage of CPR as shown in the table entitled
"Prepayment Scenarios". See "Certain Yield and Prepayment Considerations--Class
1A Certificates--Prepayment Model" above.
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of the Class 2A Certificates.
S-63
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 2A
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage ....................................... 100% 100% 100% 100% 100%
September 25, 1998 ....................................... 97 83 70 56 42
September 25, 1999 ....................................... 97 71 48 30 15
September 25, 2000 ....................................... 96 60 34 18 8
September 25, 2001 ....................................... 95 50 25 10 4
September 25, 2002 ....................................... 95 42 18 6 0
September 25, 2003 ....................................... 94 36 13 3 0
September 25, 2004 ....................................... 93 31 9 0 0
September 25, 2005 ....................................... 92 26 6 0 0
September 25, 2006 ....................................... 91 22 5 0 0
September 25, 2007 ....................................... 90 19 0 0 0
September 25, 2008 ....................................... 88 16 0 0 0
September 25, 2009 ....................................... 87 14 0 0 0
September 25, 2010 ....................................... 85 11 0 0 0
September 25, 2011 ....................................... 83 10 0 0 0
September 25, 2012 ....................................... 81 8 0 0 0
September 25, 2013 ....................................... 79 7 0 0 0
September 25, 2014 ....................................... 76 0 0 0 0
September 25, 2015 ....................................... 73 0 0 0 0
September 25, 2016 ....................................... 69 0 0 0 0
September 25, 2017 ....................................... 66 0 0 0 0
September 25, 2018 ....................................... 61 0 0 0 0
September 25, 2019 ....................................... 56 0 0 0 0
September 25, 2020 ....................................... 51 0 0 0 0
September 25, 2021 ....................................... 45 0 0 0 0
September 25, 2022 ....................................... 39 0 0 0 0
September 25, 2023 ....................................... 32 0 0 0 0
September 25, 2024 ....................................... 26 0 0 0 0
September 25, 2025 ....................................... 18 0 0 0 0
September 25, 2026 ....................................... 9 0 0 0 0
September 25, 2027 ....................................... 0 0 0 0 0
Weighted Average Life (1)(2) years .................. 21.17 5.60 2.79 1.73 1.16
</TABLE>
- ----------
(1) The weighted average life of a Class 2A Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 2A Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 2A Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
The rate of prepayment on a pool of mortgage loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments. The Depositor makes no representation as to
the particular factors that will affect the prepayment of the Sub-Pool 2
Mortgage Loans, as to the relative importance of such factors, as to the
percentage of the principal balance of the Sub-Pool 2 Mortgage Loans that will
be paid as of any date or as to the overall rate of prepayment on the Sub-Pool 2
Mortgage Loans.
S-64
<PAGE>
LIMITATION ON ADJUSTMENTS
Although each of the Sub-Pool 2 Mortgage Loans bears interest at an
adjustable Mortgage Rate, the adjustments of the Mortgage Rate for any Sub-Pool
2 Mortgage Loan will not exceed the Periodic Rate Cap and the Mortgage Rate will
in no event exceed the Maximum Mortgage Rate or be less than the Minimum
Mortgage Rate for such Sub-Pool 2 Mortgage Loan, regardless of the level of
interest rates generally or the rate otherwise produced by adding the related
Index and the Gross Margin. In addition, such adjustments will be subject to
rounding to the nearest 0.125%.
THE DEPOSITOR
For further information regarding the Depositor, see "The Depositor" in the
Prospectus.
LOAN ORIGINATION HISTORY
The Depositor originates mortgage loans on Single Family Properties,
Multifamily Properties, Mixed Use and Manufactured Home Properties nationwide
and purchases mortgage loans from lenders, mortgage bankers, and brokers on a
wholesale basis. The Depositor conducts loan origination and/or wholesale
operations in a number of jurisdictions, including Arizona, California,
Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho,
Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Minnesota,
Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah,
Virginia, Washington and Wisconsin. The dollar amounts of first and second
mortgage loans originated and purchased by the Depositor, collectively, during
the twelve month periods ended June 30, 1997, 1996, 1995 and 1994 were
approximately $998,988,000, $727,307,000, $470,938,000 and $452,156,000,
respectively.
UNDERWRITING CRITERIA
All of the Mortgage Loans were or will be originated or purchased by the
Depositor and are or will be serviced by the Servicer. All mortgage loan
applications are underwritten, and properties appraised, prior to origination
and/or purchase by the Depositor. All loans are reviewed and approved by a loan
officer of the Depositor, each of whom has specific credit limits based on
experience and seniority. However, only fourteen senior loan officers can
approve loan applications from $150,001-$250,000, only seven executive officers
of the Depositor can approve loan applications from $250,001-$325,000 and only
two senior executive officers of the Depositor can approve loan applications
from $325,001-$400,000. All loan applications over $400,000 require the approval
of two senior executive officers of the Depositor.
Borrower loan applications are reviewed through a combination of reviews of
credit bureau reports and/or individual certifications. Income is determined
through various means, including applicant interviews, written verifications
with employers and review of pay stubs and tax returns, and a determination is
made that the borrower has a sufficient level of disposable income to satisfy
debt repayment requirements.
Substantially all properties of the Depositor are appraised by independent
fee appraisers approved by the Depositor in advance of funding, although in rare
instances the appraisal may be performed by a licensed in-house appraiser of the
Depositor. In addition, as part of the Depositor's quality control audit
procedures, approximately one of every ten properties with respect to a loan
originated by the Depositor is then reappraised by a different appraiser and
approximately 10% of all loans originated or purchased are reunderwritten. With
respect to Manufactured Homes, standard FNMA Manufactured Housing appraisal
guidelines are used by both staff and independent fee appraisers. Loans are
closed through approved attorneys, title insurers or agents of title insurers
and escrow companies, and are insured by major title companies. The Depositor
makes loans primarily on suburban and urban single family homes in major
metropolitan areas. In addition, the Depositor makes loans secured by investor
properties which include a commercial unit. Loans secured by multifamily
properties and mixed residential and commercial structures are also made where
the loan proceeds may be used by the borrower for business purposes.
S-65
<PAGE>
SUB-POOL 1
Single Family Loans.
Approximately 91.66% of the Sub-Pool 1 Initial Mortgage Loans, by Sub-Pool
1 Original Principal Balance, were originated or purchased by the Depositor
pursuant to its Fixed-Rate Mortgage Program Underwriting Guidelines. The
Fixed-Rate Mortgage Program Underwriting Guidelines are primarily intended to
evaluate a borrower's credit standing and ability to repay a mortgage loan and
to assess the value of the related mortgaged property as collateral for such
mortgage loan.
The Sub-Pool 1 Mortgage Loans are originated primarily for borrowers who
are refinancing existing debt, which may include mortgage loans. Therefore, the
related mortgage may be either a senior or junior lien. In general, the
borrowers, in connection with certain lower numbered and earlier alphabetically
designated underwriting classes, have a history of paying consumer and prior
mortgage debt predominantly in a timely manner or, instead, in connection with
certain higher numbered and later alphabetically designated underwriting
classes, may have payment histories that include up to three payments missed on
a prior mortgage obligation and/or, in some cases, major derogatory credit items
such as outstanding judgments or prior bankruptcies.
The Fixed-Rate Mortgage Program allows originations of mortgage loans
secured by primary residences or investment properties.
Several different underwriting classes are used to categorize borrowers'
creditworthiness. In addition to general Fixed-Rate Mortgage Program
Underwriting Guidelines, each class has guidelines relating to maximum permitted
combined loan-to-value ratio, maximum permitted debt-to-income ratio and
acceptable consumer credit and mortgage credit delinquencies and defaults.
Generally, higher numbered underwriting classes (as set forth in the table
below) permit a greater number of derogatory credit items than the lower
numbered underwriting classes.
Each underwriting class has guidelines and standards for the type of
income, employment and asset verification performed prior to closing the loan.
In general, the Fixed-Rate Mortgage Program does not require verification of the
source of the borrower's assets to close the loan because this is not deemed to
be a critical credit factor in the case of a refinanced mortgage loan. The
Fixed-Rate Mortgage Program Class AA, Class I, Class II and Class IIB generally
require the verification of employment and income that is stated on the
borrower's application. The Class ANIV, Class III and Class III-SE program
guidelines generally require verification of employment without verification of
income that must be stated on the application. The Class III-SE program is
intended for self-employed borrowers. The Class IV program generally requires
the verification of income that is stated on the application. The Class IV-PI
program generally requires the verification of a majority of income that is
stated on the application. The Class V program generally requires the
verification of all income that can be verified by independent means.
Approximately 21.37% of the Sub-Pool 1 Initial Mortgage Loans (by Original
Sub-Pool 1 Principal Balance) were underwritten to Classes IIB, III, III-SE, IV,
IV-PI and V. See "The Mortgage Pool" herein. Generally, the maximum permitted
combined loan-to-value ratio and debt-to-income ratio guidelines for each
Fixed-Rate Mortgage Program underwriting class are as follows:
S-66
<PAGE>
<TABLE>
<CAPTION>
FIXED-RATE MORTGAGE PROGRAM
SINGLE FAMILY LOANS
MAXIMUM
PERMITTED MAXIMUM
COMBINED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT-TO-INCOME
CLASS PROPERTY TYPE RATIO RATIO
- ------------ ------------- ------------- --------------
<S> <C> <C> <C>
AA Owner Occupied One- to Four-Family......................................... 80% 45%
Owner Occupied Condominium/Townhouse/PUD................................... 75% 45%
Non-Owner Occupied One- to Four-Family..................................... 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 65% 45%
ANIV Owner Occupied One- to Four-Family......................................... 75% 40%
Non-Owner Occupied One- to Four-Family..................................... 70% 40%
I Owner Occupied One- to Four-Family......................................... 80% 50%
Owner Occupied Condominium/Townhouse/PUD................................... 70% 50%
Non-Owner Occupied One- to Four-Family..................................... 70% 50%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 60% 50%
II Owner Occupied One- to Four-Family......................................... 75% 50%
Owner Occupied Condominium/Townhouse/PUD................................... 70% 50%
Non-Owner Occupied One- to Four-Family..................................... 70% 50%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 60% 50%
IIB Owner Occupied One- to Four-Family......................................... 75% 50%
Owner Occupied Condominium/Townhouse/PUD................................... 70% 50%
Non-Owner Occupied One- to Four-Family..................................... 70% 50%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 60% 50%
III Owner Occupied One- to Four-Family......................................... 70% 45%
Owner Occupied Condominium/Townhouse/PUD................................... 60% 45%
Non-Owner Occupied One- to Four-Family..................................... 60% 45%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 55% 45%
III-SE Owner Occupied One- to Four-Family......................................... 70% 45%
Owner Occupied Condominium/Townhouse/PUD................................... 65% 45%
Non-Owner Occupied One- to Four-Family..................................... 65% 45%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 55% 45%
IV Owner Occupied One- to Four-Family......................................... 70% 45%
Owner Occupied Condominium/Townhouse/PUD................................... 60% 45%
Non-Owner Occupied One- to Four-Family..................................... 60% 45%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 55% 45%
IV-PI Owner Occupied One- to Four-Family......................................... 70% 45%
Owner Occupied Condominium/Townhouse/PUD................................... 60% 45%
Non-Owner Occupied One- to Four-Family..................................... 60% 45%
Non-Owner Occupied Condominium/Townhouse/PUD............................... 55% 45%
V Owner Occupied One- to Four-Family......................................... 65% 45%
Owner Occupied Condominium/Townhouse/PUD................................... 55% 45%
Non-Owner Occupied One- to Four-Family..................................... 55% 45%
</TABLE>
The maximum permitted combined loan-to-value ratio may be increased by 5%
for Classes AA, ANIV, I, II, IIB, III and III-SE on owner occupied one- or
two-family dwellings only, if the borrowers have exhibited an excellent mortgage
payment history, verified for the most recent twelve month period.
Further adjustments to both the maximum permitted combined loan-to-value
ratio and the maximum permitted debt-to-income ratio are available through
utilization of the "Rate Add-on Feature". This feature, offered on all loan
classes with the exception of Class V, typically allows the loan-to-value ratio
to be increased a maximum of 10%.
Down payment requirements for purchase money transactions are verifiable
liquid assets of the borrower. In addition, the minimum cash down payment
required to be provided by the borrower, which may include any gift received by
the borrower, is 10% of the sale price. For all classes with the exception of
IV, IV-PI and V, if the property is an owner-occupied single-family residence or
a two family residence, a seller financed subordinate mortgage loan is allowed.
However, in no case can a seller financed subordinate loan exceed 10% of the
purchase price.
S-67
<PAGE>
On a case-by-case basis, the Depositor may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
class guidelines warrants an underwriting exception. Compensating factors may
include, but are not limited to, low combined loan-to-value ratio, low
debt-to-income ratio, good credit history, stable employment and duration of
residence at the applicant's current address.
Manufactured Home Loans. The Manufactured Home Loans included in the
initial Sub-Pool 1 (approximately 2.72% of the Sub-Pool 1 Initial Mortgage
Loans, by Original Sub-Pool 1 Principal Balance) were originated or purchased by
the Depositor pursuant to its Manufactured Home Loan Program. The Manufactured
Home Loan Program allows origination of fixed-rate and adjustable-rate mortgage
loans secured only by first liens on manufactured homes that have been
permanently affixed to a permanent foundation and to the real property. In
addition, the Manufactured Home Loan Program allows origination of fully
amortizing loans only, with a standard amortization term of ten (10), fifteen
(15) or twenty (20) years for multi-wide properties and fifteen (15) years for
single-wide properties. Thirty (30) year and twenty-five (25) year amortizations
may also be permitted, subject to certain limitations, for loans secured by
multi-wide properties. Subject to certain limitations, the Manufactured Home, if
multi-wide, may be a second/vacation home.
The Depositor's underwriting standards under the Manufactured Home Loan
Program are primarily intended to evaluate a borrower's credit standing and
ability to repay a mortgage loan and to assess the value of the manufactured
home and underlying real estate as collateral for such mortgage loan. In
general, the Depositor's underwriting guidelines with respect to eligible
borrowers under the Manufactured Home Loan Program are the same as those under
the Depositor's Fixed-Rate Mortgage Program or Adjustable-Rate Mortgage Program,
as the case may be.
The Manufactured Home Loan Program underwriting guidelines with respect to
eligible properties are, in general, the same as those for the Fixed-Rate
Mortgage Program or Adjustable-Rate Mortgage Program, as the case may be, with
necessary modifications due to the nature of the product. The Manufactured Home
must be constructed pursuant to Federal Manufactured Home Construction and
Safety Standards and the property must be zoned 1-4 family residential. The
wheels, axles and trailer hitch must have been removed and the home must be
permanently affixed to a permanent foundation on the real estate. The Depositor
requires a manufactured housing unit (ALTA 7) endorsement from each title
insurer of a Manufactured Home Loan stating that the insurer agrees that the
related manufactured housing unit is included within the term "land" when used
in the title policy. Each underwriting class, in addition to standard Fixed-Rate
Mortgage Program guidelines or Adjustable-Rate Mortgage Program guidelines, as
the case may be, has guidelines as to the maximum permitted combined
loan-to-value ratio based on the size of the manufactured home (single-wide or
multi-wide). Generally, higher numbered underwriting classes (as set forth in
the table below) permit a greater number of derogatory credit items than the
lower numbered underwriting classes.
S-68
<PAGE>
<TABLE>
<CAPTION>
MANUFACTURED HOME LOAN PROGRAM
MAXIMUM
PERMITTED MAXIMUM
COMBINED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT-TO-INCOME
CLASS PROPERTY TYPE RATIO RATIO
------------ ------------- ------------- --------------
<S> <C> <C> <C>
AA Owner Occupied Single-wide 85% 45%
Owner Occupied Multi-wide 90% 45%
ANIV Owner Occupied Single-wide 75% 45%
Owner Occupied Multi-wide 85% 45%
I Owner Occupied Single-wide 80% 50%
Owner Occupied Multi-wide 90% 50%
II Owner Occupied Single-wide 75% 50%
Owner Occupied Multi-wide 85% 50%
IIB Owner-Occupied Multi-wide 75% 45%
III Owner Occupied Single-wide 70% 45%
Owner Occupied Multi-wide 80% 45%
III-SE Owner Occupied Single-wide 70% 45%
Owner Occupied Multi-wide 80% 45%
IV Owner Occupied 70% 45%
Multi-wide
V Owner Occupied Multi-wide 50% 45%
</TABLE>
Multifamily Loans and Mixed Use Loans. The Multifamily and Mixed Use Loans
included in the Initial Sub-Pool 1 (approximately 5.62% of the Sub-Pool 1
Initial Mortgage Loans, by Original Sub-Pool 1 Principal Balance) were
originated and purchased by the Depositor pursuant to its Fixed Rate Mortgage
Program--Multifamily and Mixed Use. The Depositor primarily underwrites loans
for 5 to 50 unit apartment buildings in Connecticut, Illinois, Indiana,
Maryland, New Jersey, New York, Ohio, Pennsylvania, Virginia and the District of
Columbia under the Fixed-Rate Mortgage Program--Multifamily and Mixed Use.
The Depositor's underwriting standards under the Fixed Rate Mortgage
Program--Multifamily and Mixed Use are primarily intended to assess the ability
of the mortgaged property to generate adequate cash flow to support the mortgage
and to a lesser extent, the financial capabilities and managerial ability of the
mortgagor. In determining whether a loan should be granted, the Depositor
considers the reliability of the income stream from investment property, the
debt service coverage ratios and the adequacy of such property as collateral for
the mortgage loan, the creditworthiness of the mortgagor and the mortgagor's
management experience. The "debt service coverage ratio" or "DSCR" with respect
to a Mortgaged Property means (a) the net operating income for the related
Mortgaged Property used in underwriting the related Mortgage Loan divided by (b)
the annual debt service (principal and interest) for such Mortgage Loan. While
their primary consideration in underwriting a mortgage loan is the mortgaged
property, sufficient documentation on the mortgagor is required to establish the
financial strength and ability of the borrower to successfully operate the
mortgaged property and meet the obligations of the note and deed of trust.
Under the Fixed Rate Mortgage Program--Multifamily and Mixed Use, the
amount of the mortgage loan is not more than 75% of the appraised value. The
debt service coverage ratio ("DSCR") is not less than 1.2 fully indexed.
The Fixed Rate Mortgage Program--Multifamily and Mixed Use requires the
inspection of the property and records regarding the property are inspected to
determine that the property is in compliance with current zoning requirements,
the number of buildings on the property, the type of construction materials
used, the proximity of the property to natural hazards and flood zones and
whether there are any negative environmental factors. The property must front on
publicly dedicated and maintained streets with provisions for adequate and safe
ingress and egress. Also, the title is reviewed to determine if there are any
covenants, conditions and restrictions or easements on the property. The
properties are appraised by independent appraisers approved by the Depositor and
reviewed either by the Depositor's property evaluation department and/or an
outside consultant. Generally, the maximum permitted combined
S-69
<PAGE>
loan-to-value ratio and minimum permitted debt service coverage ratio guidelines
for each underwriting class are as follows:
<TABLE>
<CAPTION>
FIXED-RATE MORTGAGE PROGRAM
MULTI-FAMILY AND MIXED-USE
MAXIMUM
PERMITTED MINIMUM
COMBINED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT SERVICE
CLASS PROPERTY TYPE RATIO COVERAGE
------------ ------------- ------------- ------------
<S> <C> <C> <C>
AA Owner Occupied....................................................... 75% 1.20%
Non-Owner Occupied................................................... 70% 1.20%
I Owner Occupied....................................................... 75% 1.20%
Non-Owner Occupied................................................... 70% 1.20%
II Owner Occupied....................................................... 65% 1.20%
Non-Owner Occupied................................................... 60% 1.20%
IV Owner Occupied....................................................... 55% 1.35%
Non-Owner Occupied................................................... 50% 1.35%
V Owner Occupied....................................................... 55% 1.35%
Non-Owner Occupied................................................... 50% 1.35%
</TABLE>
SUB-POOL 2
Single Family Loans. Approximately 14.27% of the Sub-Pool 2 Initial
Mortgage Loans, by Original Sub-Pool 2 Principal Balance, were originated
substantially in accordance with the Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") underwriting
guidelines for single family loans in effect on the date the mortgage loan was
originated. Approximately 85.73% of the Sub-Pool 2 Initial Mortgage Loans, by
Original Sub-Pool 2 Principal Balance, were originated or purchased by the
Depositor pursuant to its Adjustable-Rate First Mortgage Program underwriting
guidelines. The Adjustable-Rate First Mortgage Program guidelines are primarily
intended to evaluate a borrower's credit standing and ability to repay a
mortgage loan and to assess the value of the related mortgaged property as
collateral for such mortgage loan.
The Sub-Pool 2 Mortgage Loans are originated primarily for borrowers who
are refinancing existing debt. In general, the borrowers, in connection with
certain lower-numbered and earlier alphabetically designated underwriting
classes, have a history of paying consumer and prior mortgage debt predominantly
in a timely manner or, instead, in connection with certain higher-numbered and
later alphabetically designated underwriting classes, may have payment histories
that include up to three payments missed on a prior mortgage obligation and/or,
in some cases, major derogatory credit items such as outstanding judgments or
prior bankruptcies.
Several different underwriting classes are used to categorize the
creditworthiness of borrowers. In addition to general Adjustable-Rate First
Mortgage Program guidelines, each class has guidelines relating to maximum
permitted loan-to-value ratio, maximum permitted debt-to-income ratio and
acceptable consumer credit and mortgage credit delinquencies and defaults.
Generally, higher-numbered underwriting classes (as set forth in the table
below) permit a greater number of derogatory credit items than the lower
numbered underwriting classes.
Each underwriting class has guidelines and standards for the type of
income, employment and asset verification performed prior to closing the loan.
In general, the Adjustable-Rate First Mortgage Program does not require
verification of the source of the borrower's assets to close the loan because
this is not deemed to be a critical credit factor in the case of a refinanced
mortgage loan. The Adjustable-Rate First Mortgage Program Class AA, Class I,
Class II and Class IIB generally require the verification of employment and
income that is stated on the borrower's application. The Class ANIV, Class III
and Class SE program guidelines generally require verification of employment
without verification of income that must be stated on the application. The Class
SE program is intended for self-employed borrowers. The Class IV program
generally requires the verification of income that is stated on the application
without verification of employment and the Class V program generally requires
the verification of all income that can be verified by independent means.
Approximately 27.19% of the Sub-Pool 2 Initial Mortgage Loans, by Original
Sub-Pool 2 Principal Balance, were underwritten to Classes, IIB, III, SE, IV and
V. See "The Mortgage Pool" herein. Generally, the maximum
S-70
<PAGE>
permitted loan-to-value ratio and maximum permitted debt-to-income ratio
guidelines for each underwriting class are as follows:
<TABLE>
<CAPTION>
ADJUSTABLE-RATE FIRST MORTGAGE PROGRAM
MAXIMUM MAXIMUM
PERMITTED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT-TO-INCOME
CLASS PROPERTY TYPE RATIO RATIO
- ------------ ------------- ------------- --------------
<S> <C> <C> <C>
AA Owner Occupied One- to Four-Family.............................. 80% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 75% 45%
Non-Owner Occupied One- to Four-Family.......................... 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 65% 45%
ANIV Owner Occupied One- to Four-Family.............................. 75% 40%
Non-Owner Occupied One- to Four-Family.......................... 70% 40%
I Owner Occupied One- to Four-Family.............................. 80% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 70% 45%
Non-Owner Occupied One- to Four-Family.......................... 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 60% 45%
II Owner Occupied One- to Four-Family.............................. 75% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 70% 45%
Non-Owner Occupied One- to Four-Family.......................... 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 60% 45%
IIB Owner Occupied One- to Four-Family.............................. 75% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 70% 45%
Non-Owner Occupied One- to Four-Family.......................... 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 60% 45%
SE Owner Occupied One- to Four-Family.............................. 70% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 65% 45%
Non-Owner Occupied One- to Four-Family.......................... 65% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 55% 45%
III Owner Occupied One- to Four-Family.............................. 70% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 60% 45%
Non-Owner Occupied One- to Four-Family.......................... 60% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 55% 45%
IV Owner Occupied One- to Four-Family.............................. 70% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 60% 45%
Non-Owner Occupied One- to Four-Family.......................... 60% 45%
Non-Owner Occupied Condominium/Townhouse/PUD.................... 55% 45%
V Owner Occupied One- to Four-Family.............................. 65% 45%
Owner Occupied Condominium/Townhouse/PUD........................ 55% 45%
Non-Owner Occupied One- to Four-Family.......................... 55% 45%
</TABLE>
The maximum permitted loan-to-value ratio may be increased 5% for Class AA,
ANIV, I, II, IIB, SE, III and IV on one- or two-family dwellings only, if the
borrowers have exhibited an excellent mortgage payment history, verified for the
most recent twelve month period. In such cases, the maximum permitted
debt-to-income ratio is decreased 5% for Class I.
S-71
<PAGE>
Further adjustments to both maximum permitted loan-to-value ratio and maximum
permitted debt-to-income ratio are available through utilization of the Rate
Add-on Feature. This feature, offered on all loan classes with the exception of
Class V, typically allows the loan-to-value ratio to be increased a maximum of
10%.
Down payment requirements for purchase money transactions are verifiable liquid
assets of the borrower. In addition, the minimum cash down payment required to
be provided by the borrower, which may include any gift received by the
borrower, is 10% of the sale price. For all classes with the exception of IV,
and V, if the property is an owner-occupied single-family residence or a two
family residence, a seller financed subordinate mortgage loan is allowed.
However, in no case can a seller financed subordinate loan exceed 10% of the
purchase price.
On a case-by-case basis, the Depositor may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
guidelines of a particular class warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment and time
in residence at the applicant's current address.
Manufactured Home Loans. All of the Manufactured Home Loans included in the
Initial Sub-Pool 2 (approximately 0.81% of the Sub-Pool 2 Initial Mortgage
Loans, by Original Sub-Pool 2 Principal Balance) were originated or purchased by
the Depositor pursuant to its Manufactured Home Loan Program as described above
under the caption "The Depositor-Underwriting Criteria-Sub-Pool 1".
DESCRIPTION OF THE CERTIFICATES
The Series 1997-3 AFC Mortgage Loan Asset Backed Certificates will consist
of seven Classes of certificates, Class 1A-1, Class 1A-2, Class 1A-3, Class
1A-4, Class 1A-5, Class 2A and Class R (the Class 1A-1, Class 1A-2, Class 1A-3,
Class 1A-4 and Class 1A-5 Certificates are referred to herein as the "Class 1A
Certificates"; the Class 1A-1, Class 1A-2, Class 1A-3, Class 1A-4, Class 1A-5,
and Class 2A Certificates are referred to herein as the "Class A Certificates";
the Class A and Class R Certificates are referred to herein as the
"Certificates"; each such class, a "Class"). Only the Class 1A and Class 2A
Certificates are offered hereby.
The Class 1A-1 Certificates will have an initial Class 1A-1 Principal
Balance of $35,000,000; the Class 1A-2 Certificates will have an initial Class
1A-2 Principal Balance of $30,500,000; the Class 1A-3 Certificates will have an
initial Class 1A-3 Principal Balance of $12,000,000; the Class 1A-4 Certificates
will have an initial Class 1A-4 Principal Balance of $22,027,857; the Class 1A-5
Certificates will have an initial Class 1A-5 Principal Balance of $21,000,000;
and the Class 2A Certificates will have an initial Class 2A Principal Balance of
$179,472,143. The Class R Certificates will have no principal balance. In
certain circumstances, the Class R Certificates may receive distributions in
respect of principal on the Mortgage Loans. The rights of the Class R
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinate to the rights of the Class A Certificateholders to the
extent described herein.
On each Remittance Date, with respect to the Class 1A-1 Certificates,
interest will be paid at the Class 1A-1 Pass-Through Rate in an amount equal to
interest accrued during the related Accrual Period on the related Class 1A-1
Principal Balance prior to giving effect to principal distributions to be made
on such date.
On each Remittance Date, with respect to each Class of the Class 1A
Certificates, other than the Class 1A-1 Certificates, interest will be paid at
the related Class 1A Pass-Through Rate in an amount equal to 30 days' interest
on the related Class A Principal Balance prior to giving effect to principal
distributions to be made on such date. All calculations of interest on each
Class of Class 1A Certificates, other than the Class 1A-1 Certificates will be
computed on the basis of a 360-day year consisting of twelve 30-day months. See
"-Sub-Pool 1-Payments on the Sub-Pool 1 Mortgage Loans" herein.
On each Remittance Date, with respect to the Class 2A Certificates,
interest will be paid at the Class 2A Pass-Through Rate in an amount equal to
interest accrued during the related Accrual Period on the related Class 2A
Principal Balance prior to giving effect to principal distributions to be made
on such date.
Interest payable with respect to each Remittance Date on the Class 1A-1 and
the Class 2A Certificates will accrue during the period commencing on the
Remittance Date of the immediately preceding month and ending on the
S-72
<PAGE>
day immediately preceding the related Remittance Date, except that with respect
to the first Remittance Date interest payable on the Class 1A-1 and the Class 2A
Certificates will accrue during the period commencing on the Closing Date and
ending on the day immediately preceding the first Remittance Date (each such
period, an "Accrual Period"). All calculations of interest on the Class 1A-1 and
the Class 2A Certificates will be computed on the basis of the actual number of
days elapsed in the Accrual Period and a 360-day year.
Each of the Class A Certificates represents fractional undivided ownership
interests in a Trust Fund consisting of Sub-Pool 1 and Sub-Pool 2, created and
held pursuant to the Pooling Agreement. Each Sub-Pool includes (i) the related
Mortgage Loans (including the related Initial Mortgage Loans and any related
Subsequent Mortgage Loans) and all proceeds thereof due after the Cut-off Date
and related Subsequent Cut-off Date, (ii) the related Certificate Account, the
related Principal and Interest Account, the related Trustee Expense Account, the
related Pre-Funding Account, subject to certain limitations, the related
Interest Coverage Account and the related Reserve Account, and such assets as
from time to time are deposited in such accounts, including amounts on deposit
therein and invested in Permitted Instruments, (iii) any related REO Property,
(iv) the Trustee's rights under all insurance policies with respect to the
related Mortgage Loans required to be maintained pursuant to the Pooling
Agreement and any Insurance Proceeds and (v) the Certificate Insurance Policy.
Distributions on the Class A Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter commencing on October 27, 1997 (each, a "Remittance
Date"), to the persons in whose names such Certificates are registered (which,
initially, will be CEDE & Co., the nominee of DTC) as of the Business Day
immediately preceding such Remittance Date, in the case of the Class 1A-1
Certificates and the Class 2A Certificates, and the last Business Day of the
month preceding the month of such Remittance Date, in the case of all other
Classes of Certificates (each, a "Record Date").
Distributions on each Remittance Date will be made by check mailed to the
address of the person entitled thereto as it appears on the Certificate Register
or, in the case of Class A Certificates if such Holder of record owns Class A
Certificates with an initial Class A Principal Balance in excess of $5,000,000,
and who has so notified the Trustee in writing in accordance with the Pooling
Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the initial
distribution on all Classes of Certificates other than the Class 1A-1
Certificates and the Class 2A Certificates will be made to Certificateholders of
record as of the Closing Date and the final distribution in retirement of the
Class A Certificates will be made only upon presentment and surrender of such
Certificate at the Corporate Trust Office of the Trustee. On each Remittance
Date, a Holder of a Class A Certificate will receive such Holder's Percentage
Interest of the amounts required to be distributed with respect to such Class A
Certificates. The "Percentage Interest" evidenced by a Certificate will equal
the percentage derived by dividing the denomination of such Certificate by the
aggregate denominations of all Certificates of such Class.
REGISTRATION OF CERTIFICATES
The Class A Certificates will be issued in book-entry form. The Class A
Certificates will be issued in minimum dollar denominations of $100,000 and
integral multiples of $1,000 in excess thereof (except that a single certificate
of each of the Class 1A-1, Class 1A-2, Class 1A-3, Class 1A-4, Class 1A-5 and
Class 2A Certificates may be issued in a different amount which is less than the
related minimum dollar denomination). The assumed final maturity date of the
Class A Certificates is September 27, 2027, which is the first Remittance Date
occurring one month after the latest scheduled maturity date of any related
Mortgage Loan (including any related Subsequent Mortgage Loan originated in
November 1997).
Holders of Certificates may hold their Certificates through DTC (in the
United States) or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems.
The Certificates will initially be registered in the name of CEDE & Co.,
the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as
S-73
<PAGE>
depositary for CEDEL and The Chase Manhattan Bank will act as depositary for
Euroclear (in such capacities, individually the "Depositary" and collectively
the "Depositaries").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Certificates, see "Certain
Federal Income Tax Consequences" and "Global Clearance, Settlement and Tax
Documentation Procedures" in Annex I hereto.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
1934 Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including
S-74
<PAGE>
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative established policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Income Tax Consequences". CEDEL or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
THE PRINCIPAL AND INTEREST ACCOUNT
The Servicer shall establish and maintain an account for each Sub-Pool
(with respect to Sub-Pool 1, the "Sub-Pool 1 Principal and Interest Account";
with respect to Sub-Pool 2, the "Sub-Pool 2 Principal and Interest Account";
each a "Principal and Interest Account"), which shall be an Eligible Account, on
behalf of the Certificateholders. The Servicer shall deposit therein payments
and collections received or made by it in connection with the related Mortgage
Loans (net of the Servicing Fee) subsequent to the Cut-off Date or related
Subsequent Cut-off Date, as the case may be (to the extent not applied in
computing the aggregate principal balance of the related Mortgage Loans as of
such date). The Servicer may withdraw funds from a Principal and Interest
Account only for the purposes set forth in the Pooling Agreement, including but
not limited to the following:
(i) to effect the remittance to the Trustee on the twenty-second day
of each month (or if such day is not a Business Day, on the immediately
following Business Day) of the Excess Spread and the amounts set forth in
clause (i) of the definition of the Available Remittance Amount;
(ii) subject to the limitations set forth in the Pooling Agreement, to
pay the Servicer for any accrued and unpaid Servicing Fees with respect to
related Mortgage Loans and to reimburse itself for related unreimbursed
Advances and Servicing Advances and any amount used to cover shortfalls in
interest on newly originated Mortgage Loans as described below under
"--Advances." The Servicer's right to pay itself unpaid Servicing Fees, and
to reimburse itself for unreimbursed Servicing Advances and amounts used to
cover any
S-75
<PAGE>
such interest shortfalls, is limited to late collections on the related
Mortgage Loan, and such other amounts as may be collected by the Servicer
from the related Mortgagor or otherwise with respect to the related
Mortgage Loan in respect of which such unreimbursed amounts are owed. The
Servicer's right to reimbursement for unreimbursed Advances is limited to
late collections of interest on any Mortgage Loan; provided that the
Servicer shall not be entitled to reimbursement from Liquidation Proceeds
for Advances made as described in subsection (c) of the paragraph under the
caption "Advances" herein. The Servicer's right to such reimbursements is
senior to the rights of Holders of Certificates;
(iii) to withdraw any amount received from a Mortgagor on a related
Mortgage Loan that is recoverable and sought to be recovered as a
Preference Amount;
(iv) to make investments in Permitted Instruments and to pay itself
interest earned in respect of Permitted Instruments or on funds deposited
in the related Principal and Interest Account;
(v) to pay itself the Servicing Fee and any other permitted servicing
compensation to the extent not previously retained or paid; and
(vi) to withdraw funds necessary for the conservation and disposition
of any REO Property.
THE CERTIFICATE ACCOUNT
The Trustee shall establish and maintain an account for each Sub-Pool (with
respect to Sub-Pool 1, the "Sub-Pool 1 Certificate Account"; with respect to
Sub-Pool 2, the "Sub-Pool 2 Certificate Account"; each a "Certificate Account"),
which shall be an Eligible Account, on behalf of the Certificateholders. The
Trustee shall, promptly upon receipt, deposit in the Certificate Account and
retain therein the following: (i) the related Available Remittance Amount for
such Remittance Date; (ii) the related Excess Spread for such Remittance Date;
(iii) the aggregate amount withdrawn from the related Reserve Account for such
Remittance Date (as described below under the caption "--Reserve Account"); and
(iv) any amount required to be deposited by the Servicer in connection with any
losses on Permitted Instruments.
The Trustee shall withdraw funds from the Certificate Account for
distribution to Certificateholders as described below under "--Allocation of
Amount Available" and as otherwise provided in the Pooling Agreement.
CALCULATION OF ONE-MONTH LIBOR
On the second Business Day preceding the beginning of each Accrual Period
(each such date, an "Interest Determination Date"), the Trustee will determine
One-Month LIBOR for such Accrual Period with respect to the Class 1A-1 and Class
2A Certificates. One-Month LIBOR will be the rate for deposits in United States
dollars for a term equal to the relevant Accrual Period which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. The first
Accrual Period shall begin on the Closing Date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
rates at which deposits in United States dollars are offered by the Reference
Banks at approximately 11:00 a.m., London time, on that day to banks in the
London interbank market for a term equal to the relevant Accrual Period. The
Trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided as requested, the rate for that day
will be the arithmetic mean of the rates quoted by major banks in New York City,
selected by the Servicer, at approximately 11:00 a.m., New York City time, on
that day for loans in United States dollars to leading European banks for a term
equal to the relevant Accrual Period. If on any Interest Determination Date, the
Trustee is unable to determine One Month LIBOR for an Accrual Period, One Month
LIBOR for such Accrual Period shall be One Month LIBOR as determined on the
previous Interest Determination Date; provided, however, that One-Month LIBOR
for an Accrual Period shall not be based on One-Month LIBOR for the previous
Accrual Period for three consecutive Accrual Periods. If One-Month LIBOR for an
Accrual Period would be based on One-Month LIBOR for the previous Accrual Period
for the second consecutive Accrual Period, the Trustee will select a comparable
alternative Index (over which the Trustee has no control) used for determining
one-month Eurodollar lending rates that is calculated and published (or
otherwise made available) by an independent third party.
S-76
<PAGE>
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace the page on that
service for the purpose of displaying comparable rates or prices) and "Reference
Banks" means leading banks selected by the Trustee and engaged in transactions
in Eurodollar deposits in the international Eurocurrency market.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class 1A-1 and Class 2A Certificates for the related Accrual Period shall
(in the absence of manifest error) be final and binding.
ALLOCATION OF AMOUNT AVAILABLE
On or before each Remittance Date, the Servicer will determine the
Overcollateralization Amount for each Sub-Pool after giving effect to the
distribution of the related Class A Principal Remittance Amount to the related
Classes of Class A Certificates on such Remittance Date and the amount of the
related Net Excess Spread.
On each Remittance Date, the Trustee will withdraw from each Certificate
Account the related Amount Available, and make distributions thereof in the
following order of priority and to the extent of available funds.
Notwithstanding the foregoing, on any Remittance Date, in the event that the
Amount Available with respect to a particular Sub-Pool is insufficient to
distribute the entire amount of the related Class A Interest Remittance Amount,
such Amount Available shall be distributed by the Trustee among the related
Class A Certificateholders in proportion to the total respective distributions
of such amounts on each such Class of Certificates that would otherwise be
payable on such Remittance Date.
