AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1997
Registration No. _________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
SUPERIOR BANK FSB
(Exact name of registrant as specified in governing instruments)
----------------------
United States
(State or Other Jurisdiction of Incorporation or Organization)
13-3614142
(I.R.S. Employer Identification Number)
----------------------
One Lincoln Centre
Oakbrook Terrace, Illinois 60181
(708) 916-4000
(Address and telephone number of principal executive offices)
----------------------
William C. Bracken,
Senior Vice President and
Chief Financial Officer,
Superior Bank FSB
One Lincoln Centre
Oakbrook Terrace, Illinois 60181
(708) 916-4000
(Name, address and telephone number of agent for service)
----------------------
Copies to:
Kathryn Cruze, Esq.
Lawrence S. Rigie, Esq. Thacher Proffitt & Wood
777 Westchester Avenue - Suite 204 Two World Trade Center
White Plains, New York 10604 New York, New York 10048
----------------------
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed
Proposed Maximum Amount of
Title of Securities Amount Maximum Aggregate Offering Registration
Being Registered Being Registered Offering Price Price Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFC Mortgage Loan Asset Backed
Certificates........................ $1,120,240,872.08 100%(1) $1,120,240,872.08 $303,030.30(2)
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $120,240,872.08 aggregate principal amount of AFC Mortgage Loan Asset
Backed Certificates registered by the Registrant under Registration
Statement No. 333-4492 referred to below and not previously sold are
consolidated in this Registration Statement pursuant to Rule 429. All
registration fees in connection with such unsold amount of AFC Mortgage
Loan Asset Backed Certificates have been previously paid by the Registrant
under the foregoing Registration Statement. Accordingly, the total amount
registered under the Registration Statement as so consolidated as of the
date of this filing is $1,120,240,872.08.
----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is
a part of this Registration Statement is a combined prospectus and includes all
the information currently required in a prospectus relating to the securities
covered by Registration Statement No. 333-4492 previously filed by the
Registrant. This Registration Statement, which relates to $1,120,240,872.08
aggregate principal amount of AFC Mortgage Loan Asset Backed Certificates,
constitutes Post-Effective Amendment No. 2 to Registration Statement No.
333-4492.
<PAGE>
Cross Reference Sheet Furnished Pursuant to Rule 404(a)
Item and Caption in Form S-3 Location in Prospectus
---------------------------- ----------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus....... Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page of
Prospectus and Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................. Summary of Prospectus; Risk
Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... *
6. Dilution...................................... *
7. Selling Security Holders...................... *
8. Plan of Distribution.......................... Method of Distribution
9. Description of the Securities to be Registered Summary of Prospectus; The
Mortgage Pool; Certain
Yield and Prepayment
Considerations; Description
of the Certificates**
10. Interests of Named Experts and Counsel........ *
11. Material Changes.............................. Financial Information
12. Incorporation of Certain Information by
Reference.................................... Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. See page II-1
- ----------
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
<PAGE>
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A FINAL
PROSPECTUS SUPPLEMENT AND PROSPECTUS IS DELIVERED. THIS PRELIMINARY PROSPECTUS
SUPPLEMENT AND PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED FEBRUARY 10, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated ____________, 199_)
$______________
AFC Mortgage Loan Asset Backed Certificates, Series 199 - ,
Class A Certificates, ___% Pass-Through Rate
Superior Bank FSB,
Depositor
The Series 199 - AFC Mortgage Loan Asset Backed Certificates (the
"Certificates") will consist of the Class A Certificates, the Class S
Certificates (the Class A and Class S Certificates collectively, the "Senior
Certificates") and the Class R Certificates. Only the Class A Certificates are
offered hereby. The Class A Certificates will evidence a senior fractional
undivided interest in a trust fund, designated as AFC Mortgage Loan Asset Backed
Certificates, Series 199_ (the "Trust Fund"), consisting of a pool of
conventional fixed rate [and adjustable rate], one- to four-family first and
second mortgage loans (the "Mortgage Loans") originated or purchased by Superior
Bank FSB (the "Depositor") and to be deposited by the Depositor into the Trust
Fund for the benefit of the Certificateholders, all monies collected thereon
(other than the Depositor's Yield as described in the Prospectus and amounts
received on and after the Cut-off Date in respect of interest accrued on the
Mortgage Loans prior to the Cut-off Date), the Certificate Insurance Policy
described herein and certain other property. The Certificates will be issued
pursuant to a Pooling and Servicing Agreement to be entered into among the
Depositor, the Lee Servicing Company division of the Depositor, as servicer (the
"Servicer") and Bank, as trustee (the "Trustee"). In the event
there are insufficient funds to distribute the entire amounts due on both the
Class A Certificates and the Class S Certificates on any Remittance Date (as
defined herein), the funds that are available will be distributed on a pro rata
basis to the Class A Certificateholders and the Class S Certificateholders based
on the total distributions that would otherwise be payable. The rights of the
holders of the Class R Certificates to receive distributions with respect to the
Mortgage Loans will be subordinated to the rights of the holders of the Senior
Certificates to the extent described herein. Distributions on the Class A
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 , 199
(each, a "Remittance Date"), except that in no event shall the Remittance Date
occur less than two business days following the related Determination Date (as
defined herein).
[The Senior Certificates will be unconditionally and irrevocably guaranteed
as to payment of the Class A Remittance Amount and the Class S Remittance Amount
(each as defined herein) to the extent described herein on each Remittance Date
pursuant to the terms of a Certificate Insurance Policy to be issued by
.]
[Certificate Insurer's Service Mark]
There is currently no secondary market for the Class A Certificates.
(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. The Class A Certificates will not be
listed on any securities exchange.
It is a condition of the issuance of the Class A Certificates that they be
rated [not lower than] " " by .
[The interests of the owners of the Class A Certificates (the "Certificate
Owners") will be represented by book-entries on the records of The Depository
Trust Company and participating members thereof. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.]
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. Each class of Senior Certificates will constitute "regular interests"
in the REMIC. The Class R Certificates will constitute the sole class of
"residual interest" in the REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
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" herein.
================================================================================
Price to Underwriting Proceeds to
Public(1) Discount Depositor(1)(2)
- --------------------------------------------------------------------------------
Per Class A Certificate.. % % %
- --------------------------------------------------------------------------------
Total.................... $ $ $
================================================================================
(1) Plus accrued interest from 1, 199 .
(2) Before deducting expenses payable by the Depositor estimated to be
$ .
----------------------
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 facilities of The Depository Trust
Company, on or about , 199 , against payment therefor in immediately
available funds.
[UNDERWRITERS]
The date of this Prospectus Supplement is , 199 .
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------------
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, omits
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: Chicago Regional Office,
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661; and New York Regional Office, 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 and Servicing Agreement to be forwarded to 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 OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED 199 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 OFFERED
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
----------------------
UNTIL , 199 ALL DEALERS EFFECTING TRANSACTIONS IN THE
OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. 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.
<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 summary 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" in the Prospectus.
Title of Securities............... AFC Mortgage Loan Asset Backed Certificates,
Series 199 -_, Class A.
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" in the Prospectus and
herein.
Servicer.......................... The Lee Servicing Company division of the
Depositor (the "Servicer" or the "Lee
Servicing Division"). See "The Servicer"
in the Prospectus and herein.
Trustee........................... , a . See "The Trustee"
herein.
Cut-off Date...................... 1, 199 .
The Class A Certificates.......... The Class A Certificates will have a
principal balance of $_______ (the initial
"Class A Principal Balance") as of the
date of issuance, and will accrue interest
at the per annum rate of __% (the "Class A
Pass-Through Rate"). The Class A
Certificates will represent a senior
undivided ownership interest in a trust
fund designated as AFC Mortgage Loan Asset
Backed Certificates, 199_ - (the "Trust
Fund"), consisting of a pool (the
"Mortgage Pool") of fixed rate [and
adjustable rate] residential first and
second mortgage loans (the "Mortgage
Loans") with an aggregate principal
balance of $______________ as of the
Cut-off Date, after giving effect to all
payments collected prior to the Cut-off
Date (the "Original Pool Principal
Balance"), all proceeds thereof (other
than the Depositor's Yield as described in
the Prospectus 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) collected on or
after the Cut-off Date, the Certificate
Insurance Policy and certain other
property. See "Description of the
Certificates--General" herein. The Class A
Certificates will be issued pursuant to
the Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") dated
as of the Cut-off Date, among the
Depositor, the Servicer and
______________, as trustee (the
"Trustee").
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
The Class S Certificates.......... The Class S Certificates will accrue
interest on the aggregate principal
balance of the Mortgage Loans at a per
annum rate equal to __% of the excess of
the weighted average of the Mortgage Rates
(as defined herein) over the sum of the
Class A Pass-Through Rate, the rates at
which the Servicing Fee (as defined
herein) and the fee of the Trustee are
calculated and the maximum rate at which
the fee of the Certificate Insurer is
calculated. The Class S Certificates will
not have a principal balance and will not
be entitled to distributions in respect of
principal. In the event there are
insufficient funds to distribute the
entire amounts due on both the Class S
Certificates and the Class A Certificates
on any Remittance Date, the funds that are
available will be distributed on a pro
rata basis to the Class A
Certificateholders and the Class S
Certificateholders based on the total
distributions that would otherwise be
payable. See "Description of the
Certificates-- Distributions" herein.
Denominations..................... The Class A Certificates will be issued in
percentage interests (each, a "Percentage
Interest") corresponding to minimum
denominations of $ ___________ and
integral multiples of $__________ in
excess thereof; provided, however, that
one Class A Certificate may be issued in
an amount less than such minimum
denomination such that the aggregate
initial principal balance of all Class A
Certificates shall equal the initial Class
A Principal Balance.
[Registration of
Class A Certificates]............. [The Class A Certificates will initially be
represented by one or more certificates
registered in the name of CEDE & Co., the
nominee of DTC, and will only be available
in the form of book-entries on the records
of DTC, Participants and indirect
participants for the benefit of the
Certificate Owners except that the one
Class A Certificate issued in a
denomination less than $100,000 may be
issued in registered definitive form.
Certificates representing the Class A
Certificates will be issued in definitive
form only under the limited circumstances
described in the Prospectus. All
references herein to "holders" or
"Certificateholders" shall reflect the
rights of Certificate Owners as they may
indirectly exercise such rights through
DTC and participating members thereof,
except as otherwise specified in the
Prospectus. See "Risk Factors" in the
Prospectus and "Description of the
Certificates--Book-Entry
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Registration and Definitive Certificates"
in the Prospectus.]
Interest Distributions............ Interest shall accrue on each Class A
Certificate at the Class A Pass-Through
Rate, and shall be distributable, to the
extent of the Amount Available (as defined
herein) remaining, if the Remittance Date
(as defined below) is prior to the
Cross-Over Date (as defined herein), or to
the extent of the Net Excess Amount
Available (as defined herein), if the
related Remittance Date is on or after the
Cross-Over Date (subject to the third
paragraph under the caption "Principal
Distributions" below) after any required
payments on the Class S Certificates are
made as described herein (the "Class S
Remittance Amount"), on the 25th day of
each month, or if such day is not a
business day, the following business day,
commencing ______________, 199 (each, a
"Remittance Date"). With respect to each
Remittance Date, 30 days' interest accrued
at the Class A Pass-Through Rate on the
aggregate Class A Principal Balance is
referred to herein as the "Class A
Interest Remittance Amount". Interest with
respect to the Class A Certificates will
accrue on the basis of a 360-day year
consisting of twelve 30-day months. See
"Description of the
Certificates--Distributions" herein.