SUB-POOL 1
With respect to the Class 1A Certificates and Sub-Pool 1:
If the Remittance Date is prior to the Cross-Over Date, the Trustee shall
distribute the indicated amounts in the following order of priority:
(X)(i) to the Class 1A-1 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the Amount Available; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-1 Certificates;
(ii) to the Class 1A-2 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the balance of the Amount Available after payments described
in clause (X)(i) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-2 Certificates;
(iii) to the Class 1A-3 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) and (ii) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-3 Certificates;
(iv) to the Class 1A-4 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (iii) above; and
S-77
<PAGE>
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-4 Certificates;
(v) to the Class 1A-5 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (iv) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-5 Certificates;
(vi) to the Class 1A-5 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-5 Principal Balance, to the extent described below,
until the Class 1A-5 Balance is reduced to zero and to make payments in
respect of the amounts described in clauses (iii) (to the extent the amount
in clause (iii) represents prior Insured Payments or interest thereon) and
(v) of the definition of Class A Principal Remittance Amount below the
lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (v) above; and
(B) the Class 1A-5 Lockout Remittance Amount;
(vii) to the Class 1A-1 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-1 Principal Balance, to the extent described below,
until the Class 1A-1 Principal Balance is reduced to zero and to make
payments in respect of the amounts described in clauses (iii) (to the
extent the amount in clause (iii) represents prior Insured Payments or
interest thereon) and (v) of the definition of Class A Principal Remittance
Amount below, the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (vi) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clause (X)(vi) above;
(viii) at such time as the Class 1A-1 Principal Balance has been
reduced to zero, to the Class 1A-2 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-2 Principal Balance, to the extent described below,
until the Class 1A-2 Principal Balance thereof is reduced to zero and to
make payments in respect of the amounts described in clauses (iii) (to the
extent the amount in clause (iii) represents prior Insured Payments or
interest thereon) and (v) of the definition of Class A Principal Remittance
Amount below, the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (vii) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (X)(vi) and (vii) above;
(ix) at such time as the Class 1A-2 Principal Balance has been reduced
to zero, to the Class 1A-3 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-3 Principal Balance, to the extent described below,
until the Class 1A-3 Principal Balance thereof is reduced to zero and to
make payments in respect of the amounts described in clauses (iii) (to the
extent the amount in clause (iii) represents prior Insured Payments or
interest thereon) and (v) of the definition of Class A Principal Remittance
Amount below, the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (viii) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (X)(vi) through (viii)
above;
S-78
<PAGE>
(x) at such time as the Class 1A-3 Principal Balance has been reduced
to zero, to the Class 1A-4 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-4 Principal Balance, to the extent described below,
until the Class 1A-4 Principal Balance thereof is reduced to zero and to
make payments in respect of the amounts described in clauses (iii) (to the
extent the amount in clause (iii) represents prior Insured Payments or
interest thereon) and (v) of the definition of Class A Principal Remittance
Amount below, the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (ix) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (X)(vi) through (ix) above;
(xi) at such time as the Class 1A-4 Principal Balance has been reduced
to zero, to the Class 1A-5 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-5 Principal Balance, to the extent described below,
until the Class 1A-5 Principal Balance thereof is reduced to zero and to
make payments in respect of the amounts described in clauses (iii) (to the
extent the amount in clause (iii) represents prior Insured Payments or
interest thereon) and (v) of the definition of Class A Principal Remittance
Amount below, the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (X)(i) through (x) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (X)(vi) through (x) above;
(xii) to the Sub-Pool 1 Trustee Expense Account, an amount equal to
the lesser of the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (X)(i) through (xi) above and any
accrued and unpaid Annual Trustee Expense Amount with respect to Sub-Pool
1;
(xiii) to the Class 1A-1 Certificateholders to be applied to reduce
the Class 1A-1 Principal Balance until the Class 1A-1 Principal Balance has
been reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (X)(i) through (xii) above; and
(B) the Additional Principal with respect to Sub-Pool 1;
(xiv) at such time as the Class 1A-1 Principal Balance has been
reduced to zero, to the Class 1A-2 Certificateholders to be applied to
reduce the Class 1A-2 Principal Balance until the Class 1A-2 Principal
Balance has been reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (X)(i) through (xiii) above; and
(B) the Additional Principal with respect to Sub-Pool 1;
(xv) at such time as the Class 1A-2 Principal Balance has been reduced
to zero, to the Class 1A-3 Certificateholders to be applied to reduce the
Class 1A-3 Principal Balance until the Class 1A-3 Principal Balance has
been reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (X)(i) through (xiv) above; and
(B) the Additional Principal with respect to Sub-Pool 1;
(xvi) at such time as the Class 1A-3 Principal Balance has been
reduced to zero, to the Class 1A-4 Certificateholders to be applied to
reduce the Class 1A-4 Principal Balance until the Class 1A-4 Principal
Balance has been reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (X)(i) through (xv) above; and
S-79
<PAGE>
(B) the Additional Principal with respect to Sub-Pool 1;
(xvii) at such time as the Class 1A-4 Principal Balance has been
reduced to zero, to the Class 1A-5 Certificateholders to be applied to
reduce the Class 1A-5 Principal Balance until the Class 1A-5 Principal
Balance has been reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (X)(i) through (xvi) above; and
(B) the Additional Principal with respect to Sub-Pool 1;
(xviii) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Sub-Pool 1
after payments described in clauses (X)(i) through (xvii) above and any
expenses paid by the Servicer and/or Depositor that were incurred in
connection with any third party claims that remain unreimbursed;
(xix) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Sub-Pool 1 after payments described in
clauses (X)(i) through (xviii) above and the aggregate of any
Nonrecoverable Servicing Advances and Nonrecoverable Monthly Advances with
respect to Sub-Pool 1 previously made by the Servicer and not previously
reimbursed;
(xx) to the Class R Certificateholders, the balance of the Amount
Available with respect to Sub-Pool 1, if any, after payments described in
clauses (X)(i) through (xix) above.
If the Remittance Date is on or after the Cross-Over Date, the Trustee
shall distribute the indicated amounts in the following order of priority:
(Y)(i) to the Class 1A-1 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the Amount Available; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-1 Certificates;
(ii) to the Class 1A-2 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the balance of the Amount Available after payments described
in clause (Y)(i) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-2 Certificates;
(iii) to the Class 1A-3 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (Y)(i) and (ii) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-3 Certificates;
(iv) to the Class 1A-4 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the balance of the Amount Available after payments described
in clauses (Y)(i) through (iii) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-4 Certificates;
(v) to the Class 1A-5 Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
S-80
<PAGE>
(A) the balance of the Amount Available after payments described
in clauses (Y)(i) through (iv) above; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 1A-5 Certificates;
(vi) to the Class 1A-5 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-5 Principal Balance until the Class 1A-5 Principal
Balance has been reduced to zero and to make payments in respect of the
amounts described in clauses (iii) (to the extent the amount in clause
(iii) represents prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount below the lesser of:
(A) the balance of the Net Excess Amount Available with respect
to Sub-Pool 1 after payments described in clauses (Y)(i) through (v)
above; and
(B) Class 1A-5 Lockout Remittance Amount;
(vii) to the Class 1A-1 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available"), to be applied to
reduce the Class 1A-1 Principal Balance until the Class 1A-1 Principal
Balance has been reduced to zero and to make payments in respect of the
amounts described in clauses (iii) (to the extent the amounts described in
clause (iii) represent prior Insured Payments or interest thereon) and (v)
of the definition of Class A Principal Remittance Amount with respect to
the Class 1A-1 Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available with respect
to Sub-Pool 1 after payments described in clauses (Y)(i) through (vi)
above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clause (Y)(vi) above;
(viii) at such time as the Class 1A-1 Principal Balance has been
reduced to zero, to the Class 1A-2 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available") to be applied to reduce
the Class 1A-2 Principal Balance until the Class 1A-2 Principal Balance has
been reduced to zero and to make payments in respect of the amounts
described in clauses (iii) (to the extent the amounts described in clause
(iii) represents prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount with respect to the Class
1A-2 Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available after payments
described in clauses (Y)(i) through (vii) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (Y)(vi) and (vii) above;
(ix) at such time as the Class 1A-2 Principal Balance has been reduced
to zero, to the Class 1A-3 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available") to be applied to reduce
the Class 1A-3 Principal Balance until the Class 1A-3 Principal Balance has
been reduced to zero and to make payments in respect of the amounts
described in clauses (iii) (to the extent the amounts described in clause
(iii) represents prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount with respect to the Class
1A-3 Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available after payments
described in clauses (Y)(i) through (viii) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments made described in clauses (Y)(vi) through (viii)
above;
(x) at such time as the Class 1A-3 Principal Balance has been reduced
to zero, to the Class 1A-4 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available") to be applied to reduce
the Class 1A-4 Principal Balance until the Class 1A-4 Principal Balance has
been reduced to zero and to make payments in respect of the amounts
described in clauses (iii) (to the extent the amounts described
S-81
<PAGE>
in clause (iii) represents prior Insured Payments or interest thereon) and
(v) of the definition of Class A Principal Remittance Amount with respect
to the Class 1A-4 Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available after payments
described in clauses (Y)(i) through (ix) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (Y)(vi) through (ix) above;
(xi) at such time as the Class 1A-4 Principal Balance has been reduced
to zero, to the Class 1A-5 Certificateholders (subject to the last
paragraph under "--Allocation of Amount Available") to be applied to reduce
the Class 1A-5 Principal Balance until the Class 1A-5 Principal Balance has
been reduced to zero and to make payments in respect of the amounts
described in clauses (iii) (to the extent the amounts described in clause
(iii) represents prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount with respect to the Class
1A-5 Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available after payments
described in clauses (Y)(i) through (x) above; and
(B) the balance of the related Class A Principal Remittance
Amount after payments described in clauses (Y)(vi) through (x) above;
(xii) to the Sub-Pool 1 Trustee Expense Account, an amount equal to
the lesser of the balance of the Amount Available with respect to Sub-Pool
1 after payments described in clauses (Y)(i) through (xi) above and any
accrued and unpaid Annual Trustee Expense Amount with respect to Sub-Pool
1;
(xiii) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Sub-Pool 1
after payments described in clauses (Y)(i) through (xii) above and any
expenses paid by the Servicer and/or Depositor that were incurred in
connection with any third party claims that remain unreimbursed;
(xiv) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Sub-Pool 1 after payments described in
clauses (Y)(i) through (xiii) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Sub-Pool 1 previously made by the Servicer and not previously reimbursed;
(xv) to the Class R Certificateholders, the balance of the Amount
Available with respect to Sub-Pool 1 after payments described in clauses
(Y)(i) through (xiv) above, if any.
SUB-POOL 2
With respect to the Class 2A Certificates and Sub-Pool 2:
If the Remittance Date is prior to the Cross-Over Date, the Trustee shall
distribute the indicated amounts in the following order of priority:
(X) (i) to the Class 2A Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the Amount Available with respect to Sub-Pool 2; and
(B) the Class A Interest Remittance Amount with respect to the
Class 2A Certificates;
(ii) to the Class 2A Certificateholders (subject to the last paragraph
under "--Allocation of Amount Available"), to be applied to reduce the
Class 2A Principal Balance, to the extent described below, until the Class
2A Principal Balance thereof is reduced to zero and to make payments in
respect of the amounts described in clauses (iii) (to the extent the amount
in clause (iii) represents prior Insured Payments or interest thereon) and
(v) of the definition of Class A Principal Remittance Amount with respect
to the Class 2A Certificates below, the lesser of:
(A) the balance of the Amount Available after payments described
in clause (X)(i) above; and
S-82
<PAGE>
(B) the related Class A Principal Remittance Amount with respect
to the Class 2A Certificates;
(iii) to the Sub-Pool 2 Trustee Expense Account, an amount equal to
the lesser of the balance of the Amount Available with respect to Sub-Pool
2 after payments described in clauses (X)(i) and (ii) above and any accrued
and unpaid Annual Trustee Expense Amount with respect to Sub-Pool 2 ;
(iv) to the Class 2A Certificateholders to be applied to reduce the
Class 2A Principal Balance until the Class 2A Principal Balance has been
reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Sub-Pool
2 after payments described in clauses (X)(i) through (iii) above; and
(B) the Additional Principal with respect to Sub-Pool 2;
(v) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Sub-Pool 2
after payments described in clauses (X)(i) through (iv) above and any
expenses paid by the Servicer and/or Depositor that were incurred in
connection with any third party claims that remain unreimbursed;
(vi) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Sub-Pool 2 after payments described in
clauses (X)(i) through (v) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Sub-Pool 2 previously made by the Servicer and not previously reimbursed;
(vii) to the Class 2A Certificateholders until the Class 2A Principal
Balance has been reduced to zero, an amount equal to the lesser of:
(A) the balance of the Remaining Net Excess Spread with respect
to Sub-Pool 2, if any, after payments described in clauses (X)(iv)
through (vi) above and payments of Additional Principal, if any, to
the Class 1A Certificateholders; and
(B) the Available Funds Cap Carry Forward Amount, if any; and
(viii) to the Class R Certificateholders, the balance of the Amount
Available with respect to Sub-Pool 2, if any, after payments described in
clauses (X)(i) through (vii) above.
If the Remittance Date is on or after the Cross-Over Date, the Trustee
shall distribute the indicated amounts in the following order of priority:
(Y) (i) to the Class 2A Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the Amount Available with respect to Sub-Pool 2; and
(B) the related Class A Interest Remittance Amount with respect
to the Class 2A Certificates;
(ii) to the Class 2A Certificateholders (subject to the last paragraph
under "--Allocation of Amount Available"), to be applied to reduce the
Class 2A Principal Balance until the Class 2A Principal Balance has been
reduced to zero and to make payments in respect of the amounts described in
clauses (iii) (to the extent the amounts described in clause (iii)
represent prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount with respect to the Class
2A Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available after payments
described in clause (Y)(i) above; and
(B) the related Class A Principal Remittance Amount with respect
to the Class 2A Certificates;
S-83
<PAGE>
(iii) to the Sub-Pool 2 Trustee Expense Account, an amount equal to
the lesser of the balance of the Amount Available with respect to Sub-Pool
2 after payments described in clauses (Y)(i) and (ii) above and any accrued
and unpaid Annual Trustee Expense Amount with respect to Sub-Pool 2;
(iv) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Sub-Pool 2
after payments described in clauses (Y)(i) through (iii) above and any
expenses paid by the Servicer and/or Depositor that were incurred in
connection with any third party claims that remain unreimbursed;
(v) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Sub-Pool 2 after payments described in
clauses (Y)(i) through (iv) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Sub-Pool 2 previously made by the Servicer and not previously reimbursed;
(vi) to the Class 2A Certificateholders until the Class 2A Principal
Balance has been reduced to zero, the lesser of:
(A) the balance of the Remaining Net Excess Spread with respect
to Sub-Pool 2 after payments described in clauses (Y)(i) through (v)
above and payments of Additional Principal, if any, to the Class 1A
Certificateholders; and
(B) the Available Funds Cap Carry Forward Amount, if any; and
(vii) to the Class R Certificateholders, the balance of the Amount
Available with respect to Sub-Pool 2 after payments described in clauses
(Y)(i) through (vi) above, if any.
The Pooling Agreement provides that to the extent the Certificate Insurer
makes Insured Payments with respect to a Class of Class A Certificates, the
Certificate Insurer (i) will be subrogated to the rights of the Holders of such
Class A Certificates with respect to such Insured Payments, (ii) shall be
deemed, to the extent of the payments so made, to be a registered Holder of such
Class A Certificates and (iii) shall be entitled to reimbursement for such
Insured Payments, with interest accrued thereon at the weighted average of the
related Class A Pass-Through Rates in the case of the Class 1A Certificates and
at the Class 2A Pass-Through Rate in the case of the Class 2A Certificates, on
each Remittance Date after the related Class A Certificateholders have received
the related Class A Remittance Amount (exclusive of any related Class A
Carry-Forward Amount representing amounts previously paid to such
Certificateholders as Insured Payments or interest accrued in respect of such
Insured Payments) for such Remittance Date.
The Certificate Insurer does not guarantee payment of any portion of the
Class 1A-5 Lockout Remittance Amount that is in excess of the Class A Principal
Remittance Amount with respect to Sub-Pool 1 for any Remittance Date.
DEFINITIONS
The "Additional Principal" for the Class 1A or Class 2A Certificates and
any Remittance Date will equal the lesser of (i) the amount necessary to reduce
the related Class 1A or Class 2A Principal Balance so that the
Overcollateralization Amount for the related Sub-Pool equals the related
Required Overcollateralization Amount for such Sub-Pool and (ii) the sum of (a)
the Remaining Net Excess Spread for such Sub-Pool, (b) the Available Transfer
Cashflow for such Sub-Pool and (c) the Net Excess Principal for such Sub-Pool.
The "Amount Available" for a Sub-Pool on a Remittance Date will equal the
sum of:
(i) the Available Remittance Amount for such Sub-Pool (reduced by any
monthly premium payable to the Certificate Insurer);
(ii) the Excess Spread for such Sub-Pool with respect to such
Remittance Date;
(iii) if an Available Funds Shortfall exists in such Sub-Pool,
S-84
<PAGE>
(a) first, the Net Excess Spread from the other Sub-Pool, to the
extent of such Available Funds Shortfall;
(b) second, the Excess Principal from the other Sub-Pool, to the
extent of any remaining Available Funds Shortfall; and
(c) third, any amounts in respect of any remaining Available
Funds Shortfall withdrawn from the related Reserve Account and
deposited in the applicable Certificate Account (as described below
under the caption "--Reserve Account");
(iv) (a) first, the Available Transfer Cashflow, to the extent
necessary to reach the Required Overcollateralization Amount for such
Sub-Pool; and
(b) second, the Net Excess Principal, to the extent necessary to
reach the Required Overcollateralization Amount for such Sub-Pool; and
(v) any Insured Payments with respect to the related Class of
Certificates.
An "Available Funds Shortfall" with respect to any Sub-Pool and Remittance
Date means the amount by which the Available Remittance Amount plus Excess
Spread for such Sub-Pool is less than the Required Payments (other than in
respect of the Class A Principal Remittance Amount after the related Cross-Over
Date) for such Sub-Pool.
The "Available Principal Amount" for any Sub-Pool and Remittance Date will
equal the excess, if any, of the amount described in the related definition of
"Class A Principal Remittance Amount" without giving effect to clause (a)
thereof over the amount described in the definition of "Class A Principal
Remittance Amount" after giving effect to clause (a) thereof.
The "Available Remittance Amount" with respect to any Sub-Pool and
Remittance Date will be the sum of the following:
(i) the sum of all amounts received or required to be paid by the
Servicer, the Depositor or any Sub-Servicer in respect of the related
Mortgage Loans (exclusive of (a) the Depositor's Yield, (b) the Excess
Spread, (c) amounts withdrawn by the Servicer from the related Principal
and Interest Account as set forth in clauses (ii), (iii), (iv), (v) and
(vi) above under the caption "--The Principal and Interest Accounts" and
any amounts not required to be deposited therein and (d) scheduled payments
received in advance of their due date for application on such due date at
the request of the related Mortgagor) during the related Due Period (or, in
the case of amounts paid by the Depositor in connection with the purchase
or substitution of a Mortgage Loan as to which there is defective loan
documentation or a breach of representation or warranty, as of the related
Determination Date) and deposited into the related Principal and Interest
Account as of the related Determination Date;
(ii) the amount of any Advances and Compensating Interest payments
with respect to the related Sub-Pool remitted by the Servicer for such
Remittance Date; and
(iii) any amount applied by the Trustee from funds on deposit in the
related Interest Coverage Account to cover shortfalls in interest on the
related Classes of Class A Certificates attributable to the pre-funding
feature.
The "Available Transfer Cashflow" for each Sub-Pool and Remittance Date
will equal the Remaining Net Excess Spread for the other Sub-Pool remaining
after the payment, if any, of Additional Principal on the Classes of Class A
Certificates related to such other Sub-Pool.
The "Class 1A-1 Pass-Through Rate" for any Remittance Date will be a rate
equal to the least of (i) One-Month LIBOR plus 0.09% per annum, (ii) the
weighted average of the Mortgage Rates of the Sub-Pool 1 Mortgage Loans minus,
with respect to Sub-Pool 1, the sum of (a) the Servicing Fee Rate, (b) the rate
at which the monthly premium payable to the Certificate Insurer is calculated
and (c) the rate at which the Annual Trustee Expense Account is calculated and
(iii) 10.50% per annum (the "Class 1A-1 Cap Rate"); provided, however, that on
any Remittance Date on which the Servicer does not exercise its option to
purchase the Mortgage Loans and REO Properties as
S-85
<PAGE>
described under "Pooling Agreement--Termination; Purchase of the Mortgage Loans"
herein, the rate provided in clause (i) will be One-Month LIBOR plus 0.49% per
annum. One-Month LIBOR will be determined on the second Business Day preceding
the beginning of each Accrual Period with respect to the Class 1A-1
Certificates. For purposes of calculating the Class 1A-1 Pass-Through Rate for
any Remittance Date, because most of the Sub-Pool 1 Mortgage Loans do not
provide for the calculation of interest on an Actual/360 Basis (which is the
basis on which interest is calculated on the Class 1A-1 Certificates), the basis
on which interest is computed on the Sub-Pool 1 Mortgage Loans will be deemed
adjusted to an Actual/360 Basis that will result in the same amount of interest
being due as would be due using the method of computation of interest that is
used to calculate interest on the Sub-Pool 1 Mortgage Loans.
The "Class 1A-2 Pass-Through Rate" for any Remittance Date will be a rate
equal to 6.62% per annum; provided, however, on any Remittance Date on which the
Servicer does not exercise its option to purchase the Mortgage Loans and REO
Properties as described under "Pooling Agreement--Termination; Purchase of the
Mortgage Loans" herein, the rate will be increased by 0.40% per annum.
The "Class 1A-3 Pass-Through Rate" for any Remittance Date will be a rate
equal to 6.69% per annum; provided, however, on any Remittance Date on which the
Servicer does not exercise its option to purchase the Mortgage Loans and REO
Properties as described under "Pooling Agreement--Termination; Purchase of the
Mortgage Loans" herein, the rate will be increased by 0.40% per annum.
The "Class 1A-4 Pass-Through Rate" for any Remittance Date will be a rate
equal to 7.07% per annum; provided, however, on any Remittance Date on which the
Servicer does not exercise its option to purchase the Mortgage Loans and REO
Properties as described under "Pooling Agreement--Termination; Purchase of the
Mortgage Loans" herein, the rate will be increased by 0.40% per annum.
The "Class 1A-5 Pass-Through Rate" for any Remittance Date will be a rate
equal to 6.90% per annum; provided, however, on any Remittance Date on which the
Servicer does not exercise its option to purchase the Mortgage Loans and REO
Properties as described under "Pooling Agreement--Termination; Purchase of the
Mortgage Loans" herein, the rate will be increased by 0.40% per annum.
The "Class 1A-5 Certificate Amount" for any Remittance Date is an amount
equal to the product of (x) a fraction, the numerator of which is the Class 1A-5
Principal Balance immediately preceding such Remittance Date and the denominator
of which is the aggregate Class 1A Principal Balance of all Class 1A
Certificates immediately preceding such Remittance Date and (y) the Class A
Principal Remittance Amount with respect to Sub-Pool 1 for such Remittance Date.
The "Class 1A-5 Lockout Percentage" for any Remittance Date occurring
during the periods set forth below will be as follows:
Period (dates inclusive)
Class 1A-5 Lockout Percentage
-----------------------------
October 27, 1997-September 2000............................... 0%
October 2000-September 2002................................... 45%
October 2002-September 2003................................... 80%
October 2003-September 2004................................... 100%
October 2004 and thereafter................................... 300%
The "Class 1A-5 Lockout Remittance Amount" for any Remittance Date will be
an amount equal to the product of (x) the Class 1A-5 Lockout Percentage and (y)
the Class 1A-5 Certificate Amount for such Remittance Date.
The "Class 2A Pass-Through Rate" for any particular Remittance Date will be
equal to the least of (i) One-Month LIBOR plus 0.20% per annum (the rate
described in this clause (i), the "Class 2A LIBOR Rate") (ii) the weighted
average of the Mortgage Rates of the Sub-Pool 2 Mortgage Loans minus, with
respect to Sub-Pool 2, the sum of (a) the Servicing Fee Rate, (b) the rate at
which the monthly premium payable to the Certificate Insurer is calculated, (c)
the rate at which the Annual Trustee Expense Account is calculated and (d) 0.50%
per annum and (iii) the weighted average of the Maximum Mortgage Rates of the
Sub-Pool 2 Mortgage Loans minus, with respect to Sub-Pool 2, the sum of (a) the
Servicing Fee Rate, (b) the rate at which the monthly premium payable to the
Certificate
S-86
<PAGE>
Insurer is calculated, (c) the rate at which the Annual Trustee Expense Account
is calculated and (d) 0.50% per annum (the rate described in this clause (iii),
the "Class 2A Cap Rate"); provided, that on any Remittance Date on which the
Servicer does not exercise its option to purchase the Mortgage Loans and REO
Properties as described under "Pooling Agreement-Termination; Purchase of the
Mortgage Loans" herein, the rate provided in clause (i) will be One-Month LIBOR
plus 0.60% per annum. One-Month LIBOR will be determined on the second Business
Day preceding the beginning of each Accrual Period with respect to the Class 2A
Certificates. For purposes of calculating the Class 2A Pass-Through Rate for any
Remittance Date, because the Sub-Pool 2 Mortgage Loans provide for the
calculation of interest on a basis other than a 360-day year and the actual
number of days elapsed (which is the basis on which interest is calculated on
the Class 2A Certificates), the basis on which interest is computed on the
Sub-Pool 2 Mortgage Loans will be deemed adjusted to an Actual/360 Basis that
will result in the same amount of interest being due as would be due using the
method of computation of interest that is used to calculate interest on the
Sub-Pool 2 Mortgage Loans.
The "Class A Carry-Forward Amount", with respect to either the Class 1A or
Class 2A Certificates and for any Remittance Date, is the sum of (i) the amount,
if any, by which (A) the related Class A Remittance Amount with respect to all
related Classes of Class A Certificates as of the immediately preceding
Remittance Date exceeded (B) the amount of the actual distribution, exclusive of
any related Insured Payment, to the related Classes of Class A
Certificateholders made on such immediately preceding Remittance Date and (ii)
interest on the amount, if any, described in clause (i) above (to the extent
that the amount in clause (i) above represents Insured Payments), at the
weighted average of the Class 1A-1 Pass-Through Rate, the Class 1A-2
Pass-Through Rate, the Class 1A-3 Pass-Through Rate, the Class 1A-4 Pass-Through
Rate and the Class 1A-5 Pass-Through Rate with respect to Sub-Pool 1, and the
Class 2A Pass-Through Rate with respect to Sub-Pool 2 from such immediately
preceding Remittance Date.
The "Class A Interest Remittance Amount" with respect to the Class 1A-1
Certificates for any Remittance Date will be the interest accrued at the Class
1A-1 Pass-Through Rate for the related Accrual Period on the Class 1A- 1
Principal Balance immediately prior to such Remittance Date; with respect to any
Class of Class 1A Certificates, other than the Class 1A-1 Certificates, for any
Remittance Date will be 30 days' interest at the related Class 1A Pass-Through
Rate on the related Class 1A Principal Balance immediately prior to such
Remittance Date; and with respect to the Class 2A Certificates for any
Remittance Date will be the interest accrued at the Class 2A Pass-Through Rate
for the related Accrual Period on the Class 2A Principal Balance immediately
prior to such Remittance Date. All calculations of interest on the Class 1A-1
and Class 2A Certificates will be computed on the basis of the actual number of
days elapsed in the related Accrual Period and in a year of 360 days.
The "Class A Principal Balance" for any Class of Class A Certificates as of
any date of determination is equal to the related initial Class A Principal
Balance reduced by the sum of (A) all amounts (including that portion of Insured
Payments, if any, made in respect of principal) distributed to such Class A
Certificateholders in respect of principal on all previous Remittance Dates on
account of amounts described in clauses (i), (ii), (iii) (to the extent the
amount in clause (iii) represents a right to receive principal not previously
covered by Insured Payments), (iv) and (vi) of the definition of Class A
Principal Remittance Amount, (B) all other amounts previously distributed to the
related Class A Certificateholders constituting Additional Principal in
reduction of the related Class A Principal Balance and (C) all amounts
previously distributed to the related Class A Certificateholders as a mandatory
prepayment as described below under "--Mandatory Prepayments on Class A
Certificates" (only on the Remittance Date occurring on November 25, 1997).
The "Class A Principal Remittance Amount" with respect to any Sub-Pool and
Remittance Date will be equal to the least of (a) that amount required to reach
the Required Overcollateralization Amount with respect to such Sub-Pool, or
thereafter, to maintain such Required Overcollateralization Amount on such
Remittance Date, (b) the sum of the related Class A Principal Balance with
respect to all related Classes of Class A Certificates and the amounts described
in clauses (iii) (to the extent the amount in clause (iii) represents prior
Insured Payments with respect to the related Sub-Pool or interest thereon) and
(v) below and (c) the sum of the following amounts:
(i) the principal portion of all scheduled and unscheduled payments
received on the related Mortgage Loans during the Due Period including all
Principal Prepayments, Curtailments, other excess
S-87
<PAGE>
payments of principal in respect of the related Mortgage Loans, Insurance
Proceeds, Released Mortgaged Property Proceeds and Net Liquidation
Proceeds;
(ii) an amount equal to the Unrecovered Class A Portion with respect
to the related Sub-Pool;
(iii) the Class A Carry-Forward Amount with respect to the related
Sub-Pool;
(iv) the principal portion of all proceeds deposited in the Principal
and Interest Account with respect to the related Sub-Pool as of the related
Determination Date in connection with the purchase or substitution of a
Mortgage Loan as to which there is defective loan documentation or a breach
of a representation or warranty;
(v) any amounts recovered from the related Class A Certificateholders
during the related Due Period that constituted a Mortgagor payment on a
related Mortgage Loan or an Advance with respect to the related Sub-Pool
that was recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court having competent jurisdiction; and
(vi) the amount, if any, by which (A) the related Class A Principal
Balance with respect to all related Classes of Class A Certificates
immediately prior to such Remittance Date minus the amounts to be
distributed on such Remittance Date pursuant to clauses (i), (ii), (iii)
and (iv) above and pursuant to clauses (X)(vi) through (X)(xi) above under
"--Allocation of Amount Available--Sub-Pool 1" and clause (X)(ii) above
under "--Allocation of Amount Available--Sub-Pool 2" and applied to reduce
the related Class A Principal Balance with respect to all related Classes
of Class A Certificates, exceeds (B) the related Scheduled Class A
Principal Balance for such Remittance Date as set forth in the related
Principal Payment Table (the "Principal Payment Table") attached as an
exhibit to the Pooling Agreement and provided by the Certificate Insurer.
As to the final Remittance Date in connection with the purchase by the
Servicer of all the related Mortgage Loans and REO Properties pursuant to the
Pooling Agreement, the related Class A Principal Remittance Amount shall be that
amount described in clause (b) of the definition of Class A Principal Remittance
Amount above with respect to the related Sub-Pool and such Remittance Date.
The "Class A Remittance Amount" for any Class of Class A Certificates and
any Remittance Date is equal to the sum of the related Class A Interest
Remittance Amount and the related Class A Principal Remittance Amount for such
Remittance Date.
The "Cross-Over Date" with respect to a Sub-Pool is the date on and after
which the amount specified by the Certificate Insurer and set forth in the
Insurance Agreement, among the Depositor, the Servicer, the Certificate Insurer
and the Trustee (the "Subordinated Amount"), is reduced to zero.
The "Excess Principal" for any Sub-Pool and Remittance Date will equal the
lesser of (i) the portion, if any, of the Available Principal Amount for such
Sub-Pool that is not required to be included in the related Class A Principal
Remittance Amount for such Sub-Pool for such Remittance Date as a result of the
application of clause (a) of the related definition of "Class A Principal
Remittance Amount" and (ii) the amount of such portion described in clause (i)
remaining after the application of the related Available Remittance Amount to
cover the Required Payments for such Sub-Pool.
The "Excess Spread" with respect to Sub-Pool 1, for any Remittance Date, is
an amount equal to the sum of (a) the excess of (x) all payments received or
advanced on account of interest on the Sub-Pool 1 Mortgage Loans during the
related Due Period over (y) the sum of (i) the sum of the related Class A
Interest Remittance Amounts for the Class 1A-1, Class 1A-2, Class 1A-3, Class
1A-4 and Class 1A-5 Certificates for such Remittance Date, (ii) one-twelfth of
the Annual Trustee Expense Amount with respect to Sub-Pool 1, (iii) the monthly
premium payable to the Certificate Insurer with respect to Sub-Pool 1, and (iv)
the Servicing Fee with respect to Sub-Pool 1 for such Remittance Date and (b)
with respect to the October 27, 1997 and November 25, 1997 Remittance Dates
only, an amount with respect to the Sub-Pool 1 Pre-Funded Amount determined by
the Certificate Insurer and deposited into the Sub-Pool 1 Interest Coverage
Account by the Depositor on the Closing Date.
S-88
<PAGE>
The "Excess Spread" with respect to Sub-Pool 2, for any Remittance Date, is
an amount equal to the sum of (a) the excess of (x) all payments received or
advanced on account of interest on the Sub-Pool 2 Mortgage Loans during the
related Due Period over (y) the sum of (i) the Class A Interest Remittance
Amount for the Class 2A Certificates for such Remittance Date, (ii) one-twelfth
of the Annual Trustee Expense Amount with respect to Sub-Pool 2, (iii) the
monthly premium payable to the Certificate Insurer with respect to Sub-Pool 2,
and (iv) the Servicing Fee with respect to Sub-Pool 2 for such Remittance Date
and (b) with respect to the October 27, 1997 and November 25, 1997 Remittance
Dates only, an amount with respect to the Sub-Pool 2 Pre-Funded Amount
determined by the Certificate Insurer and deposited into the Sub-Pool 2 Interest
Coverage Account by the Depositor on the Closing Date.
The "Net Excess Amount Available" is the sum of the amounts described in
clauses (i) and (v) of the definition of Amount Available.
The "Net Excess Principal" for any Sub-Pool and Remittance Date will equal
the Excess Principal for such Sub-Pool remaining after the application thereof
to cover an Available Funds Shortfall with respect to the other Sub-Pool.
The "Net Excess Spread" for any Sub-Pool and Remittance Date will equal the
Excess Spread for such Sub-Pool remaining after the application thereof to cover
Required Payments with respect to such Sub-Pool (other than in respect of the
Class A Principal Remittance Amount after the related Cross-Over Date).
The "Overcollateralization Amount" for any Sub-Pool and Remittance Date
will equal the excess, if any, of (i) the sum of (a) the related Sub-Pool
Principal Balance, (b) the related Pre-Funded Amount and (c) the amount, if any,
on deposit in the Reserve Account for such Sub-Pool over (ii) the Class A
Principal Balance with respect to all related Classes of Class A Certificates
after giving effect to the distributions of the related Class A Principal
Remittance Amount on such Remittance Date.
The "Remaining Net Excess Spread" for any Sub-Pool and Remittance Date will
equal the Net Excess Spread for such Sub-Pool remaining after the application
thereof to cover an Available Funds Shortfall with respect to the other
Sub-Pool.
The "Required Overcollateralization Amount" for any Sub-Pool is the
Overcollateralization Amount required by the Certificate Insurer at any time and
set forth in the Insurance Agreement.
The "Required Payments" for any Sub-Pool and Remittance Date will equal the
amount required to pay the related Class A Interest Remittance Amount with
respect to all related Classes of Class A Certificates, the related Class A
Principal Remittance Amount with respect to all related Classes of Class A
Certificates, the Annual Trustee Expense Amount and the premium payable to the
Certificate Insurer.
The "Scheduled Class A Principal Balance" with respect to either the Class
1A or Class 2A Certificates specified in the Principal Payment Table for the
Remittance Date in each of the months commencing with October 27, 1997 and
ending with September 25, 2002, inclusive, is equal to the initial related Class
1A or Class 2A Principal Balance; and the related Scheduled Class A Principal
Balance specified in the related Principal Payment Table for the Remittance Date
in each of the months commencing after September 25, 2002 is computed based upon
the assumed related Class 1A or Class 2A Principal Balance on such date based
upon (i) a 0% Prepayment Assumption, (ii) a weighted average coupon (A) with
respect to the Sub-Pool 1 Mortgage Loans of 11.84% for Balloon Loans and 11.40%
for non-Balloon Loans and (B) with respect to the Sub-Pool 2 Mortgage Loans of
10.03%, (ii) a weighted average amortization term (A) with respect to the
Sub-Pool 1 Mortgage Loans of 178 months for Balloon Loans and 360 months for
non-Balloon Loans, and in the case of Balloon Loans, a balloon payment of
principal due in 180 months and an otherwise normal amortization of the Sub-Pool
1 Mortgage Loans since the Cut-off Date and (B) with respect to the Sub-Pool 2
Mortgage Loans, a weighted average amortization term of 350 months.
The "Unrecovered Class A Portion" with respect to either the Class 1A or
Class 2A Certificates and any Remittance Date is an amount equal to the excess,
if any, of (A) the related Class A Principal Balance with respect to all related
Classes of Class A Certificates minus the sum of (i) all amounts (excluding that
portion of Insured Payments with respect to the related Sub-Pool, if any, to be
made in respect of principal) to be distributed to the related Class A
Certificateholders in respect of principal on such Remittance Date on account of
amounts described in clauses (i), (iii) (to the extent the amount in clause
(iii) represents a right to receive principal not previously covered
S-89
<PAGE>
by an Insured Payment), (iv) and (vi) of the definition of Class A Principal
Remittance Amount, (ii) all other amounts to be distributed to the related
Classes of Class A Certificateholders constituting Additional Principal to the
extent necessary to reach the Required Overcollateralization Amount for the
related Sub-Pool and (iii) all amounts distributed to the related Classes of
Class A Certificateholders as a mandatory prepayment as described below under
"--Mandatory Prepayments on Class A Certificates" (only on the Remittance Date
occurring on November 25, 1997), over (B) the sum of (i) the related Sub-Pool
Principal Balance plus (ii) the related Pre-Funded Amount minus the sum of (x)
the principal portion of the monthly payments received during the related Due
Period and deposited in the related Principal and Interest Account and all
Principal Prepayments, Curtailments, other excess payments of principal,
Insurance Proceeds, Net Liquidation Proceeds, Released Mortgaged Property
Proceeds and net income from any REO Property with respect to the related
Sub-Pool Mortgage Loans to the extent applied by the Servicer as recoveries of
principal in respect of the related Mortgage Loans, which will be distributed to
the related Classes of Class A Certificateholders on such Remittance Date, plus
(y) the aggregate of, as to each related Mortgage Loan which was liquidated
(each, a "Liquidated Mortgage Loan") during the related Due Period, an amount
(not less than zero or greater than the related principal balance) equal to the
excess of (i) the principal balance of such Liquidated Mortgage Loan over (ii)
the principal portion of the related Net Liquidation Proceeds to be distributed
to the related Classes of Class A Certificateholders on such Remittance Date.
MANDATORY PREPAYMENTS ON CLASS A CERTIFICATES
Each Class of the Class A Certificates will be prepaid, on a pro rata
basis, on the November 25, 1997 Remittance Date to the extent that any amount
remains on deposit in the related Pre-Funding Account with respect to the
related Sub-Pool on such Remittance Date. The related Class 1A or Class 2A
Principal Balance will be reduced by an amount equal to the lesser of (i) the
amount then on deposit in the related Pre-Funding Account and (ii) the related
outstanding Class 1A or Class 2A Principal Balance. Although no assurance can be
given, it is anticipated by the Depositor that the principal amount of related
Subsequent Mortgage Loans sold to the Trust Fund will require the application of
substantially all of the related Original Pre-Funded Amounts and that there
should be no material amount of principal prepaid to the related Class A
Certificateholders from the related Pre-Funding Accounts. However, it is
unlikely that the Depositor will be able to deliver related Subsequent Mortgage
Loans with an aggregate principal balance identical to the related Original
Pre-Funded Amounts.
INTEREST COVERAGE ACCOUNT
The Depositor will establish for the benefit of each Class of the Class A
Certificateholders a trust account for each Sub-Pool (with respect to Sub-Pool
1, the "Sub-Pool 1 Interest Coverage Account"; with respect to Sub-Pool 2, the
"Sub-Pool 2 Interest Coverage Account"; each an "Interest Coverage Account"). On
the Closing Date, the Depositor will deposit in each such account a cash amount
as required by the Certificate Insurer and specified in the Pooling Agreement
(with respect to Sub-Pool 1, the "Sub-Pool 1 Interest Coverage Amount"; with
respect to Sub-Pool 2, the "Sub-Pool 2 Interest Coverage Amount"; each, an
"Interest Coverage Amount"). Funds on deposit in the related Interest Coverage
Account will be applied by the Trustee to cover shortfalls in the related Class
A Interest Remittance Amount attributable to the pre-funding feature during the
Funding Period. Such shortfall initially will exist during the Funding Period
because while the related Class A Certificateholders are entitled to receive
interest accruing on the related Class 1A or Class 2A Principal Balance, the
related Class 1A and Class 2A Principal Balance during the Funding Period will
be greater than the aggregate principal balance of the Initial Mortgage Loans
with respect to such Sub-Pool on the Closing Date. Upon conveyance of related
Subsequent Mortgage Loans to the Trust Fund, funds on deposit in the related
Interest Coverage Account will be released by the Trustee to the Depositor to
the extent not necessary to cover such shortfalls.
ADVANCES
Not later than the close of business on the twenty-second day of each month
(or if such day is not a Business Day, on the following Business Day) (the
"Determination Date"), the Servicer shall remit to the Trustee for deposit in
the Certificate Account with respect to the related Sub-Pool an amount (an
"Advance"), to be distributed on the related Remittance Date, equal to the sum
of (a) the interest portions of the aggregate amount of monthly payments on the
Mortgage Loans with respect to the related Sub-Pool (net of the Servicing Fee,
the Annual Trustee Expense Amount and, after the Cross-Over Date, the Excess
Spread) due during the related Due Period, but delinquent as of
S-90
<PAGE>
the close of business on the first day of the month in which such Remittance
Date occurs, (b) with respect to each REO Property that was acquired during or
prior to the related Due Period and which was not disposed of during such Due
Period, an amount equal to the excess, if any, of interest on the principal
balance deemed to apply to such REO Property for the most recently ended
calendar month at the related Mortgage Rate (net of the Servicing Fee, the
Annual Trustee Expense Amount and, after the Cross-Over Date, the Excess Spread)
over the net income from such property for such Due Period, (c) with respect to
each Remittance Date, the amount necessary on the first, second, third and
fourth Remittance Dates to pay 30 days' interest with respect to each
non-delinquent newly originated Mortgage Loan in the related Sub-Pool that has
not had a first payment date as of the Closing Date (net of the Servicing Fee
and the Annual Trustee Expense Amount) and (d) with respect to each Remittance
Date, if pursuant to the Pooling Agreement the Servicer has previously
reimbursed itself for an Advance described in clause (c) above, then an amount
equal to such amount previously reimbursed. The Servicer is required to make an
Advance out of its own funds or out of funds in the Principal and Interest
Account with respect to the related Sub-Pool that do not constitute the related
Amount Available with respect to the related Sub-Pool for such Remittance Date.
EXCESS SPREAD, OVERCOLLATERALIZATION AND CROSS-COLLATERALIZATION PROVISIONS
On any Remittance Date prior to the Cross-Over Date, Holders of the Class
1A and Class 2A Certificates will have a first priority right to 100% of the
related Excess Spread to fund the amount by which the related Class A Remittance
Amount with respect to all related Classes of Class A Certificates, exceeds the
related Available Remittance Amount for such Remittance Date. To the extent
available, the Net Excess Spread and Excess Principal with respect to a Sub-Pool
will then be applied to cover any Available Funds Shortfall with respect to the
other Sub-Pool.
In addition, on any Remittance Date prior to the Cross-Over Date on which
the Overcollateralization Amount for a Sub-Pool is less than the Required
Overcollateralization Amount for such Sub-Pool, the Remaining Net Excess Spread,
the Available Transfer Cashflow, and the Net Excess Principal, if any, will be
used to make additional distributions of principal (the "Additional Principal")
on the related Classes of Class A Certificates until such Overcollateralization
Amount equals the related Required Overcollateralization Amount for such
Sub-Pool.
The Pooling Agreement also provides that on any Remittance Date on which
the Class 2A Pass-Through Rate is based on the Available Funds Cap Rate, the
excess of (i) that amount of interest the Holders of Class 2A Certificates would
be entitled to receive on such Remittance Date had interest been calculated
based on the Class 2A LIBOR Rate (but in no event exceeding the Class 2A Cap
Rate), over (ii) the amount of interest such Class 2A Certificateholders will
receive on such Remittance Date at the Available Funds Cap Rate, will be carried
forward and paid on a subordinated basis to the extent of Excess Spread with
respect to Sub-Pool 2, as described below, to the Holders of Class 2A
Certificates on future Remittance Dates and such amount shall accrue interest at
the then applicable Class 2A Pass-Through Rate, until paid or until the Class 2A
Principal Balance has been reduced to zero (the amount of such excess, together
with such accrued interest, the "Available Funds Cap Carry Forward Amount").
Credit enhancement with respect to the Class 1A Certificates will be
provided in part by the initial Overcollateralization Amount for Sub-Pool 1
resulting from the sum of the Original Sub-Pool 1 Principal Balance and the
Original Sub-Pool 1 Pre-Funded Amount exceeding the initial Class 1A Principal
Balance as of the Closing Date. On the Closing Date, the initial
Overcollateralization Amount with respect to Sub-Pool 1 is expected to be
$1,155,996.61, equal to 0.95% of the sum of the Original Sub-Pool 1 Principal
Balance and the Original Sub-Pool 1 Pre-Funded Amount.
Credit enhancement with respect to the Class 2A Certificates will be
provided in part by the initial Overcollateralization Amount for Sub-Pool 2
resulting from the sum of the Original Sub-Pool 2 Principal Balance and the
Original Sub-Pool 2 Pre-Funded Amount exceeding the initial Class 2A Principal
Balance as of the Closing Date. On the Closing Date, the initial
Overcollateralization Amount with respect to Sub-Pool 2 is expected to be
$5,837,245.74 equal to 3.15% of the sum of the Original Sub-Pool 2 Principal
Balance and the Original Sub-Pool 2 Pre-Funded Amount.
Prior to the related Cross-Over Date, Excess Spread with respect to a
Sub-Pool will be applied first, to cover any Available Funds Shortfall with
respect to such Sub-Pool, second, to cover any Available Funds Shortfall with
S-91
<PAGE>
respect to the other Sub-Pool, third, to pay the amount of any related accrued
and unpaid Annual Trustee Expense Amount, fourth, to reach and maintain the
Required Overcollateralization Amount for such Sub-Pool, if necessary, fifth, to
reach and maintain the Required Overcollateralization Amount for the other
Sub-Pool, if necessary, sixth, with respect to the related Sub-Pool, to
reimburse the Servicer for amounts to which it is entitled, and seventh, with
respect to Sub-Pool 2, to pay on Available Funds Cap Carry Forward, if any, to
the Holders of Class 2A Certificates on a pro rata basis among such
Certificateholders, and to distribute any remaining amounts to the Class R
Certificateholders. After the Cross-Over Date, Excess Spread with respect to a
Sub-Pool, will be applied, first, to cover any Available Funds Shortfall,
second, to cover any Available Funds Shortfall with respect to the other
Sub-Pool, third, to pay the amount of any related accrued and unpaid Annual
Trustee Expense Amount, fourth, to reach and maintain the Required
Overcollateralization Amount for the other Sub-Pool, if necessary, fifth, with
respect to the related Sub-Pool, to reimburse the Servicer, and sixth, with
respect to Sub-Pool 2, to pay the Available Funds Cap Carry Forward Amount, if
any, to the Holders of Class 2A Certificates on a pro rata basis among such
Certificateholders and to distribute any remaining amounts to the Class R
Certificateholders.
Application of the Additional Principal will have the effect of
accelerating the rate of payment of principal of the Class A Certificates until
the Cross-Over Date. Application of funds in accordance with the foregoing is
intended to create and maintain a positive Overcollateralization Amount equal to
the Required Overcollateralization Amount and thereby provide a cushion against
ultimate losses rather than to maintain a regular cash flow to Holders of Class
A Certificates or to guarantee against current losses. There can be no assurance
that the Required Overcollateralization Amount will be attained or maintained.
In addition, the Required Overcollateralization Amount may be reduced at the
discretion of the Certificate Insurer.
RESERVE ACCOUNT
If required by the Certificate Insurer for credit enhancement, on the
Closing Date, the Trustee will establish on the Closing Date a reserve account
with respect to each Sub-Pool (with respect to Sub-Pool 1, the "Sub-Pool 1
Reserve Account"; with respect to Sub-Pool 2, the "Sub-Pool 2 Reserve Account";
each, a "Reserve Account") into which it will deposit upon receipt from the
Depositor an amount specified by the Certificate Insurer (with respect to
Sub-Pool 1, the "Sub-Pool 1 Initial Reserve Account Deposit"; with respect to
Sub-Pool 2, the "Sub-Pool 2 Initial Reserve Account Deposit"; each, an "Initial
Reserve Account Deposit"). Prior to the related Cross-Over Date, funds on
deposit in the Reserve Accounts will be available for withdrawal to fund any
shortfalls between the funds available for distribution to the Holders of the
related Classes of Class A Certificates and the related Class A Remittance
Amount with respect to all related Classes of Class A Certificates. If the
Certificate Insurer has determined that the entire amount of such funds on
deposit therein is not required for credit enhancement and has so directed the
Trustee, the portion of the amount on deposit therein not so required will be
distributed by the Trustee to the Class R Certificateholders on the November 25,
1997 Remittance Date. If amounts on deposit in the related Reserve Account are
available to fund any such shortfall, on each Remittance Date prior to the
Cross-Over Date, funds on deposit in the related Reserve Account equal to the
amount of such shortfall will be withdrawn by the Trustee and deposited into the
related Certificate Account for distribution to the related Class A
Certificateholders. In addition, on any Remittance Date on which the
Overcollateralization Amount for a Sub-Pool exceeds the Required
Overcollateralization Amount for such Sub-Pool, an amount equal to the lesser of
(i) the amount, if any, remaining in the related Reserve Account and (ii) such
excess, will be released to the Class R Certificateholders. On each Remittance
Date, in no event will the sum of (i) the initial Overcollateralization Amount
for a Sub-Pool resulting from the sum of the Original Sub-Pool 1 Principal
Balance and the Original Sub-Pool 1 Pre-Funded Amounts or the sum of the
Original Sub-Pool 2 Principal Balance and the Original Sub-Pool 2 Pre-Funded
Amounts, as the case may be, exceed the related initial Class A Principal
Balance, (ii) the aggregate amount of funds distributed to the related Class A
Certificateholders since the Closing Date from funds in the related Reserve
Account and (iii) the amount of funds distributed to the related Classes of
Class A Certificateholders to produce the related Overcollateralization Amount
since the Closing Date exceed the related Subordinated Amount. The purpose of
the Reserve Accounts is to provide protection, prior to the Cross-Over Date,
against ultimate overall losses on the Mortgage Loans in the related Sub-Pool.
S-92
<PAGE>
POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement") dated as of September 1, 1997, among the
Depositor, the Servicer and LaSalle National Bank, as Trustee, a form of which
agreement is filed as an exhibit to the Registration Statement of which this
Prospectus Supplement is a part. A copy of the Pooling Agreement as executed
will be included in the Current Report on Form 8-K relating to the Class A
Certificates, which will be filed by the Depositor with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Certificates. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the Trust Fund, the terms and
conditions of the Pooling Agreement and the Certificates. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Pooling Agreement. Requests should be
addressed to Superior Bank FSB, 135 Chestnut Ridge Road, Montvale, New Jersey
07645, Attention: President.
THE SERVICER
For further information regarding the Servicer, see "The Servicer" in the
Prospectus.
The Servicer, as of June 30, 1997, serviced approximately $2,315,716,464 of
mortgage loans (including the Mortgage Loans and mortgage loans not originated
or purchased by the Depositor) for major commercial banks, savings and loan
associations and brokerage houses across the country.
Coupon books are provided for all mortgage loans serviced. Mortgagors are
instructed to forward all payments, along with the appropriate coupons, to a
lockbox account. Available funds are then transferred from the lockbox account
to the related Principal and Interest Account. Ten days after a missed payment,
phone calls to the borrower are initiated by the Servicer and on the sixteenth
day, an automated mailgram is sent. Follow-up calls by experienced collection
personnel are made as required to promote prompt payment and to counsel the
borrower. At the second missed payment, generally, an on-site interview is
scheduled with the borrower and the mortgaged property is inspected. If
foreclosure is necessary, the Servicer's Litigation Department supervises and
monitors all litigation procedures (including bankruptcy proceedings) conducted
by the foreclosing attorneys. If title passes to the mortgagee, the Servicer's
real estate division will immediately insure that the mortgaged property is
preserved and protected. Upon extensive review and analysis, a disposition
strategy is developed and the property is aggressively marketed.
The following table and discussion set forth certain information concerning
the delinquency and loss experience on mortgage loans secured by single family
properties, multifamily properties and mixed residential and commercial
structures (including the Mortgage Loans originated or purchased by the
Depositor and serviced by the Servicer). Since the acquisition of Alliance, the
credit profile of mortgage loans originated or purchased by the Depositor as
compared with mortgage loans originated or purchased by Alliance prior to its
acquisition has changed, in part because a greater proportion of mortgage loans
in more recent periods have been originated under underwriting classes described
herein under "The Depositor-Underwriting Criteria-Sub-Pool 1" and "-Sub-Pool 2"
having generally stricter underwriting criteria. The mortgage loans originated
or purchased since the acquisition of Alliance constitute a majority of all of
the loans now serviced by the Servicer. If the following table were to include
information for periods prior to such acquisition, the table would reflect
higher delinquency and loss experience, attributable in part to inclusion of
mortgage loans originated in such prior periods under underwriting classes
described herein under "The Depositor-Underwriting Criteria-Sub-Pool 1" and
"-Sub-Pool 2" having generally less strict underwriting criteria.
S-93
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND LOSS EXPERIENCE(1)
($ IN THOUSANDS)
FOR THE YEAR ENDED JUNE 30
-------------------------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Outstanding Principal Balance.............. $592,360 $913,267 $1,332,113 $1,904,232
Number of Loans.................................. 8,440 12,895 18,420 26,119
Period of Delinquency(2):
30-59 Days(3)
Principal Balance............... $ 2,864 $ 7,654 $ 14,299 $ 39,594
Number of Loans................. 49 93 210 526
Percent Delinquency by Dollar... 0.48% 0.84% 1.07% 2.08%
60-89 Days
Principal Balance............... $ 531 $ 2,242 $ 6,419 $ 15,252
Number of Loans................. 7 36 82 186
Percent Delinquency by Dollar... 0.09% 0.25% 0.48% 0.80%
90 Days or More
Principal Balance............... $ 3,420 $ 14,101 $ 39,110 $ 77,465
Number of Loans................. 54 192 431 813
Percent Delinquency by Dollar... 0.58% 1.54% 2.94% 4.07%
Total Delinquency
Principal Balance............... $ 6,815 $ 23,997 $ 59,828 $ 132,311
Number of Loans................. 110 321 723 1,525
Percent Delinquency by Dollar... 1.15% 2.63% 4.49% 6.95%
Average Outstanding Principal Balance............ $410,653 $768,136 $1,104,163 $1,624,031
Net Gains/(Losses) on Liquidated Loans........... $ 11 $ (326) $ (1,684) $ (8,092)
Net Gains/(Losses) as a Percent of Average
Outstanding Principal Balance............ 0.00% (0.04)% (0.15)% (0.50)%
Net Gains/(Losses) on Liquidated Loans
including advances(4).................... $ 11 $ (326) $ (1,703) $ (8,161)
Net Gains/(Losses) as a Percent
of Average Outstanding
Principal Balance (4).................... 0.00% (0.04)% (0.15)% (0.50)%
</TABLE>
- ----------
(1) This table includes fixed-rate and adjustable-rate mortgage loans.
(2) Includes mortgage loans in the process of foreclosure and mortgaged
properties acquired through foreclosure or deed in lieu of foreclosure.
(3) Represents two payments missed.
(4) Includes all net recorded servicer advances through date of liquidation
less recoveries of such advances.
The number of outstanding mortgage loans originated pursuant to the
Adjustable-Rate First Mortgage Program in the Servicer's loan portfolio, and the
total principal balance of such loans, as of June 30, 1997 were approximately
6,906 and $793,336,332, respectively, as of June 30, 1996 were approximately
4,179 and $472,639,000, respectively, as of June 30, 1995 were approximately
2,710 and $291,801,000, respectively, and as of June 30, 1994 were approximately
1,978 and $200,290,000, respectively. As of June 30, 1997, only 398 such
adjustable-rate mortgage loans were delinquent.
At June 30, 1997 with respect to the mortgage loans set forth in the
preceding table, 101 properties (representing $11,131,499 in principal balance
of such loans) were acquired through foreclosure of the related mortgage loans
or through deed in lieu of foreclosure and were not liquidated. The average
length of ownership of foreclosed properties has historically been 5.78 months
with an average loss (including accrued and unpaid interest) per property of
$38,298.
The delinquency and loss experience percentages in the preceding table are
calculated on the basis of all conventional mortgage loans serviced for the
Depositor as of the end of the periods indicated. However, because the total
amount of loans serviced by the Servicer has rapidly increased over these
periods as a result of new originations, the total amount of loans serviced as
of the end of any indicated period will include many loans that will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial continuous additions
of newly originated loans to the total amount of loans serviced, the delinquency
percentages indicated in the preceding table would be higher and could be
substantially higher.
S-94
<PAGE>
THE TRUSTEE
LaSalle National Bank ("LaSalle"), a nationally chartered commercial bank
located in Chicago, Illinois, will be named Trustee pursuant to the Pooling
Agreement. LaSalle has accepted appointment as the certificate registrar and
paying agent pursuant to the Pooling Agreement. The Trustee may resign at any
time in the manner set forth in the Pooling Agreement, in which event the
Servicer will be obligated to appoint a successor trustee. The Trustee may be
removed if it ceases to be eligible to continue as such under the Pooling
Agreement, if it becomes insolvent or if it fails to perform in accordance with
the Pooling Agreement. The Trustee may also be removed by the Depositor without
cause, as long as the Certificate Insurer consents to such removal. Any
resignation or removal of the Trustee and appointment of a successor trustee
will not become effective until the acceptance of appointment by a successor
trustee. The Trustee may appoint a custodian to hold the Mortgage Loans and has
initially appointed itself to act in such capacity. The Depositor may maintain
other banking relationships in the ordinary course of business with the Trustee
and any custodian.
PAYMENT OF EXPENSES
In order to provide for the payment of the fees and expenses of the
Trustee, the Trustee will establish and maintain an account for each Sub-Pool
(with respect to Sub-Pool 1, the "Sub-Pool 1 Trustee Expense Account"; with
respect to Sub-Pool 2, the "Sub-Pool 2 Trustee Expense Account"; each a "Trustee
Expense Account") into which the Trustee will deposit on each Remittance Date,
one-twelfth of the Annual Trustee Expense Amount. The "Annual Trustee Expense
Amount" with respect to each Mortgage Loan is equal to 0.03% per annum times the
related Principal Balance. Amounts on deposit in the related Trustee Expense
Account will be withdrawn pursuant to the terms of the Pooling Agreement to pay
the fees and expenses of the Trustee with respect to the related Sub-Pool. On
each Remittance Date, the Trustee will pay from amounts on deposit in the
related Certificate Account, prior to making any required distributions to the
Certificateholders, an amount that is sufficient to pay the monthly premium due
the Certificate Insurer.
TERMINATION; PURCHASE OF MORTGAGE LOANS
On any Remittance Date on which the aggregate outstanding principal balance
of the Mortgage Loans in the Trust Fund is less than or equal to 5% of the sum
of the Original Pool Principal Balance and the Original Pre-Funded Amount, the
Servicer may determine to purchase and may purchase from the Trust Fund all of
the Mortgage Loans and all REO Property at a price equal to the sum of (i) 100%
of the Principal Balance of each Mortgage Loan remaining plus one month's
accrued interest thereon at the related Net Mortgage Rate and (ii) the appraised
value of any such REO Property remaining determined in accordance with the terms
of the Pooling Agreement (the "Termination Price"). See "Description of the
Certificates--Termination" in the Prospectus.
In connection with any such purchase by the Servicer, the Servicer shall
remit to the Trustee for remittance to the related Certificateholders on the
final Remittance Date with respect to such terminated Sub-Pool all other amounts
then on deposit in the related Principal and Interest Account that would have
constituted part of the related Available Remittance Amount for subsequent
Remittance Dates absent such purchase.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer may, pursuant to the Pooling Agreement, remove the
Servicer as servicer with respect to the Mortgage Loans of a Sub-Pool upon the
occurrence and continuation beyond the applicable cure period of any of the
following events (each, an "Event of Default"), other than the event described
in clause (i)(C) below, and the Holders of the Class 1A or the Class 2A
Certificates evidencing in excess of 51% of the related Class A Principal
Balance (with respect to a Sub-Pool, the "Majority Certificateholders"), with
the consent of the Certificate Insurer, which consent may not be unreasonably
withheld, may remove the Servicer as servicer of the Mortgage Loans of the
related Sub-Pool upon the occurrence and continuation beyond the applicable cure
period of (a) an event described in clause (ii) below or (b) upon the failure of
the Certificate Insurer to exercise its rights to remove the Servicer upon the
occurrence of any event described in clauses (i)(A), (i)(B), (i)(D), (iii), (iv)
or (v) below:
(i)(A) an Event of Nonpayment, unless in the case of an Event of
Nonpayment described in clauses (i) or (ii) of the definition thereof, the
insufficiency described in such clauses (i) or (ii) results from a failure
of the Certificate Insurer or the Trustee to perform in accordance with its
respective obligations with
S-95
<PAGE>
respect to such Sub-Pool; (B) the failure by the Servicer to make any
required Servicing Advance with respect to such Sub-Pool, to the extent
such failure materially and adversely affects the interests of the
Certificate Insurer or the related Certificateholders; (C) the failure by
the Servicer to make any required Advance with respect to such Sub-Pool; or
(D) any other failure by the Servicer to remit to related
Certificateholders, or to the Trustee for the benefit of the related
Certificateholders, any payment required to be made under the terms of the
Pooling Agreement with respect to the related Certificates, to the extent
such failure materially and adversely affects the interests of the
Certificate Insurer or the related Certificateholders and which continues
unremedied after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to the Servicer by
the Certificate Insurer or the Trustee or to the Servicer and the Trustee
with the consent of the Certificate Insurer; or
(ii) failure by the Servicer duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Servicer with respect to a Sub-Pool as set forth in the Pooling Agreement
with respect to the related Certificates, which failure continues
unremedied for a period of 60 days after the date on which written notice
of such failure, requiring the same to be remedied, shall have been given
to the Servicer by the Trustee or to the Servicer and the Trustee by the
Certificate Insurer or any related Certificateholder with the consent of
the Certificate Insurer; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Servicer
and such decree or order shall have remained in force, undischarged or
unstayed for a period of 60 days; or
(iv) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to the
Servicer or of or relating to all or substantially all of the Servicer's
property and such appointment shall continue unremedied for a period of 30
days after the Servicer has received notice of such default; or
(v) the Servicer shall admit in writing its inability to pay its debts
as they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its obligations, any of
which shall continue unremedied for a period of 30 days after the Servicer
has received notice of such default.
Upon the occurrence of the event described in clause (i)(C), and the
Servicer's failure to remedy such by twelve o'clock noon, New York City time, on
the next succeeding Business Day, the Trustee or a successor Servicer will
immediately assume the duties of the Servicer with respect to the related
Sub-Pool.
An "Event of Nonpayment" is defined in the Pooling Agreement as (i) with
respect to any Remittance Date after the related Cross-Over Date, the
insufficiency of amounts remitted to the Trustee by the Servicer and available
to the Trustee to pay the full amount of the related Class A Remittance Amount
(exclusive of the related Class A Carry-Forward Amount that represents Insured
Payments or interest accrued in respect of Insured Payments), and the monthly
premium payable to the Certificate Insurer, (ii) with respect to any Remittance
Date on or prior to the related Cross-Over Date, the insufficiency of amounts
remitted to the Trustee by the Servicer and available to the Trustee from
amounts on deposit in the related Reserve Account, the related Interest Coverage
Account, and the amount of any Net Excess Spread from the other Sub-Pool and the
amount of any Excess Principal from the other Sub-Pool, to pay the full amount
of the related Class A Remittance Amount (exclusive of the related Class A
Carry-Forward Amount that represents Insured Payments or interest accrued in
respect of Insured Payments), and the monthly premium payable to the Certificate
Insurer, and (iii) the sum of all Realized Losses with respect to such Sub-Pool
exceeds an amount specified in the Pooling Agreement. In certain instances of
the occurrence of an Event of Nonpayment the Trustee and the Certificate Insurer
may prohibit the termination of the Servicer with respect to a Sub-Pool if such
Event of Nonpayment does not result from the action or omission of the Servicer.
S-96
<PAGE>
Under the Pooling Agreement, if Realized Losses and delinquencies with
respect to a Sub-Pool reach certain specified levels, the Certificate Insurer
has the option to direct the Trustee to remove the Servicer with respect to such
Sub-Pool.
Upon removal or resignation of the Servicer as servicer of the Mortgage
Loans, the Trustee will be the successor servicer of the Mortgage Loans of the
related Sub-Pool (the "Successor Servicer"). The Trustee and any other Successor
Servicer in such capacity is entitled to the same reimbursement for advances and
servicing compensation with respect to the Mortgage Loans of the related
Sub-Pool as the Servicer. See "Description of the Pooling and Servicing
Agreements--Servicing and Other Compensation and Payment of Expenses" and
"--Rights Upon Event of Default" in the Prospectus.
RECORDATION OF ASSIGNMENTS OF MORTGAGES
Assignments of the Mortgage Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except in
states such as New York where, in the opinion of counsel, such recording is not
required to protect the Trustee's interest in the Mortgage Loan against the
claim of any subsequent transferee or creditor of the Depositor.
AMENDMENT
In addition to the provisions for amendment of the Pooling Agreement
described in the Prospectus, with respect to the Certificates, the Required
Overcollateralization Amounts and the Subordinated Amounts may be reduced at the
discretion of the Certificate Insurer and, consequently, without the consent of,
or notice to, the Holders of Class A Certificates.
THE CERTIFICATE INSURER AND THE CERTIFICATE INSURANCE POLICY
The information set forth in this section and in the financial statements
of Financial Guaranty Insurance Company (the "Certificate Insurer") set forth in
Appendix A and Appendix B hereto, has been provided by the Certificate Insurer.
No representation is made by the Depositor or any of its affiliates as to the
accuracy or completeness of any such information.
Financial Guaranty Insurance Company, the Certificate Insurer, a New York
stock insurance corporation, is a monoline financial guaranty insurance company
which, since January 1984, has been a leading insurer of bonds issued by
municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations and
pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also authorized
to carry on general insurance business in the United Kingdom and to write credit
and guaranty insurance in France.
The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Certificate Insurer.
The Certificate Insurer and its holding company, FGIC Corporation, are
subject to regulation by the State of New York Insurance Department and by each
other jurisdiction in which the Certificate Insurer is licensed to write
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies and their insurance subsidiaries
to register and file certain reports, including information concerning their
capital structure, ownership and financial condition and require prior approval
by the insurance department of their state of domicile of changes in control, of
dividends and of other intercorporate transfer of assets and of transactions
between insurance companies, their parents and affiliates. The Certificate
Insurer is required to file quarterly and annual statutory financial statements
and is subject to statutory restrictions concerning the types and quality of
investments, the use of policy forms, premium rates and the size of risk that it
may insure, subject to reinsurance. Additionally, the Certificate Insurer is
subject to triennial audits by the State of New York Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that it considers to be of investment grade quality. With
respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains
S-97
<PAGE>
its own underwriting standards that are based on those aspects of credit quality
that the Certificate Insurer deems important for the category and that take into
account criteria established for the category typically used by rating agencies.
Credit criteria for evaluating securities include economic and social trends,
debt management, financial management and legal and administrative factors, the
adequacy of anticipated cash flow, including the historical and expected
performance of assets pledged for payment of securities under varying economic
scenarios, underlying levels of protection such as insurance or
overcollateralization, and, particularly in the case of long-term municipal
securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities such as the Class A Certificates. If the issuer of a security insured
by the Certificate Insurer defaults on its obligations to pay such debt service,
or, in the case of a pass-through security, available funds are insufficient to
pay the insured amounts, the Certificate Insurer will make the scheduled insured
payments, without regard to any acceleration of the securities which may have
occurred, and will be subrogated to the rights of security holders to the extent
of its payments. The claims paying ability of the Certificate Insurer is rated
Aaa, AAA and AAA by Moody's, Standard & Poor's and Fitch Investors Service,
Inc., respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
As of June 30, 1997, and December 31, 1996 and 1995 the Certificate Insurer
had written directly or assumed through reinsurance, guaranties of approximately
$215.3 billion, $205.0 billion and $180.0 billion par value of securities,
respectively (of which approximately 85 percent, 82 percent and 88 percent,
respectively, constituted guaranties of municipal bonds), for which it had
collected gross premiums of approximately $2.09 billion, $2.05 billion and $1.95
billion, respectively. As of June 30, 1997, the Certificate Insurer had
reinsured approximately 30 percent of the risks it had written, 26 percent
through quota share reinsurance, 27 percent through excess of loss reinsurance
and 48 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1995, December 31, 1996, and June 30, 1997,
respectively. No material adverse change in the capitalization of the
Certificate Insurer has occurred since June 30, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996 JUNE 30, 1997
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
------------- ------------- -------------
<S> <C> <C> <C>
Unearned Premiums................................ $ 728 $ 682 $ 656
Other Liabilities................................ 304 288 250
Stockholder's Equity
Common Stock................................. 15 15 15
Additional Paid-in Capital................... 334 334 334
Unrealized Gains (Losses).................... 64 39 48
Foreign Currency Translation Adjustment...... (2) (1) (1)
Retained Earnings............................ 1,137 1,297 1,387
------ ------ ------
Total Stockholder's Equity....................... 1,548 1,684 1,783
------ ------ ------
Total Liabilities and Stockholder's Equity....... $2,580 $2,654 $2,689
====== ====== ======
</TABLE>
S-98
<PAGE>
For further financial information concerning the Certificate Insurer, see
the audited and unaudited financial statements of the Certificate Insurer
included as Appendix A and Appendix B of this Prospectus Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth under the
heading "The Certificate Insurer and the Certificate Insurance Policy" herein
and in Appendix A and Appendix B.
The Certificate Insurer will issue a certificate insurance policy for the
Class A Certificates (the "Certificate Insurance Policy"). The Certificate
Insurance Policy unconditionally guarantees the payment of Insured Payments on
the Class A Certificates. "Insured Payments" as to any Remittance Date means the
amount, if any, by which the related Class A Remittance Amount with respect to
all related Classes of the Class A Certificates (excepting amounts payable in
connection with the repurchase or substitution of defective Mortgage Loans if
such amounts are due but not paid by the Depositor) exceeds the sum of (a) the
related Available Remittance Amount (minus the monthly premium payable to the
Certificate Insurer), (b) the lesser of (1) the sum of (i) if any such
Remittance Date is prior to the Cross-Over Date, the Excess Spread deposited
into the related Certificate Account as of such Remittance Date, (ii) to the
extent of an Available Funds Shortfall, the Net Excess Spread from the other
Sub-Pool, if any, and (iii) to the extent of an Available Funds Shortfall, the
Excess Principal from the other Sub-Pool, if any, and (2) the related
Subordinated Amount, (c) any amount transferred from the related Reserve Account
to the Certificate Account, and (d) the aggregate amount of any previous related
Insured Payments for which the Certificate Insurer has not been reimbursed by
the Trustee pursuant to the Pooling Agreement, together with that portion of the
amounts described in the immediately preceding clause (a) of the definition of
Insured Payment that represents interest accrued in respect of prior Insured
Payments. The Certificate Insurer will make each such Insured Payment (other
than that portion of an Insured Payment constituting a Preference Amount
(defined below)) to the Trustee as paying agent on the later of (a) the
Remittance Date on which such Insured Payment is distributable to the related
Class A Certificateholders pursuant to the Pooling Agreement and (b) the
business day next following the day on which the Certificate Insurer shall have
received telephonic or telegraphic notice, subsequently confirmed in writing, or
written notice by registered or certified mail, from the Trustee as paying agent
specifying that an Insured Payment is due. The Certificate Insurance Policy will
provide for payment of the amount (a "Preference Amount") of any distributions
in respect of principal or interest previously paid to a Class A
Certificateholder that are subsequently recovered from such Certificateholder
prior to the expiration date of the Certificate Insurance Policy, pursuant to a
final, nonappealable order of a court of competent jurisdiction under the United
States Bankruptcy Code. Any such payments would be made under the Certificate
Insurance Policy on the second business day following receipt by the Certificate
Insurer of notice as described above, a certified copy of such final order,
assignment to the Certificate Insurer of such Certificateholder's rights and
claims with respect to such Preference Amount and appointment of the Certificate
Insurer as such Certificateholder's agent in respect of the Preference Amount.
No Holder of a Class A Certificate shall be entitled to reimbursement for any
payment avoided as a preference as to which the Certificate Insurer previously
has made a payment under the Certificate Insurance Policy, nor is the
Certificate Insurer obligated to make any payment in respect of any Preference
Amount which represents a payment of the principal amount of the Class A
Certificates prior to the time the Certificate Insurer otherwise would have been
required to make a payment in respect of such principal.
S-99
<PAGE>
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee.
For purposes of the Certificate Insurance Policy, "Class A
Certificateholder" as to a particular Certificate, does not include the Trust
Fund, the Servicer, any Sub-Servicer or the Depositor.
The Certificate Insurer only insures the timely receipt of interest on the
Class A Certificates and the ultimate receipt of principal on the Class A
Certificates. The Certificate Insurer does not guarantee (i) any rate of
principal payments on the Class A Certificates other than that set forth in the
related Principal Payment Table attached as an exhibit to the Pooling Agreement
and provided by the Certificate Insurer, (ii) any recovery of payments deemed
voidable preferences under state law, (iii) the payment of the purchase price by
the Depositor in connection with the purchase of Mortgage Loans due to defective
documentation or a breach of representation or warranty, (iv) payment of any
portion of the Class 1A-5 Lockout Remittance Amount that is in excess of the
Class A Principal Remittance Amount with respect to Sub-Pool 1 for any
Remittance Date or (v) the payment of any Available Funds Cap Carry Forward
Amount with respect to Sub-Pool 2 for any Remittance Date. The Certificate
Insurance Policy is non-cancelable. The Certificate Insurance Policy expires and
terminates without any action on the part of the Certificate Insurer or any
other person on the date that is one year and one day following the date on
which the Class A Certificates have been paid in full.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
In the absence of payments under the Certificate Insurance Policy,
Certificateholders will directly bear the credit and other risks associated with
their undivided interest in the Trust Fund.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling Agreement, for federal
income tax purposes, the Trust Fund REMIC will qualify as a REMIC within the
meaning of the Code.
For federal income tax purposes, the Class R Certificates will be the sole
Class of "residual interests" and the Class A Certificates will be the "regular
interests" in the Trust Fund REMIC and will generally be treated as debt
instruments of the Trust Fund REMIC. See "Certain Federal Income Tax
Consequences" in the Prospectus.
For federal income tax information reporting purposes, the Class A
Certificates will not be treated as having been issued with original issue
discount. With respect to Sub-Pool 1, the prepayment assumptions that will be
used in determining the rate of accrual of market discount and premium, if any,
for federal income tax purposes will be based on the assumption that subsequent
to the date of any determination, the Sub-Pool 1 Mortgage Loans will prepay at a
rate of 2% per annum of the then outstanding principal balance of such Sub-Pool
1 Mortgage Loans in the first month of the life of the Sub-Pool 1 Mortgage Loans
and an additional 2.1818% per annum in each month thereafter until the
twenty-first month, then, beginning in the twenty-first month and in each month
thereafter during the life of the Sub-Pool 1 Mortgage Loans, 26% per annum each
month. With respect to Sub-Pool 2, the prepayment assumptions that will be used
in determining the rate of accrual of market discount and premium, if any, for
federal income tax purposes for the REMIC will be based on the assumption that
subsequent to the date of any determination, the Sub-Pool 2 Mortgage Loans will
prepay at a rate of 28% CPR. No representation is made that the Mortgage Loans
will prepay at these rates or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount", "--Market Discount" and "--Premium" in the Prospectus.
S-100
<PAGE>
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class 1A-1 Certificates and the Class 2A Certificates should be aware that
the OID Regulations do not adequately address certain issues relevant to, or are
not applicable to prepayable securities, such as the Class 1A-1 Certificates and
the Class 2A Certificates. In addition, there is considerable uncertainty
concerning the application of Section 1272(a)(6) of the Code and the OID
Regulations to REMIC Regular Certificates that provide for payments based on an
adjustable rate, such as the Class 1A-1 Certificates and the Class 2A
Certificates. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to the Class 1A Certificates and the Class 2A
Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to the Class 1A-1
Certificates and the Class 2A Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Class 1A-1 Certificates
and the Class 2A Certificates should be treated as having been issued with
original issue discount or should be governed by some other method not yet set
forth in regulations. Prospective purchasers of the Class 1A-1 Certificates and
the Class 2A Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
If the Class 1A-1 Certificates and the Class 2A Certificates are required
to be treated as having been issued with original issue discount it appears that
a reasonable method of reporting original issue discount with respect to the
Class 1A-1 Certificates and the Class 2A Certificates, generally would be to
report all income with respect to such Certificates as original issue discount
for each period, computing such original issue discount (i) by assuming that the
value of the applicable index will remain constant for purposes of determining
the original yield to maturity of, and projecting future distributions on, such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" in the Prospectus.
In general the Class A Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code, "real estate assets" under Section
856(c)(4)(A) of the Code generally in the same proportion that the assets of the
Trust Fund REMIC would be so treated. Moreover, if 95% or more of such assets
qualify for any of the foregoing treatments at all times during a calendar year,
the Class A Certificates will qualify for the corresponding status in their
entirety for that calendar year. In addition, the Class A Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code.
Furthermore, interest on the Class A Certificates will be treated as "interest
on obligations secured by mortgages on real property" under Section 856(c)(3)(B)
of the Code generally to the extent that such Class A Certificates are treated
as "real estate assets" under Section 856(c)(4)(A) of the Code. Amounts held in
the Trustee Expense Accounts, the Reserve Accounts and the Interest Coverage
Accounts may not be treated as assets described in the foregoing sections of the
Code. In addition, prior to November 21, 1997 or any earlier Subsequent Transfer
Date on which the entire balance of the related Original Pre-Funded Amount is
applied to purchase Subsequent Mortgage Loans, the related Pre-Funding Account
will be an asset of the Trust Fund REMIC, and may not be an asset described in
certain of the foregoing sections of the Code. Moreover, to the extent that the
Mortgage Loans represent loans secured by mixed residential and commercial
structures, such loans will be treated as assets described in Section
7701(a)(19)(C) of the Code only if the residential use of the property securing
such loans exceeds 80% of the property's entire use. See "Certain Federal Income
Tax Consequences--REMICs--Characterization of Investment in REMIC Certificates"
in the Prospectus.
To the extent permitted by then applicable law, any "prohibited
transactions tax", "contributions tax", tax on "net income from foreclosure
property" or state or local income or franchise tax that may be imposed on the
Trust Fund REMIC will be borne by the Servicer or Trustee in either case out of
its own funds, provided that the Servicer or the Trustee, as the case may be,
has sufficient assets to do so, and provided further that such tax arises out of
a breach of the Servicer's or the Trustee's obligations, as the case may be,
under the Pooling Agreement and in respect
S-101
<PAGE>
of compliance with then applicable law. Any such tax not borne by the Servicer
or the Trustee will be payable out of the Trust Fund REMIC which may reduce the
amounts otherwise payable to Holders of Class A Certificates. See "Certain
Federal Income Tax Consequences--Taxation of Owners of REMIC Residual
Certificates--Prohibited Transactions and Other Possible REMIC Taxes" in the
Prospectus.
A Certificateholder that is not a "United States person" (as defined in the
Prospectus) and is not subject to federal income tax as a result of any direct
or indirect connection to the United States in addition to its ownership of a
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a Certificate, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such Certificateholder). If
the holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
The Servicer will be designated as the "tax matters person" (as defined in
Treasury regulation Section 301.6231(a)(7)-1a) with respect to the Trust Fund
REMIC, and in connection therewith will be required to hold not less than 0.01%
of the Percentage Interests of the Class R Certificates.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" in the
Prospectus.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, and any other entity that may be deemed
to be investing plan assets, including insurance companies, as applicable, that
are subject to the fiduciary responsibility provisions of ERISA and Section 4975
of the Code ("Plans") should carefully review with its legal advisors whether
the purchase or holding of Class A Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or the Code.
Any Plan fiduciary which proposes to cause a Plan to purchase Class A
Certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
the Exemptions or any other prohibited transaction exemption in connection
therewith, in particular, Prohibited Transaction Class Exemption 83-1 ("PTCE
83-1") for certain transactions involving mortgage pool investment trusts, as
discussed in "ERISA Considerations" in the Prospectus. As described in the
Prospectus, it is not clear whether the Certificates would be "mortgage
pass-through certificates" for purposes of applying PTCE 83-1. A purchaser of a
Class A Certificate should also be aware that even if the conditions specified
in one or more exemptions are met, the scope of the relief provided by an
exemption might not cover all acts which might be construed as prohibited
transactions. With respect to the applicability of ERISA, each Sub-Pool will be
deemed to be a separate sub-trust within the Trust Fund.
The DOL issued individual exemptions, Prohibited Transaction Exemption
90-29 to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Prohibited Transaction Exemption 90-23 to J.P. Morgan Securities Inc. ("J.P.
Morgan") (the "Exemptions"), which generally exempt from the application of the
prohibited transaction provisions of Section 406 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of mortgage pass-through certificates underwritten or placed by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the
S-102
<PAGE>
Exemptions are satisfied. For purposes of this section "ERISA Considerations",
the term "Underwriter" shall include (a) Merrill Lynch, (b) J.P. Morgan, (c) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with either Merrill Lynch or J.P. Morgan
and (d) any member of the underwriting syndicate or selling group of which a
person described in (a), (b) or (c) is a manager or co-manager with respect to a
Class of Certificates.
The Exemptions set forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Class A Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of Class
A Certificates by a Plan must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Exemptions only apply to Class A Certificates evidencing rights and
interests not subordinated to the rights and interests evidenced by the other
certificates of the same Trust Fund. Third, the Class A Certificates at the time
of acquisition by the Plan must be rated in one of the three highest generic
rating categories by Standard & Poor's, Moody's, Duff & Phelps Credit Rating Co.
or Fitch. Fourth, the Trustee cannot be an affiliate of any other member of the
"Restricted Group", which consists of any Underwriter, the Depositor, the
Trustee, the Servicer, any sub-servicer, the Certificate Insurer and any
mortgagor with respect to Mortgage Loans constituting more than 5% of the
aggregate unamortized principal balance of the Mortgage Loans in the related
Sub-Pool as of the date of initial issuance of the Certificates. Fifth, the sum
of all payments made to and retained by the Underwriters must represent not more
than reasonable compensation for underwriting the Class A Certificates; the sum
of all payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Fund must represent not more than the fair
market value of the Mortgage Loans; and the sum of all payments made to and
retained by the Servicer and any sub-servicer must represent not more than
reasonable compensation for such person's services under the Pooling Agreement
and reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
If the general conditions of the Exemptions are satisfied, the Exemptions
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of Class A
Certificates by Plans. However, no exemption is provided from the restrictions
of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any person
who has discretionary authority or renders investment advice with respect to the
assets of such Excluded Plan. For purposes of the Certificates, an Excluded Plan
is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemptions are also satisfied, the
Exemptions may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Class A Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Class A Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemptions are satisfied,
the Exemptions may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Mortgage Pool.
The Exemptions also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through
S-103
<PAGE>
(D) of the Code if such restrictions are deemed to otherwise apply merely
because a person is deemed to be a "party in interest" (within the meaning of
Section 3(14) of ERISA) or a "disqualified person" (within the meaning of
Section 4975(e)(2) of the Code) with respect to an investing Plan by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of the Plan's ownership of
Certificates.
On July 21, 1997, the DOL issued (62 Fed. Reg. 39021) amendments to the
Exemptions, and similar exemptions issued to other underwriters (the
"Amendments") under which the Exemptions would apply, subject to the
satisfaction of certain conditions, to transactions involving a trust the assets
of which include a pre-funding account to be used subsequent to the closing of
the transaction to purchase additional assets for the trust. In its prefatory
comments to the Amendments as proposed by the DOL (62 Fed. Reg. 28502), the DOL
stated its interpretive position that a transaction which satisfied the
conditions of the Exemptions, but did not satisfy the conditions of the
Amendments as proposed could nevertheless qualify for exemptive relief if it
included a pre-funding account that was used only to acquire assets that are
specifically identified by the sponsor or originator as of the closing date, but
transferred to the trust after the closing date for administrative or other
reasons. Although the Pre-Funding Account will not satisfy the conditions of the
Proposed Amendments, it will be used by the Trustee solely to pay for the
acquisition of Subsequent Mortgage Loans in accordance with the Pooling
Agreement from a fixed pool of loans that will have been specifically identified
prior to the closing date. It is expected that all of the loans in such fixed
pool, except for those which are determined not to meet the criteria for
purchase set forth in the Pooling Agreement, will be acquired using the related
Pre-Funded Amount. Accordingly, the Depositor believes that the existence of the
Pre-Funding Account should not cause the Exemptions to be inapplicable.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemptions and (b) that the specific and general conditions set
forth in the Exemptions and the other requirements set forth in the Exemptions
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in the Exemptions, the Plan
fiduciary should consider its general fiduciary obligations under ERISA in
determining whether to purchase any Class A Certificates on behalf of a Plan.
Any Plan fiduciary considering whether to purchase a Class A Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
Although at their initial issuance the Class 1A Certificates will be rated
Aaa by Moody's and "AAA" by Standard & Poor's, the Class 1A Certificates will
not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") because Sub-Pool 1 includes
Mortgage Loans which are secured by second liens.