Principal Distributions........... Holders of the Class A Certificates will be
entitled to receive on each Remittance
Date (subject to the next two succeeding
paragraphs), to the extent of the Amount
Available, if the Remittance Date is prior
to the Cross-Over Date, or to the extent
of the Net Excess Amount Available, if the
Remittance Date is on or after the
Cross-Over Date, remaining after
distributions on the Class S Certificates
are made and interest distributions on the
Class A Certificates are made and to the
extent of the Class A Principal Balance
then outstanding plus any amounts
described in clauses (iv) (to the extent
the amount in clause (iv) represents prior
Insured Payments or interest thereon) and
(v) below, a distribution allocable to
principal which will, as more fully
described herein, include (i) the
principal portion of all scheduled and
unscheduled payments received on the
Mortgage Loans during the immediately
preceding calendar month (the "Due
Period"), including prepayments, the
proceeds of any related insurance policy
("Insurance Proceeds"), proceeds received
in connection with the liquidation of any
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
defaulted Mortgaged Loans, 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 (as defined herein) in connection
with the repurchase or substitution of a
Mortgage Loan for which there is defective
loan documentation or a breach of a
representation or warranty, (iii) the
Unrecovered Class A Portion (as defined
herein), (iv) the Class A Carry-Forward
Amount (as defined herein), (v) any
Mortgagor payments or Monthly Advances
which are recovered from Class A
Certificateholders as a voidable
preference pursuant to a final,
non-appealable order under the United
States Bankruptcy Code and (vi) any
additional amount which may be required so
that the Class A Principal Balance for
such Remittance Date will equal the
Scheduled Class A Principal Balance (as
defined herein). As to the final
Remittance Date in connection with the
purchase by the Servicer or the
Certificate Insurer of all the Mortgage
Loans and REO Properties pursuant to the
Pooling and Servicing Agreement, the Class
A Principal Remittance Amount shall be a
Class A Principal Balance plus the Class A
Carry-Forward Amount (to the extent it
represents prior Insured Payments or
interest thereon) plus any amount
described in clause (v) above.
With respect to each Remittance Date the
lesser of (i) the Class A Principal
Balance plus any amounts described in
clauses (iv) (to the extent the amount in
clause (iv) represents prior Insured
Payments or interest thereon) and (v) of
the preceding paragraph and (ii) the
aggregate of the amounts described in
clauses (i) through (vi), inclusive, of
the preceding paragraph, is referred to
herein as the "Class A Principal
Remittance Amount" which together with the
Class A Interest Remittance Amount
constitutes the "Class A Remittance
Amount" for such Remittance Date. The
Certificate Insurer, as subrogee of the
Class A Certificateholders to the extent
of Insured Payments, will be entitled to
any payments on the Class A Certificates
in respect of that portion of the Class A
Carry-Forward Amount representing amounts
previously covered by Insured
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Payments and interest accrued thereon. See
"Description of the Certificates--
Distributions" and "The Certificate
Insurance Policy and the Certificate
Insurer" herein.
Notwithstanding the foregoing, in the event
that the Amount Available or Net Excess
Amount Available, as the case may be, is
insufficient to distribute the entire
amount of the Class S Remittance Amount
and Class A Remittance Amount on a
Remittance Date, the Amount Available or
Net Excess Amount Available, as the case
may be, shall be distributed to the Class
A Certificateholders and the Class S
Certificateholders in proportion to the
total respective distributions on each
such class of Certificates that would
otherwise have resulted absent such
shortfall.
Excess Spread..................... On any Remittance Date prior to the
Cross-Over Date (as defined herein)
holders of the Class A Certificates and
Class S Certificates will have a prior
right to 100% of the Excess Spread (as
defined herein) (the "Monthly Excess
Spread Amount") received from the Servicer
to fund the amount by which the sum of the
Class A Remittance Amount and the Class S
Remittance Amount exceeds the Available
Remittance Amount for such Remittance
Date. In addition, on any Remittance Date
prior to the Cross-Over Date, to the
extent not previously distributed as
described in the foregoing sentence, the
Monthly Excess Spread Amount will be
distributed to the Class A
Certificateholders to be applied to
further reduce the Class A Principal
Balance if and to the extent the aggregate
amount of the Monthly Excess Spread Amount
distributed to the Class A
Certificateholders and Class S
Certificateholders since the date of
issuance of the Certificates (the
"Cumulative Spread Receipts") is less than
the sum of an amount specified by the
Certificate Insurer (the "Specified Spread
Requirement") plus the aggregate of, as to
each Liquidated Mortgage Loan (as defined
herein) that became such since the date of
issuance of the Certificates, an amount
(not less than zero or greater than the
related Principal Balance) equal to the
excess, if any, of (i) the related
Principal Balance over (ii) the portion of
the related Net Liquidation Proceeds
actually distributed to Class A
Certificateholders; provided, however,
that after distributions with respect to
principal as described
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
under the first paragraph under "Principal
Distributions" above, in no event will a
payment be made pursuant to this sentence
that will result in the excess of the Pool
Principal Balance over the Class A
Principal Balance being greater than the
Specified Spread Requirement. On any
Remittance Date on and after which the
amount specified by the Certificate
Insurer (the "Subordinated Amount") is
reduced to zero (the "Cross-Over Date"),
the entire Excess Spread will be
distributed to the Holders of the Class R
Certificates (after payment of certain
amounts reimbursable to the Servicer or
the Depositor).
[Certificate Insurance Policy..... __________________, a (the "Certificate
Insurer") will issue a Certificate
insurance policy (the "Certificate
Insurance Policy") pursuant to which it
will irrevocably and unconditionally
guaranty payment to the holders of the
Class A Certificates of the Class A
Remittance Amount, and to the holders of
the Class S Certificates of the Class S
Remittance Amount, on each Remittance
Date. The Certificate Insurer only insures
the timely receipt of interest on the
Senior Certificates and the ultimate
receipt of principal on the Class A
Certificates. The Certificate Insurer does
not guaranty any rate of principal
payments on the Class A Certificates other
than that set forth in the Principal
Payment Table (as described below), any
recovery of payments deemed voidable
preferences under state law or 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. The
Certificate Insurer shall only be required
to make one Insured Payment relating to a
particular Remittance Date, and no holder
of a Senior 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 Insurance Policy and the
Certificate Insurer" herein.
Pursuant to the Pooling and Servicing
Agreement, the Certificate Insurer will be
subrogated to the rights of the holders of
the Class A Certificates and Class S
Certificates to receive any payments on
such Certificates to the extent of
payments under the Certificate Insurance
Policy which remain
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
unreimbursed and interest accrued thereon
at the Class A Pass-Through Rate.]
The Mortgage Pool................. The Mortgage Pool will consist of a pool of
[fixed rate][and adjustable rate] 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 residences, units in planned
unit developments, units in condominium
developments and townhomes (the "Mortgaged
Properties"). See "The Mortgage Pool"
herein.
Servicing Fee..................... The Servicer is entitled to a fee of __% per
annum of the principal balance of each
Mortgage Loan (the "Servicing Fee"),
calculated and payable monthly from the
interest portion of scheduled monthly
payments, prepayments, liquidation
proceeds and certain other proceeds and
computed on the basis of the same
principal amount and for the same period
respecting which any related interest
payment on a Mortgage Loan is computed.
Rating............................ The Class A Certificates will be rated [not
lower than]____________________
"______________" by _____________ at their
initial issuance. See "Ratings" herein and
in the Prospectus, "Risk
Factors--Certificate Rating" herein and
"Risk Factors--Limited Nature of Rating"
in the Prospectus.
[Optional Termination by the
Certificate Insurer............. On any Remittance Date after the Cross-Over
Date on which at least ___% of the
Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, have been
liquidated following a default thereon
("Liquidated Mortgage Loans"), the
Certificate Insurer may purchase all of
the Mortgage Loans and REO Properties from
the Trust Fund at a price equal to the sum
of the Termination Price and outstanding
unpaid fees and expenses of the Servicer
and the Trustee. See "Description of the
Certificates--Termination; Purchase of
Mortgage Loans" herein.]
Certain Legal Aspects of the
Mortgage Loans.................. Approximately____% of the Mortgage Loans, by
aggregate principal balance as of the
Cut-off Date, are secured by second
mortgages which are subordinate to a
mortgage lien on the related Mortgaged
Property prior to the lien of such
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
Mortgage Loan (such senior lien, if any, 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 the Mortgage Loans" in the Prospectus.
Certain Federal Income Tax
Consequences................... An election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit ("REMIC") for federal income tax
purposes. Upon the issuance of the Class A
Certificates, _______________, counsel to
the Company, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the
Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a REMIC under
Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code").
Forfederal income tax purposes, the REMIC
Residual Certificates will be the sole
class of "residual interests" in the
REMIC, and the Senior Certificates will be
the "regular interests" in the REMIC and
will generally be treated as debt
instruments of the REMIC.
The Class A Certificates will [not] be
treated for federal income tax reporting
purposes as having been issued with
original issue discount. The Class A
Certificates may be treated for federal
income tax purposes as having been issued
at a premium. The prepayment assumption
that will be used in determining the rate
of accrual of original issue discount,
market discount and premium, if any, for
federal income tax purposes will be ___%.
No representation is made that the
Mortgage Loans will prepay at that rate or
at any other rate.
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.
ERISA Considerations.............. [A fiduciary of any employee benefit plan or
other retirement arrangement 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
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
Labor has issued individual exemptions,
Prohibited Transaction Exemption to
_______________ (the "Exemptions"). The
Exemptions 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
A Certificates will be rated [not lower
than] " _________________ " by
____________, the Class A Certificates
will not constitute "mortgage related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
because the Mortgage Pool includes
Mortgage Loans which are secured by second
liens. Investors should consult their own
legal advisers in determining whether and
to what extent the Class A Certificates
constitute legal investments for them. See
"Legal Investment" in the Prospectus.
- --------------------------------------------------------------------------------
S-11
<PAGE>
RISK FACTORS
[Description will depend on the Particulars of the Mortgage Pool]
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 Class A Certificateholders 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, participating organizations 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 system, or otherwise to take actions in respect of
such Certificates, may be limited due to lack of a physical certificate
representing the Class A 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 (as defined herein) 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.
Risks of the Mortgage Loans
[Approximately % and % of the Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, are located in and ,
respectively. The Northeast region of the United States, including
and , has been affected by a contraction of economic activity
and a deterioration of the real estate market. Considerable uncertainty exists
with respect to the regional economy and real estate market.]
[Approximately ___% of the Mortgage Loans, by Original Pool Principal
Balance, are secured by second liens, and the related first liens ("First
Liens") are not included in the Mortgage Pool. 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" in
the Prospectus.]
None of the Mortgage Loans have been originated prior to ___________ and
approximately ___% of the Mortgage Loans, by Original Pool Principal Balance,
have been originated within ___ months prior to the Cut-off Date. No Mortgage
Loan has an unexpired term to maturity as of the Cut-off Date of less than
__________ years and __________ months. Of the remaining Mortgage Loans, no
Mortgage Loan has an unexpired term to maturity as of the Cut-off Date of less
than __________ years and _____ months. The weighted average remaining term to
maturity of the Mortgage Loans as of
S-12
<PAGE>
the Cut-off Date is approximately ___ months. Defaults on mortgage loans are
expected to occur with greater frequency in their early years, although little
data is available with respect to the rate of default on second mortgage loans.