The Class 2A Certificates will not constitute "mortgage related securities"
for purposes of SMMEA until such time as the balance of the related Pre-Funding
Account is reduced to zero. At such time the Class 2A Certificates will
constitute "mortgage related securities" for purposes of SMMEA so long as they
are rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization, and, as such, they will constitute
legal investments for certain entities to the extent provided for in SMMEA.
Institutions whose investment activities are subject to review by federal
and state regulatory authorities should consult with their counsel or the
applicable authorities to determine whether an investment in the Class 1A or
Class 2A Certificates complies with applicable guidelines, policy statements or
restrictions. See "Legal Investment" in the Prospectus.
S-104
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Depositor has agreed to sell to Merrill
Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. (the
"Underwriters"), and each of the Underwriters has agreed to purchase from the
Depositor, the principal amount of the Class A Certificates set forth opposite
its name below:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS 1A-1 CLASS 1A-2 CLASS 1A-3 CLASS 1A-4 CLASS 1A-5 CLASS 2A
UNDERWRITERS CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce, Fenner &
Smith Incorporated.................. $17,500,000 $15,250,000 $ 6,000,000 $11,013,928.50 $10,500,000 $89,736,071.50
J.P. Morgan Securities, Inc......... $17,500,000 $15,250,000 $ 6,000,000 $11,013,928.50 $10,500,000 $89,736,071.50
----------- ----------- ----------- -------------- ----------- --------------
Total............................... $35,000,000 $30,500,000 $12,000,000 $22,027,857 $21,000,000 $179,472,143
</TABLE>
In the Underwriting Agreement, each of the Underwriters has agreed, subject
to the terms and conditions set forth therein, to purchase all of its respective
allocation of the Class A Certificates if any of the Class A Certificates are
purchased.
The Underwriters have advised the Depositor that they propose initially to
offer the Class A Certificates to the public at the price set forth on the cover
page hereof, and to certain dealers at such price less a concession not in
excess of .12% of the Certificate denominations for the Class 1A-1 Certificates,
not in excess of .15% for the Class 1A-2 Certificates, not in excess of .20% for
the Class 1A-3 Certificates, not in excess of .25% for the Class 1A-4
Certificates, not in excess of .30% for the Class 1A-5 Certificates, and not in
excess of .19% of the Certificate denominations for the Class 2A Certificates.
The Underwriters may allow and such dealers may reallow a concession not in
excess of .10% of the Certificate denominations to certain other dealers. After
the initial public offering, the public offering price and such concessions may
be changed.
Until the distribution of the Class A Certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A
Certificates. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Class A
Certificates. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Certificates.
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Depositor or any of its affiliates nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Class
A Certificates. In addition, neither the Depositor or any of its affiliates nor
any of the Underwriters makes any representation that the Underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders", which will
include information as to the outstanding principal balance of the Class A
S-105
<PAGE>
Certificates and the status of any existing credit enhancement. There can be no
assurance that any additional information regarding the Class A Certificates
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Class A
Certificates will be generally available on an ongoing basis. The limited nature
of such information regarding the Class A Certificates may adversely affect the
liquidity of the Class A Certificates, even if a secondary market for the Class
A Certificates becomes available.
EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A and in the related registration
statement, as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996, have been included in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing in Appendix A and in the related registration statement upon the
authority of such firm as experts in accounting and auditing.
RATINGS
As a condition of issuance, the Class 1A and Class 2A Certificates will be
rated Aaa by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Standard &
Poor's Ratings Services, A Division of the McGraw-Hill Companies, Inc.
("Standard & Poor's"). The security ratings of the Class A Certificates should
be evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the rating agencies. In
general, ratings address credit risk and do not address the likelihood or rate
of prepayment. See "Rating" and "Risk Factors--Limited Nature of Ratings" in the
Prospectus.
The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by the holders thereof of all distributions on the
underlying mortgage loans to which they are entitled. Moody's ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The rating assigned
by Moody's to the Class A Certificates does not address the possibility that the
Class A Certificateholders might suffer a lower than anticipated yield, nor does
it address the likelihood that the Available Funds Cap Carry Forward Amount will
be paid to the Class 2A Certificateholders.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of payments required thereon.
Standard & Poor's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream on the mortgage pool is adequate to
make payments required under the certificates. Standard & Poor's rating on the
Class A Certificates does not, however, constitute a statement regarding
frequency of prepayments on the Mortgage Loans nor the likelihood that the
Available Funds Cap Carry Forward Amount will be paid to the Class 2A
Certificateholders.
The Depositor does not expect a rating on the Class A Certificates by any
rating agency other than as set forth above. However, there can be no assurance
as to whether any other rating agency will rate the Class A Certificates, or, if
it does, what rating would be assigned by such other rating agency. A rating on
the Class A Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Class A Certificates as set forth above.
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be passed
upon for the Depositor by Thacher Proffitt & Wood and Lawrence S. Rigie, Esq.
and for the Underwriters by Brown & Wood LLP.
S-106
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
TERM PAGE
- ---- ----
Accrual Period ............................................................8, 74
Adjustment Date ........................................................... 34
Advance ................................................................... 16
Amount Available .......................................................... 85
ARMs ...................................................................... 62
Available Funds Cap Carry Forward Amount .................................. 8
Available Funds Cap Rate .................................................. 7
Available Funds Shortfall ................................................. 12
Available Principal Amount ................................................ 13
Available Remittance Amount ............................................... 86
Available Transfer Cashflow ............................................... 12
Balloon Loans ............................................................. 17
Business Day .............................................................. 50
CEDEL ..................................................................... 4
CEDEL Participants ........................................................ 75
Certificate Account ....................................................... 77
Certificate Insurance Policy .............................................. 14
Certificate Insurer ....................................................... 14
Certificateholders ........................................................ 3
Certificates .............................................................. 4
Class ..................................................................... 4
Class 1A Certificates ..................................................... 4
Class 1A Pass-Through Rate ................................................ 7
Class 1A Principal Balance ................................................ 5
Class 1A-1 Cap Rate .......................................................7, 52
Class 1A-1 Certificates ................................................... 5
Class 1A-1 Pass-Through Rate .............................................. 6
Class 1A-1 Principal Balance .............................................. 5
Class 1A-2 Certificates ................................................... 5
Class 1A-2 Pass-Through Rate .............................................. 7
Class 1A-2 Principal Balance .............................................. 5
Class 1A-3 Certificates ................................................... 5
Class 1A-3 Pass-Through Rate .............................................. 7
Class 1A-3 Principal Balance .............................................. 5
Class 1A-4 Certificates ................................................... 5
Class 1A-4 Pass-Through Rate .............................................. 7
Class 1A-4 Principal Balance .............................................. 5
Class 1A-5 Certificate Amount ............................................. 87
Class 1A-5 Certificates ................................................... 5
Class 1A-5 Lockout Percentage ............................................. 87
Class 1A-5 Lockout Remittance Amount ...................................... 87
Class 1A-5 Pass-Through Rate .............................................. 7
Class 1A-5 Principal Balance .............................................. 5
Class 2A Pass-Through Rate ................................................ 87
Class 2A Principal Balance ................................................ 5
Class A Carry-Forward Amount .............................................. 88
S-107
<PAGE>
Class A Certificates ..................................................... 4
Class A Interest Remittance Amount ....................................... 88
Class A Pass-Through Rate ................................................ 7
Class A Principal Balance ................................................ 5
Class A Principal Remittance Amount ...................................... 8
Class A Remittance Amount ................................................ 89
Closing Date ............................................................. 5
Code ..................................................................... 17
Combined Loan-to-Value Ratios ............................................ 31
Commission ............................................................... 3
Cross-Collateralization .................................................. 92
Cross-Over Date .......................................................... 89
Curtailments ............................................................. 50
Cut-off Date ............................................................. 4
Depositaries ............................................................. 5
Depositor ................................................................ 1
Determination Date ....................................................... 91
Due Period ............................................................... 9
ERISA .................................................................... 19
Euroclear ................................................................ 4
Euroclear Participants ................................................... 75
Event of Default ......................................................... 96
Event of Nonpayment ...................................................... 97
Excess Principal ......................................................... 12
Excess Spread ............................................................ 89
Exemptions ............................................................... 19
First Lien ............................................................... 17
GE Capital ............................................................... 98
Gross Margin ............................................................. 35
Holders .................................................................. 3
Index .................................................................... 2
Initial Mortgage Loans ................................................... 14
Initial Sub-Pool 1 ....................................................... 25
Initial Sub-Pool 2 ....................................................... 34
Insurance Proceeds ....................................................... 9
Insured Payments ......................................................... 100
J.P. Morgan .............................................................. 103
LaSalle .................................................................. 96
Lee Servicing Division ................................................... 4
Liquidated Mortgage Loan ................................................. 91
Majority Certificateholders .............................................. 96
Mandatory Prepayments .................................................... 91
Manufactured Home Loans .................................................. 16
Maximum Mortgage Rate .................................................... 35
Merrill Lynch ............................................................ 103
Minimum Mortgage Rate .................................................... 35
Mixed Use Loans .......................................................... 20
Mixed Use Properties ..................................................... 20
Moody's .................................................................. 17
Mortgage Loans ........................................................... 1
Mortgage Notes ........................................................... 14
S-108
<PAGE>
Mortgage Pool ............................................................ 2
Mortgaged Properties ..................................................... 14
Mortgages ................................................................ 14
Net Excess Amount Available .............................................. 90
Net Excess Principal ..................................................... 12
Net Excess Spread ........................................................ 12
Net Liquidation Proceeds ................................................. 9
OID Regulations .......................................................... 102
One-Month LIBOR ..........................................................52, 61
One-Year U.S. Treasury Index ............................................. 2
One-Year U.S. Treasury Index Loans ....................................... 15
Original Pool Principal Balance .......................................... 6
Original Sub-Pool 1 Pre-Funded Amount .................................... 33
Original Sub-Pool 1 Principal Balance .................................... 6
Original Sub-Pool 2 Pre-Funded Amount .................................... 15
Original Sub-Pool 2 Principal Balance .................................... 6
Overcollateralization Amount ............................................. 9
Percentage Interest ...................................................... 74
Periodic Payment ......................................................... 17
Periodic Payment Loan .................................................... 17
Periodic Rate Cap ........................................................ 35
Plans .................................................................... 103
Pooling Agreement ........................................................ 4
Preference Amount ........................................................ 100
Prepayment Assumption .................................................... 90
Prepayment Model ......................................................... 52
Principal and Interest Account ........................................... 76
Principal Payment Table .................................................. 89
Principal Prepayments .................................................... 50
PTCE 83-1 ................................................................ 103
Realized Losses .......................................................... 97
Record Date .............................................................. 4, 74
Released Mortgaged Property Proceeds ..................................... 9
Remaining Net Excess Spread .............................................. 12
REMIC .................................................................... 2
Remittance Date .......................................................... 2
Required Overcollateralization Amount .................................... 9
Required Payments ........................................................ 12
Reserve Account .......................................................... 6
Scheduled Class A Principal Balance ...................................... 90
Servicer ................................................................. 2
Servicing Fee ............................................................ 16
Servicing Fee Rate ....................................................... 16
Six-Month LIBOR .......................................................... 2, 16
Six-Month LIBOR Loans .................................................... 16
SMMEA .................................................................... 19
Standard & Poor's ........................................................ 17
Sub-Pool ................................................................. 2
Sub-Pool 1 ............................................................... 2
Sub-Pool 1 Certificate Account ........................................... 77
Sub-Pool 1 Initial Mortgage Loans ........................................ 6
S-109
<PAGE>
Sub-Pool 1 Interest Coverage Amount ...................................... 91
Sub-Pool 1 Principal and Interest Account ................................ 76
Sub-Pool 1 Reserve Account ............................................... 13
Sub-Pool 1 Subsequent Cut-off Date ....................................... 33
Sub-Pool 2 ............................................................... 1
Sub-Pool 2 Certificate Account ........................................... 77
Sub-Pool 2 Initial Mortgage Loans ........................................ 6
Sub-Pool 2 Interest Coverage Account ..................................... 91
Sub-Pool 2 Principal and Interest Account ................................ 76
Sub-Pool 2 Reserve Account ............................................... 13
Subordinated Amount ...................................................... 89
Subsequent Mortgage Loans ................................................ 15
Successor Servicer ....................................................... 98
Termination Price ........................................................ 96
Trigger Event ............................................................ 98
Trust Fund ............................................................... 1
Trustee .................................................................. 2
Trustee Expense Account .................................................. 96
Underwriters ............................................................. 2
Underwriting Agreement ................................................... 106
Unrecovered Class A Portion .............................................. 90
S-110
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AFC Mortgage
Loan Asset Backed Certificates, Series 1997-3 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("DTC"),
Centrale de Livraison de Valeurs Mobilieres S.A. ("CEDEL"), or the Euroclear
System ("Euroclear"). The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset Back
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as Direct
and Indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that the settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset Backed Certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary
market trading between CEDEL Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
I-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to proposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to the settlement. In these cases, CEDEL or
Euroclear will instruct the respective Depositary, as appropriate, to deliver
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be backed-value to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
I-2
<PAGE>
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participants or Euroclear
Participants.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside of the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owners of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized, in, or under the
laws of, the United States or any political subdivision thereof, or an estate
whose income is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
supervision over the administration of the trust and one or more United States
fiduciaries have authority to control all substantial decisions of the trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant
I-3
<PAGE>
to foreign holders of the Global Securities. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding and
disposing of the Global Securities.
I-4
<PAGE>
KPMG Peat Marwick LLP APPENDIX A
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Report of Independent Auditors................................. 1
Balance Sheets................................................. 2
Statements of Income........................................... 3
Statements of Stockholder's Equity............................. 4
Statements of Cash Flows....................................... 5
Notes to Financial Statements.................................. 6
<PAGE>
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1996 and 1995, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
January 17, 1997
[LOGO] Member Firm of
Klynveld Peat Marwick Goerdeler
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
==================================================================================================================
($ in Thousands, except per share amounts)
<CAPTION>
December 31, December 31,
1996 1995
ASSETS ------------ ------------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,190,303 in 1996 and $2,043,453 in 1995) ............. $2,250,549 $2,141,584
Short-term investments, at cost, which approximates market .................. 73,839 91,032
Cash ........................................................................ 860 199
Accrued investment income ................................................... 37,655 37,347
Reinsurance recoverable ..................................................... 7,015 7,672
Prepaid reinsurance premiums ................................................ 167,683 162,087
Deferred policy acquisition costs ........................................... 91,945 94,868
Property and equipment, net of accumulated depreciation
($15,333 in 1996 and $12,861 in 1995) ..................................... 4,696 6,314
Receivable for securities sold .............................................. 379 26,572
Prepaid expenses and other assets ........................................... 19,520 12,627
---------- ----------
Total assets ........................................................... $2,654,141 $2,580,302
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums ........................................................... $ 681,816 $ 727,535
Loss and loss adjustment expenses ........................................... 72,616 77,808
Ceded reinsurance balances payable .......................................... 10,561 1,942
Accounts payable and accrued expenses ....................................... 54,165 32,811
Payable to Parent ........................................................... 1,791 1,647
Current federal income taxes payable ........................................ 52,016 51,296
Deferred federal income taxes ............................................... 91,805 99,171
Payable for securities purchased ............................................ 4,937 40,211
---------- ----------
Total liabilities $ 969,707 1,032,421
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding ......................... 15,000 15,000
Additional paid-in capital ................................................. 334,011 334,011
Net unrealized gains on fixed maturity securities available-
for-sale, net of tax ..................................................... 39,160 63,785
Foreign currency translation adjustment, net of tax ........................ (429) (1,499)
Retained earnings .......................................................... 1,296,692 1,136,584
---------- ----------
Total stockholder's equity ......................................... 1,684,434 1,547,881
---------- ----------
Total liabilities and stockholder's equity ......................... $2,654,141 $2,580,302
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
=======================================================================================================================
($ in Thousands)
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Gross premiums written ..................................... $ 97,027 $ 97,288 $161,940
Ceded premiums ............................................ (29,376) (19,319) (46,477)
-------- -------- --------
Net premiums written .................................... 67,651 77,969 115,463
Decrease in net unearned premiums ......................... 51,314 27,309 53,364
-------- -------- --------
Net premiums earned ..................................... 118,965 105,278 168,827
Net investment income ..................................... 124,635 120,398 109,828
Net realized gains ........................................ 15,022 30,762 5,898
-------- -------- --------
Total revenues .......................................... 258,622 256,438 284,553
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses ......................... 2,389 (8,426) 3,646
Policy acquisition costs .................................. 16,327 13,072 15,060
Decrease (Increase) in Deferred policy acquisition costs . 2,923 (3,940) 3,709
Other underwriting expenses ............................... 12,508 19,100 21,182
-------- -------- --------
Total expenses .......................................... 34,147 19,806 43,597
-------- -------- --------
Income before provision for Federal income taxes .......... 224,475 236,632 240,956
-------- -------- --------
Federal income tax expense:
Current ................................................. 41,548 28,913 43,484
Deferred ................................................ 5,318 19,841 7,741
-------- -------- --------
Total Federal income tax expense ........................ 46,866 48,754 51,225
-------- -------- --------
Net income .............................................. $177,609 $187,878 $189,731
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
====================================================================================================================================
($ in Thousands)
<CAPTION>
Unrealized
Gains (Losses) on
Additional Fixed Maturity Foreign
Common Paid-in Securities Available- Currency Retained
Stock Capital For-Sale, Net of Tax Adjustment Earnings
------- ---------- --------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ........................ $15,000 $334,011 $ 90,708 $(2,265) $ 783,975
Net income ...................................... -- -- -- -- 189,731
Change in fixed maturity securities
available for sale, net of tax of ($71,336) ... -- -- (132,481) -- --
Foreign currency translation adjustment ......... -- -- -- 1,044 --
------- -------- --------- ------- ----------
Balance, December 31, 1994 ...................... 15,000 334,011 (41,773) (1,221) 973,706
------- -------- --------- ------- ---------
Net income ...................................... -- -- -- -- 187,878
Dividend paid ................................... -- -- -- -- (25,000)
Change in fixed maturity securities
available for sale, net of tax of $56,839...... -- -- 105,558 -- --
Foreign currency translation adjustment ......... -- -- -- (278) --
------- -------- --------- ------- ----------
Balance, December 31, 1995 ...................... 15,000 334,011 63,785 (1,499) 1,136,584
------- -------- --------- ------- ----------
Net Income ...................................... -- -- -- -- 177,609
Dividend paid ................................... -- -- -- -- (17,500)
Change in fixed maturity securities available
for sale, net of tax of ($13,260) ............. -- -- (24,625) -- --
Foreign currency translation adjustment ......... -- -- -- 1,070 --
------- -------- --------- -------- ----------
Balance at December 31, 1996 .................... $15,000 $334,011 $ 39,160 $ (429) $1,296,692
======= ======== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
====================================================================================================================================
($ in Thousands)
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................... $ 177,609 $ 187,878 $ 189,731
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums ........................................ (45,719) (29,890) (45,927)
Change in loss and loss adjustment expense reserves ................ (5,192) (20,938) 2,648
Depreciation of property and equipment ............................. 2,472 2,348 2,689
Change in reinsurance receivable ................................... 657 6,800 (304)
Change in prepaid reinsurance premiums ............................. (5,596) 2,581 (7,437)
Change in foreign currency translation adjustment .................. 1,646 (427) 1,607
Policy acquisition costs deferred .................................. (16,327) (16,219) (18,306)
Amortization of deferred policy acquisition costs .................. 19,250 12,279 22,015
Change in accrued investment income, and prepaid
expenses and other assets ...................................... (7,201) 2,906 (5,150)
Change in other liabilities ........................................ 30,117 (12,946) 2,577
Change in deferred income taxes .................................... 5,318 19,841 7,741
Amortization of fixed maturity securities .......................... 792 1,922 5,112
Change in current income taxes payable ............................. 720 (30,827) 33,391
Net realized gains on investments .................................. (15,022) (30,762) (5,898)
----------- --------- ---------
Net cash provided by operating activities ............................ 143,524 94,546 184,489
----------- --------- ---------
Investing Activities:
Sales and maturities of fixed maturity securities .................... 891,643 836,103 550,534
Purchases of fixed maturity securities ............................... (1,033,345) (891,108) (721,908)
Purchases, sales and maturities of short-term investments, net ....... 17,193 (15,358) (11,486)
Purchases of property and equipment, net ............................. (854) (750) (1,290)
----------- --------- ---------
Net cash used in investing activities ................................ (125,363) (71,113) (184,150)
----------- --------- ---------
Financing Activities:
Dividends paid ....................................................... (17,500) (25,000) --
----------- --------- ---------
Net cash provided by financing activities ............................ (17,500) (25,000) --
----------- --------- ---------
Increase (Decrease) in cash .......................................... 661 (1,567) 339
Cash at beginning of year ............................................ 199 1,766 1,427
----------- --------- ---------
Cash at end of year .................................................. $ 860 $ 199 $ 1,766
=========== ========= =========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 82% of the business
written since inception by the Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's
insurance policies do not provide for accelerated payment of the principal
of, or interest on, the bond insured in the case of a payment default. If
the issuer of a Company-insured bond defaults on its obligation to pay debt
service, the Company will make scheduled interest and principal payments as
due and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1996 presentation. Significant
accounting policies are as follows:
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." The Statement defines
three categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's equity,
net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are
determined on the basis of specific identification.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
PREMIUM REVENUE RECOGNITION
Premiums for policies where premiums are collected in a single payment at
policy inception are earned over the period at risk, based on the total
exposure outstanding at any point in time. Financial guaranty insurance
policies exposure generally declines according to predetermined schedules.
For policies with premiums that are collected periodically, premiums are
reflected in income pro rata over the period covered by the premium
payment.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees
involved in underwriting, marketing and policy issuance functions, rating
agency fees, state premium taxes and certain other underwriting expenses,
offset by ceding commission income on premiums ceded to reinsurers (see
Note 6). Net acquisition costs are deferred and amortized over the period
in which the related premiums are earned. Anticipated loss and loss
adjustment expenses are considered in determining the recoverability of
acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments
due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such reserves
amounted to $72.6 million and $77.8 million at December 31, 1996 and 1995,
respectively. As of December 31, 1996 and 1995, such reserves included
$28.9 million and $28.8 million, respectively, established based on an
evaluation of the insured portfolio in light of current economic conditions
and other relevant factors. Loss and loss adjustment expenses include
amounts discounted at an interest rate of between 6.5 and 6.6 in 1996 and
5.5% in 1995. The reserve for loss and loss adjustment expenses is
necessarily based upon estimates, however, in management's opinion the
reserves for loss and loss adjustment expenses is adequate. However, actual
results will likely differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included in
taxable income upon their release from the reserves or upon earlier release
of such amounts from such reserves to cover excess losses as permitted by
insurance regulators. The amounts deducted are allowed as deductions from
taxable income only to the extent that U.S. government non-interest bearing
tax and loss bonds are purchased and held in an amount equal to the tax
benefit attributable to such deductions.
-7-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income
over their estimated service lives. Office furniture and equipment are
depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated over
three years. Maintenance and repairs are charged to expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing
at December 31, 1996 and 1995 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at December
31, 1996 and 1995 was $0.4 million and $1.5 million, respectively, net of
tax, and is reported as a separate component of stockholder's equity.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by
state insurance regulatory authorities. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to the
total exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the
financial reporting and the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax
payments; and
(g) all fixed income investments are carried at amortized cost rather
than at fair value for securities classified as
available-for-sale under GAAP.
-8-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------- -----------------------
Net Stockholder's Net Stockholder's Net Stockholder's
Income Equity Income Equity Income Equity
-------- ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount ................................ $177,609 $1,684,434 $187,878 $1,547,881 $189,731 $1,279,723
Premium revenue recognition ...................... (9,358) (176,285) (22,555) (166,927) (4,970) (144,372)
Deferral of acquisition costs .................... 2,923 (91,945) (3,940) (94,868) 3,709 (90,928)
Contingency reserve .............................. -- (460,973) -- (386,564) -- (328,073)
Non-admitted assets .............................. -- (3,879) -- (5,731) -- (7,566)
Case basis loss reserves ......................... (3,197) (3,249) 4,048 (52) (3,340) (4,100)
Portfolio loss reserves .......................... -- 24,000 (22,100) 24,000 (11,050) 46,100
Deferral of income taxes (benefits) .............. 5,317 70,719 19,842 64,825 7,741 45,134
Unrealized gains (losses) on fixed
maturity securities held at fair
value, net of tax .............................. -- (39,160) -- (63,785) -- 41,773
Recognition of profit commission ................. (441) (6,185) 3,096 (5,744) (2,410) (8,840)
Provision for unauthorized reinsurance ........... -- -- -- -- -- (266)
Contingency reserve tax deduction (see Note 2) ... -- 85,176 -- 78,196 -- 55,496
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) ........................... 313 10,603 637 10,290 (63) 9,653
-------- ---------- -------- ---------- -------- ----------
Statutory-basis amount ........................... $173,166 $1,093,256 $166,906 $1,001,521 $179,348 $ 893,734
======== ========== ======== ========== ======== ==========
</TABLE>
-9-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.2 million as of December 31, 1996 and 1995, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1996 Cost Gains Losses Value
---- ---------- ---------- ------------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ............ $ 57,987 $ 373 $ 1 $ 58,359
Obligations of states and political
subdivisions ......................... 2,098,486 65,254 4,854 2,158,886
Debt securities issued by foreign
governments .......................... 33,830 -- 526 33,304
---------- ------- ------ ----------
Investments available-for-sale ........ 2,190,303 65,627 5,381 2,250,549
Short-term investments ................ 73,839 -- -- 73,839
---------- ------- ------ ----------
Total ................................. $2,264,142 $65,627 $5,381 $2,324,388
========== ======= ====== ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1996, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
1996 Cost Value
- ---- --------- ----------
Due in one year or less ........................ $ 110,783 $ 110,888
Due after one year through five years .......... 92,279 92,951
Due after five years through ten years ......... 337,495 349,524
Due after ten years through twenty years ....... 1,650,945 1,696,623
Due after twenty years ......................... 72,640 74,402
---------- ----------
Total .......................................... $2,264,142 $2,324,388
========== ==========
-10-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
- ---- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ........ $ 71,182 $ 1,696 -- $ 72,878
Obligations of states and political
subdivisions ..................... 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments ...................... 30,270 152 550 29,872
---------- -------- ------ ----------
Investments available-for-sale .... 2,043,453 100,306 2,175 2,141,584
Short-term investments ............ 91,032 -- -- 91,032
---------- -------- ------ ----------
Total ............................. $2,134,485 $100,306 $2,175 $2,232,616
========== ======== ====== ==========
</TABLE>
In 1996, 1995 and 1994, proceeds from sales and maturities of investments in
fixed maturity securities available-for-sale carried at fair value were $891.6
million, $836.1 million, and $550.5 million, respectively. For 1996, 1995 and
1994 gross gains of $19.8 million, $36.3 million and $18.2 million respectively,
and gross losses of $15.0 million, $5.5 million and $12.3 million respectively,
were realized on such sales.
Net investment income of the Company is derived from the following sources (in
thousands):
Year Ended December 31,
-------------------------------
1996 1995 1994
------ ------ -----
Income from fixed maturity securities ...... $119,290 $112,684 $108,519
Income from short-term investments ......... 6,423 8,450 2,479
-------- -------- --------
Total investment income .................... 125,713 121,134 110,998
Investment expenses ........................ 1,078 736 1,170
-------- -------- --------
Net investment income ...................... $124,635 $120,398 $109,828
======== ======== ========
As of December 31, 1996, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the
Parent based upon their respective contributions to consolidated net
income. The Company's effective federal corporate tax rate (20.8 percent in
1996, 20.6 percent in 1995 and 21.3 percent in 1994) is less than the
corporate tax rate on ordinary income of 35 percent in 1996, 1995 and 1994.
Federal income tax expense relating to operations of the Company for 1996,
1995 and 1994 is comprised of the following (in thousands):
Year Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Current tax expense ............. $41,548 $28,913 $43,484
Deferred tax expense ............ 5,318 19,841 7,741
------- ------- -------
Federal income tax expense ...... $46,866 $48,754 $51,225
======= ======= =======
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
Year Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate.. $ 78,566 $ 82,821 $ 84,334
Tax effect of:
Tax-exempt interest ................. (32,609) (30,630) (30,089)
Other, net .......................... 909 (3,437) (3,020)
-------- -------- --------
Provision for income taxes ............ $ 46,866 $ 48,754 $ 51,225
======== ======== ========
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31, 1996
and 1995 are presented below (in thousands):
1996 1995
-------- --------
Deferred tax assets:
Loss reserves ................................. $ 9,249 $ 8,382
Deferred compensation ......................... 2,531 5,735
Tax over book capital gains ................... 2,144 1,069
Other ......................................... 2,601 3,248
-------- --------
Total gross deferred tax assets ................. 16,525 18,434
-------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale .............. 21,086 34,346
Deferred acquisition costs .................... 32,181 33,204
Premium revenue recognition ................... 37,159 32,791
Rate differential on tax and loss bonds ....... 9,454 9,454
Other ......................................... 8,450 7,810
-------- --------
Total gross deferred tax liabilities ............ 108,330 117,605
-------- --------
Net deferred tax liability ...................... $ 91,805 $ 99,171
======== ========
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are
deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it will
realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1996 and 1995. The
Company anticipates that the related deferred tax asset will be realized.
Total federal income tax payments during 1996, 1995 and 1994 were $33.9
million, $59.8 million, and $10.1 million, respectively.
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a
facultative basis. This process serves to limit the Company's exposure on
risks underwritten. In the event that any or all of the reinsuring
companies were unable to meet their obligations, the Company would be
liable for such defaulted amounts. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral under reinsurance agreements in the form of
letters of credit and trust agreements in various amounts with various
reinsurers totaling $32.9 million that can be drawn on in the event of
default.
Net premiums earned are presented net of ceded earned premiums of $23.7
million, $21.9 million and $39.0 million for the years ended December 31,
1996, 1995 and 1994, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $(0.8) million, $1.1 million
and $0.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
-14-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
Year Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Balance at January 1, ........... $ 77,808 $ 98,746 $ 96,098
Less reinsurance recoverable... (7,672) 14,472 14,168
-------- -------- --------
Net balance at January 1, ....... 70,136 84,274 81,930
Incurred related to:
Current year .................... -- 26,681 15,133
Prior years ..................... 2,389 (1,207) (437)
Portfolio reserves .............. -- (33,900) (11,050)
-------- -------- --------
Total Incurred .................. 2,389 (8,426) 3,646
-------- -------- --------
Paid related to:
Current year .................... -- (197) (382)
Prior years ..................... (6,924) (5,515) (920)
-------- -------- --------
Total Paid ...................... (6,924) (5,712) (1,302)
-------- -------- --------
Net balance at December 31, ..... 65,601 70,136 84,274
Plus reinsurance recoverable . 7,015 7,672 14,472
-------- -------- --------
Balance at December 31, ......... $ 72,616 $ 77,808 $ 98,746
======== ======== ========
The changes in incurred portfolio and case reserves principally relates to
business written in prior years. The changes are based upon an evaluation
of the insured portfolio in light of current economic conditions and other
relevant factors.
-15-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the management
of the Company's investment portfolio; and telecommunication service
charges. Approximately $8.1 million, $3.2 million and $3.2 million in
expenses were incurred in 1996, 1995 and 1994, respectively, related to
such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides first
loss protection in the event of default. Gross premiums written on these
issues amounted to $0.6 million in 1996, $1.3 million in 1995, and $2.5
million in 1994.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1996, 1995 and 1994.
(9) COMPENSATION PLANS
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans.
Expenses incurred by the Company under compensation plans and bonuses
amounted to $4.5 million, $7.5 million and $12.2 million in 1996, 1995 and
1994, respectively, before deduction for related tax benefits.
(10) DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus
after such dividend may not be less than the minimum required paid-in
capital, which was $66.4 million in 1996 and 1995, and (b) dividends may
not exceed the lesser of 10 percent of its surplus or 100 percent of
adjusted net investment income, as defined by New York insurance law, for
the 12 month period ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State Insurance Department.
At December 31, 1996 and 1995, the amount of the Company's surplus
available for dividends was approximately $91.8 million and $100.2 million,
respectively.
During 1996 and 1995, the Company paid dividends of $17.5 million and $25.0
million, respectively. No dividends were paid during 1994.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(11) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities Purchased:
The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Fair Carrying Fair
amount Value amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts .... $ 860 $ 860 $ 199 $ 199
Short-term investments .............. $ 73,839 $ 73,839 $ 91,032 $ 91,032
Fixed maturity securities ........... $2,250,549 $2,250,549 $2,141,584 $2,141,584
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves. Estimated
fair values of these guaranties are based on amounts currently charged to
enter into similar agreements (net of applicable ceding commissions),
discounted cash flows considering contractual revenues to be received
adjusted for expected prepayments, the present value of future obligations
and estimated losses, and current interest rates. The estimated fair values
of such financial guaranties range between $358.7 million and $387.4
million compared to a carrying value of $487.8 million as of December 31,
1996 and between $412.8 million and $456.2 million compared to a carrying
value of $540.6 million as of December 31, 1995.
-17-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The
Company has established and maintains its own underwriting standards that
are based on those aspects of credit that the Company deems important for
the particular category of obligations considered for insurance. Credit
criteria include economic and social trends, debt management, financial
management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to
make payment prior to any payment by the Company. The types and extent of
collateral pledged varies, but may include residential and commercial
mortgages, corporate debt, government debt and consumer receivables.
As of December 31, 1996, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $104.4 billion, net
of reinsurance of $30.8 billion. The Company's insured portfolio as of
December 31, 1996 was broadly diversified by geography and bond market
sector with no single debt issuer representing more than 1% of the
Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1996, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
-----------
Municipal:
General obligation ............................... $ 50,213.1
Special revenue .................................. 33,037.8
Industrial revenue ............................... 366.5
Non-municipal .................................... 20,776.2
----------
Total .............................................. $104,393.6
==========
The Company's net exposure outstanding is $188,646.00 million as of
December 31, 1996.
-18-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1996 by state, net of reinsurance, was as
follows (in millions):
Net
Principal
Outstanding
-----------
California ........................................ $ 11,251.7
Florida ........................................... 9,838.4
Pennsylvania ...................................... 9,325.3
New York .......................................... 8,184.5
Illinois .......................................... 6,721.2
Texas ............................................. 5,799.1
New Jersey ........................................ 4,465.3
Michigan .......................................... 4,166.6
Arizona ........................................... 2,808.9
Ohio .............................................. 2,616.0
----------
Sub-total ......................................... 65,177.0
Other states and International .................... 39,216.6
----------
Total ............................................. $104,393.6
==========
(12) COMMITMENTS
Total rent expense was $2.8 million, $2.2 million and $2.6 million in
1996, 1995 and 1994, respectively. For each of the next five years and
in the aggregate as of December 31, 1996, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
Year Amount
---- ------
1997 .............................................. $ 2,909
1998 .............................................. 2,909
1999 .............................................. 2,909
2000 .............................................. 2,909
2001 .............................................. 2,911
-------
Total minimum future rental payments ............. $14,547
=======
-19-
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1997
Balance Sheets............................................................. 1
Statements of Income....................................................... 2
Statements of Cash Flows................................................... 3
Notes to Unaudited Interim Financial Statements............................ 4
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEET
==========================================================================================================================
($ in Thousands)
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,188,078 in 1997 and $2,190,303 in 1996) .................................. $2,262,206 $2,250,549
Short-term investments, at cost, which approximates market ..................... 86,702 73,839
Cash ........................................................................... 2,191 860
Accrued investment income ...................................................... 37,205 37,655
Reinsurance receivable ......................................................... 7,077 7,015
Deferred policy acquisition costs .............................................. 91,399 91,945
Property, plant and equipment net of
accumulated depreciation of $16,600 in 1997 and $15,333 in 1996 ............. 3,913 4,696
Prepaid reinsurance premiums ................................................... 165,706 167,683
Prepaid expenses and other assets .............................................. 33,176 19,899
---------- ----------
Total assets ....................................................... $2,689,575 $2,654,141
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums .............................................................. $ 655,857 $ 681,816
Losses and loss adjustment expenses ............................................ 70,116 72,616
Ceded reinsurance payable ...................................................... 2,533 10,561
Accounts payable and accrued expenses .......................................... 38,305 54,165
Due to parent .................................................................. -- 1,791
Current federal income taxes payable ........................................... 24,808 52,016
Deferred federal income taxes payable .......................................... 98,777 91,805
Payable for securities purchased ............................................... 15,941 4,937
---------- ----------
Total liabilities .................................................. 906,337 969,707
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30,
1997 and at December 31, 1996: 10,000 shares authorized,
issued and outstanding ....................................................... 15,000 15,000
Additional paid-in capital ..................................................... 334,011 334,011
Net unrealized gains on fixed maturity securities available
for sale, net of tax ........................................................ 48,183 39,160
Foreign currency translation adjustment ........................................ (676) (429)
Retained earnings .............................................................. 1,386,720 1,296,692
---------- ----------
Total stockholder's equity ......................................... 1,783,238 1,684,434
---------- ----------
Total liabilities and stockholder's equity ......................... $2,689,575 $2,654,141
========== ==========
</TABLE>
See accompanying notes to interim financial statements
-1-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENT OF INCOME
================================================================================
($ in Thousands)
Six Months
Ended June 30,
---------------------
1997 1996
-------- --------
(Unaudited)
REVENUES:
Gross premiums written ............................. $ 46,339 $ 45,481
Ceded premiums ..................................... (11,668) (6,643)
--------- ---------
Net premiums written ............................... 34,671 38,838
Decrease in net unearned premiums .................. 23,982 23,353
--------- ---------
Net premiums earned ................................ 58,653 62,191
Net investment income .............................. 63,518 61,513
Net realized gains ................................. 9,127 8,348
--------- ---------
Total revenues ................................. 131,298 132,052
--------- ---------
Expenses:
Losses and loss adjustment expenses ................ 1,063 (2,702)
Policy acquisition costs ........................... 7,525 9,637
Other underwriting expenses ........................ 7,949 7,561
--------- ---------
Total expenses ................................. 16,537 14,496
--------- ---------
Income before provision for federal income taxes 114,761 117,556
Provision for federal income taxes ................. 24,733 25,071
--------- ---------
Net income .................................... $ 90,028 $ 92,485
========= =========
See accompanying notes to interim financial statements
-2-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENT OF CASH FLOW
==========================================================================================================
($ in Thousands)
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................................................... $ 90,028 $ 92,485
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes ......................................... 1,586 2,400
Amortization of fixed maturity securities ................................... 671 398
Policy acquisition costs deferred ........................................... (6,979) (8,565)
Amortization of deferred policy acquisition costs ........................... 7,525 10,333
Depreciation of fixed assets ................................................ 1,267 1,233
Change in reinsurance receivable ............................................ (62) 314
Change in prepaid reinsurance premiums ...................................... 1,977 6,033
Foreign currency translation adjustment ..................................... (380) (1,226)
Change in accrued investment income, prepaid
expenses and other assets ................................................ 4,090 (12,116)
Change in unearned premiums ................................................. (25,959) (29,386)
Change in losses and loss adjustment expense reserves ....................... (2,500) (6,774)
Change in other liabilities ................................................. (25,679) 4,678
Change in current income taxes payable ...................................... (27,208) 15,781
Net realized gains on investments ........................................... (9,127) (8,348)
--------- ---------
Net cash provided by operating activities ...................................... 9,250 67,240
--------- ---------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities ............................... 425,102 406,676
Purchases of fixed maturity securities ......................................... (419,674) (429,529)
Sales or maturities (purchases) of short-term investments, net ................. (12,863) (42,800)
Purchases of property and equipment, net ....................................... (484) (492)
--------- ---------
Net cash used for investing activities ......................................... (7,919) (66,145)
Increase in cash ................................................................ 1,331 1,095
Cash at beginning of period .................................................... 860 199
--------- ---------
Cash at end of period .......................................................... $ 2,191 $ 1,294
========= =========
</TABLE>
See accompanying notes to interim financial statements
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 1997 and 1996
(Unaudited)
(1) BASIS OF PRESENTATION
The interim financial statements of Financial Guaranty
Insurance Company (the Company) in this report reflect all
adjustments necessary, in the opinion of management, for a
fair statement of (a) results of operations for the six months
ended June 30, 1997 and 1996, (b) the financial position at
June 30, 1997 and December 31, 1996, and (c) cash flows for
the six months ended June 30, 1997 and 1996.
These interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 1996 audited financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(2) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP,
which differs in certain respects from accounting practices
prescribed or permitted by state insurance regulatory
authorities. The following are the significant ways in which
statutory basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the
scheduled principal and interest payments rather than
in proportion to the total exposure outstanding at any
point in time;
(b) policy acquisition costs are charged to current
operations as incurred rather than as related premiums
are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as
admitted assets, while under GAAP they are recorded as
federal income tax payments; and
(g) all fixed income investments are carried at amortized
cost, rather than at fair value for securities
classified as "Available for Sale" under GAAP.
-4-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
===============================================================================================================================
The following is a reconciliation of the net income and stockholder's equity of
Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------
1997 1996
---------------------- ------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
GAAP basis amount .................................................... $90,028 $1,783,238 $92,485 $1,570,310
Premium revenue recognition .......................................... (2,158) (178,443) (4,061) (170,988)
Deferral of acquisition costs ........................................ 545 (91,399) 1,768 (93,100)
Contingency reserve .................................................. -- (489,210) -- (415,603)
Non-admitted assets .................................................. -- (3,369) -- (4,837)
Case-basis losses incurred ........................................... (355) (3,604) (3,394) (3,446)
Portfolio loss reserves .............................................. -- 24,000 -- 24,000
Deferral of income tax ............................................... 1,586 72,173 2,400 66,796
Unrealized gains on fixed maturity
securities held at fair value, net of taxes........................ -- (48,183) -- 5,472
Profit commission .................................................... (266) (6,452) 1,273 (4,471)
Contingency reserve tax deduction .................................... -- 95,185 -- 85,176
Allocation of tax benefits due to Parent's
net operating loss to the Company ................................. 156 10,759 (4) 10,287
------- ---------- ------- ----------
Statutory basis amount ............................................... $89,536 $1,164,695 $90,467 $1,069,596
======= ========== ======= ==========
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 1997 and 1996
(Unaudited)
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $66.4 million
in 1996.
o Dividends may not exceed the lesser of 10 percent of
its surplus or 100 percent of adjusted net investment
income, as defined therein, for the twelve month period
ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State
Insurance Department.
The amount of the Company's surplus available for dividends
during 1997 is approximately $116.5 million.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (21.6
percent and 21.3 percent for the three months ended June 30,
1997 and 1996, respectively) is less than the statutory
corporate tax rate (35 percent in 1997 and 1996) on ordinary
income due to permanent differences between financial and
taxable income, principally tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts",
the Company reports assets and liabilities relating to
reinsured contracts gross of the effects of reinsurance. Net
premiums earned are shown net of premiums ceded of $13.6
million and $12.7 million, respectively, for the six months
ended June 30, 1997 and 1996.
-6-
<PAGE>
EXHIBIT A
APPROVED FINANCIAL INFORMATION
AS OF JUNE 30, 1997
As of June 30, 1997, December 31, 1996 and 1995 the Certificate Insurer had
written directly or assumed through reinsurance, guaranties of approximately
$215.3 billion, $205.0 billion and $180.0 billion par value of securities,
respectively (of which approximately 85 percent, 82 percent and 88 percent
constituted guaranties of municipal bonds), for which it had collected gross
premiums of approximately $2.09 billion, $2.05 billion and $1.95 billion,
respectively. As of June 30, 1997, the Certificate Insurer had reinsured
approximately 30 percent of the risks it had written, 26 percent through quota
share reinsurance, 27 percent through excess of loss reinsurance, and 48 percent
through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate Insurer as
of December 31, 1995, December 31, 1996, and June 30, 1997, respectively, on the
basis of generally accepted accounting principles. No material adverse change in
the capitalization of the Certificate Insurer has occurred since June 30, 1997.
December 31,
---------------- June 30,
1995 1996 1997
------ ------ ------
(in Millions)
Unearned Premiums ............................. $ 728 $ 682 $ 656
Other Liabilities ............................. 304 288 250
Stockholder's Equity
Common Stock ............................... 15 15 15
Additional Paid-in Capital ................. 334 334 334
Unrealized gains ........................... 64 39 48
Foreign currency translation adjustment .... (2) (1) (1)
Retained Earnings .......................... 1,137 1,297 1,387
------ ------ ------
Total Stockholder's Equity .................... 1,548 1,684 1,783
------ ------ ------
Total Liabilities and
Stockholder's Equity ........................ $2,580 $2,654 $2,689
====== ====== ======
For further financial information concerning the Certificate Insurer, see the
audited financial statements of the Certificate Insurer included as Appendix A
and the unaudited interim financial statements of the Certificate Insurer
included as Appendix B.
Copies of the Certificate Insurer's quarterly and annual statutory statements
filed by the Certificate Insurer with the New York Insurance Department are
available upon request to Financial Guaranty Insurance Company, 115 Broadway,
New York, New York 10006, Attention: Corporate Communications Department. The
Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of
information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurance Policy" and "The
Certificate Insurer" and in Appendix A and Appendix B.
<PAGE>
PROSPECTUS
AFC MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in Series)
SUPERIOR BANK FSB,
Depositor
The Certificates offered hereby and by Supplements to this Prospectus (the
"Offered Certificates") will be offered from time to time in series. Each series
of Certificates will represent in the aggregate the entire beneficial ownership
interest in a trust fund (with respect to any series, the "Trust Fund")
consisting primarily of a segregated pool (a "Mortgage Pool") of various types
of conventional single family and/or multifamily first and second mortgage loans
and/or manufactured housing conditional sales contracts and installment loan
agreements (collectively, the "Mortgage Loans") originated or purchased by the
Depositor. If so specified in the related Prospectus Supplement, the Trust Fund
for a series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any series, collectively, "Credit Support"). See
"Description of the Trust Funds", "Description of the Certificates" and
"Description of Credit Support".
Each series of Certificates will consist of one or more classes of
Certificates that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Certificates in respect of distributions of principal or
interest (or both) on the Mortgage Loans included in the related Trust Fund;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; and/or (vi) provide for
distributions of principal sequentially, or based on specified payment
schedules, to the extent of available funds, in each case as described in the
related Prospectus Supplement. Any such classes may include classes of Offered
Certificates. Principal and interest with respect to Certificates will be
distributable monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement. Distributions on
the Certificates of any series will be made only from the assets of the related
Trust Fund. See "Description of the Certificates".
The Certificates of each series will not represent an obligation of or
interest in the Depositor, the Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Certificates nor any assets in the related Trust Fund
will be guaranteed or insured by any governmental agency or instrumentality or
by any other person, unless otherwise provided in the related Prospectus
Supplement. The assets in each Trust Fund will be held in trust for the benefit
of the holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Loans in the related Trust Fund and the timing of receipt of such
payments as described under the caption "Yield Considerations" herein and under
the caption "Certain Yield and Prepayment Considerations" in the related
Prospectus Supplement. A Trust Fund may be subject to early termination under
the circumstances described herein and in the related Prospectus Supplement.
Prospective investors should review the information contained herein and in
the related Prospectus Supplement, in particular the information appearing under
the caption "Risk Factors" herein and in the related Prospectus Supplement
before purchasing any Offered Certificate.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" for federal income tax purposes. See
"Certain Federal Income Tax Consequences".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
Prior to issuance there will have been no market for the Certificates of
any series and there can be no assurance that a secondary market for any Offered
Certificates will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of a series of Offered
Certificates unless accompanied by a Prospectus Supplement.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters, as more fully
described under "Method of Distribution" herein and in the related Prospectus
Supplement.
----------
MARCH 6, 1997
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Certificates of each series will, among other things, set forth
with respect to such Certificates, as appropriate: (i) a description of the
class or classes of Certificates, the payment provisions with respect to each
such class and the Pass-Through Rate or method of determining the Pass-Through
Rate with respect to each such class; (ii) the aggregate principal amount and
distribution dates relating to such series, the method used to calculate
principal distributions to each class of Certificates on each distribution date
and, if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of the Mortgage Loans, any Credit Support and any
other assets included therein (with respect to the Certificates of any series,
the "Trust Assets"); (iv) the additional circumstances, if any, under which the
Trust Fund may be subject to early termination; (v) additional information with
respect to the method of distribution of such Certificates; (vi) whether one or
more REMIC elections will be made and the designation of the regular interests
and residual interests; (vii) the aggregate original percentage ownership
interest in the Trust Fund to be evidenced by each class of Certificates; (viii)
information as to the Servicer, Sub-Servicer (or provision for the appointment
thereof), if any, the provider of Credit Support, if any, and the Trustee, as
applicable; (ix) information as to the nature and extent of subordination with
respect to any class of Certificates that is subordinate in right of payment to
any other class; and (x) whether such Certificates will be initially issued in
definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto. In addition, the Depositor is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with the
Commission. Such Registration Statement, exhibits, reports and other information
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, 500 West Madison, 14th Floor, Chicago,
Illinois 60661; and New York Regional Office, Seven World Trade Center, New
York, New York 10048.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered
Certificates or an offer of the Offered Certificates to any person in any state
or other jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is correct as
of any time subsequent to its date; however, if any material change occurs while
this Prospectus is required by law to be delivered, this Prospectus will be
amended or supplemented accordingly.
-ii-
<PAGE>
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Servicer or the Trustee will be required to mail to holders of
Offered Certificates of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Certificates are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to CEDE & Co., as nominee of
The Depository Trust Company ("DTC") and registered holder of the Offered
Certificates, pursuant to the applicable Pooling and Servicing Agreement. Such
reports may be available to holders of interests in the Certificates (the
"Certificateholders") upon request to their respective DTC participants. See
"Description of the Certificates--Reports to Certificateholders" and
"Description of the Pooling and Servicing Agreements--Evidence as to
Compliance". The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Exchange Act and the rules and regulations of the Commission thereunder.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund, including
the amount of distribution of principal and interest and certain amounts
relating to the Mortgage Loans included in the Trust Fund, are required under
the Pooling and Servicing Agreement to be forwarded to Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, such reports
will not be examined and reported on by an independent public accountant. See
"Description of the Certificates--Reports to Certificateholders" herein.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement by
reference all documents and reports filed or caused to be filed by the
Registrant with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the
Offered Certificates of the related series. The Registrant will provide or cause
to be provided without charge to each person to whom this Prospectus is
delivered in connection with the offering of one or more classes of Offered
Certificates, upon written or oral request of such person, a copy of any or all
such reports incorporated herein by reference, in each case to the extent such
reports relate to one or more of such classes of such Offered Certificates,
other than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to Superior Bank FSB, 135 Chestnut Ridge Road, Montvale, New Jersey
07645. The Registrant has determined that its financial statements will not be
material to the offering of any Offered Certificates.
-iii-
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT ..................................................... ii
AVAILABLE INFORMATION ..................................................... ii
REPORTS TO CERTIFICATEHOLDERS ............................................. iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ......................... iii
SUMMARY OF PROSPECTUS ..................................................... 1
RISK FACTORS .............................................................. 9
Limited Liquidity ...................................................... 9
Limited Assets and Obligations ......................................... 9
Average Life of Certificates; Prepayments; Yields ...................... 10
Limited Nature of Ratings .............................................. 10
Risks Associated With the Mortgage Loans and Mortgaged
Properties ......................................................... 11
Investment in the Mortgage Loans ..................................... 11
Second Liens ......................................................... 12
Bankruptcy Proceedings ............................................... 13
Delinquent Loans ..................................................... 13
Regulatory Matters ................................................... 13
Balloon Payments ..................................................... 14
Credit Support Limitations ............................................. 14
Enforceability ......................................................... 15
The Status of the Mortgage Loans in the Event of
Insolvency of the Depositor .......................................... 15
Limitations on Interest Payments and Foreclosures ...................... 15
Environmental Risks .................................................... 15
ERISA Considerations ................................................... 16
Certain Federal Tax Considerations Regarding REMIC
Residual Certificates ................................................ 16
Control ................................................................ 16
Book-Entry Registration ................................................ 16
DESCRIPTION OF THE TRUST FUNDS ............................................ 17
Mortgage Loans ......................................................... 17
General .............................................................. 17
Mortgage Loan Information in Prospectus Supplements .................. 18
Payment Provisions of the Mortgage Loans ............................. 18
ARM Loans ............................................................ 18
Principal and Interest Account ......................................... 19
Certificate Account .................................................... 19
Pre-Funding Account .................................................... 19
Credit Support ......................................................... 19
USE OF PROCEEDS ........................................................... 20
YIELD CONSIDERATIONS ...................................................... 20
-iv-
<PAGE>
Page
----
General ................................................................ 20
Pass-Through Rate ...................................................... 20
Timing of Payment of Interest and Principal ............................ 20
Principal Prepayments .................................................. 21
Defaults ............................................................... 21
Prepayments--Maturity and Weighted Average Life ........................ 22
Other Factors Affecting Weighted Average Life .......................... 23
Type of Mortgage Loan ................................................ 23
Foreclosures and Payment Plans ......................................... 24
Due-on-Sale Clauses .................................................. 24
THE DEPOSITOR ............................................................. 24
THE SERVICER .............................................................. 25
DESCRIPTION OF THE CERTIFICATES ........................................... 25
General ................................................................ 25
Distributions .......................................................... 25
Distributions of Interest on the Certificates .......................... 26
Distributions of Principal on the Certificates ......................... 26
Allocation of Losses and Shortfalls .................................... 27
Example of Distributions ............................................... 27
Monthly Advances in Respect of Delinquencies ........................... 28
Compensating Interest .................................................. 28
Reports to Certificateholders .......................................... 29
Termination ............................................................ 30
Book-Entry Registration and Definitive Certificates .................... 30
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS ....................... 33
Assignment of Mortgage Loans; Repurchases .............................. 34
Representations and Warranties; Repurchases ............................ 35
Payments on Mortgage Loans; Deposits to Principal
and Interest Account ................................................. 36
Deposits to Certificate Account ........................................ 37
Collection and Other Servicing Procedures .............................. 38
Servicing Advances ..................................................... 39
Sub-Servicers .......................................................... 39
Realization Upon Defaulted Mortgage Loans .............................. 40
Hazard Insurance Policies .............................................. 40
Due-on-Sale Provisions ................................................. 41
Servicing and Other Compensation and Payment of Expenses ............... 41
Evidence as to Compliance .............................................. 41
Certain Matters Regarding the Servicer ................................. 42
Events of Default ...................................................... 42
Rights Upon Event of Default ........................................... 42
Amendment .............................................................. 43
Duties of the Trustee .................................................. 43
The Trustee ............................................................ 43
DESCRIPTION OF CREDIT SUPPORT ............................................. 44
-v-
<PAGE>
Page
----
General ................................................................ 44
Subordinate Certificates ............................................... 44
Cross-Support Provisions ............................................... 44
Insurance or Guarantees With Respect to the Mortgage Loans ............. 45
Letter of Credit ....................................................... 45
Insurance Policies and Surety Bonds .................................... 45
Reserve Funds or Spread Account ........................................ 45
Overcollateralization .................................................. 46
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS ................................... 46
General ................................................................ 46
Single Family and Multifamily Loans .................................... 46
Contracts .............................................................. 47
Foreclosure on Mortgages ............................................... 48
Repossession With Respect to Contracts ................................. 50
Second Mortgages ....................................................... 50
Rights of Redemption ................................................... 51
Single Family and Multifamily Properties ............................. 51
Manufactured Homes ................................................... 51
Anti-Deficiency Legislation and Other Limitations on Lenders ........... 51
Single Family and Multifamily Properties ............................. 51
Contracts ............................................................ 52
Enforceability of Certain Provisions ................................... 52
Single Family and Multifamily Properties ............................. 52
Manufactured Homes ................................................... 53
Subordinate Financing .................................................. 54
Applicability of Usury Laws ............................................ 54
Consumer Protection Laws with respect to Contracts ..................... 54
Environmental Legislation .............................................. 55
Formaldehyde Litigation With Respect to Contracts ...................... 55
Soldiers' and Sailors' Civil Relief Act ................................ 55
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ................................... 56
General ................................................................ 56
REMICs ................................................................. 57
Classification of REMICs ............................................. 57
Characterization of Investments in REMIC Certificates ................ 57
Tiered REMIC Structures .............................................. 58
Taxation of Owners of REMIC Regular Certificates ....................... 58
General .............................................................. 58
Original Issue Discount .............................................. 58
Market Discount ...................................................... 60
Premium .............................................................. 61
Realized Losses ...................................................... 62
Taxation of Owners of REMIC Residual Certificates ...................... 62
General .............................................................. 62
Taxable Income of the REMIC .......................................... 63
Basis Rules, Net Losses and Distributions ............................ 64
Excess Inclusions .................................................... 65
-vi-
<PAGE>
Page
----
Noneconomic REMIC Residual Certificates .............................. 66
Mark-to-Market Rules ................................................. 67
Possible Pass-Through of Miscellaneous Itemized Deductions ........... 67
Sales of REMIC Certificates .......................................... 67
Prohibited Transactions and Other Possible REMIC Taxes ............... 68
Tax and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations ..................... 69
Termination .......................................................... 70
Reporting and Other Administrative Matters ........................... 70
Backup Withholding With Respect to REMIC Certificates ................ 71
Foreign Investors in REMIC Certificates .............................. 71
STATE AND OTHER TAX CONSEQUENCES .......................................... 72
ERISA CONSIDERATIONS ...................................................... 72
General ................................................................ 72
Plan Asset Regulations ................................................. 72
Prohibited Transaction Exemptions ...................................... 73
LEGAL INVESTMENT .......................................................... 74
METHOD OF DISTRIBUTION .................................................... 75
LEGAL MATTERS ............................................................. 76
FINANCIAL INFORMATION ..................................................... 76
RATING .................................................................... 76
INDEX OF PRINCIPAL DEFINITIONS ............................................ 77
-vii-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Certificates.......AFC Mortgage Loan Asset Backed Certificates,
issuable in series (the "Certificates").
Depositor...................Superior Bank FSB, a federally chartered stock
savings bank (the "Depositor"), will deposit into
each Trust Fund Mortgage Loans originated or
purchased by the Depositor. See "The Depositor".
Servicer....................The servicer (the "Servicer" or the "Lee Servicing
Division") for each series of Certificates will be
the Lee Servicing Company division of the
Depositor. See "The Servicer" and "Description of
the Pooling and Servicing Agreements--Collection
and Other Servicing Procedures".
Trustee.....................The trustee (the "Trustee") for each series of
Certificates will be named in the related
Prospectus Supplement. See "Description of the
Pooling and Servicing Agreements--The Trustee".
The Trust Funds.............Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest
in a Trust Fund consisting primarily of:
(a) Mortgage Loans........The Mortgage Loans with respect to each series of
Certificates will consist of a pool (a "Mortgage
Pool") of conventional mortgage loans and/or
manufactured housing conditional sales contracts
and installment loan agreements that are secured by
first or second liens on properties located in any
one of the fifty states or the District of
Columbia. Unless otherwise specified in the related
Prospectus Supplement, the properties securing the
Mortgage Loans will consist of (i) one- to
four-family residential properties ("Single Family
Properties"), (ii) residential properties
consisting of five or more dwelling units including
mixed residential and commercial structures
("Multifamily Properties") and/or (iii) new or used
manufactured homes ("Manufactured Homes";
collectively with Single Family Properties and
Multifamily Properties, the "Mortgaged
Properties"). All Mortgage Loans will have been
originated by the Depositor or will have been
purchased, either directly or indirectly, by the
Depositor on or before the date of initial issuance
of the related series of Certificates from
affiliated or unaffiliated sellers, except for
Mortgage Loans purchased subsequently with funds in
a Pre-Funding Account (as defined herein).
<PAGE>
Each Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a "Mortgage
Rate") that is fixed over its term or that adjusts
from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate, from time to
time at the mortgagor's election, in each case as
described in the related Prospectus Supplement.
Each Mortgage Loan may provide for scheduled
payments to maturity, payments that adjust from
time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain
events, and may provide for negative amortization
or accelerated amortization, in each case as
described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated
maturity date, in each case as described in the
related Prospectus Supplement. The Mortgage Loans
may provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly,
semi-annually or at such other interval as is
specified in the related Prospectus Supplement. See
"Description of the Trust Funds--Mortgage Loans".
(b) Principal and
Interest Account
and Certificate
Account................Each Trust Fund will include one or more accounts
(collectively, the "Principal and Interest
Account") established and maintained on behalf of
the Certificateholders into which the Servicer
will, to the extent described herein and in the
related Prospectus Supplement, deposit all payments
and collections received or advanced with respect
to the Mortgage Loans other than (i) the
Depositor's Yield (as defined herein), if any, and
(ii) payments received on or after the Cut-off Date
(as defined herein) in respect of interest accrued
on the Mortgage Loans prior to the Cut-off Date.
Each Trust Fund will also include one or more
accounts (collectively, the "Certificate Account")
established and maintained on behalf of the
Certificateholders into which the Trustee will, to
the extent described herein and in the related
Prospectus Supplement, deposit all amounts remitted
by the Servicer from the Principal and Interest
Account and other payments and collections received
from other assets in the Trust Fund or advanced by
the Servicer. Unless otherwise specified in the
related Prospectus Supplement funds held in the
Principal and Interest Account and the Certificate
Account may be invested in certain short-term, high
quality investments. See "Description of the Trust
Funds--Principal and Interest Account; and
"--Certificate Account", and "Description of the
Pooling and Servicing Agreements--Payments on
Mortgage Loans; Deposits to the Principal and
Interest Account and "--Deposits to Certificate
Account".
2
<PAGE>
(c) Pre-Funding Account....If so provided in the related Prospectus
Supplement, the related Trust Fund will include one
or more accounts (collectively, the "Pre-Funding
Account") established and maintained on behalf of
the Certificateholders into which the Trustee will,
to the extent described herein and in the related
Prospectus Supplement, deposit amounts received
from the Depositor to be applied to acquire
additional Mortgage Loans subject to certain
conditions specified in the related Prospectus
Supplement. See "Description of the Trust Funds--
Pre-Funding Account", and "Description of Pooling
and Servicing Agreements - Subsequent Mortgage
Loans".
(d) Credit Support.........If so provided in the related Prospectus Supplement,
partial or full protection against certain defaults
and losses on the Mortgage Loans in the related
Trust Fund may be provided to one or more classes
of Certificates of the related series in the form
of subordination of one or more other classes of
Certificates of such series or by one or more other
types of credit support, such as a letter of
credit, insurance policy, guarantee, reserve fund,
cross-collateralization, overcollateralization or
another type of credit support, or a combination
thereof (any such coverage with respect to the
Certificates of any series, "Credit Support"). The
amount and types of coverage, the identification of
the entity providing the coverage (if applicable)
and related information with respect to each type
of Credit Support, if any, will be described in the
Prospectus Supplement for a series of Certificates.
See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support".
Description of
Certificates...............Each series of Certificates will be issued pursuant
to a Pooling and Servicing Agreement (a "Pooling
and Servicing Agreement") among the Depositor, the
Servicer and the Trustee. Pooling and Servicing
Agreements are sometimes referred to herein as
Agreements. Each series of Certificates will
include one or more classes. Each series of
Certificates (including any class or classes of
Certificates of such series not offered hereby)
will represent in the aggregate the entire
beneficial ownership interest in a Trust Fund. Each
class of Certificates (other than certain Stripped
Interest Certificates, as defined below) will have
a stated principal amount (a "Certificate Balance")
and (other than certain Stripped Principal
Certificates, as defined below) will be entitled to
distributions of interest accrued thereon based on
a fixed, variable or adjustable interest rate (a
"Pass-Through Rate"). The related Prospectus
Supplement will specify the Certificate Balance and
the Pass-Through Rate for each class of
Certificates, as applicable, or, in the case of a
variable or adjustable Pass-Through Rate, the
method for determining the Pass-Through Rate.
3
<PAGE>
Each series of Certificates will consist of one or
more classes of Certificates that may (i) be senior
(collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate
Certificates") to one or more other classes of
Certificates in respect of certain distributions on
the Certificates; (ii) be entitled to principal
distributions, with disproportionately low, nominal
or no interest distributions (collectively,
"Stripped Principal Certificates"); (iii) be
entitled to interest distributions, with
disproportionately low, nominal or no principal
distributions (collectively, "Stripped Interest
Certificates"); (iv) provide for distributions of
accrued interest thereon only following the
occurrence of certain events, such as the
retirement of one or more other classes of
Certificates of such series (collectively, "Accrual
Certificates"); and/or (v) provide for payments of
principal sequentially, based on specified payment
schedules or other methodologies, to the extent of
available funds, in each case as described in the
related Prospectus Supplement. Any such classes may
include classes of Offered Certificates.
As to each series of Certificates, unless otherwise
specified in the related Prospectus Supplement, one
or more elections will be made to treat the Trust
Fund or a designated portion thereof as a "real
estate mortgage investment conduit" or "REMIC" as
defined in the Internal Revenue Code of 1986 (the
"Code").
The Certificates will not represent an obligation of
or interest in the Depositor, the Servicer or any
of their respective affiliates except as set forth
herein, nor will the Certificates or any Mortgage
Loans be guaranteed or insured by the Depositor or
any of its affiliates, by any governmental agency
or instrumentality or by any other person, unless
otherwise provided in the related Prospectus
Supplement. See "Risk Factors--Limited Assets and
Obligations" and "Description of the Certificates".
Distributions of Interest
of Certificates............Interest on each class of Offered Certificates
(other than certain classes of Stripped Interest
Certificates and Stripped Principal Certificates)
of each series will accrue at the applicable
Pass-Through Rate on the outstanding Certificate
Balance thereof and will be distributed to
Certificateholders as provided in the related
Prospectus Supplement (each of the specified dates
on which distributions are to be made, a
"Remittance Date"). Distributions with respect to
interest on Stripped Interest Certificates may be
made on each Remittance Date on the basis of a
notional amount as described in the related
Prospectus Supplement. Distributions of interest
with respect to one or more classes of Certificates
may be reduced to the extent of certain
delinquencies and
4
<PAGE>
other contingencies described herein and in the
related Prospectus Supplement. See "Risk Factors--
Average Life of Certificates; Prepayments; Yields",
"Yield Considerations", and "Description of the
Certificates-- Distributions of Interest on the
Certificates".
Distributions of Principal
on Certificates............The Certificates of each series (other than certain
classes of Stripped Interest Certificates)
initially will have an aggregate Certificate
Balance no greater than the outstanding principal
balance of the Mortgage Loans included in the
related Trust Fund as of, unless the related
Prospectus Supplement provides otherwise, the first
day of the month of formation of the related Trust
Fund (the "Cut-off Date"). The Certificate Balance
of a Certificate outstanding from time to time
represents the maximum amount that the holder
thereof is then entitled to receive in respect of
principal from future cash flow on the assets in
the related Trust Fund. Unless otherwise provided
in the related Prospectus Supplement, distributions
of principal will be made on each Remittance Date
to the class or classes of Certificates entitled
thereto until the Certificate Balances of such
Certificates have been reduced to zero.
Distributions of principal on any class of
Certificates entitled thereto will be made on a pro
rata basis among all of the Certificates of such
class. Stripped Interest Certificates with no
Certificate Balance or a notional balance will not
receive distributions in respect of principal.
Distributions of principal on any series of
Certificates or with respect to one or more classes
included therein may be reduced to the extent of
delinquencies and other contingencies described
herein and in the related Prospectus Supplement and
not otherwise covered by Credit Support, if any.
See "Description of the Certificates--Distributions
of Principal of the Certificates".
Monthly Advances............The Servicer, directly or through Sub-Servicers (as
defined herein), will service and administer the
Mortgage Loans included in each Trust Fund and,
unless otherwise provided in the related Prospectus
Supplement, will be obligated as part of its
servicing responsibilities to make certain advances
(each, a "Monthly Advance") with respect to
delinquent scheduled payments of interest on the
Mortgage Loans in such Trust Fund. Monthly Advances
made by the Servicer are reimbursable generally
from subsequent recoveries in respect of such
Mortgage Loans and otherwise to the extent
described herein and in the related Prospectus
Supplement. See "Description of the
Certificates--Monthly Advances in Respect of
Delinquencies".
Compensating Interest.......Unless otherwise specified in the Prospectus
Supplement for a series of Certificates, the
Servicer will be required to remit
5
<PAGE>
to the Trustee on the date specified in the related
Prospectus Supplement as the "Determination Date",
with respect to each Mortgage Loan in the related
Trust Fund as to which a principal prepayment in
full (a "Principal Prepayment") or a principal
payment which is in excess of four times the
scheduled monthly payment and is not intended to
cure a delinquency (a "Curtailment") was received
during the calendar month preceding the month in
which such Determination Date occurs (a "Due
Period"), an amount, from and to the extent of
amounts otherwise payable to the Servicer as
servicing compensation, equal to the excess, if
any, of (a) 30 days' interest on the principal
balance of the related Mortgage Loan at the
Mortgage Rate net of the per annum rate at which
the Servicer's servicing fee accrues, over (b) the
amount of interest actually received on such
Mortgage Loan during such Due Period, net of the
Servicer's servicing fee. See "Description of the
Certificates--Compensating Interest".
Termination.................Unless otherwise provided in the related Prospectus
Supplement, a series of Certificates will be
subject to optional early termination through the
repurchase of the Mortgage Loans in the related
Trust Fund by the Servicer, under the circumstances
and in the manner set forth herein. See
"Description of the Certificates--Termination".
If so specified in the related Prospectus
Supplement, a series of Certificates may also be
subject to optional early termination through the
repurchase of the assets in the related Trust Fund
by the provider of Credit Support or the holders of
Certificates of a specified class under the
circumstances and in the manner set forth therein.
Depositor's Yield...........For each Mortgage Loan, the "Depositor's Yield"
represents the right to receive all prepayment
penalties and premiums collected on the Mortgage
Loan and certain other amounts if specified in the
related Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement for a series
of Certificates, the Depositor's Yield will be
retained by the Depositor and will not be a part of
any Trust Fund.
Registration of
Certificates...............If so provided in the related Prospectus Supplement,
one or more classes of the Offered Certificates
will initially be represented by one or more
Certificates registered in the name of CEDE & Co.,
as the nominee of The Depository Trust Company
("DTC") in the United States, or Centrale de
Livraison de Valeurs Mobilieres S.A. ("CEDEL") or
the Euroclear System ("Euroclear") in Europe.
Transfers within DTC, CEDEL or Euroclear, as the
case may be, will be in accordance with the usual
rules and operating procedures of the relevant
system. No person acquiring an interest in
6
<PAGE>
Offered Certificates so registered will be entitled
to receive a definitive certificate representing
such person's interest except in the event that
definitive certificates are issued under the
limited circumstances described herein. See "Risk
Factors--Book-Entry Registration" and "Description
of the Certificates--Book-Entry Registration and
Definitive Certificates".
Tax Status of the
Certificats................The Certificates of each series will constitute
"regular interests" ("REMIC Regular Certificates")
and "residual interests" ("REMIC Residual
Certificates") in one or more REMICs under Sections
860A through 860G of the Code, unless otherwise
specified in the related Prospectus Supplement. See
"Certain Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
REMIC Regular Certificates generally will be treated
as debt obligations of the applicable REMIC for
federal income tax purposes. In general, to the
extent the assets and income of the REMIC are
treated as qualifying assets and income under the
following sections of the Code, REMIC Regular
Certificates (i) owned by a thrift institution will
be treated as "obligations secured principally by
an interest in real property" for purposes of
Section 7701(a)(19)(C) of the Code and (ii) owned
by a real estate investment trust will be treated
as "real estate assets" for purposes of Section
856(c)(4)(A) of the Code and interest income
therefrom will be treated as "interest on
obligations secured by mortgages on real property"
for purposes of Section 856(c)(3)(B) of the Code.
In addition, REMIC Regular Certificates will be
"obligations. . . which. . . are principally
secured by an interest in real property" within the
meaning of Section 860G(a)(3)(C) of the Code.
Moreover, if 95% or more of the assets and the
income of the REMIC qualify for any of the
foregoing treatments, the REMIC Regular
Certificates will qualify for the foregoing
treatments in their entirety. Holders of REMIC
Regular Certificates must report income with
respect thereto on the accrual method, regardless
of their method of tax accounting generally.
Holders of any class of REMIC Regular Certificates
issued with original issue discount generally will
be required to include the original issue discount
in income as it accrues, which will be determined
using an initial prepayment assumption and taking
into account, from time to time, actual prepayments
occurring at a rate different than the prepayment
assumption.
REMIC Residual Certificates generally will be
treated as representing an interest in qualifying
assets and income to the same extent described
above for institutions subject to Sections
856(c)(5)(A), 856(c)(3)(B) and 7701(a)(19)(C) of
7
<PAGE>
the Code. A portion (or, in certain cases, all) of
the income from REMIC Residual Certificates (i) may
not be offset by any losses from other activities
of the holder of such REMIC Residual Certificates,
(ii) may be treated as unrelated business taxable
income, for holders of REMIC Residual Certificates
that are subject to tax on unrelated business
taxable income (as defined in Section 511 of the
Code), and (iii) may be subject to foreign
withholding rules. In addition, transfers of
certain REMIC Residual Certificates may be
prohibited, or may be disregarded under some
circumstances for all federal income tax purposes.
See "Certain Federal Income Tax
Consequences--REMICs --Taxation of Owners of REMIC
Residual Certificates", "--Excess Inclusions" and
"--Noneconomic REMIC Residual Certificates".
Investors are advised to consult their tax advisors
and to review "Certain Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
ERISA Considerations........A fiduciary of an employee benefit plan and certain
other retirement plans and arrangements, including
individual retirement accounts, annuities, Keogh
plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities
or arrangements are invested, that is subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the
Code should carefully review with its legal
advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that
is prohibited or is not otherwise permissible
either under ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the related
Prospectus Supplement.
Legal Investment............Unless otherwise provided in the related Prospectus
Supplement, the Offered Certificates will not
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984. Accordingly, investors
whose investment authority is subject to legal
restrictions should consult their own legal
advisors to determine whether and to what extent
the Offered Certificates constitute legal
investments for them. See "Legal Investment" herein
and in the related Prospectus Supplement.
Rating......................At the date of issuance, as to each series, each
class of Offered Certificates will be rated in one
of the four highest rating categories by one or
more nationally recognized statistical rating
agencies (each, a "Rating Agency"). See "Rating"
herein and in the related Prospectus Supplement.
8
<PAGE>
RISK FACTORS
In connection with the purchase of Offered Certificates, investors should
pay particular attention to the following factors and certain other factors as
may be set forth under the caption "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Offered
Certificates of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue while Certificates
of such series remain outstanding. The Offered Certificates will not be listed
on any securities exchange. The market value of Certificates will fluctuate with
changes in prevailing rates of interest and prepayments. Consequently, a sale of
Certificates by a holder in any secondary market that may develop may be at a
discount from 100% of their original principal balance or from their purchase
price. Furthermore, secondary market purchasers may look only hereto, to the
related Prospectus Supplement and to the reports to Certificateholders delivered
pursuant to the Pooling and Servicing Agreement as described herein under the
heading "Description of the Certificates--Reports to Certificateholders";
"--Book-Entry Registration and Definitive Certificates" and "Description of the
Pooling and Servicing Agreements--Evidence as to Compliance" for information
concerning the Certificates. Issuance of the Offered Certificates in book-entry
form may also reduce the liquidity of such Certificates since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Risk Factors--Book-Entry Registration". Except to the extent
described herein and in the related Prospectus Supplement, Certificateholders
will have no redemption rights and the Certificates are subject to early
retirement only under certain specified circumstances described herein and in
the related Prospectus Supplement. See "Description of the
Certificates--Termination". Each class of Offered Certificates of a series will
be issued in minimum denominations corresponding to Certificate Balances or, in
the case of Stripped Interest Certificates, notional amounts specified in the
Prospectus Supplement for such series.
LIMITED ASSETS AND OBLIGATIONS
Unless otherwise specified in the related Prospectus Supplement, a series
of Certificates will not have any claim against or security interest in the
Trust Fund for any other series. If the related Trust Fund is insufficient to
make payments on the related Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including the Principal and Interest Account, Certificate
Account and any accounts maintained as Credit Support, may be withdrawn under
certain conditions, as described in the related Prospectus Supplement. In the
event of such withdrawal, such amounts will not be available for future payment
of principal or interest on the Certificates. If so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Remittance Date in respect of which losses or
shortfalls in collections on the Mortgage Loans have been incurred, the amount
of such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations specified
in such Prospectus Supplement.
The Certificates will not represent an obligation of or interest in the
Depositor, the Servicer or any of their respective affiliates. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be obligations (if any) of the Depositor and the Servicer
pursuant to certain limited representations and warranties made with respect to
the Mortgage Loans, the Servicer's servicing obligations under the related
Pooling and Servicing Agreement (including its limited obligation to make
certain advances in the event of delinquencies with respect to interest on the
Mortgage Loans, and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Depositor or Servicer
in connection with an agreement to purchase or act as a remarketing agent with
respect to a Convertible Mortgage Loan (as defined herein) upon conversion to a
fixed rate. Except as so described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage
9
<PAGE>
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Servicer or any of their respective
affiliates. Proceeds of the assets included in the related Trust Fund for a
series of Certificates (including the Mortgage Loans and any Credit Support)
will be the sole source of payments on the Certificates, and there will be no
recourse to the Depositor or the Servicer or any of their respective affiliates
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Certificates.
AVERAGE LIFE OF CERTIFICATES; PREPAYMENTS; YIELDS
Prepayments (including liquidations due to defaults and repurchases due to
conversion of Convertible Mortgage Loans to fixed interest rate loans, breaches
of representations and warranties or exercise of a repurchase option upon
default) on the Mortgage Loans in any Trust Fund generally will result in a
faster rate of principal payments on one or more classes of the related
Certificates than if payments on such Mortgage Loans were made as scheduled.
Thus, the prepayment experience on the Mortgage Loans may affect the average
life of each class of related Certificates. The rate of principal payments on
pools of mortgage loans varies between pools and from time to time is influenced
by a variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Mortgage
Loans in any Trust Fund or that the rate of payments will conform to any model
described herein or in any Prospectus Supplement. If prevailing interest rates
fall significantly below (or rise significantly above) the applicable mortgage
rates, principal prepayments are likely to be higher (or lower) than if
prevailing rates remain at the rates borne by the Mortgage Loans underlying or
comprising the Mortgage Loans in any Trust Fund. As a result, the actual
maturity of any class of Certificates could occur significantly earlier (or
later) than expected. A series of Certificates may include one or more classes
of Certificates with priorities of payment and, as a result, yields on other
classes of Certificates, including classes of Offered Certificates, of such
series may be more sensitive to prepayments on Mortgage Loans. A series of
Certificates may include one or more classes offered at a significant premium or
discount. Yields on such classes of Certificates will be sensitive, and in some
cases extremely sensitive, to prepayments on Mortgage Loans and, where the
amount of interest payable with respect to a class is disproportionately high,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A series of Certificates may include one or more
classes of Certificates ("Accrual Certificates"), including classes of Offered
Certificates, with respect to which certain accrued certificate interest will
not be distributed but rather will be added to the principal balance thereof
and, as a result, yields on such Certificates will be sensitive to (a) the
provisions of such Accrual Certificates relating to the timing of distributions
of interest thereon and (b) if such Accrual Certificates accrue interest at a
variable or adjustable Pass-Through Rate, changes in such rate. See "Yield
Considerations" herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time. No person is obligated
to maintain the rating on any Certificate. In the event the rating is revised or
withdrawn, the liquidity of the Certificates may be adversely affected.
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Pooling and Servicing
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the related Mortgage Loans will be made, the degree to
which the rate of such prepayments might differ from that originally anticipated
or the likelihood of early optional termination of the series of Certificates.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Certificate at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Certificates of the related series are entitled that is
not covered by the applicable rating.
10
<PAGE>
The amount, type and nature of credit support, if any, established with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of such series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit support required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Mortgage Loans. In addition, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect to
any Trust Fund. To the extent that such losses are not covered by Credit
Support, such losses will be borne by the holders of one or more classes of the
Certificates of the related series. See "Description of Credit Support" and
"Rating".
RISKS ASSOCIATED WITH THE MORTGAGE LOANS AND MORTGAGED PROPERTIES
INVESTMENT IN THE MORTGAGE LOANS. An investment in securities such as the
Offered Certificates will represent interests in mortgage loans and/or
manufactured housing conditional sales contracts and installment loan agreements
and may be affected by, among other things, a decline in real estate values. No
assurance can be given that values of the Mortgaged Properties will remain at
the levels existing on the dates of origination of the related Mortgage Loans.
If the residential real estate market should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans, and
any secondary financing on the Mortgaged Properties, 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. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to the principal
balance of that portion of interest that has accrued but is not payable in any
month because the amount of interest accrued in such month exceeded the
scheduled payment on the Mortgage Loan (such portion of interest, "Deferred
Interest"), the principal balances of such Mortgage Loans could be increased to
an amount equal to or in excess of the value of the underlying Mortgaged
Properties, thereby increasing the likelihood of default. To the extent that
such losses are not covered by the applicable Credit Support, holders of
Certificates of the series evidencing interest in the related Mortgage Pool will
bear all risk of loss resulting from default by Mortgagors and will have to look
primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of loans which may be included in the Mortgage Pools may
involve additional uncertainties not present in traditional types of loans. For
example, certain of the Mortgage Loans may provide for escalating or variable
payments by the borrower under the Mortgage Loan (the "Mortgagor") as to which
the Mortgagor is generally qualified on the basis of the initial payment amount.
In some instances the Mortgagor's income may not be sufficient to enable the
Mortgagor to continue to make required loan payments as such payments increase
and thus the likelihood of default will increase. To the extent that such losses
are not covered by Credit Support, holders of the Certificates will bear all
risk of loss resulting from default by Mortgagors and will have to look
primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans. In
addition to the foregoing, 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 the Mortgage Loans in such a
region may present risk considerations in addition to those generally present
for similar mortgage-backed securities without such concentration.
Certain of the Mortgage Loans included in a Trust Fund, particularly those
secured by Multifamily Properties, may not be fully amortizing over their terms
to maturity and, thus, will require substantial payments of principal (that is,
balloon payments) at their stated maturity. Mortgage Loans of this type involve
a greater degree of risk than self-amortizing loans because the ability of a
Mortgagor to make a balloon payment typically will depend upon its ability
either to fully refinance the loan or to sell the related Mortgaged Property at
a price sufficient to permit the Mortgagor to make the balloon payment. The
ability of a Mortgagor to accomplish either of these goals will be
11
<PAGE>
affected by a number of factors, including the value of the related Mortgaged
Property, the level of available mortgage rates at the time of sale or
refinancing, the Mortgagor's equity in the related Mortgaged Property,
prevailing general economic conditions, the availability of credit for loans
secured by comparable real properties and, in the case of Multifamily
Properties, the financial condition and operating history of the Mortgagor and
the related Mortgaged Property, tax laws and rent control laws.
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property is
directly related to the net operating income derived from such property. If the
net operating income of the property is reduced (for example, if rental or
occupancy rates decline or real estate tax rates or other operating expenses
increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
Additional special risks associated with particular types of Mortgage Loans
may be specified in the related Prospectus Supplement.
SECOND LIENS. Certain of the Mortgage Loans may be secured by second liens
and the related first liens ("First Liens") may not be included in the Mortgage
Pool. The primary risk to holders of Mortgage Loans secured by second liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related First Lien to satisfy fully both the First Lien and
the Mortgage Loan. In the event that a holder of the First Lien forecloses on a
Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the First Lien. The claims of the holder of
the First Lien will be satisfied in full out of proceeds of the liquidation of
the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the second lien receives any payments in respect of the Mortgage Loan.