The rate of default of second mortgage loans may be greater than that of
mortgage loans secured by first liens on comparable properties.
[The weighted average of the Second Mortgage Ratios for the Mortgage Loans
secured by second liens on real property is approximately %. The "Second
Mortgage Ratio" for each Mortgage Loan secured by a second lien is calculated as
the outstanding principal balance of such Mortgage Loan as of the Cut-off Date
divided by the sum of (i) the outstanding principal balance of the related First
Lien at the time of origination of such Mortgage Loan and (ii) the outstanding
principal balance as of the Cut-off Date of such Mortgage Loan.]
[Approximately % of the Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, provide for the payment of the unamortized principal
balance of the Mortgage Loan in a single payment at the maturity of the Mortgage
Loan that is greater than the preceding monthly payment (the "Balloon Loans").
Approximately % of the Balloon Loans, by aggregate principal balance as of the
Cut-off Date provide for equal monthly payments, consisting of principal and
interest, based on a 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. The remainder of the Mortgage Loans provide for a
schedule of substantially equal payments which are, if timely paid, sufficient
to amortize fully the principal balance of the Mortgage Loan on or before its
maturity date. 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.]
[Certificate Rating
The ratings of the Senior Certificates are based primarily on the rating of
the Certificate Insurer. If the ratings assigned to the Certificate Insurer were
to decline, the ratings assigned to the Senior Certificates would likely
decline.]
THE MORTGAGE POOL
General
The Mortgage Pool consists of Mortgage Loans with an aggregate principal
balance outstanding as of the Cut-off Date, after deducting all payments of
principal collected before such date, of
$ (the "Original Pool Principal Balance"). With respect to Mortgage
Loans originated after the Cut-Off Date, the "principal balance outstanding as
of the Cut-Off Date" shall mean the original principal balance thereof. The
Mortgage Pool consists of [fixed rate][and adjustable rate] Mortgage Loans with
original terms to maturity of not more than __ months. At least __% of the
Mortgage Loans, by Original Pool Principal Balance, are secured by
owner-occupied Mortgaged Property, and at least __% of the Mortgaged Loans by
Original Pool Principal Balance, are primary residences. None of the Mortgage
Loans are secured by vacation or second homes which are not for the exclusive
use of the owner. No more than __% of the Mortgage Loans, by Original Pool
Principal Balance, are secured by units in condominiums with one to four
stories. None of the Mortgage Loans are secured by units in condominiums with
more than four stories. Approximately __% of the Mortgage Loans, by Original
Pool Principal Balance, were originated and underwritten by the Depositor and
the remainder of the Mortgage Loans were purchased and re-underwritten by the
Depositor. In each case the underwriting was performed in accordance with the
criteria set forth
S-13
<PAGE>
herein under "The Depositor." Prior to the Cut-off Date, approximately __% of
the Mortgage Loans, by Original Pool Principal Balance, were serviced for the
Depositor by the Servicer.
Approximately __% of the Mortgage Loans, by Original Pool 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 the Mortgage
Pool. With respect to the remainder of the Mortgage Loans there exists no other
mortgage lien senior to that of such Mortgage Loans.
The weighted average Mortgage Rate of the Mortgage Loans as of the Cut-off
Date is approximately __% per annum. All the Mortgage Loans have Mortgage Rates
as of the Cut-off Date of at least __% per annum but not more than __% per
annum. The Mortgage Loans had individual principal balances at origination of at
least $ but not more than $ .
None of the Mortgage Loans have been originated prior to or have a
scheduled maturity later than _______________. No Mortgage Loan has an unexpired
term to maturity as of the Cut-off Date of less than _____ years and _____
months. The weighted average remaining term to maturity of the Mortgage Loans as
of the Cut-off Date will be approximately ___ months.
The Mortgage Loans have the following characteristics as of the Cut-off
Date (such percentage being equal to the aggregate principal balance of the
Mortgage Loans having such characteristics relative to the aggregate principal
balance of all the Mortgage Loans as of the Cut-off Date):
No Mortgage Loan has a Combined Loan-to-Value Ratio (as defined
below), calculated for each Mortgage Loan using the related original
principal balance of such Mortgage Loan and the then outstanding principal
balance of any related First Lien, exceeding 80%. The weighted average
Combined Loan-to-Value Ratio as of the Cut-off Date is approximately __%.
At least __% of such Mortgage Loans are secured by fee simple
interests in attached or detached single family dwelling units (including
units in de minimis planned unit developments) with the remaining units
being secured by fee simple interests in attached or detached two- to
four-family dwelling units, units in planned unit developments,
condominiums and townhomes.
No more than __% of the Mortgage Loans are secured by Mortgaged
Properties located in any one zip code area in California, and no more than
__% are secured by Mortgaged Properties located in any one zip code area
outside California.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately __% of the Mortgage Loans are Balloon Loans.
The following table sets forth the number and average original principal
balance of Mortgage Loans having original principal balances in the ranges
described therein, as of the Cut-off Date. The table also indicates the weighted
average Mortgage Rate and the weighted average Combined Loan-to-Value Ratio of
the Mortgage Loans in each given range, as of the Cut-off Date. Such weighted
average Combined Loan-to-Value Ratio of the Mortgage Loans is equal to the
average of the Combined Loan-to-Value Ratios at origination, weighted by the
principal balance of the Mortgage Loans as of the Cut-off Date.
S-14
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average Average
of Original Mortgage Combined
Mortgage Principal Interest Loan-to-Value
Original Principal Balance Loans Balance Rate Ratio
-------------------------- ----- ------- ---- -----
<S> <C> <C> <C> <C>
$ 10,000.......................... $ % %
$ 10,001 -- $ 15,000.............
$ 15,001 -- $ 20,000.............
$ 20,001 -- $ 25,000.............
$ 25,001 -- $ 30,000.............
$ 30,001 -- $ 35,000.............
$ 35,001 -- $ 40,000.............
$ 40,001 -- $ 45,000.............
$ 45,001 -- $ 50,000.............
$ 50,001 -- $ 55,000.............
$ 55,001 -- $ 60,000.............
$ 60,001 -- $ 65,000.............
$ 65,001 -- $ 70,000.............
$ 70,001 -- $ 75,000.............
$ 75,001 -- $ 80,000.............
$ 80,001 -- $ 85,000.............
$ 85,001 -- $ 90,000.............
$ 90,001 -- $ 95,000.............
$ 95,001 -- $ 100,000.............
$ 100,001-- $ 105,000.............
$ 105,001-- $ 110,000.............
$ 110,001-- $ 115,000.............
$ 115,001-- $ 120,000.............
$ 120,001-- $ 125,000.............
$ 125,001-- $ 130,000.............
$ 130,001-- $ 135,000.............
$ 135,001-- $ 140,000.............
$ 140,001-- $ 145,000.............
$ 145,001-- $ 150,000.............
$ 150,001-- $ 200,000.............
$ 200,001-- $ 250,000.............
--------- --------- ------ ------
Total, Average or
Weighted Average............. $ 100.00% 100.00%
--------- --------- ====== ======
</TABLE>
S-15
<PAGE>
The following table sets forth the geographic distribution of the Mortgage
Loans by state as of the Cut-off Date:
Percent of
Percent of Mortgage Pool
Mortgage Pool Number of by Number of
Principal by Principal Mortgage Mortgage
State Balance Balance Loans Loans
----- ------- ------- ----- -----
Arizona................. $ % %
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Illinois................
Indiana.................
Kentucky................
Maryland................
Massachusetts...........
Michigan................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
Ohio....................
Oregon..................
Pennsylvania............
Rhode Island............
Utah....................
Virginia................
Washington..............
Wisconsin...............
------- ------
Totals............. $ -- 100.00% -- 100.00%
========= ====== ===== ======
S-16
<PAGE>
The following table sets forth the Combined Loan-to-Value Ratios (as
defined below) of the Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Percent of
Percent of Mortgage Pool
Combined Mortgage Pool Number of by Number of
Loan-to-Value Principal by Principal Mortgage Mortgage
Ratio Balance Balance Loans Loans
----- ------- ------- ----- -----
<S> <C> <C> <C> <C>
0-10%................... $ % %
10.01-20%...................
20.01-30%...................
30.01-40%...................
40.01-50%...................
50.01-60%...................
60.01-70%...................
70.01-80%...................
Totals................. $ -- 100.00% -- 100.00%
=========== ====== ======= ======
</TABLE>
The "Combined Loan-to-Value Ratios" shown above are equal, with respect to
each 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 lesser of (a) the value of
the related Mortgaged Property, based upon the appraisal made at the time of
origination of the Mortgage Loan or (b) the purchase price of the Mortgaged
Property if the Mortgage Loan proceeds are used to purchase the Mortgaged
Property.
S-17
<PAGE>
The following table sets forth the Mortgage Rates borne by the Mortgage
Notes relating to the Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Percent of
Percent of Number Mortgage Pool
Mortgage Pool of by Number of
Mortgage Principal by Principal Mortgage Mortgage
Interest Rate Balance Balance Loans Loans
------------- --------- --------- ------- ------
<S> <C> <C> <C>
9.76-10.00%................ $ % %
10.26-10.50%................
10.51-10.75%................
10.76-11.00%................
11.01-11.25%................
11.26-11.50%................
11.51-11.75%................
11.76-12.00%................
12.01-12.25%................
12.26-12.50%................
12.51-12.75%................
12.76-13.00%................
13.01-13.25%................
13.26-13.50%................
13.51-13.75%................
13.76-14.00%................
14.01-14.25%................
14.26-14.50%................
14.51-14.75%................
14.76-15.00%................
15.01-15.25%................
15.26-15.50%................
15.51-15.75%................
15.76-16.00%................
16.01-16.25%................
16.26-16.50%................
16.51-16.75%................
16.76-17.00%................
17.01-17.25%................
17.26-17.50%................
17.76-18.00%................
Greater than 18%............
Total................ $ -- 100.00% -- 100.00%
====== ====== ====== ======
</TABLE>
S-18
<PAGE>
The following table sets forth the number of remaining months to maturity
of the Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Percent of
Percent of Number Mortgage Pool
Mortgage Pool of by Number of
Remaining Months Principal by Principal Mortgage Mortgage
to Maturity Balance Balance Loans Loans
----------- ------- --------- ------- ------
<S> <C> <C> <C>
114.01-126.00.................... $ % %
126.01-138.00....................
150.01-162.00....................
162.01-174.00....................
174.01-182.00....................
Total..................... $ -- 100.00% -- 100.00%
====== ====== ===== ======
</TABLE>
The following table sets forth the number of months since origination of
the Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Percent of
Percent of Number Mortgage Pool
Mortgage Pool of by Number of
Remaining Months Principal by Principal Mortgage Mortgage
to Maturity Balance Balance Loans Loans
----------- ------- --------- ------- ------
<S> <C> <C> <C>
12 or less....................... $ % %
12.01-24.........................
24.01-36.........................
36.01-48.........................
48.01-60.........................
60.01-72.........................
Total..................... $ -- 100.00% -- 100.00%
====== ====== ===== ======
</TABLE>
Payments on the Mortgage Loans
Each Mortgage Loan provides for substantially equal monthly payments
(except, in the case of a Balloon Loan, for the final monthly payment and except
for Mortgage Loans that provide for interest only payments for
the initial two years) that are allocated to principal and interest according to
the daily simple interest method. Each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Mortgage 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. 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 borrower 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, the next succeeding payment
will allocate a greater amount to interest if such payment is made on the due
date.
Conversely, if a borrower 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
scheduled due date, the principal balance of the Mortgage Loan will amortize in
the manner described in the preceding
S-19
<PAGE>
paragraph. However, if the borrower consistently makes scheduled payments after
the scheduled due date the Mortgage Loan will amortize more slowly than
scheduled. Any remaining unpaid principal is payable on the final maturity date
of the Mortgage Loan.
The borrower is required to pay interest only to the date of prepayment in
the case of Principal Prepayments and Curtailments.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The effective yield to the Class A Certificateholders will be slightly
lower than the yield otherwise produced by the Class A Pass-Through Rate
because, while interest will accrue from the first day of each month, the
distribution of such interest will not be made until the 25th day of the month
following the month of accrual. See "Description of the
Certificates--Distributions," herein.
Interest shortfalls on the Mortgage Loans due to Principal Prepayments and
Curtailments will be covered to the extent described herein by payments of
Compensating Interest by the Servicer and any resulting shortfall in amounts
distributable on the Class A Certificates will be covered by distributions of
the Monthly Excess Spread Amount and the Certificate Insurance Policy, subject
to the limitations described herein. Because the Monthly Excess Spread Amount
will be used to make distributions of principal of the Class A Certificates,
except in certain circumstances as described herein, any such shortfalls will
reduce payments to the Class A Certificates and, consequently, affect the Class
A Certificateholders to a greater extent than other Certificateholders. See
"Description of the Certificates--Compensating Interest" herein.
The rate of principal payments on the Class A Certificates is directly
related to the rate of payments of principal on the Mortgage Loans, which may be
in the form of scheduled and unscheduled payments. 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. Defaults on mortgage loans are expected to occur with greater
frequency in their early years, although little data is available with respect
to the rate of default on second mortgage loans. 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 Class A Certificateholders of
amounts of principal which would otherwise be distributed over the remaining
terms of the Mortgage Loans.
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 Class A Certificates, on any Remittance Date following the
first date on which the Pool Principal Balance is less than 10% of the Original
Pool Principal Balance, and the Certificate Insurer can similarly effect the
early retirement of the Class A Certificates on any Remittance Date after the
Cross-Over Date on which the aggregate principal balances at the Cut-off Date of
the Mortgage Loans that have become Liquidated Mortgage Loans is equal to or
exceeds __% of the Original Pool Principal Balance. See "Description of the
Certificates--Termination; Purchase of Mortgage Loans" herein and "Description
of the Certificates--Termination" in the Prospectus.
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 is
used to accelerate payments of principal on the Class A Certificates.
S-20
<PAGE>
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.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Model") is based on a Constant Prepayment Rate. A Constant
Prepayment Rate or CPR represents a constant rate of prepayment relative to the
then outstanding principal balance of the Mortgage Loans. The Prepayment
Assumption does not purport to be either an 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
Mortgage Loans. The Depositor does not make any representation about the
appropriateness of the Prepayment Model.
The percentages and weighted average lives in the second following table
were determined assuming that (i) scheduled interest and principal payments
(including balloon payments) on the Mortgage Loans are received in a timely
manner and prepayments of Mortgage Loans in full are made at the indicated
constant percentages of the Prepayment Model set forth in the table; (ii)
neither the Servicer nor the Certificate Insurer exercises its right of optional
termination described above; (iii) distributions are made on the 15th day of
each calendar month regardless of the day on which the Remittance Date actually
occurs, commencing _______________, 199_; (iv) the Mortgage Loans have been
aggregated into two hypothetical Mortgage Loans with the characteristics set
forth in the table immediately following this paragraph; (v) losses on the
Mortgage Loans will be realized in an amount equal to the product of (a) the
principal balance of each hypothetical Mortgage Loan (prior to giving effect to
the payment of principal received in such Due Period) and (b) one-twelfth of __%
(such losses do not separately reduce the principal balance of a hypothetical
Mortgage Loan but instead are assumed to comprise a portion of the payment of
principal for which liquidation proceeds are not received); (vi) the Servicing
Fee is equal to __% per annum of the scheduled principal balance of the Mortgage
Pool for each Remittance Date; (vii) no interest shortfalls will arise in
connection with prepayment in full of the Mortgage Loans; (viii) the Class A
Pass-Through Rate is equal to __% per annum; (ix) the Class S Certificates
accrue interest at a rate of __% per annum on the aggregate outstanding
principal balance of the Mortgage Loans; (x) the Class A Principal Remittance
Amount on each Remittance Date is equal to principal received plus the
Unrecovered Class A Portion for such Remittance Date; (xi) the Monthly Excess
Spread Amount remaining after application thereof pursuant to clause (x) above
is applied to reduce the principal balance of the Class A Certificates on each
Remittance Date that is prior to the Cross-Over Date and on which the aggregate
amount of such reductions together with the application thereof pursuant to
clause (x) above is less than $__________ plus aggregate losses as of such
Remittance Date; (xii) the Annual Trustee Expense Amount is equal to zero and
(xiii) the Certificates are purchased on _____________. The table also assumes
that there are no delinquencies on the Mortgage Loans.
S-21
<PAGE>
Remaining Remaining
Amortization Months to
Cut-off Date Mortgage Term Balloon
Principal Balance Interest Rate (in months) Payment
----------------- ------------- ----------- -------
$ %
%
Since the table was prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the mortgage loans assumed in
preparing the table. Any such discrepancy may have an effect upon the
percentages of the Class A Principal Balance outstanding and the weighted
average life of the Class A Certificates set forth in the table. In addition,
since the actual 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 A Certificates may be made earlier or
later than as indicated in the table.
It is not likely that the Mortgage Loans will prepay at any constant
percentage of the Prepayment Model to maturity or that all Mortgage Loans will
prepay at the same rate. In addition, the diverse remaining terms to maturity of
the Mortgage Loans (which include recently originated Mortgage Loans) could
produce slower or faster distributions of principal than as indicated in the
table at the various percentages of the Prepayment Model specified.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of the Class A Certificates and sets forth the
percentage of the original Class A Principal Balance that would be outstanding
after each of the dates shown at the indicated constant percentages of the
Prepayment Model.
Percentage of the Original Principal Balance of the Class A
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Date............................. % % % %
Initial Percentage............... % % % %
Weighted Average Life(1) (years).
- ----------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A Certificate.
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
S-22
<PAGE>
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 Mortgage Loans, as to the relative importance of such factors,
as to the percentage of the principal balance of the Mortgage Loans that will be
paid as of any date or as to the overall rate of prepayment on the Mortgage
Loans.
THE DEPOSITOR
For further information regarding the Depositor, see "The Depositor" in the
Prospectus. The Depositor maintains its principal office at One Lincoln Centre,
Oakbrook Terrace, Illinois 60181. The Depositor operates _________ full service
branch banking offices in and around the Chicago, Illinois area. As of the
fiscal year ended __________, the total stockholder's equity of the Depositor,
as reported in its audited consolidated financial statements, was approximately
$_________. As of ___________, 199-_, total deposits were approximately
$_____________ and total assets were approximately $_____________. The telephone
number of the principal office of the Depositor is (708) 916-4000.
Loan Origination History
The Depositor originates mortgage loans (including the Mortgage Loans) on
residential 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. 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, Illinois, Indiana, Kentucky, Maryland, Massachusetts,
Michigan, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Utah, Virginia, Washington
and Wisconsin. Prior to the Effective Date, all such operations were conducted
by the predecessor of the Depositor, Alliance Funding Company, Inc. The dollar
amounts of first and second mortgage loans originated and purchased by the
Depositor during the ____________ periods ended _________, ____________, and
____________ were approximately $_________, $_________, $__________ and
$_________, respectively. No Mortgage Loans have been originated in [states].
Underwriting Criteria
General
All of the Mortgage Loans were originated or purchased by the Depositor and
are serviced by the Servicer. All mortgage loan applications are underwritten,
and properties appraised, prior to origination and/or purchase by the Depositor.
Underwriting and approval is centralized at the Alliance Funding Division of the
Depositor (the "Alliance Funding Division") with headquarters in Montvale, New
Jersey. 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 __ senior loan officers can approve loan applications from
$175,001-$250,000, only _____ executive officers of the Alliance Funding
Division can approve loan applications from $250,001-$325,000 and only executive
officers of the Alliance Funding Division can approve loan applications from
$325,001-
S-23
<PAGE>
$400,000. All loan applications over $400,000 require the approval of _____
executive officers of the Alliance Funding Division.
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, review of paystubs and tax returns, or in the manner as set
forth in the following program descriptions, and a determination is made that
the borrower has a sufficient level of disposable income to satisfy debt
repayment requirements.
Substantially all properties 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 re-underwritten. 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.
The Mortgage Loans 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 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
S-24
<PAGE>
Mortgage Program Class AA, Class I and Class II 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.
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-25
<PAGE>
Fixed Rate Mortgage Program
<TABLE>
<CAPTION>
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........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
ANIV Owner Occupied One- to Four-Family........ % %
Non-Owner Occupied One- to Four-Family.... % %
I Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
II Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
III Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
III-SE Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
IV Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
IV-PI Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
Non-Owner Occupied % %
Condominium/Townhouse/PUD.................
V Owner Occupied One- to Four-Family........ % %
Owner Occupied Condominium/Townhouse/PUD.. % %
Non-Owner Occupied One- to Four-Family.... % %
</TABLE>
The maximum permitted combined loan-to-value ratio may be increased by 5%
for Classes AA, ANIV, I, II, III, III-SE, IV and IV-PI on owner occupied one- or
two-family dwellings only,
S-26
<PAGE>
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 AA and Class II, and 8% for Class
I.
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.
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.
[The Mortgage Loans 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 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 and
Class II generally require the
S-27
<PAGE>
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.
Generally, the maximum permitted loan-to-value ratio and maximum permitted
debt-to-income ratio guidelines for each underwriting class are as follows:
Adjustable Rate First Mortgage Program
<TABLE>
<CAPTION>
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........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
Non-Owner Occupied Condominium/Townhouse/PUD. % %
ANIV Owner Occupied One- to Four-Family........... % %
Non-Owner Occupied One- to Four-Family....... % %
I Owner Occupied One- to Four-Family........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
Non-Owner Occupied Condominium/Townhouse/PUD. % %
II Owner Occupied One- to Four-Family........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
Non-Owner Occupied Condominium/Townhouse/PUD. % %
SE Owner Occupied One- to Four-Family........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
Non-Owner Occupied Condominium/Townhouse/PUD. % %
III Owner Occupied One- to Four-Family........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
Non-Owner Occupied Condominium/Townhouse/PUD. % %
IV Owner Occupied One- to Four-Family........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
Non-Owner Occupied Condominium/Townhouse/PUD. % %
V Owner Occupied One- to Four-Family........... % %
Owner Occupied Condominium/Townhouse/PUD..... % %
Non-Owner Occupied One- to Four-Family....... % %
</TABLE>
The maximum permitted loan-to-value ratio may be increased 5% for Class AA,
ANIV, I, II, 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.
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 5%.
S-28
<PAGE>
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.]
THE SERVICER
For further information regarding the Servicer, see "The Servicer" in the
Prospectus.
Servicing; Collection Procedures
The Servicer as of _____________, 199_ serviced approximately
$______________ 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. The
Servicer currently employs approximately _____ persons and continues to operate
through other agency offices of the Depositor nationwide.
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 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 sets forth certain information
concerning the delinquency and loss experience on one- to four-family
residential mortgage loans originated or purchased by the Depositor or its
predecessor, Alliance Funding Company, Inc., and serviced for the Depositor or
Alliance by the Servicer or its predecessor, Lee Servicing Corp., a Delaware
corporation and formerly wholly-owned subsidiary of Alliance.