If the Servicer were to foreclose on any Mortgage Loan, it would do so subject
to any related First Lien. In order for the debt related to the Mortgage Loan to
be paid in full at such sale, a bidder at the foreclosure sale of such Mortgage
Loan would have to bid an amount sufficient to pay off all sums due under the
Mortgage Loan and the First Lien or purchase the Mortgaged Property subject to
the First Lien. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy both loans in
the aggregate, the Trust Fund, as the holder of the second lien, and,
accordingly, holders of the Certificates bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained and
(ii) the risk of loss if the deficiency judgment is not realized upon. Moreover,
deficiency judgments may not be available in certain jurisdictions. In addition,
a second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Servicer to foreclose on or sell the
Mortgaged Property or to obtain liquidation proceeds sufficient to repay all
amounts due on the related Mortgage Loan. In addition, the Servicer will be
entitled to deduct from related liquidation proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted
12
<PAGE>
Mortgage Loans and not yet repaid, including payments to senior lienholders,
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses.
Liquidation expenses with respect to defaulted second mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted second mortgage loan having a small remaining principal balance
as it would in the case of a defaulted second mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
defaulted second mortgage loan having a small remaining principal balance than
would be the case with the defaulted second mortgage loan having a large
remaining principal balance. Because the average outstanding principal balance
of the Mortgage Loans is smaller relative to the size of the average outstanding
principal balance of the loans in a typical pool of conventional first priority
mortgage loans, liquidation proceeds may also be smaller as a percentage of the
principal balance of a Mortgage Loan than would be the case in a typical pool of
conventional first priority mortgage loans. Similarly, the smaller the balance
of the Mortgage Loan is in relation to the First Lien, the greater may be the
potential is for losses on the Mortgage Loan.
BANKRUPTCY PROCEEDINGS. If so provided in the Prospectus Supplement for a
series of Certificates, certain of the Mortgagors may be subject to a repayment
plan (a "Bankruptcy Plan"), filed in proceedings under Chapter 7 or 13 of Title
11, United States Bankruptcy Code (the "Bankruptcy Code"). The Bankruptcy Plan
may permit the debtor to cure defaults with respect to the monthly payments due
in respect of its Mortgage Loan (such Mortgage Loan, a "Bankruptcy Loan") by
scheduling payments to pay arrearages in monthly installments, within a
reasonable time period (each such payment, a "Plan Payment"), and reinstating
the original loan payment schedule. The debtor may be required to make Plan
Payments to the bankruptcy trustee (unless otherwise ordered by the court),
which payments the bankruptcy trustee then distributes to creditors, and to
continue to make payments due under its Mortgage Note after the effectiveness of
the Bankruptcy Plan to the mortgagee named therein in accordance with the
provisions of the Bankruptcy Plan. To the extent that losses are not covered by
Credit Support, holders of the Certificates representing an interest in a Trust
Fund including Bankruptcy Loans will bear all risk of loss resulting from
default by the Mortgagors and will have to look primarily to the value of the
Mortgaged Properties for recovery of the outstanding principal and unpaid
interest of the defaulted Bankruptcy Loans.
DELINQUENT LOANS. Certain of the Mortgage Loans in a Trust Fund may be up
to three months past due as of the related Cut-off Date. The primary risk for
holders of Certificates evidencing an interest in such Trust Fund is the
increased possibility of (i) the foreclosure of such Mortgage Loan, (ii) the
Trustee taking possession of the Mortgaged Property by deed-in-lieu of
foreclosure, or (iii) the related Mortgagor becoming subject to bankruptcy
proceedings with attendant delays in payment and the further possibility that
such Mortgage Loan may become a Bankruptcy Loan.
REGULATORY MATTERS. Applicable state laws generally regulate interest rates
and other charges, require certain disclosures, and require licensing of certain
originators and servicers of Mortgage Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers and unfair and deceptive practices which may apply to the
origination, servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of The Mortgage Loans".
The Mortgage Loans 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 of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and (iii) the Fair
13
<PAGE>
Credit Reporting Act, which regulates the use and reporting of information
related to the borrower's credit experience. The Contracts are also subject to
general equitable principles and other rules in consumer credit transactions,
such as the "Holder-in-Due Course" Rule of the Federal Trade Commission. See
"Certain Legal Aspects of the Mortgage Loans--Consumer Protection Laws with
respect to Contracts." Moreover, the Contracts may be subject to potential
personal injury litigation based on claims of exposure to the chemical
formaldehyde. See "Certain Legal Aspects of the Mortgage Loans--Formaldehyde
Litigation with respect to Contracts".
If applicable, certain legal aspects of the Mortgage Loans for a series of
Certificates may be described in the related Prospectus Supplement. See also
"Certain Legal Aspects of Mortgage Loans" herein.
BALLOON PAYMENTS. Certain of the Mortgage Loans as of the Cut-off Date may
not be fully amortizing over their terms to maturity and, thus, will require
substantial principal payments (i.e., balloon payments) at their stated
maturity. Mortgage Loans with balloon payments involve a greater degree of risk
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to timely refinance the loan or to timely sell
the related Mortgaged Property. The ability of a mortgagor to accomplish either
of these goals will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the mortgagor's
equity in the related Mortgaged Property, the financial condition of the
mortgagor and applicable tax laws. Because Mortgagors of Mortgage Loans with
balloon payments are required to make substantial principal payments upon
maturity, the default risk associated with Mortgage Loans with balloon payments
is greater than that associated with fully amortizing loans.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe any
Credit Support for such series, which may include letters of credit, insurance
policies, guarantees, reserve funds, cross-collateralization,
overcollateralization or other types of credit support, or combinations thereof.
Use of Credit Support will be subject to the conditions and limitations
described herein and in the related Prospectus Supplement. Moreover, such Credit
Support may not cover all potential losses or risks. For example, Credit Support
may or may not cover fraud or negligence by a mortgage loan originator or other
parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Mortgage Loans may fall primarily upon
those classes of Certificates having a lower priority of payment. Moreover, if a
form of Credit Support covers more than one pool of Mortgage Loans in a Trust
(each, a "Covered Pool") or more than one series of Certificates (each, a
"Covered Trust"), holders of Certificates evidencing an interest in a Covered
Pool or a Covered Trust will be subject to the risk that such Credit Support
will be exhausted by the claims of other Covered Pools or Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on assumptions regarding
levels of defaults, delinquencies and losses and on other factors. There can,
however, be no assurance that the loss experience on the related Mortgage Loans
will not exceed such assumed levels. See "--Limited Nature of Ratings",
"Description of the Certificates" and "Description of Credit Support".
14
<PAGE>
ENFORCEABILITY
Mortgages will contain a due-on-sale clause which permits the lender to
accelerate the maturity of the Mortgage Loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages may also include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or non-monetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF INSOLVENCY OF THE DEPOSITOR
The Depositor believes that the transfer of the Mortgage Loans by it to a
Trust Fund and the sale of Certificates to an independent third party for fair
value and without recourse will constitute absolute and unconditional sales.
However, in the event of an insolvency and receivership of the Depositor at a
time when it or any affiliate holds Certificates, the Federal Deposit Insurance
Corporation (the "FDIC") as its receiver, for purposes of such a receivership,
could attempt to recharacterize the sale of the Mortgage Loans by the Depositor
as a borrowing by the Depositor or such affiliate from the holders of the
Certificates, secured by a pledge of the Mortgage Loans. Such an attempt, even
if unsuccessful, could result in delays in payments on the Certificates. If such
an attempt were successful, the FDIC could elect to liquidate the Mortgage Loans
and accelerate payment of the Certificates with the holders thereof entitled to
the then outstanding principal amount thereof, if any, together with interest at
the applicable Pass-Through Rate to the date of payment. Thus, the holders of
Certificates could lose the right to future payments of interest, and might
suffer reinvestment loss in a lower interest rate environment and, in the case
of certain Stripped Interest Certificates, may fail to recoup the value of their
investment.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), may adversely affect, for an indeterminate period of
time, the ability of the Servicer to collect full amounts of interest on certain
of the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation, which would not be
recoverable from the related Mortgage Loans, or which would not be covered by
any applicable Credit Support, would result in a reduction of the amounts
distributable to the holders of the Offered Certificates of any series. In
addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan or enforce rights under a
Contract during the Mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that the Relief Act or similar legislation applies to any Mortgage Loan
which goes into default, there may be delays in payment on the Certificates or
losses in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the Mortgage Loans resulting from similar legislation
or regulations may result in delays in payments or losses to Certificateholders.
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject to
certain environmental risks. Under the laws of certain states, contamination of
a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator", for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the mortgagor,
regardless of whether or not the
15
<PAGE>
environmental damage or threat was caused by a prior owner. See "Certain Legal
Aspects of Mortgage Loans--Environmental Legislation".
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans and
other retirement arrangements and transactions involving the assets of such
plans and arrangements. Due to the complexity of regulations which govern such
plans, prospective investors that are subject to ERISA are urged to consult
their own counsel regarding consequences under ERISA of the acquisition,
ownership and disposition of the Offered Certificates of any series. See "ERISA
Considerations".
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in "Certain Federal Income Tax
Consequences--REMICs". Accordingly, under certain circumstances, holders of
Offered Certificates that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of REMIC Residual Certificates report their pro rata share of the
taxable income and net loss of the REMIC will continue until the Certificate
Balances of all classes of Certificates of the related series have been reduced
to zero, even though holders of REMIC Residual Certificates have received full
payment of their stated interest and principal. A portion (or, in certain
circumstances, all) of such Certificateholder's share of the REMIC taxable
income may be treated as "excess inclusion" income to such holder which (i)
generally, will not be subject to offset by losses from other activities, (ii)
for a tax-exempt holder, will be treated as unrelated business taxable income
and (iii) for a foreign holder, will not qualify for exemption from withholding
tax. Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct Servicing Fees and other expenses of the REMIC. In addition,
REMIC Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the taxable
income arising in a given year on a REMIC Residual Certificate will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the REMIC Residual Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics and may in some circumstances be negative.
CONTROL
Under certain circumstances, the consent or approval of the holders of a
specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a series, and/or the consent of the holders of all outstanding
Certificates of a specific class affected thereby, and/or the consent of the
provider of Credit Support, if any, or a similar means of allocating
decision-making under the Pooling and Servicing Agreement ("Voting Rights"),
will be required to direct, and will be sufficient to bind all
Certificateholders to, or the Certificateholders of the specific class affected
thereby to, certain actions, including amending the related Pooling and
Servicing Agreement in certain circumstances. See "Description of the Pooling
and Servicing Agreements--Events of Default", "--Rights Upon Event of Default"
and "--Amendment".
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of
Certificates will be initially represented by one or more certificates
registered in the name of CEDE & Co., the nominee for DTC, and will not be
registered in the names of the Certificateholders or their nominees. Because of
this, unless and until Definitive Certificates are issued, Certificateholders
will not be recognized by the Trustee as "Certificateholders" (as that term is
to be used in the related Pooling and Servicing Agreement). Hence, until such
time, Certificateholders will be able to exercise the
16
<PAGE>
rights of Certificateholders only indirectly through DTC and its participating
organizations. See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates".
DESCRIPTION OF THE TRUST FUNDS
MORTGAGE LOANS
GENERAL. Unless otherwise specified in the related Prospectus Supplement,
the primary assets of each Trust Fund will consist of a pool of conventional
mortgage loans (the "Mortgages") and/or manufactured housing conditional sale
contracts and installment loan agreements (the "Contracts") evidenced by
promissory notes (the "Mortgage Notes"), secured by first or second mortgages or
deeds of trust or other similar instruments creating first or second liens on
Single Family Properties, Multifamily Properties, and/or Manufactured Homes,
each as described below (the "Mortgaged Properties") located in any one of the
fifty states or the District of Columbia.
The Mortgage Loans (other than the Contracts) will be secured by Mortgaged
Properties that consist primarily of owner-occupied attached or detached
one-family dwelling units, two- to four-family dwelling units, townhouses,
rowhouses, individual condominium units, individual units in planned unit
developments and certain other dwelling units ("Single Family Properties" and
the related loans, "Single Family Loans"). The Mortgaged Properties for such
loans may also consist of residential properties consisting of five or more
dwelling units in multi-story structures ("Multifamily Properties" and the
related loans, "Multifamily Loans"; Multifamily Loans, Single Family Loans and
the Contracts described below, collectively the "Mortgage Loans"). If specified
in the related Prospectus Supplement, the Multifamily Properties may include
mixed residential and commercial structures. The Mortgaged Properties may
include vacation, second and non-owner-occupied homes. The Mortgaged Properties
may include leasehold interests in residential properties, the title to which is
held by third party lessors. The term of any such leasehold will exceed the term
of the Mortgage Note by at least five years.
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 United States Code Section 5402(6), which defines
a "manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under this chapter."
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Mortgage Pool from among those originated by or purchased by the Depositor,
either directly or through its affiliates, from banks, savings and loan
associations, mortgage bankers, investment banking firms, the FDIC and other
mortgage loan originators or sellers not affiliated with the Depositor
("Unaffiliated Sellers") or from its affiliates ("Affiliated Sellers";
Unaffiliated Sellers and Affiliated Sellers are collectively referred to herein
as "Sellers"). Each Prospectus Supplement will contain information, as of the
date of such Prospectus Supplement, with respect to the underwriting standards
and criteria applied by the Depositor in originating or purchasing the Mortgage
Loans included in the related Trust Fund.
The Depositor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement, for
the benefit of the holders of all of the Certificates of a series. The Servicer
will, directly or through Sub-Servicers, service the Mortgage Loans pursuant to
a Pooling and Servicing
17
<PAGE>
Agreement and will receive a fee for such services. See "Description of the
Pooling and Servicing Agreements--Servicing and Other Compensation and Payment
of Expenses".
The Depositor will make certain representations and warranties regarding
the Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will
be without recourse. See "Description of the Pooling and Servicing
Agreements--Assignment of the Mortgage Loans; Repurchases". The obligations of
the Servicer with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Pooling and Servicing
Agreements including, unless otherwise specified in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in certain payments of interest and/or principal on or with
respect to the Mortgage Loans in amounts described herein under "Description of
the Certificates--Monthly Advances in Respect of Delinquencies". Any obligation
of the Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. Each Prospectus
Supplement will contain information, as of the date of such Prospectus
Supplement and to the extent then applicable and specifically known to the
Depositor, with respect to the Mortgage Loans constituting related Trust Assets,
including (i) the aggregate outstanding principal balance as of the applicable
Cut-off Date and the largest, smallest and average original principal balance of
the Mortgage Loans, (ii) the type of property securing the Mortgage Loans, (iii)
the remaining terms to maturity and the weighted average remaining term to
maturity of the Mortgage Loans, (iv) the earliest and latest origination date,
(v) the range of loan-to-value ratios at origination of the Mortgage Loans, (vi)
the Mortgage Rates or range of Mortgage Rates and the weighted average Mortgage
Rate borne by the Mortgage Loans, (vii) the geographical distribution of the
Mortgaged Properties on a state-by-state basis, (viii) information with respect
to the prepayment provisions, if any, of the Mortgage Loans, (ix) with respect
to Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the adjustment
dates, the highest, lowest and weighted average margin, and the maximum Mortgage
Rate variation at the time of any adjustment and over the life of the ARM Loan
and (x) information regarding the payment characteristics of the Mortgage Loans,
including without limitation balloon payment and other amortization provisions.
The related Prospectus Supplement will also contain certain other information
available to the Depositor and referred to in a general manner under
"Description of the Trust Funds-- Mortgage Loans" above. If specific information
respecting the Mortgage Loans is not known to the Depositor at the time
Certificates are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement and specific
information will be set forth in a report which will be available to purchasers
of the related Certificates at or before the initial issuance thereof and will
be filed, together with the related Pooling and Servicing Agreement, as part of
a Current Report on Form 8-K with the Commission within fifteen days after such
initial issuance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Unless otherwise specified in the
related Prospectus Supplement, all of the Mortgage Loans will (i) have original
terms to maturity of not more than 30 years and (ii) provide for payments of
principal, interest or both, on due dates that occur monthly, quarterly or
semi-annually or at such other interval as is specified in the related
Prospectus Supplement. Each Mortgage Loan may provide for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from time
to time at the Mortgagor's election, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may provide for accrual of interest on
an actual basis or a daily simple interest basis. Each Mortgage Loan may provide
for scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of certain
events, and may provide for negative amortization or accelerated amortization,
in each case as described in the related Prospectus Supplement. Each Mortgage
Loan may be fully amortizing or require a balloon payment due on its stated
maturity date, in each case as described in the related Prospectus Supplement.
ARM LOANS. If provided for in the related Prospectus Supplement, a Mortgage
Pool may contain ARM Loans which allow the Mortgagors to convert the adjustable
rates on such Mortgage Loans to a fixed rate at some point
18
<PAGE>
during the life of such Mortgage Loans (each such Mortgage Loan, a "Convertible
Mortgage Loan"), generally not later than six to ten years subsequent to the
date of origination, depending upon the length of the initial adjustment period.
If specified in the related Prospectus Supplement, upon any conversion, the
Depositor will repurchase or the Servicer or a third party will purchase the
converted Mortgage Loan as and to the extent set forth in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Depositor or the Servicer (or another party specified therein) may agree to
act as remarketing agent with respect to such converted Mortgage Loans and, in
such capacity, to use its best efforts to arrange for the sale of converted
Mortgage Loans under specified conditions. Upon the failure of any party so
obligated to purchase any such converted Mortgage Loan, the inability of any
remarketing agent to so arrange for the sale of the converted Mortgage Loan or
the unwillingness of the remarketing agent to exercise any election to purchase
the converted Mortgage Loan for its own account, the related Mortgage Pool
thereafter may include both fixed rate and ARM Mortgage Loans.
PRINCIPAL AND INTEREST ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, each Trust
Fund will include one or more accounts (collectively, the "Principal and
Interest Account") established and maintained on behalf of the
Certificateholders into which the Servicer will, to the extent described herein
and in such Prospectus Supplement, deposit all payments received on or after the
Cut-off Date with respect to the Mortgage Loans, other than the Depositor's
Yield and amounts received on or after the Cut-off Date in respect of interest
accrued on the Mortgage Loans prior to the Cut-off Date. The "Depositor's Yield"
represents the right to receive all prepayment penalties and premiums collected
on a Mortgage Loan and certain other amounts, if specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor's Yield is retained by the Depositor and will not be a
part of any Trust Fund. Unless otherwise provided in the Prospectus Supplement
for a series of Certificates, a Principal and Interest Account may be maintained
as an interest bearing or non-interest bearing account and funds held therein
may be invested in certain short-term, high quality investments. See
"Description of the Pooling and Servicing Agreements--Payments on the Mortgage
Loans; Deposits to Principal and Interest Account".
CERTIFICATE ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, each Trust
Fund will include one or more accounts (collectively, the "Certificate Account")
established and maintained on behalf of the Certificateholders into which the
Trustee designated in the related Prospectus Supplement will, to the extent
described herein and in such Prospectus Supplement, deposit all amounts remitted
by the Servicer from the Principal and Interest Account and payments received or
advanced with respect to the other assets in the Trust Fund. Unless otherwise
provided in the Prospectus Supplement for a series of Certificates, a
Certificate Account shall be maintained as a non-interest bearing account and
funds held therein may be invested in certain short-term, high quality
investments. See "Description of the Pooling and Servicing Agreements--Deposits
to Certificate Account".
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the related Trust Fund
will include one or more accounts (collectively, the "Pre-Funding Account")
established and maintained on behalf of the Certificateholders into which the
Trustee will, to the extent described herein and in the related Prospectus
Supplement, deposit amounts received from the Depositor to be applied to acquire
additional Mortgage Loans subject to certain conditions specified in the related
Prospectus Supplement. See "Description of Pooling and Servicing
Agreements--Subsequent Mortgage Loans".
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Loans in the
related Trust Fund may be provided to one or more classes of Certificates in the
related series by Credit Support in the form of subordination of one or more
other classes of Certificates in such series
19
<PAGE>
or by one or more other types of Credit Support, such as a letter of credit,
insurance policy, guarantee, reserve fund, cross-collateralization,
overcollateralization or another type of credit support, or a combination
thereof. The amount and types of coverage, the identification of the entity
providing the coverage (if applicable) and related information with respect to
each type of Credit Support, if any, will be described in the Prospectus
Supplement for a series of Certificates. See "Risk Factors-- Credit Support
Limitations" and "Description of Credit Support".
USE OF PROCEEDS
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the net proceeds to be received from the sale of the Certificates
will be applied by the Depositor to finance the purchase of, or to repay
short-term loans incurred to originate or finance the purchase of, the Mortgage
Loans or will be used by the Depositor for general corporate purposes.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate, the receipt and
timing of receipt of distributions on the Certificate, the weighted average life
of the Mortgage Loans in the related Trust Fund, liquidations of Mortgage Loans
following Mortgagor defaults and by purchases of Mortgage Loans in the event of
optional termination of the Trust Fund or breaches of representations made in
respect of such Mortgage Loans by the Depositor, the Servicer and others, and,
in the case of Certificates evidencing interests in ARM Loans, by changes in the
Net Mortgage Rates (as defined below) or conversions of ARM Loans to a fixed
interest rate. See "Risk Factors--Average Life of Certificates; Prepayments;
Yields", and "Description of the Pooling and Servicing Agreements--Assignment of
Mortgage Loans; Repurchases--Representations and Warranties; Repurchases".
PASS-THROUGH RATE
Certificates of any class within a series may have fixed, variable or
adjustable Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of such Certificates or, in the case of a
variable or adjustable Pass-Through Rate, the method of determining the
Pass-Through Rate. Holders of Stripped Interest Certificates or a class of
Certificates having a Pass-Through Rate that varies based on the weighted
average Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates than the average Net Mortgage Rate.
TIMING OF PAYMENT OF INTEREST AND PRINCIPAL
The effective yield to Certificateholders entitled to payments of interest
will be slightly lower than the yield otherwise produced by the applicable
Pass-Through Rate because, while interest on the Mortgage Loans may accrue from
the first day of each month, the distributions of such interest will not be made
until the Remittance Date which may be as late as the 25th day of the month
following the month in which interest accrues on the Mortgage Loans. Each
payment of interest on the Certificates (or addition to the Certificate Balance
of a class of Accrual Certificates) on a Remittance Date will include interest
accrued during the Interest Accrual Period described in the related Prospectus
Supplement for such Remittance Date. If the Interest Accrual Period ends on a
date other than a Remittance Date for the related series, the yield realized by
the holders of such Certificates may be lower than the yield that would result
if the Interest Accrual Period ended on such Remittance Date. In addition, if so
specified in the related Prospectus Supplement, interest accrued for an Interest
Accrual Period for one or more classes of Certificates may be calculated on the
assumption that distributions of principal (and additions to the Certificate
Balance
20
<PAGE>
of Accrual Certificates) and allocations of losses on the Mortgage Loans may be
made on the first day of the Interest Accrual Period for a Remittance Date and
not on such Remittance Date. Such method would produce a lower effective yield
than if interest were calculated on the basis of the actual principal amount
outstanding during an Interest Accrual Period.
For each Mortgage Pool, if all necessary advances are made and if there is
no unrecoverable loss on any Mortgage Loan, the net effect of each distribution
respecting interest will be to pass-through to each class of Certificates of a
series then entitled to payments of interest an amount which is equal to one
month's interest at the applicable Pass-Through Rate on such class's Certificate
Balance or notional balance.
PRINCIPAL PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate of
principal payments on the Mortgage Loans (including Principal Prepayments,
Curtailments (as defined herein), defaults and liquidations). The rate at which
principal prepayments occur on the Mortgage Loans will be affected by a variety
of factors, including, without limitation, the terms of the Mortgage Loans, the
level of prevailing interest rates, the availability of mortgage credit and, in
the case of Multifamily Loans, the quality of management of the Mortgaged
Properties, and economic, demographic, geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly below (or
rise significantly above) the Mortgage Rates on the Mortgage Loans included in a
particular Trust Fund, such Mortgage Loans are likely to be the subject of
higher (or lower) principal prepayments than if prevailing rates remain at the
rates borne by such Mortgage Loans. The rate of principal payments on some or
all of the classes of Certificates of a series will correspond to the rate of
principal payments on the Mortgage Loans included in the related Trust Fund and
is likely to be affected by the existence of prepayment premium provisions of
the Mortgage Loans in a Mortgage Pool, and by the extent to which the Servicer
of any such Mortgage Loan is able to enforce such provisions. Mortgage Loans
with a prepayment premium provision, to the extent enforceable, generally would
be expected to experience a lower rate of Principal Prepayments than otherwise
identical Mortgage Loans without such provisions, or with lower prepayment
premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Mortgage Loans,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Certificate offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Mortgage Loans,
the actual yield to maturity will be lower than that so calculated. In either
case, the effect on yield of prepayments on one or more classes of Certificates
of a series may be mitigated or exacerbated by the priority of distributions of
principal to such classes as provided in the related Prospectus Supplement.
The timing of changes in the rate of principal payments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed in respect of a Certificate, the greater the
effect on such investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
DEFAULTS
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. However, there is a risk that
Mortgage Loans, including Multifamily Loans, that require balloon payments may
default at maturity, or that the maturity of such Mortgage Loans may be extended
in connection with a workout. The rate of default on Single Family Loans which
are refinance
21
<PAGE>
or limited documentation mortgage loans, Mortgage Loans with high loan-to-value
ratios, and ARM Loans may be higher than for other types of Mortgage Loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage Loans
included in a Trust Fund and the rate at which payments are made from any Credit
Support for the related series of Certificates may affect the ultimate maturity
and the weighted average life of each class of such series. Prepayments on the
Mortgage Loans comprising a Mortgage Pool in a particular Trust Fund will
generally accelerate the rate at which principal is paid on some or all of the
classes of the Certificates of the related series.
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of Certificates may have a final scheduled Remittance Date,
which is the date on or prior to which the Certificate Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Certificates of a series will be influenced by, among other factors, the rate at
which principal on the Mortgage Loans comprising a Mortgage Pool is paid to such
class, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
In addition, the weighted average life of the Certificates may be affected
by the varying maturities of the Mortgage Loans comprising a Mortgage Pool. If
any Mortgage Loans comprising a Mortgage Pool in a particular Trust Fund have
actual terms to maturity of less than those assumed in calculating the final
scheduled Remittance Dates for the classes of Certificates of the related
series, one or more classes of such Certificates may be fully paid prior to
their respective final scheduled Remittance Dates, even in the absence of
prepayments. Accordingly, the prepayment experience of the Mortgage Pool will,
to some extent, be a function of the mix of Mortgage Rates and maturities of the
Mortgage Loans comprising such Mortgage Pool. See "Description of the Trust
Funds".
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans comprising a Mortgage Pool. Moreover, CPR and SPA were developed based
upon historical prepayment experience for Single Family Loans. Thus, it is
likely that prepayment of any Mortgage Loans comprising the Mortgage Loans for
any series will not conform to any particular level of CPR or SPA.
22
<PAGE>
The Prospectus Supplement with respect to each series of Certificates may
contain tables, if applicable, setting forth the projected weighted average life
of one or more classes of Offered Certificates of such series and the percentage
of the initial Certificate Balance of each such class that would be outstanding
on specified Remittance Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Mortgage Loans are made at rates
corresponding to various percentages of CPR, SPA or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Certificates to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual weighted
average life of the Certificates. It is unlikely that prepayment of any Mortgage
Loans comprising or underlying the Mortgage Loans for any series will conform to
any particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE LOAN. A number of Mortgage Loans may have balloon payments
due at maturity, and because the ability of a Mortgagor to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property, there is a risk that a number of
Mortgage Loans having balloon payments may default at maturity, or that the
Servicer may extend the maturity of such a Mortgage Loan in connection with a
workout. In addition, a number of Mortgage Loans may be second mortgage loans.
The rate of default on second mortgage loans may be greater than that of
mortgage loans secured by first liens in comparable properties. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the mortgagor or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the Servicer
may, to the extent and under the circumstances set forth herein and in the
related Pooling and Servicing Agreement, be permitted to modify Mortgage Loans
that are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Certificates, thereby
lengthening the period of time elapsed from the date of issuance of a
Certificate until it is retired.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments generally will, unless otherwise specified in the
related Prospectus Supplement, (i) not increase or decrease such Mortgage Rates
by more than a fixed percentage amount on each adjustment date, (ii) not
increase such Mortgage Rates over a fixed percentage amount during the life of
any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related fixed percentage set
forth in the related Mortgage Note (the "Note Margin") (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate mortgage loans. In certain rate environments, the
prevailing rates on fixed rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on ARM Loans with the result that
the rate of prepayments may increase as a result of refinancings. There can be
no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Certificates.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class or classes of
Certificates of a series will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Certificates were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of
23
<PAGE>
declining interest rates, it might be expected that each minimum scheduled
monthly payment on such a Mortgage Loan would exceed the amount of scheduled
principal and accrued interest on the principal balance thereof, and since such
excess will be applied to reduce the principal balance of the related class or
classes of Certificates, the weighted average life of such Certificates will be
reduced which may adversely affect yield to holders thereof, depending upon the
price at which such Certificates were purchased.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the Mortgage Loans comprising or underlying the Mortgage
Loans that are foreclosed in relation to the number of Mortgage Loans that are
repaid in accordance with their terms will affect the weighted average life of
the Mortgage Loans comprising a Mortgage Pool and that of the related series of
Certificates. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular Mortgage Loans and thus the
weighted average life of the Certificates.
DUE-ON-SALE CLAUSES. Acceleration of mortgage payments as a result of
certain transfers of or the creation of encumbrances upon underlying Mortgaged
Property is another factor affecting prepayment rates that may not be reflected
in the prepayment standards or models used in the relevant Prospectus
Supplement. All of the Mortgage Loans comprising a Mortgage Pool will include
"due-on-sale" clauses that permit the lender to accelerate the maturity of the
loan if the borrower sells, transfers or conveys the property. Unless otherwise
provided in the related Prospectus Supplement, the Servicer, on behalf of the
Trust Fund, will employ its usual practices in determining whether to exercise
any such right that the Trustee may have as mortgagee to accelerate payment of
the Mortgage Loan. An ARM Loan may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Servicer or the
related Sub-Servicer, the security for the ARM Loan would not be impaired by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the related series of Certificates. See "Certain Legal Aspects of Mortgage
Loans--Enforceability of Certain Provisions" and "Description of the Pooling and
Servicing Agreements--Due-on-Sale Provisions".
THE DEPOSITOR
Superior Bank FSB (the "Depositor") is a federally chartered stock savings
bank acquired by Coast to Coast Financial Corporation, a Nevada corporation, on
December 30, 1988. The deposits of the Depositor are insured by the Savings
Association Insurance Fund of the FDIC. The Depositor is a member of the Federal
Home Loan Bank of Chicago and is subject to regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS") and the FDIC. The
Depositor maintains its principal office at One Lincoln Centre, Oakbrook
Terrace, Illinois 60181 and administrative offices for the consumer finance
operations of the Depositor at 135 Chestnut Ridge Road, Montvale, New Jersey
07645. The telephone number of the principal office of the Depositor is (708)
916-4000 and the telephone number of its administrative offices is (201)
930-1500.
On November 30, 1992, the Depositor acquired by merger the mortgage
origination and servicing operating assets utilized by Alliance Funding Company,
Inc., a Delaware corporation ("Alliance"), and its subsidiaries in mortgage
origination and servicing activities. Effective December 1, 1992 (the "Effective
Date") mortgage origination and servicing activities historically conducted by
Alliance and its mortgage banking and servicing subsidiaries began to be
conducted by two new divisions of the Depositor. These new divisions are the
Alliance Funding Company division (primarily engaged in mortgage origination)
(the "Alliance Funding Division"), and the Lee Servicing Company division
(primarily engaged in mortgage servicing) (the "Servicer" or the "Lee Servicing
Division"). As of the Effective Date, the senior officers of Alliance became
senior officers of the Alliance Funding Division with direct responsibility for
the operations of the new Alliance Funding Division and Lee Servicing Division.
The Depositor originates mortgage loans (including the Mortgage Loans) on
residential and multifamily dwellings nationwide; purchases mortgage loans from
lenders, mortgage bankers, and brokers on a wholesale basis; assembles and sells
pools of mortgages to commercial banks and other financial institutions; and
services the mortgage portfolios it has placed with investors. Since the
Effective Date, the Depositor has conducted, from the location previously
utilized by Alliance, the mortgage origination activities conducted by Alliance
in a manner substantially
24
<PAGE>
identical to the conduct of business prior to the Effective Date. Each
Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement, with respect to the underwriting criteria of the
Depositor.
THE SERVICER
Since the Effective Date, the Lee Servicing Division has conducted,
primarily from its Montvale, New Jersey locations (one of which was previously
utilized by Alliance), now operated as agency offices of the Depositor, the
mortgage servicing activities previously conducted by Alliance's servicing
subsidiary Lee Servicing Corp. ("Lee") in a manner substantially identical to
the conduct of business prior to the Effective Date. As of the Effective Date,
the Servicer succeeded, without interruption, to the same servicing operations
and facilities, including operating systems, computers, files and personnel,
maintained and utilized by Lee prior to the Effective Date.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to a Pooling and Servicing Agreement. Each series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to one or more other
classes of Certificates in respect of certain distributions on the Certificates;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Certificates"); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Certificates"); (v) provide for distributions of accrued
interest thereon only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series
(collectively, "Accrual Certificates"); and/or (vi) provide for payments of
principal sequentially, or based on specified payment schedules, to the extent
of available funds, in each case as described in the related Prospectus
Supplement. Any such classes may include classes of Offered Certificates.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts specified in the related Prospectus
Supplement. The transfer of any Offered Certificates may be registered and such
Certificates may be exchanged without the payment of any service charge payable
in connection with such registration of transfer or exchange, but the Depositor
or the Trustee or any agent thereof may require payment of a sum sufficient to
cover any tax or other governmental charge. One or more classes of Certificates
of a series may be issued in definitive form ("Definitive Certificates") or in
book-entry form ("Book-Entry Certificates"), as provided in the related
Prospectus Supplement. See "Risk Factors--Book-Entry Registration" and
"Description of the Certificates--Book-Entry Registration and Definitive
Certificates". Definitive Certificates will be exchangeable for other
Certificates of the same class and series of a like aggregate Certificate
Balance or notional amount but of different authorized denominations. See "Risk
Factors--Limited Liquidity--Limited Assets and Obligations".
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the Trustee on each Remittance Date as specified in the related
Prospectus Supplement from the available funds for such series and such
Remittance Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Certificates are registered at the close of
business on the last business day of the month preceding the month in which the
Remittance Date occurs (the "Record Date"), and the amount of each distribution
will be determined as of the date specified in the related Prospectus Supplement
(the "Determination Date"). All distributions with respect to each class of
Certificates on each Remittance Date will be allocated pro rata among the
outstanding Certificates in such class. Payments will be made either by wire
transfer in immediately available funds to the account of a Certificateholder at
a bank or other entity having appropriate facilities therefor, if such
Certificateholder has so notified the Trustee or other person required to make
such payments no later than the date specified in the related Prospectus
Supplement and, if so provided in the related Prospectus
25
<PAGE>
Supplement, holds Certificates in the requisite amount specified therein, or by
check mailed to the address of the person entitled thereto as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of the Certificates (whether Definitive Certificates or Book-Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the location specified in the notice to Certificateholders of
such final distribution.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which may be a fixed, variable or adjustable Pass-Through Rate. The
related Prospectus Supplement will specify the Pass-Through Rate for each class
or, in the case of a variable or adjustable Pass-Through Rate, the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
(other than any class of Accrual Certificates, which will be entitled to
distributions of accrued interest commencing only on the Remittance Date, or
under the circumstances specified in the related Prospectus Supplement, and any
class of Stripped Principal Certificates that are not entitled to any
distributions of interest) will be made on each Remittance Date based on the
Accrued Certificate Interest (as defined below) for such class and such
Remittance Date, subject to the sufficiency of the portion of the Amount
Available (as defined herein) allocable to such class on such Remittance Date.
Prior to the time interest is distributable on any class of Accrual
Certificates, Accrued Certificate Interest on such class will be added to the
Certificate Balance thereof on each Remittance Date. With respect to each class
of Certificates and each Remittance Date (other than certain classes of Stripped
Interest Certificates), "Accrued Certificate Interest" will be equal to interest
accrued during the related Interest Accrual Period on the outstanding
Certificate Balance thereof immediately prior to the Remittance Date, at the
applicable Pass-Through Rate. Unless otherwise provided in the Prospectus
Supplement, Accrued Certificate Interest on Stripped Interest Certificates will
be equal to interest accrued on the outstanding notional amount thereof
immediately prior to each Remittance Date, at the applicable Pass-Through Rate.
The method of determining the notional amount for any class of Stripped Interest
Certificates will be described in the related Prospectus Supplement. Reference
to notional amount is solely for convenience in certain calculations and does
not represent the right to receive any distributions of principal. Unless
otherwise provided in the related Prospectus Supplement and unless covered by
payments of Compensating Interest as described in "--Compensating Interest", the
Accrued Certificate Interest on a series of Certificates will be reduced in the
event of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in such accrual period on the Mortgage Loans in the Trust Fund for such
series. The particular manner in which such shortfalls are to be allocated among
some or all of the classes of Certificates of that series will be specified in
the related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) a class of Offered
Certificates may be reduced as a result of any other contingencies, including
applicable law, delinquencies, losses and deferred interest on or in respect of
the Mortgage Loans in the related Trust Fund. See "Risk Factors--Average Life of
Certificates; Prepayments; Yields" and "Yield Considerations".
DISTRIBUTIONS OF PRINCIPAL ON THE CERTIFICATES
The Certificates of each series, other than certain classes of Stripped
Interest Certificates, will have a "Certificate Balance" which, at any time,
will equal the then maximum amount that the holder will be entitled to receive
in respect of principal out of the future cash flow on the Mortgage Loans and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon from time to time, and if and to the extent so provided in the
related Prospectus Supplement, by the amount of losses incurred in respect of
the related Mortgage Loans, may be increased in respect of Deferred Interest on
the related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Certificates prior to the Remittance Date
on which distributions of interest are required to commence, will be increased
by any Accrued Certificate Interest. The initial aggregate Certificate Balance
of all classes of Certificates
26
<PAGE>
of a series will not be greater than the outstanding aggregate principal balance
of the related Mortgage Loans as of the applicable Cut-off Date. The initial
aggregate Certificate Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Remittance Date to the class or classes of Certificates entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Certificate Balance of such class has been reduced to zero. Stripped Interest
Certificates with no Certificate Balance are not entitled to any distributions
of principal.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Certificates
consisting of one or more classes of Subordinate Certificates, on any Remittance
Date in respect of which losses or shortfalls in collections on the Mortgage
Loans have been incurred, the amount of such losses or shortfalls will be borne
first by a class of Subordinate Certificates in the priority and manner and
subject to the limitations specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Mortgage
Loans comprising such Trust Fund.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on a series of
Certificates, based upon the assumption that such Certificates will be issued in
June 1996 and that the Remittance Date is the twenty-fifth day of each month:
June 1, 1996.................... Cut-off Date. The "Original Pool Principal
Balance" will be the aggregate principal
balances of the Mortgage Loans as of the
Cut-off Date after application of all
payments due and collected on such date.
June 2-July 1, 1996............. The Servicer or the Sub-Servicers remit for
deposit in the Principal and Interest
Account all amounts received on account
of the Mortgage Loans.
June 28, 1996................... Record Date (the last day of the month
immediately preceding the month of the
related Remittance Date). Distributions on
July 25, 1996 will be made to
Certificateholders of record at the close of
business on June 28, 1996.
July 22, 1996................... Determination Date (e.g., the day of the
month which is at least two business days
prior to the Remittance Date). The
Servicer determines the amount of
principal and interest that will be
distributed to the Certificateholders on
July 25, 1996, and transfers funds in the
Principal and Interest Account to the
Certificate Account together with any
Monthly Advances and Compensating
Interest.
27
<PAGE>
Not later than 10:00 a.m., New
York time, on July 24, 1996... If applicable, notice in the event that an
Event of Default has occurred with respect
to such Remittance Date is given by the
Trustee. The Trustee will notify the
Servicer and the provider of the Credit
Support of the amount of Credit Support,
if any, required to be distributed to the
Certificateholders on July 25, 1996.
July 25, 1996................... Remittance Date (e.g., the 25th day of the
month or if such 25th day is not a business
day, the first business day immediately
following). The Trustee or its designee
will distribute to Certificateholders the
amounts required to be distributed pursuant
to the related Pooling and Servicing
Agreement.
MONTHLY ADVANCES IN RESPECT OF DELINQUENCIES
Unless otherwise provided in the related Prospectus Supplement, the
Servicer will be required as part of its servicing responsibilities to remit to
the Trustee for deposit in the Certificate Account, not later than the close of
business on each Determination Date, an amount (each, a "Monthly Advance") to be
distributed on the related Remittance Date, equal to the aggregate of payments
of interest (net of related Servicing Fees and Trustee's fees) that were due on
the Mortgage Loans in such Trust Fund during the related Due Period and were
delinquent as of the first day of the month in which such Remittance Date occurs
and, with respect to each REO Property (as defined herein) which was acquired
during or prior to the related Due Period and which was not disposed of during
such Due Period, an amount equal to the excess, if any, of interest on the
principal balance deemed to apply to such REO Property for the most recently
ended calendar month at the related Mortgage Rate (net of related Servicing Fees
and Trustee's fees) over the net income from such property for such month.