S-29
<PAGE>
Delinquency and Loss Experience
<TABLE>
<CAPTION>
Fiscal Year Ending June Six
----------------------- Months
30, Ended
199 199 199 199
---- ---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Total Outstanding Principal Balance......................... $ $ $ $
Number of Loans.............................................
Period of Delinquency:
30-59 Days...........................................
Principal Balance....................................
Number of Loans......................................
Percent of Delinquency by Dollar.....................
Period of Delinquency:
60 - 89 Days
Principal Balance....................................
Number of Loans......................................
Percent of Delinquency by Dollar.....................
Period of Delinquency:
90 Days or More*
Principal Balance....................................
Number of Loans......................................
Percent of Delinquency by Dollar.....................
Total Delinquencies:
Principal Balance....................................
Number of Loans......................................
Percent of Delinquency by Dollar.....................
Average Outstanding Principal Balance.......................
Net Gains/(Losses) on Liquidated Loans......................
As a Percent of Average Outstanding Principal Balance....... % % % %**
Net Gains/(Losses) on Liquidated Loans including monthly
payment advances***.................................. % % % %**
As a Percent of Average Outstanding Principal Balance.......
</TABLE>
- ----------
* Includes mortgage loans secured by mortgaged properties, the titles to
which have been acquired by Superior Bank FSB.
** Annualized.
*** Includes monthly advances of interest through liquidation pursuant to
various sale and servicing agreements.
----------
The above delinquency and loss experience percentages are calculated on the
basis of the total conventional mortgage loans serviced 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 above
would be higher and could be substantially higher. Because the Mortgage Pool
consists of a fixed
S-30
<PAGE>
group of Mortgage Loans, the actual delinquency percentages with respect to the
Mortgage Pool may be substantially higher than the delinquency percentages
indicated above.
[Net losses on liquidated loans for the fiscal years ended ____________,
199_ and __________, 199_, were a direct result of the continued deterioration
of the real estate market in the Northeast and the general weakening of the
economy. This further deterioration has been evidenced by increases in
delinquencies of loans secured by real estate, slower absorption rates and lower
sales prices on the underlying mortgaged property. The general weakening of the
economy has resulted in decreases in the financial strength of borrowers and
decreases in the values of mortgaged properties. If the real estate market and
the economy continue to decline, the Depositor may experience further increases
in delinquencies and additional net losses on liquidated loans.]
Since its inception, the Depositor had recovered approximately __% of the
aggregate outstanding principal balance of mortgage loans where it has incurred
a net loss at the time of liquidation.
DESCRIPTION OF THE CERTIFICATES
General
The Series 199 - AFC Mortgage Loan Asset Backed Certificates (the
"Certificates") will consist of three classes of Certificates, the Class A
Certificates, Class S Certificates and Class R Certificates. Only the Class A
Certificates are offered hereby.
The Class A Certificates represent fractional undivided ownership interests
in the Trust Fund created and held pursuant to the Pooling and Servicing
Agreement. The Trust Fund includes (i) the Mortgage Loans and all proceeds
thereof (other than the Depositor's Yield and amounts received on and after the
Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the
Cut-off Date) collected on or after the Cut-off Date, (ii) such assets as from
time to time are deposited in the Certificate Account, Principal and Interest
Account, Trustee Expense Account or Insurance Account, including amounts on
deposit and invested in Permitted Instruments (as defined herein), (iii) REO
Property, (iv) the Trustee's rights under all insurance policies with respect to
the Mortgage Loans required to be maintained pursuant to the Pooling and
Servicing Agreement and any Insurance Proceeds and (v) the Certificate Insurance
Policy.
Payments on the Mortgage Loans
The Servicer shall establish and maintain a Principal and Interest Account
which is an Eligible Account. The Servicer may make withdrawals from the
Principal and Interest Account only for the following purposes:
(i) to effect the remittance to the Trustee on each Determination Date
of the Monthly Excess Spread Amount and of the portion of the Available
Remittance Amount (as defined herein) that is net of Compensating Interest
and Monthly Advances;
(ii) to pay itself for any accrued and unpaid Servicing Fees and to
reimburse itself for unreimbursed Monthly Advances and Servicing Advances
(as defined herein). The Servicer's right to pay itself unpaid Servicing
Fees and to reimburse itself for unreimbursed Servicing Advances is limited
to 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 related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which
such unreimbursed amounts are owed.
S-31
<PAGE>
The Servicer's right to reimbursement for unreimbursed Monthly Advances is
limited to late collections of interest on any Mortgage Loan. The
Servicer's right to such reimbursements is senior to the rights of
Certificateholders;
(iii) to withdraw any amount received from a Mortgagor that is
recoverable and sought to be 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;
(iv) to make investments in Permitted Instruments and to pay itself
interest earned in respect of Permitted Instruments or on funds deposited
in the Principal and Interest Account;
(v) to withdraw any funds deposited in the Principal and Interest
Account that were not required to be deposited therein or were deposited
therein in error;
(vi) to pay itself the Servicing Fee and any other permitted servicing
compensation to the extent not previously retained or paid;
(vii) to withdraw funds necessary for the conservation and disposition
of any REO Property;
(viii) to remit to the Trustee any amount which was deposited by the
Certificate Insurer to cover unpaid fees and expenses of the Trustee; and
(ix) to clear and terminate the Principal and Interest Account upon
the termination of the Pooling and Servicing Agreement with any amounts on
deposit therein being paid to the Servicer and/or the Depositor to the
extent of any reimbursable amounts and the remainder to the Class R
Certificateholders.
On the day of each month which is at least two business days prior to the
Remittance Date (each such day a "Determination Date"), the Servicer is required
to wire transfer to the Trustee the Available Remittance Amount for deposit in
the Certificate Account which shall be an Eligible Account established and
maintained by the Trustee.
With respect to each Remittance Date the "Available Remittance Amount" is
the sum of the following:
(i) the sum of all amounts received or required to be paid by the
Servicer, the Depositor or any Subservicer (exclusive of (a) the
Depositor's Yield, (b) the Monthly Excess Spread Amount, (c) amounts
withdrawn by the Servicer from the Principal and Interest Account as set
forth in clauses (ii), (iii), (vi) and (vii) above) and (d) scheduled
payments received in advance of their due date for application on such due
date at the request of the 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 for defective loan documentation or a
breach of representation or warranty, as of the related Determination Date)
and deposited into the Certificate Account as of the related Determination
Date, and
(ii) the amount of any Monthly Advances (as described below) and
Compensating Interest payments remitted by the Servicer for such Remittance
Date.
Distributions
On the 25th day of each month or, if such 25th day is not a business day,
the first business day immediately following, commencing on ________________
(each such date, a "Remittance Date"), the
S-32
<PAGE>
Trustee or its designee will distribute to the persons in whose names the Class
A Certificates are registered [(which initially will be CEDE & Co., the nominee
of DTC)] on the last day of the month immediately preceding the month of the
related Remittance Date (the "Record Date"), the portion of the aggregate
distribution to be made to the Class A Certificateholders to which such holder
is entitled (based on the respective Percentage Interest of the Class A
Certificates held thereby), as described below. Distributions will be made by
wire transfer of immediately available funds to the account of such holder at a
bank or other entity having appropriate facilities therefor, if such holder owns
of record Class A Certificates with an initial principal balance aggregating in
excess of $5,000,000, and has so notified the Trustee, or by check mailed to the
address of the person entitled thereto as it appears on the certificate
register.
Notwithstanding the following, in the event that the Amount Available (as
defined below), if the related Remittance Date is prior to the Cross-Over Date,
is insufficient to distribute the entire amount of the Class S Remittance Amount
and Class A Remittance Amount on such Remittance Date, the Amount Available or
Net Excess Amount Available, as the case may be, shall be distributed by the
Trustee to the Class A Certificateholders and the Class S Certificateholders in
proportion to the total respective distributions on each such class of
Certificates which would otherwise have resulted absent such shortfall.
On each Remittance Date the Trustee shall withdraw from the Certificate
Account the sum of (i) the Available Remittance Amount (reduced by any amounts
which are required to be deposited into the Insurance Account as described
herein), (ii) the aggregate of Insured Payments (as defined herein) to be made
on such Remittance Date (the sum of (i) and (ii), the "Net Excess Amount
Available") and (iii) the Monthly Excess Spread Amount (as defined herein)
deposited therein with respect to such Remittance Date (the sum of (i), (ii) and
(iii), the "Amount Available") and make distributions thereof in the following
order of priority (subject to the preceding paragraph) in each case to the
extent of available funds:
(X) If the Remittance Date is prior to the Cross-Over Date,
distributions shall be made in the following order of priority:
(i) to the Class S Certificateholders (subject to the last
paragraph under "--Distributions"), the lesser of:
(A) the Amount Available; and
(B) the sum of (1) 30 days' interest on the aggregate principal
balance of the Mortgage Loans as of the commencement of the related
Due Period (the "Class S Interest Remittance Amount") at a per annum
rate equal to __% of the excess of the weighted average of the
Mortgage Rates over the sum of the Class A Pass-Through Rate and the
rates at which the Servicing Fee and the fee of the Trustee are
calculated and the maximum rate at which the fee of the Certificate
Insurer is calculated (the "Class S Pass-Through Rate"), (2) the Class
S Carry-Forward Amount (as defined below) and (3) any Mortgagor
payments or Monthly Advances which are recovered from the Class S
Certificateholders as voidable preferences in a federal bankruptcy
proceeding;
(ii) to the Class A Certificateholders (subject to the last
paragraph under "--Distributions"), an amount equal to the lesser of:
(A) the balance of the Amount Available after payments
described in clause (i); and
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(B) 30 days' interest at the Class A Pass-Through Rate on the
Class A Principal Balance immediately prior to such Remittance Date
(the "Class A Interest Remittance Amount");
(iii) to the Class A Certificateholders (subject to the last
paragraph under "--Distributions"), to be applied to reduce the Class A
Principal Balance, to the extent described below, until the Class A
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 (i) and (ii) above; and
(B) the Class A Principal Remittance Amount;
(iv) to the Trustee Expense Account (as defined herein), an
amount equal to the lesser of the balance of the Amount Available and
one-twelfth of the Annual Trustee Expense Amount (as defined herein);
(v) to the Class A Certificateholders to be applied to reduce the
Class A Principal Balance until the Class A Principal Balance is zero, an
amount equal to the lesser of:
(A) the balance of the Amount Available after payments
described in clauses (i), (ii), (iii) and (iv) above; and
(B) the amount if any by which (1) the Specified Spread
Requirement (as defined below) plus, the aggregate of, as to each
Liquidated Mortgage Loan which became such since the date of issuance
of the Certificates, an amount (not less than zero or greater than the
related Principal Balance) equal to the excess, if any, of (i) the
related Principal Balance over (ii) the portion of the related Net
Liquidation Proceeds actually distributed to Class A
Certificateholders pursuant to clause (iii) above, exceeds (2) the
Cumulative Spread Receipts; provided, however, that after
distributions with respect to principal pursuant to clause (X) (iii)
above, in no event will a payment be made pursuant to this clause (v)
that will result in the excess of the Pool Principal Balance over the
Class A Principal Balance being greater than the Specified Spread
Requirement.
(vi) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available and any expenses incurred in
connection with any third party claims that remain unreimbursed;
(vii) to the Servicer, an amount equal to the lesser of the
balance of the Amount Available and the aggregate of any Nonrecoverable
Advances previously made by the Servicer and not previously reimbursed; and
(viii) to the Class R Certificateholders, the balance of the
Amount Available, if any.
(Y) If the Remittance Date is on or after the Cross-Over Date,
distributions shall be made in the following order of priority:
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(i) to the Class S Certificateholders (subject to the last
paragraph under "--Distributions"), the lesser of:
(A) the Net Excess Amount Available; and
(B) the Class S Remittance Amount;
(ii) to the Class A Certificateholders (subject to the last
paragraph under "--Distributions"), the lesser of:
(A) the balance of the Net Excess Available after payments
described in clause (i) above; and
(B) the Class A Interest Remittance Amount;
(iii) to the Class A Certificateholders (subject to the last
paragraph under "--Distributions"), to be applied to reduce the Class A
Principal Balance until the Class A Principal Balance is 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 below, the lesser of:
(A) the balance of the Net Excess Amount Available after
payments described in clauses (i) and (ii) above; and
(B) the Class A Principal Remittance Amount;
(iv) to the Trustee Expense Account, an amount equal to the
lesser of the balance of the Amount Available and one-twelfth of the Annual
Trustee Expense Amount;
(v) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available and any expenses 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 and the aggregate of any Nonrecoverable
Advances previously made by the Servicer and not previously reimbursed;
(vii) to the Class R Certificateholders, the balance of the
Amount Available, if any.
The "Class A Principal Remittance Amount" for any Remittance Date will
be equal to the lesser of (a) the sum of the Class A Principal Balance and the
amounts described in clauses (iii) (to the extent the amount in clause (iii)
represents prior Insured Payments or interest thereon) and (v) below and (b) the
sum of the following amounts:
(i) the principal portion of all scheduled and unscheduled
payments received on the Mortgage Loans during the related Due Period
including all Insurance Proceeds, Released Mortgaged Property Proceeds and
Net Liquidation Proceeds;
(ii) an amount equal to the Unrecovered Class A Portion (as
defined below);
(iii) the Class A Carry-Forward Amount (as defined below);
(iv) the principal portion of all proceeds deposited in the
Principal and Interest Account on the related Determination Date in
connection with the repurchase or substitution
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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 Class A Certificateholders
during the related Due Period that constituted a Mortgagor payment or a
Monthly Advance, 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 Class A Principal
Balance 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 clause (x)(v) above under "--Distribution"
and applied to reduce such Class A Principal Balance, exceeds (B) the
Scheduled Class A Principal Balance for such Remittance Date as set forth
on the Principal Payment Table (as described below) which is attached to
the Pooling and Servicing Agreement.
As to the final Remittance Date in connection with the purchase by the
Servicer or the Certificate Insurer of all the Mortgage Loans and REO Properties
pursuant to the Pooling and Servicing Agreement, the Class A Principal
Remittance Amount shall be that amount described in clause (a) of the definition
of Class A Principal Remittance Amount above with respect to such Remittance
Date.
The "Class A Principal Balance" as of any date of determination is equal to
the initial Class A Principal Balance reduced by the sum (A) of all amounts
(including that portion of Insured Payments, if any, made in respect of
principal) previously distributed to 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 and (B) all other
amounts previously distributed to Class A Certificateholders constituting Excess
Spread in reduction of the Class A Principal Balance.
With respect to each Remittance Date the sum of the Class A Interest
Remittance Amount and the Class A Principal Remittance Amount constitutes the
"Class A Remittance Amount" for such Remittance Date, and the sum of the amounts
payable on the Class S Certificates constitutes the "Class S Remittance Amount"
for such Remittance Date. With respect to each Remittance Date, the "Unrecovered
Class A Portion", means an amount equal to the excess, if any, of (A) the Class
A Principal Balance minus the sum of (i) all amounts (excluding that portion of
Insured Payments, if any, to be made in respect of principal) to be distributed
to 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 by
an Insured Payment), (iv) and (vi) of the definition of Class A Principal
Remittance Amount and (ii) all other amounts to be distributed to Class A
Certificateholders constituting Excess Spread in reduction of the Class A
Principal Balance on such Remittance Date, over (B) the Pool Principal Balance
minus the sum of (x) the principal portion of the Monthly Payments received
during the related Due Period and deposited in the Principal and Interest Amount
and all Principal Prepayments, Curtailments, Excess Payments, Insurance
Proceeds, Net Liquidation Proceeds, Released Mortgaged Property Proceeds and net
income from any REO Certificateholders on such Remittance Date, plus (y) the
aggregate of, as to each Liquidated Mortgage Loan which became such during the
related Due Period, an amount (not less than zero or greater than the related
Principal Balance) equal to the
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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 Class A Certificateholders on such Remittance Date. The "Scheduled Class
A Principal Balance" specified in the Principal Payment Table attached as an
exhibit to the Pooling and Servicing Agreement and provided by the Certificate
Insurer (the "Principal Payment Table") for the Remittance Date in each of the
months commencing with __________ 199_ and ending with ________, inclusive, is
equal to the initial Class A Principal Balance; and the Scheduled Class A
Principal Balance specified in the Principal Payment Table for the Remittance
Date in each of the months commencing after _____________ is computed based upon
the assumed Class A Principal Balance on such date based upon a 0% Prepayment
Assumption, a weighted average coupon with respect to the Mortgage Loans of __%
for Balloon Loans and __% for non-balloon loans, a weighted average amortization
term of 360 months for Balloon Loans and ____ months for non-Balloon Loans, a
balloon payment of principal due in ____ months and an otherwise normal
amortization of the Mortgage Loans since the Cut-off Date.
With respect to each Remittance Date, the "Class A Carry-Forward Amount" is
the sum of (i) the amount, if any, by which (A) the Class A Remittance Amount as
of the immediately preceding Remittance Date exceeded (B) the amount of the
actual distribution, exclusive of any Insured Payment, to the 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 Class A
Pass-Through Rate from such immediately preceding Remittance Date. With respect
to each Remittance Date, the "Class S Carry-Forward Amount" is the sum of (i)
the amount, if any, by which (A) the Class S Remittance Amount as of the
immediately preceding Remittance Date exceeded (B) the amount of the actual
distribution, exclusive of any Insured Payments, to the Class S
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 Class A
Pass-Through Rate from such immediately preceding Remittance Date.
The Pooling and Servicing Agreement provides that to the extent the
Certificate Insurer makes Insured Payments, the Certificate Insurer will be
subrogated to the rights of the holders of the Class A Certificates and Class S
Certificates with respect to such Insured Payments, shall be deemed, to the
extent of the payments so made, to be a registered holder of such Class A
Certificates or Class S Certificates and shall be entitled to reimbursement for
such Insured Payments, with interest thereon at the Class A Pass-Through Rate,
on each Remittance Date after the Class A Certificateholders and the Class S
Certificateholders have received the Class A Remittance Amount and the Class S
Remittance Amount (exclusive of any Class A Carry-Forward Amount or Class S
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.
Excess Spread
On any Remittance Date prior to the Cross-Over Date, Holders of the Class A
Certificates and Class S Certificates will have a prior right to 100% of the
Excess Spread (as defined below) (the "Monthly Excess Spread Amount") received
from the Servicer to fund the amount by which the sum of the Class A Remittance
Amount and the Class S Remittance Amount exceeds the Available Remittance Amount
for such Remittance Date. Moreover, to the extent not previously distributed as
described in the foregoing sentence, on each Remittance Date prior to the
Cross-Over Date, the Monthly Excess Spread Amount will be distributed to the
Class A Certificateholders to be applied to further reduce the Class A Principal
Balance whenever, to the extent that, the aggregate amount of Monthly Excess
Spread Amount distributed to the Class A Certificateholders and the Class S
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Certificateholders since the date of issuance of the Certificates ("Cumulative
Spread Receipts"), is less than an amount as specified by the Certificate
Insurer (the "Specified Spread Requirement") plus the aggregate of, as to each
Liquidated Mortgage Loan which became such since the date of the issuance of the
Certificates, an amount (not less than zero or greater than the related
Principal Balance) equal to the excess, if any, of (i) the related Principal
Balance over (ii) the portion of the related Liquidation Proceeds actually
distributed to Class A Certificateholders ("Realized Losses"); provided,
however, that after distributions with respect to principal pursuant to clause
(X) (iii) of the third paragraph under "--Distributions", in no event will a
payment be made pursuant to this sentence that will result in the excess of the
Pool Principal Balance over the Class A Principal Balance being greater than the
Specified Spread Requirement. The "Excess Spread" with respect to any Remittance
Date is an amount equal to the product of (i) the Pool Principal Balance as of
the first day of the related Due Period and (ii) one-twelfth the difference
between (x) the weighted average Mortgage Rate for the Mortgage Loans as of the
first day of the related Due Period and (y) the sum of the Class A Pass-Through
Rate, the Class S Pass-Through Rate, the annual rates at which the Servicing Fee
and the Annual Trustee Expense Amount (as defined below) are calculated and the
maximum rate at which the fee of the Certificate Insurer is calculated.
The "Cross-Over Date" is the date on and after which the amount specified
by the Certificate Insurer (the "Subordinated Amount") is reduced to zero. The
Specified Spread Requirement and the Subordinate Amount may be reduced in the
sole discretion of the Certificate Insurer or may decline over time in a manner
specified by the Certificate Insurer.
Overcollateralization Provisions
Application of the Excess Spread, to the extent not applied to cover
delinquent payments of Monthly Payments on the Mortgage Loans or Realized
Losses, will have the effect of accelerating the rate of payment of principal of
the Class A Certificates. The purpose of accelerating the rate of payment of
principal of the Class A Certificates is to provide protection against ultimate
overall losses on the Mortgage Loans. Whenever and to the extent that, the
excess of the Pool Principal Balance over the Class A Principal Balance is less
than the Specified Spread Requirement, all amounts constituting Excess Spread
remaining available for distribution on any Remittance Date after distributions
of interest on the Senior Certificates will be applied in reduction of the Class
A Principal Balance. Application of funds in accordance with the foregoing is
intended to effect, over time, and thereafter maintain, a cushion against
ultimate losses in the amount of the Specified Spread Requirement, 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 this cushion
will be attained or maintained. In addition, the Specified Spread Requirement
may be reduced in accordance with the terms set forth in the definition thereof
or in the discretion of the Certificate Insurer. The Certificate Insurance
Policy only guarantees, as to any Remittance Date, payments in respect of
principal in an amount equal to the excess, if any, of the Class A Principal
Balance over the Pool Principal Balance. Consequently, under certain extreme
delinquency scenarios, the Holders of Class A Certificates may, as a result,
receive no distributions in respect of principal.
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 (the "Trustee
Expense Account") into which the Trustee will deposit on each Remittance Date as
described above under "--Distributions" one-twelfth of the Annual Trustee
Expense Amount. The "Annual Trustee Expense Amount" with respect to each
Mortgage Loan is equal to __% times the related principal balance. Amounts on
deposit in the
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Trustee Expense Account will be withdrawn pursuant to the terms of the Pooling
and Servicing Agreement to pay the fees and expenses of the Trustee. In
addition, in order to provide for the payment of the fees of the Certificate
Insurer the Trustee will establish and maintain an account (the "Insurance
Account") into which the Trustee will deposit on each Remittance Date, from
amounts on deposit in the Certificate Account, prior to making any required
distributions to the Certificateholders, an amount that is sufficient to pay
such fees. Amounts on deposit in the Insurance Account will be withdrawn
pursuant to the terms of the Pooling and Servicing Agreement to pay the fees of
the Certificate Insurer.