Monthly Advances are intended to maintain a regular flow of scheduled
interest payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, Monthly Advances will be
reimbursable only out of late collections of interest on Mortgage Loans;
provided, however, that unless otherwise provided in the related Prospectus
Supplement, any such Monthly Advance will be reimbursable from any amounts
available in the Certificate Account, after distributions to Certificateholders,
to the extent that the Servicer shall determine in its good faith business
judgment that such advance (a "Nonrecoverable Monthly Advance") is not
ultimately recoverable from late collections of interest. If so specified in the
related Prospectus Supplement, the obligations of the Servicer to make Monthly
Advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
COMPENSATING INTEREST
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will remit to the Trustee for deposit in the Certificate Account, not
later than the close of business on each Determination Date and with respect to
each Mortgage Loan in the related Trust Fund for which a Principal Prepayment or
Curtailment was received during the related Due Period, from and to the extent
of amounts otherwise payable to it as servicing compensation, an amount equal to
the difference between (a) 30 days' interest on the principal balance of such
Mortgage Loan as of the beginning of the related Due Period at the Mortgage
Rate, net of the per annum rate at which the Servicer's Servicing Fee accrues
(the "Net Mortgage Rate"), and (b) the amount of interest actually received on
each such Mortgage Loan for such Due Period, net of the Servicer's Servicing
Fees (such difference, "Compensating Interest").
28
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise provided in the related Prospectus Supplement, with each
distribution to holders of any class of Certificates of a series, the Trustee
will forward or cause to be forwarded to each such holder, to the Depositor and
to such other parties as may be specified in the related Pooling and Servicing
Agreement, a statement prepared by the Servicer setting forth, in each case to
the extent applicable and available:
(i) the amount of such distribution to holders of Certificates of such
class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of
such class allocable to Accrued Certificate Interest;
(iii) the amount available for distribution to holders of Certificates
for such Remittance Date;
(iv) the aggregate amount of Monthly Advances and Compensating
Interest included in such distribution;
(v) the aggregate principal balance of the Mortgage Loans at the close
of business on such Remittance Date;
(vi) the aggregate Certificate Balance or notional amount, as the case
may be, of each class of Certificates (including any class of Certificates
not offered hereby) at the close of business on such Remittance Date,
separately identifying any reduction in such Certificate Balance due to the
allocation of any loss and increase in the Certificate Balance of a class
of Accrual Certificates in the event that Accrued Certificate Interest has
been added to such balance;
(vii) the aggregate amount of principal and interest received on the
Mortgage Loans during the related Due Period;
(viii) the amount deposited in the reserve fund, if any, or Spread
Account (as defined herein), if any, on such Remittance Date;
(ix) the amount remaining in the reserve fund, if any, or Spread
Account, if any, as of the close of business on such Remittance Date;
(x) the weighted average Mortgage Rate;
(xi) in the case of Certificates with a variable Pass-Through Rate,
the Pass-Through Rate applicable to such Remittance Date, as calculated in
accordance with the method specified in the related Prospectus Supplement;
(xii) in the case of Certificates with an adjustable Pass-Through
Rate, for statements to be distributed in any month in which an adjustment
date occurs, the adjustable Pass-Through Rate applicable to the next
succeeding Remittance Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xiii) certain delinquency and foreclosure information;
(xiv) the Servicing Fees and Trustee's fees and such other information
as Certificateholders may reasonably request which is produced or available
in the ordinary course of the Servicer's business; and
(xv) as to any series which includes Credit Support, certain
information regarding any payments thereunder or coverage provided and the
remaining availability thereof.
29
<PAGE>
Additional information may be included in reports to holders of
Certificates if required by the Pooling and Servicing Agreement with respect to
a series of Certificates.
Within a reasonable period of time after the end of each calendar year, the
Servicer or the Trustee, as provided in the related Prospectus Supplement, shall
furnish to each person who at any time during the calendar year was a holder of
a Certificate a statement containing the information set forth in subclauses
(i)-(iii) and (xiv) above, aggregated for such calendar year or the applicable
portion thereof during which such person was a Certificateholder. Such
obligation of the Servicer or the Trustee shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Servicer or the Trustee pursuant to any requirements of the Code as are from
time to time in force. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates".
TERMINATION
Unless otherwise provided in the related Prospectus Supplement, the
obligations created by the Pooling and Servicing Agreement for each series of
Certificates will terminate upon notice to the Trustee of either: (a) the later
of the distribution to holders of Certificates of a series of the final payment
or collection with respect to the last Mortgage Loan (or Monthly Advances of
same by the Servicer), or the disposition of all funds with respect to the last
Mortgage Loan and the remittance of all funds due under such Pooling and
Servicing Agreement and the payment of all amounts due and payable to the
provider of Credit Support, if any, and the Trustee or (b) mutual consent of the
Servicer, the provider of Credit Support, if any, and all Certificateholders in
writing; provided, however, that in no event will the trust established by the
Pooling and Servicing Agreement terminate later than twenty-one years after the
death of the last surviving lineal descendant of the person named in the Pooling
and Servicing Agreement, alive as of the Cut-off Date.
Unless otherwise provided in the related Prospectus Supplement and subject
to provisions in such Pooling and Servicing Agreement concerning adopting a plan
of complete liquidation, the Servicer may, at its option, terminate the Pooling
and Servicing Agreement for each series on any date on which the outstanding
principal balance of the Mortgage Pool is less than 10% of the Original Pool
Principal Balance by purchasing, on the next succeeding Remittance Date, all of
the outstanding Mortgage Loans and REO Properties at the price (the "Termination
Price") equal to the sum of (x) 100% of the aggregate principal balances of the
Mortgage Loans and REO Properties, and (y) to the extent not covered by interest
collections on the Mortgage Loans that are distributable to holders of
Certificates, 30 days' interest on such amount computed at a rate equal to the
sum of the Pass-Through Rates of the Certificates for such series. In connection
with any such purchase, the Servicer will pay the outstanding fees and expenses
of the Trustee and the provider of Credit Support and the Servicer shall remit
to the Trustee for remittance to holders of Certificates on the final Remittance
Date all other amounts then on deposit in the Principal and Interest Account
that would have constituted part of the amount available for distribution to
holders of Certificates for subsequent Remittance Dates absent such purchase.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the provider of Credit Support or the
holders of Certificates of a specified class under the circumstances and in the
manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of Certificates,
the Offered Certificates of one or more classes of such series will be issued as
Book-Entry Certificates, and each such class will be represented by one or more
single Certificates registered in the name of CEDE & Co., the nominee of the
depository, The Depository Trust Company ("DTC").
If so provided in the related Prospectus Supplement for a series of
Certificates, holders of Certificates may hold their Certificates through DTC
(in the United States) or Centrale de Livraison de Valeurs Mobilieres S.A.
("CEDEL") or the Euroclear System ("Euroclear"), in Europe. Transfers within
DTC, CEDEL or Euroclear, as the
30
<PAGE>
case may be, will be in accordance with the usual rules and operating procedures
of the relevant system (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositories which in turn will hold such
positions in customers' securities accounts in the depositories' names on the
books of DTC. Unless otherwise provided in the related Prospectus Supplement for
a series of Certificates, Citibank, N.A. will act as depositary for CEDEL and
Morgan Guaranty Trust Company of New York will act as depositary for Euroclear
(in such capacities, individually the "Depositary" and collectively the
"Depositories").
Transfers between Participants (as defined below) will occur in accordance
with DTC rules. Transfers between CEDEL Participants and Euroclear Participants
(each as defined below) will occur in accordance with their respective rules and
operating procedures.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, owners of
Offered Certificates ("Certificate Owners") or prospective owners, as the case
may be, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Offered Certificates may do so only through Participants and Indirect
Participants. In addition, such Certificate Owners will receive all
distributions of principal and interest on the Offered Certificates from the
Trustee or the applicable paying agent through DTC and its Participants. Under a
book-entry format, Certificateholders may receive payments after the related
Remittance Date because, while payments are required to be forwarded to CEDE &
Co., as nominee for DTC, on each such date, DTC will forward such payments to
its Participants which thereafter will be required to forward them to Indirect
Participants or Certificate Owners. Unless otherwise provided in the related
Prospectus Supplement, the only "Certificateholder" (as such term is used in the
related Pooling and Servicing Agreement) will be CEDE & Co., as nominee of DTC,
and the Certificate Owners will not be recognized by the Trustee as
Certificateholders under the Pooling and Servicing Agreement. Certificate Owners
will be permitted to exercise the rights of Certificate Owners under the related
Pooling and Servicing Agreement only indirectly through DTC and its Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain other entities, the ability of a
Certificate Owner to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international
31
<PAGE>
clearing system by the counterparty in such system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositories.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative established
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on
32
<PAGE>
behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Income Tax Consequences". CEDEL or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the Certificates
are credited.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued as Book-Entry Certificates will be issued as
Definitive Certificates only if (i) DTC or the Servicer advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the Certificates and
the Servicer is unable to locate a qualified successor or (ii) the Servicer, at
its option, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of an Event of Default, if holders of Offered Certificates
evidencing not less than 51% of the Voting Rights advise the Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) to the exclusion of any physical certificates being issued to
Certificate Owners is no longer in the best interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates for the Certificates. Upon
surrender by DTC of the certificate or certificates representing such
Certificates and instructions for reregistration, the Trustee will issue such
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement and such holders of Definitive
Certificates will deal directly with the Trustee with respect to transfers,
notices and distributions. In the event that Definitive Certificates are issued
or DTC ceases to be the clearing agency for the Certificates, the Pooling and
Servicing Agreement will provide that the applicable Certificateholders will be
notified of such event. For purposes of this Prospectus and each Prospectus
Supplement, unless the context otherwise requires, the term "Certificateholder"
shall be deemed to mean Certificate Owner.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS
The Certificates of each series evidencing interests in a Trust Fund
consisting of Mortgage Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, the Servicer and the Trustee. The Trustee with
respect to any series of Certificates will be named in the related Prospectus
Supplement. The provisions of each Pooling and Servicing Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust Fund. A form of a Pooling and Servicing Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions that
may appear in each Pooling and Servicing Agreement. The Prospectus Supplement
for a series of Certificates will describe any provision of the Pooling and
Servicing Agreement relating to such series that materially differs from the
description thereof contained in this Prospectus. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the Pooling and Servicing Agreement for
each Trust Fund and the related Prospectus Supplement. As used herein with
respect to any series, the term "Certificate" refers to all of the Certificates
of that series, whether or not offered hereby and by the related Prospectus
Supplement,
33
<PAGE>
unless the context otherwise requires. The Depositor will provide a copy of the
Pooling and Servicing Agreement (without exhibits) relating to any series of
Certificates without charge upon written request of a holder of a Certificate of
such series addressed to Superior Bank FSB, 135 Chestnut Ridge Road, Montvale,
New Jersey 07645, Attention: Secretary.
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
cause the Mortgage Loans included in the related Trust Fund to be assigned to
the Trustee, together with all principal and interest received by or on behalf
of the Depositor on or with respect to such Mortgage Loans on and after the
Cut-off Date, other than the Depositor's Yield and amounts received on and after
the Cut-off Date in respect of interest accrued prior to the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to the
Depositor in exchange for the Mortgage Loans and the other assets comprising the
Trust Fund for such series. Each Mortgage Loan will be identified in a schedule
(the "Mortgage Loan Schedule") appearing as an exhibit to the related Pooling
and Servicing Agreement. Unless otherwise provided in the related Prospectus
Supplement, such schedule will include detailed information in respect of each
Mortgage Loan included in the related Trust Fund, including without limitation,
the address of the related Mortgaged Property, the Mortgage Rate and, if
applicable, the applicable index, margin, adjustment date and any rate cap
information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the appraised value,
the loan-to-value ratio as of the date indicated and the scheduled payment of
principal and interest.
With respect to each Mortgage Loan (other than the Contracts), the
Depositor will, unless otherwise provided in the related Prospectus Supplement,
deliver or cause to be delivered to the Trustee (or to the custodian acting on
behalf of the Trustee, if set forth in the Prospectus Supplement with respect to
a series of Certificates) certain loan documents, including the Mortgage Note
endorsed, without recourse, to the order of the Trustee, the Mortgage with
evidence of recording indicated thereon and an assignment of the Mortgage to the
Trustee with evidence of recording thereon (except for any such assignment of
Mortgage not returned from the public recording office, or one or more blanket
certificates attaching copies of one or more assignments of mortgage relating
thereto where the original assignment is not being delivered to the Trustee),
evidence of title insurance, intervening assignments of Mortgage (except for any
such assignment of the Mortgage that has been lost or has not been returned from
the public recording office and any assumption and modification agreements
(each, a "Trustee's Mortgage File"). In the event that, with respect to any
Mortgage Loan, the Depositor cannot deliver the Mortgage or any assignment with
evidence of recording thereon concurrently with the execution and delivery of
the Pooling and Servicing Agreement for any series because they have been lost
or have not yet been returned by the public recording office, the Depositor will
deliver or cause to be delivered to the Trustee a certified true photocopy of
such Mortgage or assignment. The Depositor will deliver or cause to be delivered
to the Trustee any such Mortgage or assignment with evidence of recording
indicated thereon upon receipt thereof from the public recording office.
Assignments of the Mortgage Loans to the Trustee will be recorded in the
appropriate public office for real property records. In addition, the Depositor
will, unless specified in the related Prospectus Supplement, as to each
Contract, deliver or cause to be delivered the original Contract endorsed,
without recourse, to the order of the Trustee and copies of documents and
instruments related to the Contract and the security interest in the
Manufactured Home securing the Contract, together with a blanket assignment to
the Trustee of all Contracts in the related Trust Fund and such documents and
instruments. In order to give notice of the right, title and interest of the
Certificateholders to the Contracts, the Depositor will cause to be executed and
delivered to the Trustee a UCC-1 financing statement identifying the Trustee as
the secured party and identifying all Contracts as collateral.
The Trustee will review (or cause to be reviewed) each Trustee's Mortgage
File within 45 days after the initial issuance of the Certificates of each
series, unless otherwise provided in the related Prospectus Supplement, to
ascertain that all required documents have been executed and received. If the
Trustee or the provider of Credit Support, if applicable under the related
Pooling and Servicing Agreement, during the process of reviewing the Trustee's
Mortgage Files finds any document constituting a part of a Trustee's Mortgage
File to be missing or defective in any material respect, the Trustee or the
provider of Credit Support, as applicable, shall promptly so notify the
Depositor. Unless otherwise provided in the related Prospectus Supplement, if
within 60 days after the Trustee's notice to it respecting such defect the
Depositor has not remedied the defect and the defect materially and adversely
34
<PAGE>
affects the interest of the holders of Certificates in the related Mortgage Loan
or the interests of the provider of Credit Support if applicable, the Depositor
will, on the next succeeding Determination Date, either (i) substitute in lieu
of such Mortgage Loan a mortgage loan or loans which meet certain criteria set
forth in the related Pooling and Servicing Agreement (each, a "Qualified
Substitute Mortgage Loan") and, if the then aggregate outstanding principal
balance of such Qualified Substitute Mortgage Loans is less than the principal
balance of such Mortgage Loan as of the date of such substitution plus accrued
and unpaid interest thereon, deliver to the Trustee the amount of any such
shortfall or (ii) purchase such Mortgage Loan at a price (the "Mortgage Loan
Purchase Price") equal to the principal balance of such Mortgage Loan as of the
date of purchase, plus all accrued and unpaid interest thereon through the due
date for such Mortgage Loan in the Due Period most recently ended prior to such
Determination Date computed at the Mortgage Rate plus the amount of any
unreimbursed Servicing Advances (as defined herein) made by the Servicer, which
purchase price shall be deposited in the Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, this
repurchase or substitution obligation constitutes the sole remedy available to
holders of Certificates or the Trustee for omission of, or a material defect in,
a constituent document.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series, with
respect to each Mortgage Loan included in the related Trust Fund, the Depositor
will make or assign certain representations and warranties, as of a specified
date (the person making such representations and warranties, the "Warranting
Party") covering, by way of example, the following types of matters: (i) the
accuracy of the information set forth for such Mortgage Loan on the Mortgage
Loan Schedule; (ii) the existence of title insurance insuring the lien priority
of the Mortgage Loan; (iii) the authority of the Depositor to sell the Mortgage
Loan; (iv) the payment status of the Mortgage Loan and the status of payments of
taxes, assessments and other charges affecting the related Mortgaged Property;
(v) the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard insurance
coverage on the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, in the
event of a breach of any such representation or warranty, the Warranting Party
will be obligated to cure such breach or repurchase or replace the affected
Mortgage Loan as described below. Since the representations and warranties may
not address events that may occur following the date as of which they were made,
the Warranting Party will have a cure, repurchase or substitution obligation in
connection with a breach of such a representation and warranty only if the
relevant event that causes such breach occurs prior to such date. Such party
would have no such obligations if the relevant event that causes such breach
occurs after such date. However, the Depositor will not include any Mortgage
Loan in the Trust Fund for any series of Certificates if anything has come to
the Depositor's attention that would cause it to believe that the
representations and warranties made in respect of such Mortgage Loan will not be
accurate and complete in all material respects as of the date of initial
issuance of the related series of Certificates.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Servicer and/or Trustee
will be required to notify promptly the relevant Warranting Party of any breach
of any representation or warranty made by or on behalf of it in respect of a
Mortgage Loan that materially and adversely affects the value of such Mortgage
Loan or the interests therein of the Certificateholders. If such Warranting
Party cannot cure such breach within 60 days following the date on which such
Warranting Party discovered such breach or was notified of such breach, then
such Warranting Party will be obligated to, on the Determination Date next
succeeding the end of such 60 day period, either (i) repurchase such Mortgage
Loan from the Trustee at the Mortgage Loan Purchase Price therefor or (ii) if
during the first two years following the initial issuance of the related
Certificates, or thereafter if an opinion of counsel is provided, replace such
Mortgage Loan with one or more Qualified Substitute Mortgage Loans, provided
that if the aggregate outstanding balance of such Qualified Substitute Mortgage
Loan is less than the outstanding principal balance of the defective Mortgage
Loan plus accrued and unpaid interest thereon, the Warranting Party shall also
remit for distribution to the holders of Certificates an amount equal to such
shortfall. This repurchase or substitution obligation will constitute the sole
remedy available to holders of Certificates or the Trustee for a breach of
representation by a Warranting Party.
35
<PAGE>
Neither the Depositor nor the Servicer (except to the extent that it is the
Warranting Party) will be obligated to purchase or substitute for a Mortgage
Loan if a Warranting Party defaults on its obligation to do so, and no assurance
can be given that Warranting Parties will carry out such obligations with
respect to Mortgage Loans.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Pooling and Servicing Agreement. Upon a breach of any such
representation of the Servicer which materially and adversely affects the
interests of the Certificateholders, the Servicer will be obligated to cure the
breach in all material respects.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO PRINCIPAL AND INTEREST ACCOUNT
Unless otherwise provided in the related Prospectus Supplement, the
Servicer will, as to each Trust Fund, establish and maintain or cause to be
established and maintained a Principal and Interest Account for the collection
of payments on the related Mortgage Loans, which must be either (A) an account
or accounts maintained with an institution whose deposits are insured by the
FDIC, the unsecured and uncollateralized debt obligations of which shall be
rated "A" or better by Standard and Poor's, a Division of the McGraw-Hill
Companies, Inc. ("S&P"), and A2 or better by Moody's Investors Service, Inc.
("Moody's") and in one of the two highest short-term rating categories by S&P
and in the highest short-term rating category by Moody's and which is either (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) if required by the related Pooling
and Servicing Agreement, approved in writing by the provider of Credit Support
and S&P or (B) a trust account or accounts (which shall be a "special deposit
account") maintained with the trust department of a federal or state chartered
depository institution or trust company, having capital and surplus of not less
than $50,000,000, acting in its fiduciary capacity (the account or accounts
described in (A) or (B), an "Eligible Account"). Amounts on deposit in the
Principal and Interest Account may be invested in certain high quality
instruments ("Permitted Instruments"). Unless otherwise provided in the related
Prospectus Supplement, any interest or other income earned on funds in the
Principal and Interest Account will be paid to the Servicer or its designee as
additional servicing compensation and the Servicer shall be responsible for any
losses thereon. The Principal and Interest Account may be maintained with an
institution that is an affiliate of the Servicer, if applicable, provided that
such institution meets the standards set forth above. If permitted by each
Rating Agency and so specified in the related Prospectus Supplement, a Principal
and Interest Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Servicer or serviced or master
serviced by it on behalf of others.
The Servicer will deposit or cause to be deposited in the Principal and
Interest Account for each Trust Fund within one business day of receipt of good
funds, unless otherwise provided in the Pooling and Servicing Agreement and
described in the related Prospectus Supplement, the following payments and
collections received by the Servicer or on its behalf on or subsequent to the
Cut-off Date (other than any amounts representing the Depositor's Yield and
amounts received on or after the Cut-off Date in respect of interest accrued on
the Mortgage Loans prior to the Cut-off Date):
(i) all payments on account of principal, including Principal
Prepayments, Curtailments and other excess payments of principal, on the
Mortgage Loans (net of the Depositor's Yield, if any);
(ii) all payments on account of interest on the Mortgage Loans (net
of amounts received on and after the Cut-off Date in respect of interest
accrued on the Mortgage Loans prior to the Cut-off Date);
(iii) all proceeds of the hazard insurance policies (to the extent
such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the normal servicing
procedures of the Servicer or the related Sub-Servicer, subject to the
terms and conditions of the related Mortgage and Mortgage Note)
(collectively, "Insurance Proceeds"), any proceeds received in connection
with the taking of an entire Mortgaged Property by exercise of the power of
eminent domain or condemnation or any release of a part of the Mortgaged
Property from the lien of the related Mortgage, whether by partial
36
<PAGE>
condemnation, sale or otherwise ("Released Mortgaged Property Proceeds")
and all other amounts received and retained in connection with the
liquidation of defaulted Mortgage Loans, by foreclosure or otherwise
("Liquidation Proceeds") net of fees and advances reimbursable therefrom
plus the net proceeds on a monthly basis with respect to any Mortgaged
Properties ("REO Property") acquired for the benefit of Certificateholders
by foreclosure or by deed-in-lieu of foreclosure or otherwise
(collectively, "Net Liquidation Proceeds");
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Depositor as described under "Description of the Pooling
and Servicing Agreements-- Assignment of Mortgage Loans; Repurchases" and
"--Representations and Warranties; Repurchases", net of the Depositor's
Yield, if any, in respect of such Mortgage Loan;
(v) all payments required to be deposited in the Principal and
Interest Account with respect to any deductible clause in any blanket
insurance policy described under "--Hazard Insurance Policies"; and
(vi) any amount required to be deposited by the Servicer in connection
with losses realized on investments of funds held in the Principal and
Interest Account in Permitted Instruments.
Unless otherwise specified in the related Prospectus Supplement, the
foregoing requirements for deposit in the Principal and Interest Account may be
net of any portion thereof retained by the Servicer as its servicing
compensation which need not, to the extent permitted by the related Pooling and
Servicing Agreement, be deposited in the Principal and Interest Account. See
"Description of the Pooling and Servicing Agreements--Servicing and Other
Compensation and Payment of Expenses".
DEPOSITS TO CERTIFICATE ACCOUNT
The Trustee will, as to each Trust Fund, establish and maintain or cause to
be established and maintained a Certificate Account which must be an Eligible
Account.
The Trustee will deposit or cause to be deposited in the Certificate
Account for each Trust Fund, unless otherwise provided in the Pooling and
Servicing Agreement and described in the related Prospectus Supplement, the
following amounts (collectively, the "Amount Available") received on or
subsequent to the Cut-off Date:
(i) all amounts transferred to the Trustee by the Servicer from the
Principal and Interest
Account;
(ii) any Monthly Advances and Compensating Interest remitted to the
Trustee by the Servicer as described under "Description of the
Certificates--Monthly Advances in respect of Delinquencies--Compensating
Interest";
(iii) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Certificates as
described under "Description of Credit Support";
(iv) all income or gain from investments of funds on deposit in the
Certificate Account and any amount required to be deposited by the Servicer
in connection with losses realized on investments of funds in the
Certificate Account; and
(v) the Termination Price.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the original principal
amount of a series of Certificates may exceed the principal balance of the
Mortgage Loans initially being delivered to the Trustee. Cash in an amount equal
to such difference will be deposited into a separate trust account (the
"Pre-Funding Account") maintained with
37
<PAGE>
the Trustee. During the period set forth in the related Prospectus Supplement,
amounts on deposit in the Pre-Funding Account may be used to purchase additional
Mortgage Loans for the related Trust Fund. Such additional Mortgage Loans will
be required to conform to the requirements set forth in the related Prospectus
Supplement and Pooling and Servicing Agreement. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related series of Certificates at the time and
in the manner set forth in the related Prospectus Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Mortgage Loans
and will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Mortgage Loans
and held for its own account, provided such procedures are consistent with the
Pooling and Servicing Agreement and any related hazard insurance policy or
instrument of Credit Support included in the related Trust Fund described herein
or under "Description of Credit Support". The Servicer will be required to
perform the customary functions of a servicer of comparable loans, including:
collecting payments from mortgagors maintaining hazard insurance policies as
described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder; maintaining escrow or impoundment accounts of
mortgagors for payment of taxes, insurance and other items required to be paid
by any mortgagor pursuant to the terms of the Mortgage Loan; processing
assumptions or substitutions, although, unless otherwise specified in the
related Prospectus Supplement, the Servicer is generally required to exercise
due-on-sale clauses to the extent such exercise is permitted by law and would
not adversely affect insurance coverage; attempting to cure delinquencies;
supervising foreclosures; and maintaining accounting records relating to the
Mortgage Loans.
The Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans.
Consistent with the foregoing, the Servicer may at its own discretion waive any
late payment charge, prepayment charge, assumption fee or any penalty interest
in connection with the prepayment of a Mortgage Loan or any other fee or charge
which the Servicer would be entitled to retain as servicing compensation and may
waive, vary or modify any term of any Mortgage Loan or consent to the
postponement of strict compliance with any such term or in any manner grant
indulgence to any Mortgagor, subject to the limitations set forth in the related
Pooling and Servicing Agreement. In the event the Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Servicer
will nonetheless make payment of any required Monthly Advances with respect to
the payments so extended to the same extent as if such installment were due,
owing and delinquent and had not been deferred.
Under a Pooling and Servicing Agreement, a Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Servicer may, among other
things, grant a period of temporary indulgence (generally up to four months) to
a Mortgagor or may enter into a plan providing for repayment by such Mortgagor
of delinquent amounts within a specified period (generally up to one year) from
the date of execution of the plan. However, unless otherwise specified in the
related Prospectus Supplement, the Servicer must first determine that any such
waiver or extension will not impair the coverage of any related insurance policy
or materially adversely affect the security for such Mortgage Loan or Contract.
In addition, unless otherwise specified in the related Prospectus Supplement, if
a material default occurs or a payment default is reasonably foreseeable with
respect to a Multifamily Loan, the Servicer will be permitted, subject to any
specific limitations set forth in the related Pooling and Servicing Agreement
and described in the related Prospectus Supplement, to modify, waive or amend
any term of such Mortgage Loan, including deferring payments, extending the
stated maturity date or otherwise adjusting the payment schedule, provided that
such modification, waiver or amendment (i) is reasonably likely to produce a
greater recovery with respect to such Mortgage Loan on a present value basis
than would liquidation and (ii) will not adversely affect the coverage under any
applicable credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of all required taxes and otherwise to maintain
38
<PAGE>
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Mortgaged Property and take such other actions as are consistent
with the related Pooling and Servicing Agreement. A significant period of time
may elapse before the Servicer is able to assess the success of any such
corrective action or the need for additional initiatives. The time within which
the Servicer can make the initial determination of appropriate action, evaluate
the success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose (or accept a deed to a Mortgaged
Property in lieu of foreclosure) on behalf of the Certificateholders of the
related series may vary considerably depending on the particular Multifamily
Loan, the Mortgaged Property, the Mortgagor, the presence of an acceptable party
to assume the Multifamily Loan and the laws of the jurisdiction in which the
Mortgaged Property is located.
If a Mortgagor files a bankruptcy petition, the Servicer may not be
permitted to accelerate the maturity of the related Mortgage Loan or to
foreclose on the Mortgaged Property for a considerable period of time. See
"Certain Legal Aspects of Mortgage Loans."
SERVICING ADVANCES
In the course of performing its servicing obligations, the Servicer will,
unless otherwise specified in the related Prospectus Supplement, pay all
reasonable and customary "out of pocket" costs and expenses incurred in the
performance of its servicing obligations in accordance with the general
servicing standards described above, which costs and expenses may include the
cost of (i) the preservation, restoration and protection of Mortgaged
Properties, including advances in respect of real estate taxes and assessments
and insurance premiums on fire, hazard and flood insurance policies, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage Loan and (iv) in connection with the liquidation of a Mortgage
Loan, expenditures relating to the purchase or maintenance of the First Lien.
Each such expenditure will constitute a "Servicing Advance".
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may recover Servicing Advances, if not theretofore recovered from the
mortgagor on whose behalf such Servicing Advance was made, from late collections
on the related Mortgage Loan, including Liquidation Proceeds, Released Mortgaged
Property Proceeds, Insurance Proceeds and such other amounts as may be collected
by the Servicer from the mortgagor or otherwise relating to the Mortgage Loan.
To the extent the Servicer, in its good faith business judgment, determines that
such Servicing Advances will not be ultimately recoverable from late
collections, Insurance Proceeds, Released Mortgaged Property Proceeds or
Liquidation Proceeds on the related Mortgage Loans ("Nonrecoverable Servicing
Advances"), unless otherwise provided in the related Prospectus Supplement, the
Servicer may be reimbursed from distributions of the Amount Available after
distributions to the Certificateholders. The Servicer is not required to make
any Servicing Advance which it determines would be a Nonrecoverable Servicing
Advance.
SUB-SERVICERS
A Servicer may delegate its servicing obligations in respect of the
Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Servicer will remain obligated under the related Pooling and Servicing
Agreement. The sub-servicing agreement between a Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") will be consistent with the terms of the related
Pooling and Servicing Agreement and will not result in a withdrawal or
downgrading of the rating of any class of Certificates issued pursuant to such
Pooling and Servicing Agreement. Although each Sub-Servicing Agreement will be a
contract solely between the Servicer and the Sub-Servicer, the related Pooling
and Servicing Agreement will provide that, if for any reason the Servicer for
such series of Certificates is no longer acting in such capacity, the Trustee or
any successor Servicer must recognize the Sub-Servicer's rights and obligations
under such Sub-Servicing Agreement.
The Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Servicer's compensation pursuant to
the related Pooling and Servicing Agreement is sufficient to pay such fees. Each
Sub-Servicer will be reimbursed by the Servicer for certain expenditures which
it makes, generally to the same extent
39
<PAGE>
the Servicer would be reimbursed under a Pooling and Servicing Agreement. See
"--Servicing and Other Compensation and Payment of Expenses".
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will be required to foreclose upon or otherwise comparably
effect the ownership in the name of the Trustee on behalf of the
Certificateholders of Mortgaged Properties relating to defaulted Mortgage Loans
as to which no satisfactory arrangements can be made for collection of
delinquent payments; provided, however, that the Servicer will not be required
to foreclose in the event that it determines that foreclosure would not be in
the best interests of the Certificateholders or the provider of Credit Support,
if any.
In connection with such foreclosure or other conversion, the Servicer shall
exercise collection and foreclosure procedures with the same degree of care and
skill in its exercise or use as it would exercise or use under the circumstances
in the conduct of its own affairs.
The limitations imposed by the Pooling and Servicing Agreement for a series
of Certificates and the REMIC provisions of the Code (if a REMIC election has
been made with respect to the related Trust Fund) on the operations and
ownership of any Mortgaged Property acquired on behalf of the Trust Fund may
result in the recovery of an amount less than the amount that would otherwise be
recovered. See "Certain Legal Aspects of Mortgage Loans--Foreclosure".
If recovery on a defaulted Mortgage Loan under any related instrument of
Credit Support is not available, the Servicer nevertheless will be obligated to
follow or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Mortgage Loan. If the
proceeds of any liquidation of the property securing the defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon at the Mortgage Rate plus the aggregate amount of
expenses incurred by the Servicer in connection with such proceedings and which
are reimbursable under the related Pooling and Servicing Agreement, the Trust
Fund will realize a loss in the amount of such difference. The Servicer will be
entitled to withdraw or cause to be withdrawn from the Principal and Interest
Account out of the Liquidation Proceeds recovered on any defaulted Mortgage
Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, amounts representing its normal servicing compensation on
the Mortgage Loan and unreimbursed Servicing Advances incurred with respect to
the Mortgage Loan.
HAZARD INSURANCE POLICIES
Each Pooling and Servicing Agreement will require the Servicer to maintain
or cause to be maintained fire and hazard insurance with extended coverage
customary in the area where the Mortgaged Property is located in an amount which
is at least equal to the least of (i) the outstanding principal balance owing on
the related Mortgage Loan and any First Lien, (ii) the full insurable value of
the premises securing the Mortgage Loan and (iii) the minimum amount required to
compensate for damage or loss on a replacement cost basis. Generally, if at the
origination of the Mortgage Loan or at any time during the term of the Mortgage
Loan, the Servicer determines that the Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available)
and the Servicer determines that such insurance is necessary in accordance with
accepted mortgage servicing practices of prudent lending institutions, the
Servicer will cause to be purchased a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier, in an amount representing
coverage not less than the lesser of (a) the outstanding principal balance of
the Mortgage Loan and any First Lien and (b) the maximum amount of insurance
available under the National Flood Insurance Act of 1968, the Flood Disaster
Protection Act of 1973 or the National Flood Insurance Act of 1994, as amended.
The Servicer will also be required to maintain on REO Property, to the extent
such insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1994, as amended, and the Servicer
determines that such insurance is necessary in accordance with accepted mortgage
servicing practices of prudent lending institutions, flood insurance in an
amount equal to that required above. Any amounts collected by the Servicer under
any such policies (other than amounts to be applied to
40
<PAGE>
the restoration or repair of the Mortgaged Property, or to be released to the
Mortgagor in accordance with customary mortgage servicing procedures) will be
deposited in the Principal and Interest Account.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire and hazards of extended coverage on all of the Mortgage
Loans, then, to the extent such policy names the Servicer as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balance
on the Mortgage Loans without co-insurance, and otherwise complies with the
requirements of the first paragraph of this sub-section, the Servicer will be
deemed conclusively to have satisfied its obligations with respect to fire and
hazard insurance coverage.
DUE-ON-SALE PROVISIONS
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer, on behalf of the Trustee, will be required under the
related Pooling and Servicing Agreement, to the extent it has knowledge of such
conveyance or prospective conveyance, to enforce the rights of the Trustee as
the mortgagee of record to accelerate the maturity of the related Mortgage Loan
under any "due-on-sale" clause contained in the related Mortgage or Mortgage
Note; provided, however, that the Servicer will not be required to exercise any
such right if the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law. In such event, the Servicer
will be required to enter into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Mortgage Note and, unless prohibited
by applicable law or the mortgage documents, the Mortgagor remains liable
thereon. The Servicer may also be authorized under the related Pooling and
Servicing Agreement, subject to certain approvals, to enter into a substitution
of liability agreement with such person, pursuant to which the original
Mortgagor is released from liability and such person is substituted as Mortgagor
and becomes liable under the Mortgage Note.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a portion of the
interest payment on each Mortgage Loan (the "Servicing Fee") which amount will
be set forth in the Prospectus Supplement with respect to a series of
Certificates. Since the Servicer's primary compensation is a percentage of the
principal balance of each Mortgage Loan, such amounts will decrease in
accordance with the amortization schedule of each Mortgage Loan. Unless
otherwise provided in the related Prospectus Supplement, the Servicer may
retain, as additional servicing compensation, all assumption fees, modification
fees and other administrative fees, late payment charges, release fees, bad
check charges, any other servicing-related fees (other than the Depositor's
Yield), Net Liquidation Proceeds not otherwise required to be deposited into the
Principal and Interest Account pursuant to the related Pooling and Servicing
Agreement, interest or other income which may be earned on funds held in the
Principal and Interest Account, Certificate Account and any other account
created under the related Pooling and Servicing Agreement. The Pooling and
Servicing Agreement and Prospectus Supplement with respect to a series of
Certificates will set forth any other amounts payable to the Servicer. Any
Sub-Servicer will receive a portion of the Servicer's compensation as its
sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Servicer or Trustee
may, to the extent provided in the related Prospectus Supplement, pay certain
expenses incurred, including, without limitation, payment of the fees and
disbursements of the Trustee and the obligor under an instrument of Credit
Support, if any. The Pooling and Servicing Agreement and Prospectus Supplement
with respect to a series of Certificates may provide that additional accounts be
established by the Servicer or the Trustee into which the Servicer or the
Trustee will deposit amounts sufficient to pay such fees.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date specified in the
Pooling and Servicing Agreement, there will be furnished to the related Trustee
a report of a firm of independent certified public accountants stating that (i)
it has obtained a letter of representation regarding certain matters from the
management of the Servicer which includes an assertion that the Servicer has
complied with certain minimum mortgage loan servicing standards identified in
the Uniform Single Attestation
41
<PAGE>
Program for Mortgage Bankers established by the Mortgage Bankers Association of
America, with respect to the servicing by or on behalf of the Servicer of
residential mortgage loans during the most recently completed fiscal year and
(ii) on the basis of an examination conducted by such firm in accordance with
standards established by the American Institute of Certified Public Accountants,
such representation is fairly stated in all material respects, subject to such
exceptions and other qualifications as may be appropriate. In rendering its
report such firm may rely, as to matters relating to the direct servicing of
mortgage loans by Sub-Servicers, upon comparable reports of firms of public
accountants rendered on the basis of examinations conducted in accordance with
the same standards (rendered within one year of such report) with respect to
those Sub-Servicers.
Each such Pooling and Servicing Agreement will also provide for delivery to
the Trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the Servicer to the effect that the Servicer has
fulfilled its obligations under the Pooling and Servicing Agreement throughout
the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Servicer will be obtainable by Certificateholders without charge upon
written request to the Servicer at the address set forth in the related
Prospectus Supplement.
CERTAIN MATTERS REGARDING THE SERVICER
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Servicer may not assign the related Pooling and Servicing
Agreement nor resign from the obligations and duties thereby imposed on it
except by mutual consent of the Servicer, the Depositor, the provider of Credit
Support, if any, the Trustee and the majority Certificateholders, or upon the
determination that the Servicer's duties thereunder are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer. No
such resignation shall become effective until a successor has assumed the
Servicer's responsibilities and obligations in accordance with such Pooling and
Servicing Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, Events of Default under the related Pooling and Servicing
Agreement will consist of (i) any failure by the Servicer to distribute or cause
to be distributed to Certificateholders, or to remit to the Trustee for
distribution to Certificateholders, any required payment that continues
unremedied after the giving of written notice of such failure to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by any Certificateholder; (ii) any failure by the Servicer to make any required
Servicing Advance, to the extent such failure materially and adversely affects
the interests of the Certificateholders, or any required Monthly Advance to the
extent of the full amount; (iii) any failure by the Servicer duly to observe or
perform in any material respect any of its other covenants or obligations under
the Pooling and Servicing Agreement which continues unremedied for no more than
sixty days after the giving of written notice of such failure to the Servicer by
the Trustee, the provider of Credit Support, if applicable, or the Depositor, or
to the Servicer, the Depositor and the Trustee by any Certificateholder; and
(iv) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities, receivership or similar proceedings and certain actions by or
on behalf of the Servicer indicating its insolvency or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, so long as an Event of Default under a Pooling and Servicing
Agreement remains unremedied, the Trustee at the direction of holders of
Certificates evidencing not less than 51% of the Voting Rights, shall, terminate
all of the rights and obligations of the Servicer under the Pooling and
Servicing Agreement relating to such Trust Fund and in and to the Mortgage
Loans, whereupon the Trustee will succeed to all of the responsibilities, duties
and liabilities of the Servicer under the Pooling and Servicing Agreement
(except that if the Trustee is prohibited by law from obligating itself to make
advances regarding delinquent mortgage loans, then the Trustee will not be so
obligated) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, in the event that the
Trustee is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the
42
<PAGE>
appointment of, a loan servicing institution acceptable to each Rating Agency or
provider of Credit Support, if any, with a net worth at the time of such
appointment of at least $15,000,000 to act as successor to the Servicer under
the Pooling and Servicing Agreement. Pending such appointment the Trustee is
obligated to act in such capacity. The Trustee and any such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation payable to the Servicer under the Pooling and Servicing
Agreement.
The Trustee, however, is under no obligation to exercise any of the trusts
or powers vested in it by any Pooling and Servicing 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 of Certificates covered by such Pooling and
Servicing Agreement, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may be amended by the Depositor, the Servicer
and the Trustee by written agreement, upon written consent of the provider of
Credit Support, if any, without notice to or the consent of any of the holders
of Certificates covered by the Pooling and Servicing Agreement, to cure any
ambiguity, to correct, modify or supplement any provision therein which may be
inconsistent with any other provisions thereof, to comply with any changes in
the Code, or to make any other provisions with respect to matters or questions
arising under the Pooling and Servicing Agreement which are not inconsistent
with the provisions thereof; provided that such action will not, as evidenced by
an opinion of counsel delivered to the Trustee, adversely affect in any material
respect the interests of any holder of Certificates covered by the Pooling and
Servicing Agreement; and provided further that no such amendment may reduce in
any manner the amount of or, delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Certificate without the
consent of the holder of such Certificate, or change the rights or obligations
of any other party without the consent of such party. However, with respect to
any series of Certificates as to which a REMIC election is to be made, the
Trustee will not consent to any amendment of the Pooling and Servicing Agreement
unless it shall first have received an opinion of counsel to the effect that
such amendment will not cause the Trust Fund to fail to qualify as a REMIC at
any time that the related Certificates are outstanding.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Pooling and Servicing Agreement, the Certificates or any Mortgage Loan or
related document and is not accountable for the use or application by or on
behalf of any Servicer of any funds paid to the Servicer or its designee in
respect of the Certificates or the Mortgage Loans, or deposited into or
withdrawn from the Principal and Interest Account or any other account by or on
behalf of the Servicer. If no Event of Default has occurred and is continuing,
the Trustee is required to perform only those duties specifically required under
the related Pooling and Servicing Agreement. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee is required to examine such documents and to determine whether
they conform to the requirements of the Pooling and Servicing Agreement.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking association
or trust company serving as Trustee may have typical banking relationships with
the Depositor and its affiliates, the Servicer and its affiliates and any
Sub-Servicer and its affiliates. The Trustee may resign at any time in the
manner set forth in the related Pooling and Servicing Agreement, in which event
the Servicer will be obligated to appoint a successor Trustee. The Trustee may
be removed if it ceases to be eligible to continue as such under the related
Pooling and Servicing Agreement or if it becomes insolvent. Any resignation or
removal of the Trustee and appointment of a successor trustee will not become
effective until the acceptance of appointment by a successor trustee. The
Trustee may appoint separate trustees and co-trustees to the extent provided in
the related Pooling and Servicing Agreement.