Removal and Resignation of Servicer
The Certificate Insurer may, pursuant to the Pooling and Servicing
Agreement, remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of any of the following events, other than the event
described in clause (i)(C) below, and the holders of in excess of 51% of the
Percentage Interests in the Class A Certificates (the "Majority
Certificateholders"), with the consent of the Certificate Insurer, which consent
may not be unreasonably withheld, may remove the Servicer 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
clause (i)(A), (i)(B), (i)(D), (iii), (iv) or (v) below:
(i) (A) an Event of Nonpayment (as defined below), unless in the case
of an Event of Nonpayment described in clause (i) of the definition
thereof, the insufficiency described in such clause (i) or (ii) results
from a failure of the Certificate Insurer or the Trustee to perform in
accordance with its respective obligations; (B) the failure by the Servicer
to make any required Servicing Advance, to the extent such failure
materially and adversely affects the interests of the Certificate Insurer
or the Certificateholders; (C) the failure by the Servicer to make any
required Monthly Advance to the extent of the full amount of the Class A
Interest Remittance Amount and the Class S Interest Remittance Amount; or
(D) any other failure by the Servicer to remit to Certificateholders, or to
the Trustee for the benefit of the Certificateholders, any payment required
to be made under the terms of the Pooling and Servicing Agreement to the
extent such failure materially and adversely affects the interests of the
Certificate Insurer or the 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 as set forth in the Pooling and Servicing Agreement, 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 any Certificateholder with the consent of the Certificate
Insurer or 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
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(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; 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.
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.
An "Event of Nonpayment" is defined in the Pooling and Servicing Agreement
as (i) with respect to any Remittance Date on or after the Cross-Over Date, the
insufficiency of amounts remitted to the Trustee by the Servicer (exclusive of
the Monthly Excess Spread Amount) to pay the full amount of the Class A
Remittance Amount and Class S Remittance Amount (exclusive of the Class A
Carry-Forward Amount and Class S Carry-Forward Amount that represents Insured
Payments or interest accrued in respect of Insured Payments) and the amount to
be deposited in the Insurance Account, (ii) with respect to any Remittance Date
prior to the Cross-Over Date, the insufficiency of amounts remitted to the
Trustee by the Servicer to pay the full amount of the Class A Remittance Amount
and Class S Remittance Amount (exclusive of the Class A Carry-Forward Amount and
Class S Carry-Forward Amount that represents Insured Payments or interest
accrued in respect of Insured Payments) and the amount to be deposited in the
Insurance Account, and (iii) the sum of all Realized Losses exceeds an amount
specified in the Pooling and Servicing Agreement. In certain instances of the
occurrence of an Event of Nonpayment described in the immediately preceding
clauses (ii) or (iii), the Trustee and the Certificate Insurer may prohibit the
termination of the Servicer if such Event of Nonpayment does not result from the
action or omission of the Servicer.
The Servicer may not assign the Pooling and Servicing Agreement nor resign
from the obligations and duties thereby imposed on it except by mutual consent
of the Servicer, the Depositor (if the Depositor is not the Servicer), the
Certificate Insurer, 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 the
Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, is obligated to make Monthly Advances and Servicing Advances and
certain other advances unless it determines reasonably and in good faith that
such advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Servicer, or if the Majority Certificateholders or
Certificate Insurer so request, the Trustee may appoint, or petition a court of
competent jurisdiction to appoint, any established mortgage loan servicing
institution acceptable to the Certificate Insurer having a net worth of not less
than $________________ and which is approved as a servicer by the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation, as
the Successor Servicer in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer.
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The Trustee and any other successor Servicer in such capacity is entitled
to the same reimbursement for advances and servicing compensation as the
Servicer. See "--Servicing and Other Compensation and Payment of Expenses".
Termination; Purchase of Mortgage Loans
[In addition to the provisions for early termination of the Certificates
described in the Prospectus, on any Remittance Date after the Cross-Over Date on
which Mortgage Loans with aggregate principal balances at the Cut-off Date that
equal or exceed __% of the Original Pool Principal Balance have become
Liquidated Mortgage Loans, the Certificate Insurer may determine to purchase and
may cause the purchase from the Trust Fund of all Mortgage Loans and all REO
Property at a price equal to the sum of the Termination Price and the amount of
any unpaid fees and expenses of the Servicer and the Trustee.
In connection with any such purchase by the Certificate Insurer, the
Servicer shall remit to the Trustee for remittance to Certificateholders on the
final Remittance Date all other amounts then on deposit in the Principal and
Interest Account that would have constituted part of the Available Remittance
Amount for subsequent Remittance Dates absent such purchase.]
[Amendment
In addition to the provisions for amendment of the Pooling and Servicing
Agreement described in the Prospectus, the Specified Spread Requirement 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.]
Registration of Class A Certificates
[The Class A Certificates will initially be registered in the name of CEDE
& Co., the nominee of DTC. Certificate Owners that are not Participants but
desire to purchase, sell or otherwise transfer ownership of Class A Certificates
may do so only through Participants (unless and until Definitive Class A
Certificates, as defined below, are issued). In addition, Certificate Owners
will receive all distributions of principal of, and interest on, the Class A
Certificates from the Trustee through DTC and Participants. Certificate Owners
will not receive or be entitled to receive certificates representing their
respective interests in the Class A Certificates, except under the limited
circumstances described under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.]
THE TRUSTEE
______________________, _________________________, has been named Trustee
pursuant to the Pooling and Servicing Agreement. ____________________________
has accepted appointment as the certificate registrar and paying agent pursuant
to the Pooling and Servicing Agreement. The Trustee may resign at any time in
the manner set forth in the 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 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 will
hold those Mortgage Loans secured by Mortgaged Property located in _____________
_________________________ through a separate trustee that may be an affiliate of
the Trustee.]
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[THE CERTIFICATE INSURANCE POLICY
AND THE CERTIFICATE INSURER
The information set forth in this section has been provided
by . No representation is made by the Depositor or any
of its affiliates as to the accuracy or completeness of any such information.
______________ (the "Certificate Insurer") has issued its Certificate
Guaranty Surety Bond for the Class A Certificates and the Class S Certificates
(the "Certificate Insurance Policy"). The Certificate Insurance Policy
unconditionally guarantees the payment of Insured Payments on the Class A and
Class S Certificates. "Insured Payments" as to any Remittance Date means the
amount, if any, by which the sum of (i) the Class A Remittance Amount (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) and (ii)
the Class S Remittance Amount exceeds the sum of (x) the Available Remittance
Amount (minus the amounts withdrawable from the Certificate Account for deposit
in the Insurance Account), (y) if any such Remittance Date is prior to the
Cross-Over Date, the lesser of (1) the Monthly Excess Spread Amount deposited
into the Certificate Account as of such Remittance Date and (2) the Subordinated
Amount, and (z) the aggregate amount of any previous Insured Payments for which
the Certificate Insurer has not been reimbursed by the Trustee pursuant to the
Pooling and Servicing Agreement, together with that portion of the amounts
described in the immediately preceding clauses (i) and (ii) 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 to the
Trustee as paying agent on the later of (a) the Remittance Date on which such
Insured Payment is distributable to the Class A Certificateholders or Class S
Certificateholders pursuant to the Pooling and Servicing 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 also provide for payment of the amount of any distributions in
respect of principal or interest previously paid to a Class A Certificateholder
or a Class S Certificateholder that are subsequently recovered from a Class A
Certificateholder or a Class S Certificateholder 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 business day following receipt by the Certificate
Insurer of a copy of the order, assignment to the Certificate Insurer of such
Certificateholder's rights and appointment of the Certificate Insurer as such
Certificateholder's agent. The Certificate Insurer shall only be required to
make an Insured Payment relating to a particular Remittance Date, and no Holder
of a Senior Certificate shall be entitled to reimbursement for any payment
avoided as a preference as to which the Certificate Insurer made a payment under
the Certificate Insurance Policy.
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 and the Class S
Certificateholders, whether or not such funds are properly distributed by the
Trustee.
For purposes of the Certificate Insurance Policy, "Class A
Certificateholder" and "Class S Certificateholder", as to a particular
Certificate, does not and may not include the Trust Fund, the Servicer, any
Subservicer or the Depositor.
The Certificate Insurer only insures the timely receipt of interest on the
Senior Certificates and the ultimate receipt of principal on the Class A
Certificates. The Certificate Insurer does not guaranty any rate of principal
payments on the Class A Certificates other than that set forth in the
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Principal Payment Table, any recovery of payments deemed voidable preferences
under state law or 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.
The Certificate Insurer has the right to terminate the Trust Fund as
described above under "Description of the Certificates--Termination; Purchase of
Mortgage Loans", causing an acceleration of the Class A Certificates and Class S
Certificates, if the Cross-Over Date has occurred and Mortgage Loans with
aggregate principal balances as of the Cut-off Date that equal or exceed __% of
the Original Pool Principal Balance have become Liquidated Mortgage Loans.
The Certificate Insurance Policy is non-cancelable.
The Certificate Insurer is a .
The Certificate Insurer is authorized to write insurance in states.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that the Certificate Insurer considers to be of investment
grade quality. With respect to each category of obligations considered for
insurance, the Certificate Insurer has established and maintains its own
underwriting standards that are based on those aspects of credit quality that
the Certificate Insurer deems important for the category and that take into
account rating agency criteria established for the category. 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 the
underwriting of 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 principal and interest on insured debt securities and scheduled
payments due in respect of pass-through securities such as the Class A
Certificates and Class S Certificates. If the issuer of a Certificate
Insurer-insured security defaults on its obligations to pay the insured amounts,
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. Securities insured to maturity by the Certificate Insurer are
rated by .
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 or semi-annual 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.
Committees of senior officers of the Certificate Insurer must approve all
issues for insurance with the exception of certain small exposures, which may be
approved by the [Director of Public
S-43
<PAGE>
Finance]. These committees review reports prepared by credit analysts on the
staff of the Certificate Insurer assigned to review such issues. Prior to its
presentation to a committee, the recommendation for insurance in such report
must be reviewed by the director of the group responsible for the underwriting
of the type of security under consideration.
As of , 199 , the Certificate Insurer had written directly or
assumed through reinsurance guarantees of approximately $ billion par value
of securities (of which approximately percent constituted guarantees of
municipal bonds) for which it had collected gross premiums of approximately
$ . To date, the Certificate Insurer has reinsured approximately
percent of the risks it has written, primarily through quota share reinsurance
treaties, but also through facultative arrangements.
The Certificate Insurer is subject to regulation by each state in which the
Certificate Insurer is licensed to write insurance. These regulations vary from
state to state, 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 certain dividends and certain other
intercorporate transfer of assets and of transactions between affiliated
insurance companies, their parents and other 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.
Capitalization
(Table setting forth the capitalization of the Certificate Insurer as of
the most recent date. Audited and unaudited financial statements of the
Certificate Insurer will be included as appendices to the Prospectus
Supplement.)]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, , counsel to
the Company, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a REMIC under the
Code.
For federal income tax purposes, the REMIC Residual Certificates will be
the sole class of "residual interests" in the REMIC and the Senior Certificates
will be the "regular interests" in the REMIC and will be generally treated as
debt instruments of the REMIC.
The Class A Certificates may be treated as having been issued with original
issue discount for federal income tax reporting purposes. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, 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 Mortgage Loans will prepay at a rate equal to [ %]. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of such a class of
Certificates will be treated as holding
S-44
<PAGE>
a certificate with amortizable bond premium will depend on such
Certificateholder's purchase price and the distributions remaining to be made on
such Certificate at the time of its acquisition by such Certificateholder.
Holders of such classes of Certificates should consult their own tax advisors
regarding the possibility of making an election to amortize such premium. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates" and "--Premium" in the Prospectus.
The Class A Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. 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)(5)(A) of
the Code. Moreover, the Class A Certificates will be "obligation[s] . . . which
. . . [are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3)(C) of the Code. See "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
The Servicer will be designated as the "tax matters person" with respect to
the REMIC as defined in the REMIC Provisions, and in connection therewith will
be required to hold not less than 0.01% of the Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
ERISA CONSIDERATIONS
[A fiduciary of employee benefit plans 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 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.
The DOL issued individual exemptions, Prohibited Transaction
Exemption to (" ") and prohibited Transaction
Exemption to (" ") (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
Exemptions are satisfied. For purposes of this section "ERISA Considerations",
the term "Underwriter" shall include (a) , (b) , (c) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with either 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
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<PAGE>
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, A Division of the McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, Inc. Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group", which consists of any Underwriter, the Depositor, the
Trustee, the Servicer, any subservicer, 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 Trust Fund
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 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 subservicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. 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.
A fiduciary of a Plan contemplating purchasing a Class A Certificate must
make its own determination that the general conditions set forth above will be
satisfied with respect to such Certificate.
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
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<PAGE>
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 (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.
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 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. A purchaser of a Class A
Certificate should be aware, however, that even if the conditions specified in
one or more exemptions are met, the scope of the relief provided by an exemption
might not cover all acts which might be construed as prohibited transactions.
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.]
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
(the "Underwriters"), and each of the Underwriters have agreed
to purchase from the Depositor, the principal amount of Class A Certificates set
forth opposite its name below:
Aggregate Principal
Amount of Class
A Certificates to
Underwriter be Purchased
----------- ------------
Total................................
In the Underwriting Agreement, each of the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of its
respective allocation of the Class A Certificates offered hereby if any of the
Class A Certificates are purchased.
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<PAGE>
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 % of the Class A Certificate denominations. The Underwriters may
allow and such dealers may reallow a concession not in excess of % of the
Class A Certificate denominations to certain other dealers. After the initial
public offering, the public offering price and such concessions may be changed.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
RATINGS
The Class A Certificates will be rated at their initial issuance [not lower
than] " " by .
ratings on mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of payments required
thereon. 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 in the mortgage pool is
adequate to make payments required under the certificates. 's
rating on the Class A Certificates does not, however, constitute a statement
regarding frequency of prepayments on the Mortgage Loans.
The ratings assigned to the Class A Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Class A Certificates may result in a reduction
of one or more of the ratings assigned to the Class A Certificates.
The Depositor does not expect a rating on the Class A Certificates by any
rating agency other than . 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 by .
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be passed
upon for the Depositor by and and for the Underwriter
by .
S-48
<PAGE>
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS AND THE ACCOMPANYING
PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A FINAL
PROSPECTUS SUPPLEMENT AND PROSPECTUS IS DELIVERED. THIS PRELIMINARY PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1997
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.
----------
February 10, 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.
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.
-ii-
<PAGE>
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
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PROSPECTUS SUPPLEMENT....................................................... ii
AVAILABLE INFORMATION....................................................... ii
REPORTS TO CERTIFICATEHOLDERS.............................................. iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... iii
SUMMARY OF PROSPECTUS....................................................... 1
RISK FACTORS................................................................ 8
Limited Liquidity....................................................... 8
Limited Assets and Obligations.......................................... 8
Average Life of Certificates; Prepayments; Yields....................... 8
Limited Nature of Ratings............................................... 9
Risks Associated With the Mortgage Loans and Mortgaged Properties....... 9
Investment in the Mortgage Loans........................................ 9
Second Liens........................................................ 10
Bankruptcy Proceedings.............................................. 11
Delinquent Loans.................................................... 11
Regulatory Matters.................................................. 12
Balloon Payments.................................................... 12
Credit Support Limitations.............................................. 12
Enforceability.......................................................... 13
The Status of the Mortgage Loans in the Event of Insolvency of the
Depositor............................................................. 13
Limitations on Interest Payments and Foreclosures....................... 13
Environmental Risks..................................................... 13
ERISA Considerations.................................................... 13
Certain Federal Tax Considerations Regarding REMIC Residual
Certificates.......................................................... 14
Control................................................................. 14
Book-Entry Registration................................................. 14
DESCRIPTION OF THE TRUST FUNDS.............................................. 14
Mortgage Loans.......................................................... 14
General............................................................. 14
Mortgage Loan Information in Prospectus Supplements................. 15
Payment Provisions of the Mortgage Loans............................ 16
ARM Loans........................................................... 16
Principal and Interest Account.......................................... 16
Certificate Account..................................................... 16
Pre-Funding Account..................................................... 17
Credit Support.......................................................... 17
USE OF PROCEEDS............................................................. 17
YIELD CONSIDERATIONS........................................................ 17
General................................................................. 17
Pass-Through Rate....................................................... 17
Timing of Payment of Interest and Principal............................. 17
Principal Prepayments................................................... 18
Defaults................................................................ 18
Prepayments--Maturity and Weighted Average Life......................... 19
Other Factors Affecting Weighted Average Life........................... 19
Type of Mortgage Loan............................................... 19
Foreclosures and Payment Plans.......................................... 20
Due-on-Sale Clauses................................................. 20
THE DEPOSITOR............................................................... 21
THE SERVICER................................................................ 21
DESCRIPTION OF THE CERTIFICATES............................................. 21
General................................................................. 21
Distributions........................................................... 22
Distributions of Interest on the Certificates........................... 22
Distributions of Principal on the Certificates.......................... 23
Allocation of Losses and Shortfalls..................................... 23
Example of Distributions................................................ 23
Monthly Advances in Respect of Delinquencies............................ 24
Compensating Interest................................................... 25
Reports to Certificateholders........................................... 25
Termination............................................................. 26
Book-Entry Registration and Definitive Certificates..................... 26
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS......................... 29
Assignment of Mortgage Loans; Repurchases............................... 29
Representations and Warranties; Repurchases............................. 30
<PAGE>
Page
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Payments on Mortgage Loans; Deposits to Principal and Interest
Account............................................................... 31
Deposits to Certificate Account......................................... 32
Collection and Other Servicing Procedures............................... 33
Servicing Advances...................................................... 34
Sub-Servicers........................................................... 35
Realization Upon Defaulted Mortgage Loans............................... 35
Hazard Insurance Policies............................................... 35
Due-on-Sale Provisions.................................................. 36
Servicing and Other Compensation and Payment of Expenses................ 36
Evidence as to Compliance............................................... 37
Certain Matters Regarding the Servicer.................................. 37
Events of Default....................................................... 37
Rights Upon Event of Default............................................ 37
Amendment............................................................... 38
Duties of the Trustee................................................... 38
The Trustee............................................................. 38
DESCRIPTION OF CREDIT SUPPORT............................................... 39
General................................................................. 39
Subordinate Certificates................................................ 39
Cross-Support Provisions................................................ 39
Insurance or Guarantees With Respect to the Mortgage Loans.............. 40
Letter of Credit........................................................ 40
Insurance Policies and Surety Bonds..................................... 40
Reserve Funds or Spread Account......................................... 40
Overcollateralization................................................... 41
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..................................... 41
General................................................................. 41
Single Family and Multifamily Loans..................................... 41
Contracts............................................................... 41
Foreclosure on Mortgages................................................ 43
Repossession with respect to Contracts.................................. 44
Second Mortgages........................................................ 45
Rights of Redemption.................................................... 45
Anti-Deficiency Legislation and Other Limitations on Lenders............ 46
Enforceability of Certain Provisions.................................... 47
Subordinate Financing................................................... 48
Applicability of Usury Laws............................................. 48
Consumer Protection Laws with respect to Contracts...................... 49
Environmental Legislation............................................... 49
Formaldehyde Litigation with respect to Contracts....................... 49
Soldiers' and Sailors' Civil Relief Act................................. 50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 50
General................................................................. 50
REMICs.................................................................. 51
Classification of REMICs............................................ 51
Characterization of Investments in REMIC Certificates............... 51
Tiered REMIC Structures............................................. 52
Taxation of Owners of REMIC Regular Certificates........................ 52
General............................................................. 52
Original Issue Discount............................................. 52
Market Discount..................................................... 54
Premium............................................................. 55
Realized Losses..................................................... 55
Taxation of Owners of REMIC Residual Certificates....................... 56
General............................................................. 56
Taxable Income of the REMIC......................................... 57
Basis Rules, Net Losses and Distributions........................... 58
Excess Inclusions................................................... 59
Noneconomic REMIC Residual Certificates............................. 59
Mark-to-Market Rules................................................ 60
Possible Pass-Through of Miscellaneous Itemized Deductions.......... 60
Sales of REMIC Certificates......................................... 61
Prohibited Transactions and Other Possible REMIC Taxes.............. 62
Tax and Restrictions on Transfers of REMIC Residual Certificates
to Certain Organizations 62
Termination......................................................... 63
Reporting and Other Administrative Matters.......................... 63
Backup Withholding With Respect to REMIC Certificates............... 64
Foreign Investors in REMIC Certificates............................. 64
STATE AND OTHER TAX CONSEQUENCES............................................ 65
ERISA CONSIDERATIONS........................................................ 65
General................................................................. 65
Plan Asset Regulations.................................................. 65
Prohibited Transaction Exemptions....................................... 66
<PAGE>
Page
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LEGAL INVESTMENT............................................................ 67
METHOD OF DISTRIBUTION...................................................... 67
LEGAL MATTERS............................................................... 68
FINANCIAL INFORMATION....................................................... 68
RATING...................................................................... 69
INDEX OF PRINCIPAL DEFINITIONS.............................................. 70
<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).
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
<PAGE>
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".
(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
2
<PAGE>
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.
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
3
<PAGE>
"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
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,
4
<PAGE>
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 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.
5
<PAGE>
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 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 Certificates.... 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 "qualifying
real property loans" within the meaning of
Section 593(d) of the Code and
"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)(5)(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.
6
<PAGE>
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 593(d), 856(c)(5)(A),
856(c)(3)(B) and 7701(a)(19)(C) of 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
(except generally with respect to thrift
institutions described in Section 593 of
the Code, if such REMIC Residual
Certificate has "significant value"), (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.
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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 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
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<PAGE>
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.
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
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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 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
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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 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.
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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 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
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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".
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 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".
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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 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
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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 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
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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 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".
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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 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
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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 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 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.
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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.
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
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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 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
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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 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 the Montvale, New Jersey location (previously utilized by
Alliance and now operated as an agency office 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.
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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 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
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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 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
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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.
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.
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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").
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
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(xv) as to any series which includes Credit Support, certain
information regarding any payments thereunder or coverage provided and the
remaining availability thereof.
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 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.
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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. 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
"Depositaries").
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 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.
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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 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.
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Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
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, 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,
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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
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
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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.
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
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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
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.
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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 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.
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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 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
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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 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
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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 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
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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 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
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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 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.
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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
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.
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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 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
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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.
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
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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 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
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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.
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
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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 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
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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 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.
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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 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
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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 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
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("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 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.
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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.
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
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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 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
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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.
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)(5)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code in the same proportion that the assets of the REMIC underlying such
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)(5)(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)(5)(A) of the Code. Furthermore, foreclosure property will qualify
as "real estate assets" under