43
<PAGE>
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Certificates, Credit Support may be provided with respect
to one or more classes thereof or the related Mortgage Loans. Credit Support may
be in the form of the subordination of one or more classes of Certificates,
letters of credit, insurance policies, surety bonds, guarantees, the
establishment of one or more reserve funds, cross-collateralization,
overcollateralization or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may be
structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Certificates, the Credit Support will not provide protection against all
risks of loss and will not guarantee repayment of the entire Certificate Balance
of the Certificates and interest thereon. If losses or shortfalls occur that
exceed the amount covered by Credit Support or that are not covered by Credit
Support, Certificateholders will bear their allocable share of deficiencies.
Moreover, if a form of Credit Support covers more than one pool of Mortgage
Loans in a Trust (each, a "Covered Pool") or more than one series of
Certificates (each, a "Covered Trust"), holders of Certificates evidencing
interests in any of such Covered Pools or Covered Trusts will be subject to the
risk that such Credit Support will be exhausted by the claims of other Covered
Pools or Covered Trusts prior to such Covered Pool or Covered Trust receiving
any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or the related Mortgage Loans, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and (d) the material provisions relating
to such Credit Support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the obligor under any instrument of
Credit Support, including (i) a brief description of its principal business
activities, (ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the Prospectus Supplement. See "Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more classes of
Certificates of a series may be Subordinate Certificates. If so specified in the
related Prospectus Supplement, the rights of the holders of Subordinate
Certificates to receive distributions of principal and interest from the
Certificate Account on any Remittance Date will be subordinated to such rights
of the holders of Senior Certificates to the extent specified in the related
Prospectus Supplement. If so provided in the related Prospectus Supplement, the
subordination of a class may apply only in the event of (or may be limited to)
certain types of losses or shortfalls. The related Prospectus Supplement will
set forth information concerning the amount of subordination of a class or
classes of Subordinate Certificates in a series, the circumstances in which such
subordination will be applicable and the manner, if any, in which the amount of
subordination will be effected. If one or more classes of Subordinate
Certificates of a series are Offered Certificates, the related Prospectus
Supplement will provide information as to the sensitivity of distributions on
such Certificates based on certain default assumptions.
CROSS-SUPPORT PROVISIONS
If so provided in the related Prospectus Supplement, the Mortgage Loans for
a series of Certificates may be divided into separate groups, each supporting a
separate class or classes of Certificates of a series, and credit support may be
provided by cross-support provisions requiring that distributions be made on
certain classes of Certificates evidencing interests in one group of Mortgage
Loans prior to distributions on other classes of Certificates evidencing
44
<PAGE>
interests in a different group of Mortgage Loans. The Prospectus Supplement for
a series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
the Mortgage Loans in the related Trust Fund will be covered for various default
risks by insurance policies or guarantees. A copy of any such material
instrument for a series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed within 15 days of issuance of the
Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the "L/C
Bank"). Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Loans
on the related Cut-off Date or one or more classes of Certificates. If so
specified in the related Prospectus Supplement, the letter of credit may permit
draws in the event of only certain types of losses. The amount available under
the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and otherwise as described in the related
Prospectus Supplement. The obligations of the L/C Bank under the letter of
credit for each series of Certificates will expire at the earlier of the date
specified in the related Prospectus Supplement or the termination of the Trust
Fund. A copy of any such letter of credit for a series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed within 15
days of issuance of the Certificates of the related series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or determined
in the manner specified in the related Prospectus Supplement. A copy of any such
instrument for a series 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 the Certificates of the related series.
RESERVE FUNDS OR SPREAD ACCOUNT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more reserve funds in which cash, a
letter of credit, Permitted Investments, a demand note or a combination thereof
will be deposited, in the amounts so specified in such Prospectus Supplement.
The reserve funds for a series may also be funded over time by depositing
therein a specified amount of the distributions received on the related Mortgage
Loans as specified in the related Prospectus Supplement. A reserve fund for a
series of Certificates which is funded over time by depositing therein a portion
of the interest payment on each Mortgage Loan will be referred to as a "Spread
Account" in the related Prospectus Supplement and Pooling and Servicing
Agreement.
Amounts on deposit in any reserve fund for a series of Certificates,
together with the reinvestment income thereon, if any, will be applied for the
purposes, in the manner, and to the extent specified in the related Prospectus
Supplement. A reserve fund may be provided to increase the likelihood of timely
distributions of principal of or interest on the Certificates. If so specified
in the related Prospectus Supplement, reserve funds may be established to
provide limited protection against only certain types of losses and shortfalls.
Following each Remittance Date amounts in a reserve fund in excess of any amount
required to be maintained therein may be released from the reserve fund
45
<PAGE>
under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application to the
Certificates.
Moneys deposited in any reserve funds will be invested in Permitted
Instruments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related reserve fund for such series, and any loss resulting from such
investments will be charged to such reserve fund. However, such income may be
payable to the Servicer or another service provider as additional compensation.
The reserve fund, if any, for a series will not be a part of the Trust Fund
unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any reserve fund will be set forth in the
related Prospectus Supplement, including the initial balance of such reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which such required balance will decrease over time, the manner of funding such
reserve fund, the purposes for which funds in the reserve fund may be applied to
make distributions to Certificateholders and the use of investment earnings from
the reserve fund, if any.
OVERCOLLATERALIZATION
If so provided in the Prospectus Supplement for a series of Certificates, a
portion of the interest payment on each Mortgage Loan may be applied as an
additional distribution in respect of principal to reduce the principal balance
of a certain class or classes of Certificates and, thus, accelerate the rate of
payment of principal on such class or classes of Certificates.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans secured by one- to four-family residential properties that are
general in nature. Because such legal aspects are governed in part by applicable
state law (which laws may differ substantially), the summaries do not purport to
be complete nor to reflect the laws of any particular state nor to encompass the
laws of all states in which the Mortgaged Properties may be situated. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the Mortgage Loans.
GENERAL
Single Family and Multifamily Loans. Each Single Family and Multifamily
Loan will be secured by either a deed of trust or mortgage, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to such
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage conveys
legal title to the property to the mortgagee subject to a condition subsequent,
i.e., the payment of the indebtedness secured thereby. There are two parties to
a mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust has three parties, the borrower-homeowner called
the trustor (similar to a mortgagor), a lender called the beneficiary (similar
to a mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary. Some states use a security deed or deed to secure debt which is
similar to a deed of trust except that it has only two parties: a grantor
(similar to a mortgagor) and a grantee (similar to a mortgagee). Mortgages,
deeds of trust and deeds to secure debt are not prior to liens for real estate
taxes and assessments and other charges imposed under governmental police
powers. Priority between mortgages, deeds of trust and deeds to secure debt and
other encumbrances depends on their terms in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
46
<PAGE>
The Mortgages that encumber Multifamily Properties will contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
Contracts. Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by the majority of states. Such financing
statements are effective for five years and must be renewed at the end of each
five years. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title issued by the motor vehicles department (or
a similar entity) of such state. In the states that have enacted certificate of
title laws, a security interest in a unit of manufactured housing, so long as it
is not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Servicer will be required under the related Pooling and Servicing
Agreement to effect such notation or delivery of the required documents and
fees, and to obtain possession of the certificate of title, as appropriate under
the laws of the state in which any Manufactured Home is registered. In the event
the Servicer fails, due to clerical errors or otherwise, to effect such notation
or delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few states),
the Trustee may not have a first priority security interest in the Manufactured
Home securing a Contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention by the
borrowers to move them, courts in many states have held that manufactured homes
may, under certain circumstances, become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state where
the home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home that is prior to
the security interest originally retained by the Depositor.
The Depositor will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Depositor, the Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Depositor will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In most
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to the Depositor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, such assignment of the security interest might not
be held effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to
47
<PAGE>
perfect or cause to be perfected the security interest assigned to the Trust
Fund, such security interest would be subordinate to, among others, subsequent
purchasers for value of Manufactured Homes and holders of perfected security
interests. There also exists a risk in not identifying the Trustee, on behalf of
the Certificateholders, as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in such state, and if the Depositor did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Depositor must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Depositor would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Depositor would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Pooling and Servicing Agreement, the Servicer will be
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent that it has no knowledge of any such liens with respect
to any Manufactured Home securing a Contract. However, such liens could arise at
any time during the term of a Contract. No notice will be given to the Trustee
or Certificateholders in the event such a lien arises.
FORECLOSURE ON MORTGAGES
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available remedies under the mortgage.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest of record in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not contested 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 a judicial foreclosure, the court would
issue a judgment of foreclosure and would generally appoint a referee or other
court officer to conduct the sale of the property.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the sale of the property
to a third party upon any default by the borrower under the terms of the note,
deed of trust or deed to secure debt. In some states, prior to such sale, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, prior to such sale, the trustee must provide
notice in some states to any other individual having an interest of record in
the real property, including any junior lienholders. In some states, 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 obligations,
including attorney's and trustee's fees to the extent allowed by applicable law.
Certain states may require notices of sale to be published periodically for a
proscribed period in a specified manner prior to the date of the trustee's sale.
Generally, 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.
48
<PAGE>
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 often a public
sale. Because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, a third party
may be unwilling to purchase the property at a foreclosure sale. Until recently,
potential buyers were confronted with the 1980 decision of the United States
Court of Appeals for the Fifth Circuit in Durrett v. Washington National
Insurance Company. The court in Durrett held that even a non-collusive,
regularly conducted foreclosure sale was a fraudulent transfer under section 67d
of the former Bankruptcy Act (section 548 of the current United States
Bankruptcy Code) and, therefore, could be rescinded in favor of the bankrupt's
estate, if (i) the foreclosure sale was held while the debtor was insolvent and
not more than one year prior to the filing of the bankruptcy petition, and (ii)
the price paid for the foreclosed property did not represent "fair
consideration" ("reasonably equivalent value" under the United States Bankruptcy
Code). However, on May 23, 1994, Durrett was effectively overruled by the United
States Supreme Court in BFP v. Resolution Trust Corporation, as Receiver for
Imperial Federal Savings and Loan Association, et al., in which the Court held
that "'reasonably equivalent value', for foreclosed property, is the price in
fact received at the foreclosure sale, so long as all the requirements of the
State's foreclosure law have been complied with".
For these reasons, it is common for the lender to purchase the property
from the trustee, referee or other court officer for an amount equal to the
principal amount of the indebtedness secured by the mortgage or deed of trust,
accrued and unpaid interest and the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
and trustee's fees, which may be recovered by a lender. In some states there is
a statutory minimum purchase price which the lender may offer for the property.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including the obligation to pay taxes, obtain casualty insurance and
to make 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.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage to the first
mortgagee prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the first mortgage in the event the mortgagor is
in default thereunder, in either event adding the amounts expended to the
balance due on the second loan, and may be subrogated to the rights of the first
mortgagee. In addition, in the event that the foreclosure of a second mortgage
triggers the enforcement of a "due-on-sale" clause, the second mortgagee may be
required to pay the full amount of the first mortgage to the first mortgagee.
Accordingly, with respect to those Mortgage Loans which are second mortgage
loans, if the lender purchases the property, the lender's title will be subject
to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
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. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
Under the REMIC provisions of the Code and the Pooling and Servicing
Agreement with respect to a series of Certificates, the Servicer may be required
to hire an independent contractor to operate any REO Property. The costs of such
operation may be significantly greater than the cost of direct operation by the
Servicer.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the REMIC with respect to its acquisition (by foreclosure or
otherwise) and disposition of REO Property, and any such taxes or fees
49
<PAGE>
imposed may reduce Liquidation Proceeds with respect to such REO Property, as
well as distributions payable to the Certificateholders.
REPOSSESSION WITH RESPECT TO CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of
the right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be repossessed
in accordance with that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured home
to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants
were residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of the
lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgement in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
SECOND MORTGAGES
Some of the Mortgage Loans may be secured by second mortgages or deeds of
trust, which are junior to first mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed of
trust or a junior mortgage are subordinate in lien and in payment to those of
the holder of the senior mortgage or deed of trust, including the prior rights
of the senior mortgagee or beneficiary to receive and apply hazard insurance and
condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure
on the property. Upon
50
<PAGE>
completion of the foreclosure proceedings by the holder of the senior mortgage
or the sale pursuant to the deed of trust, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior lienholder satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, the terms of the second mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust. In the event of
a conflict between the terms of the first mortgage or deed of trust and the
second mortgage or deed of trust, the terms of the first mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the second mortgage.
RIGHTS OF REDEMPTION
Single Family and Multifamily Properties. 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 exercise of a right of redemption would defeat the
title of any purchaser subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
Manufactured Homes. While state laws do not usually require notice to be
given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Single Family and Multifamily Properties. Certain states have imposed
statutory prohibitions which limit the remedies of a beneficiary under a deed of
trust or a mortgagee under a mortgage. In some states, statutes limit the right
of the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal in most
cases to the difference between the 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. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower. Finally, 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
51
<PAGE>
respect to federal bankruptcy law, a court with federal bankruptcy jurisdiction
may permit a debtor through its Chapter 11 or Chapter 13 rehabilitative plan to
cure a monetary default in respect of a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court provided
no sale of the residence had yet occurred prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction 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, forgiving all or a portion of the debt and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan.
In the case of income-producing Multifamily Properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. In addition, substantive requirements are imposed
upon 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 applicable laws. In some cases, this liability may
affect assignees of the Mortgage Loans.
Contracts. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
ENFORCEABILITY OF CERTAIN PROVISIONS
Single Family and Multifamily Properties. All of the Single Family and
Multifamily Loans will include a debt-acceleration clause, which permits the
lender to accelerate the debt upon a monetary default of the borrower, after the
applicable cure period. The courts of all states will enforce clauses providing
for acceleration in the event of a material payment default. However, courts of
any state, exercising equity jurisdiction, may refuse to allow a lender to
foreclose a mortgage or deed of trust when an acceleration of the indebtedness
would be inequitable or unjust and the circumstances would render the
acceleration unconscionable.
Some courts have imposed general equitable principles to limit the remedies
available in connection with foreclosure. These equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. For example, some courts have required 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 lenders' 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 lenders to foreclose if the default
52
<PAGE>
under the mortgage instrument or deed of trust is not monetary, such as the
borrower's failure to maintain adequately the property or the borrower's
execution of a second mortgage or deed of trust affecting the property. Finally,
some courts have been willing to relieve a borrower from the consequences of the
default if the borrower has not received adequate notice of the default.
All of the Mortgage Loans will contain "due-on-sale" clauses. These clauses
permit the lender to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property. The enforceability of these clauses has been
the subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale clauses are
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, the exception applies 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 unless the property underlying such Window Period Loan is located in one
of the five "window period states" identified below. 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, successor to the Federal Home Loan Bank Board,
which preempt state law restrictions on the enforcement of due-on-sale clauses.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. The Federal Home
Loan Mortgage Corporation ("FHLMC") has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states", five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Manufactured Homes. Generally, manufactured housing contracts contain
provisions prohibiting the sale or transfer of the related manufactured homes
without the consent of the obligee on the contract and permitting the
acceleration of the maturity of such contracts by the obligee on the contract
upon any such sale or transfer that is not consented to. Unless otherwise
provided in the related Prospectus Supplement, the Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause to
be exercised its rights to accelerate the maturity of the related Contracts
through enforcement of due-on-sale clauses, subject to applicable state law. In
certain cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
due-on-sale clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting
53
<PAGE>
enforcement of due-on-sale clauses applicable to the Manufactured Homes.
Consequently, in some cases the Servicer may be prohibited from enforcing a
due-on-sale clause in respect of certain Manufactured Homes.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges. Title V also provides that, subject to
conditions (among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit), state usury limitations shall not apply to any loan that is
secured by a first lien on certain kinds of manufactured housing. In any state
in which application of Title V was expressly rejected or a provision limiting
discount points or other charges has been adopted, no Contract which imposes
finance charges or provides for discount points or charges in excess of
permitted levels has been included in the Trust Fund.
In the Pooling and Servicing Agreement, the Depositor represents and
warrants that each Mortgage Loan was originated in compliance with applicable
state law in all material respects.
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. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related Pooling and Servicing Agreement, late charges will be retained
by the Servicer as additional servicing compensation, and any inability to
collect these amounts will not affect payments to Certificateholders.
54
<PAGE>
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 to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller of goods and certain
related creditors and their assignees in a consumer credit transaction to all
claims and defenses which the debtor in the transaction could assert against the
seller of the goods. Liability under the FTC Rule is limited to the amounts paid
by the obligor under the contract, and the assignee of the contract may also be
unable to collect amounts still due thereunder. It is likely that the majority
of the Contracts in a Trust Fund will be subject to the requirements of the FTC
Rule. Accordingly, the Trust Fund, as assignee of the Contracts, will be subject
to any claims or defenses that the obligor under the Contract may assert against
the seller of the manufactured home, subject to a maximum liability equal to the
amounts paid by the obligor on the Contract.
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 possibly 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 otherwise is 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 Trust Fund).
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, the holder of any Contract secured by a Manufactured
Home with respect to which a formaldehyde claim has been successfully asserted
may be liable to the obligor for the amount paid by the obligor on the related
Contract and may be unable to collect amounts still due under the Contract. In
the event an obligor is successful in asserting such a claim, the related
Certificateholders could suffer a loss if (i) the Depositor fails or cannot be
required to repurchase the affected Contract for a breach of representation and
warranty and (ii) the Servicer or the Trustee were unsuccessful in asserting any
claim of contribution or subrogation on behalf of the Certificateholders against
the manufacturer or other persons who were directly liable to the plaintiff for
the damages. Typical products liability insurance policies held by manufacturers
and component suppliers of manufactured homes may not cover liabilities arising
from formaldehyde in manufactured housing, with the result that recoveries from
such manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Mortgage Loans. Any shortfall in interest collections resulting
from the application of the Relief Act
55
<PAGE>
or similar legislation, which would not be recoverable from the related Mortgage
Loans, would result in a reduction of the amounts distributable to the holders
of the Offered Certificates of any series, but, as described in the related
Prospectus Supplement, may be covered by Credit Support. In addition, the Relief
Act imposes limitations that would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan or enforce rights under a Contract during
the Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation applies to any Mortgage Loan which goes into
default there may be delays in payment on the Certificates in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Mortgage Loans resulting from similar legislation or regulations may
result in delays in payments or losses to Certificateholders in the event that
the Credit Support, if any, has been exhausted or is no longer in effect or does
not cover such shortfall.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and it
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses certificates ("REMIC Certificates")
representing interests in a Trust Fund, or a portion thereof, which the Trustee
will covenant to elect to have treated as a real estate mortgage investment
conduit ("REMIC") under Sections 860A through 860G (the "REMIC Provisions") of
the Code. The Prospectus Supplement for each series of Certificates will
indicate whether a REMIC election (or elections) will be made for the related
Trust Fund and, if such an election is to be made, will identify all "regular
interests" and "residual interests" in the REMIC. If a REMIC election will not
be made for a Trust Fund, the federal income tax consequences of the purchase,
ownership and disposition of the related Certificates will be set forth in the
related Prospectus Supplement. For purposes of this tax discussion, references
to a "Certificateholder" or a "holder" are to the beneficial owner of a
Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
56
<PAGE>
REMICs
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, unless otherwise provided in the related Prospectus Supplement,
the REMIC Certificates will be "real estate assets" within the meaning of
Section 856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. Moreover, if 95% or more of the assets of the
REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar year. Interest (including original issue discount) on
the REMIC Regular Certificates and income allocated to the class of REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The Servicer will report those determinations to Certificateholders in
the manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances the Mortgage Loans may not be treated entirely as
assets described in the foregoing sections. If so, the related Prospectus
Supplement will describe the Mortgage Loans that may not be so treated. The
REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property will qualify
as "real estate assets" under Section 856(c)(4)(A) of the Code.
57
<PAGE>
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Thacher Proffitt & Wood, counsel to the Depositor,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans...secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor, the Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" includes interest that is unconditionally payable at
least
58
<PAGE>
annually at a single fixed rate, or at a "qualified floating rate", an
"objective rate" a combination of a single fixed rate and one or more "qualified
floating rates" or one "qualified inverse floating rate", or a combination of
"qualified floating rates" or at an "objective rate" that does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period", some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that the portion of the interest paid on the first Distribution Date in excess
of interest accrued for a number of days corresponding to the number of days
from the Closing Date to the first Distribution Date should be included in the
stated redemption price of such REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how an election to
do so would be made under the OID Regulations and whether such an election could
be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date
59
<PAGE>
but excluding the disposition date. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount will be
determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in the stated redemption price. The
original issue discount accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the accrual period
to determine the daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of the REMIC Regular
Certificate's "adjusted issue price", in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate on any given day equals the sum of (i) the adjusted issue price (or,
in the case of the first accrual period, the issue price) of such Certificate at
the beginning of the accrual period which includes such day and (ii) the daily
portions of original issue discount for all days during such accrual period
prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Taxation of
60
<PAGE>
Owners of REMIC Regular Certificates--Premium" below. Each of these elections to
accrue interest, discount and premium with respect to a Certificate on a
constant yield method or as interest may not be revoked without the consent of
the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such
61
<PAGE>
premium under the constant yield method over the life of the Certificate. If
made, such an election will apply to all debt instruments having amortizable
bond premium that the holder owns or subsequently acquires. Amortizable premium
will be treated as an offset to interest income on the related debt instrument,
rather than as a separate interest deduction. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the Certificateholder
as having made the election to amortize premium generally. See "--Taxation of
Owners of REMIC Regular Certificates--Market Discount" above. The Committee
Report states that the same rules that apply to accrual of market discount
(which rules will require use of a Prepayment Assumption in accruing market
discount with respect to REMIC Regular Certificates without regard to whether
such Certificates have original issue discount) will also apply in amortizing
bond premium under Section 171 of the Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income of or
allowed as a loss to any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "--Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
62
<PAGE>
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions" and
"noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return and may cause such after-tax rate of return to be negative.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Trustee may be required to estimate the fair market value of such interests in
order to determine the basis of the REMIC in the Mortgage Loans and other
property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See
63
<PAGE>
"--Taxation of Owners of REMIC Regular Certificates" above, which describes a
method for accruing such discount income that is analogous to that required to
be used by a REMIC as to Mortgage Loans with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
above, is less than (or greater than) its stated redemption price. Any such
discount will be includible in the income of the REMIC as it accrues, in advance
of receipt of the cash attributable to such income, under a method similar to
the method described above for accruing original issue discount on the REMIC
Regular Certificates. It is anticipated that each REMIC will elect under Section
171 of the Code to amortize any premium on the Mortgage Loans. Premium on any
Mortgage Loan to which such election applies may be amortized under a constant
yield method, presumably taking into account a Prepayment Assumption. Further,
such an election would not apply to any Mortgage Loan originated on or before
September 27, 1985. Instead, premium on such a Mortgage Loan should be allocated
among the principal payments thereon and be deductible by the REMIC as those
payments become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not
64
<PAGE>
currently deductible by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC Residual Certificate. The
ability of REMIC Residual Certificateholders to deduct net losses may be subject
to additional limitations under the Code, as to which REMIC Residual
Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of the
taxable income of the REMIC. However, such bases increases may not occur until
the end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have had in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal 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. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value."
For REMIC Residual Certificateholders, excess inclusions (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any
65
<PAGE>
applicable tax treaty with respect to the 30% United States withholding tax
imposed on distributions to REMIC Residual Certificateholders that are foreign
investors. See, however, "--Foreign Investors in REMIC Certificates" below.
Furthermore, for purposes of the alternative minimum tax, (i) excess inclusions
will not be permitted to be offset by the alternative tax net operating loss
deduction and (ii) alternative minimum taxable income may not be less than the
taxpayer's excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute "noneconomic" residual interests will
be subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor is
also required to make a reasonable investigation to determine such transferee's
historic payment of its debts and ability to continue to pay its debts as they
come due in the future. Prior to purchasing a REMIC Residual Certificate,
prospective purchasers should consider the possibility that a purported transfer
of such REMIC Residual Certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described rules
which would result in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
66
<PAGE>
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of Servicing Fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as provided in the following two paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code.
67
<PAGE>
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires a REMIC Residual Certificate,
or acquires any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Code) during the
period beginning six months before, and ending six months after, the date of
such sale, such sale will be subject to the "wash sale" rules of Section 1091 of
the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that the REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property
68
<PAGE>
(a "Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on net income from foreclosure property or state or local
income or franchise tax that may be imposed on the REMIC will be borne by the
related Servicer or the Trustee in either case out of its own funds, provided
that the Servicer or the Trustee, as the case may be, has sufficient assets to
do so, and provided further that such tax arises out of a breach of the
Servicer's or the Trustee's obligations, as the case may be, under the related
Pooling and Servicing Agreement and in respect of compliance with applicable
laws and regulations. Any such tax not borne by the Servicer or the Trustee will
be charged against the related Trust Fund resulting in a reduction in amounts
payable to holders of the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TO CERTAIN ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Such a tax
would be generally imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (i) residual interests in
such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the related Pooling and Servicing Agreement, and will be discussed
more fully in any Prospectus Supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization.
69
<PAGE>
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(not including instrumentalities described in Section 168(h)(2)(D) of the Code
or the Federal Home Loan Mortgage Corporation), (ii) any organization (other
than a cooperative described in Section 521 of the Code) that is exempt from
federal income tax, unless it is subject to the tax imposed by Section 511 of
the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity for
taxable years beginning after December 31, 1997, notwithstanding the preceding
two sentences, in the case of a REMIC Residual Certificate held by an "electing
large partnership", all interests in such partnership shall be treated as held
by disqualified organizations (without regard to whether the record holders of
the partnership furnish statements described in the preceding sentence) and the
amount that is subject to tax under the second preceding sentence is excluded
from the gross income of the partnership allocated to the partners (in lieu of
allocating to the partners a deduction for such tax paid by the partners).
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such REMIC Residual Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Servicer, which generally will hold at least a nominal amount of
REMIC Residual Certificates, will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects.
As the tax matters person, the Servicer will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee, as tax matters person, and the IRS concerning any such
REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be
70
<PAGE>
provided by the later of 30 days after the end of the quarter for which the
information was requested, or two weeks after the receipt of the request. The
REMIC must also comply with rules requiring a REMIC Regular Certificate issued
with original issue discount to disclose on its face the amount of original
issue discount and the issue date, and requiring such information to be reported
to the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the Servicer will not have, such regulations only require
that information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee, unless otherwise stated in the related Prospectus
Supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, (except, in the case of a partnership, to the
extent provided in regulations) or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust to the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the related REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
71
<PAGE>
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences". Prospective investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Certificates offered hereunder. State tax law may differ substantially
from the corresponding federal tax law, and the discussion above does not
purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Certificates offered hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain 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 that are
subject to the fiduciary responsibility provisions of ERISA and Section 4975 of
the Code ("Plans") and on persons who are fiduciaries with respect to such Plans
in connection with the investment of Plan assets. Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA), and,
if no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Offered Certificates
without regard to the ERISA considerations described below, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Section 406 of ERISA and Section 4975 of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Certificates may cause the Trust Assets to be deemed
Plan assets. Section 2510.3-101 of the regulations of the United States
Department of Labor ("DOL") provides that when Plan acquires an equity interest
in an entity, the Plan's assets include both such equity interest and an
undivided interest in each of the underlying assets of the entity, unless
certain exceptions not applicable to this discussion apply, or unless the equity
participation in the entity by "benefit plan investors" (i.e., Plans and certain
employee benefit plans not subject to ERISA) is not "significant", both as
defined therein. For this purpose, in general, equity participation by benefit
plan
72
<PAGE>
investors will be "significant" on any date if 25% or more of the value of any
class of equity interests in the entity is held by benefit plan investors.
Equity participation in a Trust Fund will be significant on any date if
immediately after the most recent acquisition of any Certificate, 25% or more of
any class of Certificates is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Trust Assets constitute Plan assets, then any party exercising
management or discretionary control regarding those assets, such as the Servicer
or any Sub-Servicer, may be deemed to be a Plan "fiduciary" and thus subject to
the fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code with respect to the Trust Assets. In addition, if the Trust
Assets constitute Plan assets, the purchase of Certificates by a Plan, as well
as the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of certificates in the initial issuance of certificates and the
servicing and operation of "mortgage pools" (as defined below). PTCE 83-1
permits, subject to certain general and specific conditions, transactions which
might otherwise be prohibited between Plans and Parties in Interest with respect
to those Plans, related to the origination, maintenance and termination of
mortgage pools (other than pools including Multifamily Loans and Contracts) and
the acquisition and holding of certain mortgage pool pass-through certificates
representing interests in such mortgage pools by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgage
loans in the mortgage pool. PTCE 83-1 does not provide an exemption for
Certificates subordinate to other certificates of the same series and is not
available for mortgage pools consisting of Multifamily Loans or Contracts.
PTCE 83-1 defines the term "mortgage pool" as "an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one- to four-family, residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash." The Depositor expects that each pool of Single Family Loans
(but not a Mortgage Pool consisting of Multifamily Loans or Contracts) will be a
"mortgage pool" within the meaning of PTCE 83-1.
PTCE 83-1 defines the term "mortgage pool pass-through certificate" as a
"certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor". The Depositor has been advised that, for purposes
of applying PTCE 83-1, the term "mortgage pool pass-through certificate" would
include (i) Certificates representing interests in a Trust Fund consisting of
Mortgage Loans issued in a series consisting of only a single class of
Certificates; and (ii) Senior Certificates representing interests in a Trust
Fund consisting of Mortgage Loans issued in a series in which there is only one
class of Senior Certificates; provided that the Certificates described in
clauses (i) and (ii) evidence the beneficial ownership of a specified portion of
both future interest payments and future principal payments with respect to the
Mortgage Loans.
It is not clear whether all types of Certificates that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Certificates that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Stripped Interest Certificates and
Stripped Principal Certificates; or (b) Certificates in a series including
classes of Certificates which differ as to timing, sequential order, rate or
amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or formula, or on
the basis of collections from designated portions of the Mortgage Pool; or (c)
Certificates
73
<PAGE>
evidencing an interest in a Trust Fund as to which two or more REMIC elections
have been made; or (d) a series including other types of multiple classes.
Accordingly, until further clarification by the DOL, Plans should not acquire or
hold Certificates representing interests described in this paragraph in reliance
upon the availability of PTCE 83-1 without first consulting with their counsel
regarding the application of PTCE 83-1 to the proposed acquisition and holding
of such Certificates.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
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 mortgages,
or the principal balance of the largest covered mortgage, must be maintained;
and (3) the amount of the payment retained by the pool sponsor together with
other funds inuring to its benefit must be limited to not more than adequate
consideration for forming the mortgage pool plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also
imposes additional specific conditions for certain types of transactions
involving an investing Plan and for situations in which the Parties in Interest
are fiduciaries.
The Prospectus Supplement for a series of Certificates will set forth
whether the Trustee in respect of that series is affiliated with the Depositor.
If the Credit Support for a series of Certificates constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of one percent of the aggregate principal
balance of the Single Family Loans or the principal balance of the largest
Single Family Loan, then the Depositor has been advised that the second general
condition referred to above will be satisfied. It is not expected that the
Depositor will receive total compensation for forming and providing services to
the Mortgage Pools which will be more than adequate consideration. Each Plan
fiduciary responsible for making the investment decision whether to acquire or
hold Certificates must make its own determination as to whether (i) the
Certificates constitute "mortgage pool pass-through certificates" for purposes
of applying PTCE 83-1, (ii) the second and third general conditions will be
satisfied, and (iii) the specific conditions, not discussed herein, of PTCE 83-1
have been satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor, the
DOL did not have under its consideration certificates of the exact nature
described herein. There are other class and individual prohibited transaction
exemptions issued by the DOL that could apply to a Plan's acquisition or holding
of Certificates. There can be no assurance that any of those exemptions will
apply with respect to any particular Plan that acquires or holds Certificates
or, even if all of the conditions specified therein were satisfied, that such
exemption would apply to all transactions involving a Trust Fund. The applicable
Prospectus Supplement under "ERISA Considerations" may contain additional
information regarding the application of PTCE 83-1, or other prohibited
transaction exemptions that may be available, with respect to the series offered
thereby.
Any Plan fiduciary considering whether to purchase an Offered Certificate
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Offered Certificates constitute legal investments for them.
All depository institutions considering an investment in the Certificates
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, certain
74
<PAGE>
investment practices deemed to be unsuitable for an institution's investment
portfolio, as well as guidelines for investing in certain types of mortgage
related securities.
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".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by the Supplements to this
Prospectus will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Depositor from such sale. The Depositor intends that
Offered Certificates will be offered through the following methods from time to
time and that offerings may be made through more than one of these methods or
that an offering of a particular series of Certificates may be made through a
combination of two or more of these methods; such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. by placements by the Depositor with institutional investors through
dealers; and
3. by direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Certificates may be offered in whole or in part in exchange for the Mortgage
Loans (and other assets, if applicable) that would comprise the Mortgage Pool in
respect of such Certificates. If underwriters (each, an "Underwriter") are used
in a sale of any Certificates (other than in connection with an underwriting on
a best efforts basis), such Certificates 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 a fixed public offering
price or at varying prices to be determined at the time of sale or at the time
of commitment therefor.
The Offered Certificates may be distributed in a firm commitment
underwriting subject to the terms and conditions of an underwriting agreement.
In such event, the Prospectus Supplement may also specify that the underwriter
will not be obligated to pay for any Offered Certificates agreed to be purchased
by purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of Offered Certificates, an underwriter may receive
compensation from the Depositor or from purchasers of Offered Certificates in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Certificates will be distributed by the underwriter acting as agent or in some
cases as principal with respect to Offered Certificates that they have
previously purchased or agreed to purchase. If the underwriter acts as agent in
the sale of Offered Certificates, the underwriter will receive a selling
commission with respect to such Offered Certificates, depending on market
conditions, expressed as a percentage of the aggregate Certificate Balance or
notional amount of such Offered Certificates as of the Cut-off Date. The exact
percentage for each series of Certificates will be disclosed in the related
Prospectus Supplement. To the extent that the underwriter elects to purchase
Offered Certificates as principal, the underwriter may realize losses or profits
based upon the difference between its purchase price and the sales price. The
Prospectus Supplement with respect to any series offered other than through
underwriters will contain information regarding the nature of such
75
<PAGE>
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The related underwriting agreement may require that the Depositor indemnify
the underwriter against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"), or that it will
contribute to payments the underwriter may be required to make in respect
thereof.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be an "underwriter" within the meaning of the Securities
Act in connection with reoffers and sales by them of Offered Certificates.
Certificateholders should consult with their legal advisors in this regard prior
to any such reoffer or sale.
As to each series of Certificates, only those classes rated in an
investment grade rating category by a Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters in connection with the Certificates, including
certain federal income tax consequences, will be passed upon for the Depositor
by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated in one of the four highest rating categories by a
Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the provider of Credit Support, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of Stripped Interest Certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
76
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Accrual Certificates..................................................4, 10, 25
Accrued Certificate Interest.................................................26
Affiliated Sellers...........................................................17
Alliance ....................................................................24
Alliance Funding Division....................................................24
Amount Available.............................................................37
ARM Loans....................................................................18
Bankruptcy Code..............................................................13
Bankruptcy Loan..............................................................13
Bankruptcy Plan..............................................................13
Book-Entry Certificates......................................................25
CEDEL ........................................................................6
CEDEL Participants...........................................................32
CERCLA ....................................................................15
Certificate Account.......................................................2, 19
Certificate Balance...........................................................3
Certificate Owners...........................................................31
Certificateholders..........................................................iii
Certificates..................................................................1
Code .........................................................................4
Commission...................................................................ii
Compensating Interest........................................................28
Contracts....................................................................17
Convertible Mortgage Loan....................................................19
Covered Trust............................................................14, 44
CPR .........................................................................22
Credit Support.............................................................i, 3
Curtailment...................................................................6
Cut-off Date..................................................................5
Deferred Interest............................................................11
Definitive Certificates......................................................25
Depositor.................................................................1, 24
Determination Date...........................................................25
DOL .........................................................................72
DTC .................................................................iii, 6, 30
Due Period....................................................................6
Effective Date...............................................................24
Eligible Account.............................................................36
ERISA ....................................................................8, 72
Euroclear.....................................................................6
Euroclear Participants.......................................................32
Exchange Act.................................................................ii
FDIC ........................................................................15
FHLMC .......................................................................53
First Liens..................................................................12
FTC Rule ....................................................................55
Garn-St Germain Act..........................................................53
Indirect Participants........................................................31
Insurance Proceeds...........................................................36
L/C Bank ....................................................................45
Lee .........................................................................25
Lee Servicing Division.......................................................24
Liquidation Proceeds.........................................................37
Manufactured Homes............................................................1
Monthly Advance...........................................................5, 28
Moody's .....................................................................36
<PAGE>
Mortgage Loan Purchase Price.................................................35
Mortgage Loan Schedule.......................................................34
Mortgage Loans............................................................i, 17
Mortgage Notes...............................................................17
Mortgage Pool..............................................................i, 1
Mortgage Rate.............................................................2, 18
Mortgaged Properties......................................................1, 17
Mortgages....................................................................17
Mortgagor....................................................................11
Multifamily Loan.........................................................39, 73
Multifamily Loans............................................................17
Multifamily Properties....................................................1, 17
Net Liquidation Proceeds.....................................................37
Net Mortgage Rate............................................................28
Nonrecoverable Monthly Advance...............................................28
Nonrecoverable Servicing Advances............................................39
Note Margin..................................................................23
Offered Certificates..........................................................i
OTS .........................................................................24
Parties in Interest..........................................................72
Pass-Through Rate.............................................................3
Permitted Instruments........................................................36
Plan Payment.................................................................13
Plans .......................................................................72
Pooling and Servicing Agreement...............................................3
Pre-Funding Account..........................................................37
Principal and Interest Account............................................2, 19
Principal Prepayment..........................................................6
Qualified Substitute Mortgage Loan...........................................35
Rating Agency.................................................................8
Record Date..................................................................25
Released Mortgaged Property Proceeds.........................................37
Relief Act...............................................................15, 55
REMIC Regular Certificates....................................................7
REMIC Residual Certificates...................................................7
Remittance Date...............................................................4
REO Property.................................................................37
S&P .........................................................................36
Sellers .....................................................................17
Senior Certificates.......................................................4, 25
Servicing Fee................................................................41
Single Family Loans..........................................................17
Single Family Properties..................................................1, 17
SMMEA .......................................................................74
SPA .........................................................................22
Stripped Interest Certificates...............................................25
Stripped Principal Certificates...........................................4, 25
Sub-Servicer.................................................................39
Sub-Servicing Agreement......................................................39
Subordinate Certificates..................................................4, 25
Termination Price............................................................30
Title V ....................................................................54
Trust Assets.................................................................ii
Trust Fund....................................................................i
Trustee .....................................................................1
Trustee's Mortgage File......................................................34
Unaffiliated Sellers.........................................................17
Voting Rights................................................................16
Warranting Party.............................................................35
Window Period Loans..........................................................53
<PAGE>
===============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement.......................................... S-4
Risk Factors.............................................................. S-20
The Mortgage Pool......................................................... S-24
Certain Yield and Prepayment Considerations............................... S-50
The Depositor............................................................. S-65
Description of the Certificates........................................... S-72
Pooling Agreement......................................................... S-93
The Certificate Insurer and the Certificate
Insurance Policy.......................................................... S-97
Certain Federal Income Tax Consequences...................................S-100
ERISA Considerations......................................................S-102
Legal Investment..........................................................S-104
Method of Distribution....................................................S-105
Experts...................................................................S-106
Ratings...................................................................S-106
Legal Matters.............................................................S-106
Index of Principal Definitions............................................S-107
Global Clearance, Settlement and Tax Documentation
Procedures................................................................ I-1
PROSPECTUS
Summary of Prospectus .................................................... 1
Risk Factors ............................................................. 9
Description of the Trust Funds ........................................... 17
Use of Proceeds .......................................................... 20
Yield Considerations ..................................................... 20
The Depositor ............................................................ 24
The Servicer ............................................................. 25
Description of the Certificates .......................................... 25
Description of the Pooling and Servicing Agreements ...................... 33
Description of Credit Support ............................................ 44
Certain Legal Aspects of Mortgage Loans .................................. 46
Certain Federal Income Tax Consequences .................................. 56
State And Other Tax Consequences ......................................... 72
ERISA Considerations ..................................................... 72
Legal Investment ......................................................... 74
Method of Distribution ................................................... 75
Legal Matters ............................................................ 76
Financial Information .................................................... 76
Rating ................................................................... 76
Index of Principal Definitions ........................................... 77
UNTIL DECEMBER 11, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
$300,000,000
AFC MORTGAGE LOAN
ASSET BACKED CERTIFICATES
SERIES 1997-3
SUPERIOR BANK FSB,
DEPOSITOR
$35,000,000 CLASS 1A-1 CERTIFICATES
VARIABLE PASS-THROUGH RATE
$30,500,000 CLASS 1A-2 CERTIFICATES
6.62% PASS-THROUGH RATE
$12,000,000 CLASS 1A-3 CERTIFICATES
6.69% PASS-THROUGH RATE
$22,027,857 CLASS 1A-4 CERTIFICATES
7.07% PASS-THROUGH RATE
$21,000,000 CLASS 1A-5 CERTIFICATES
6.90% PASS-THROUGH RATE
$179,472,143 CLASS 2A CERTIFICATES
VARIABLE PASS-THROUGH RATE
_______________________
PROSPECTUS SUPPLEMENT
_______________________
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
SEPTEMBER 12, 1997
===============================================================================
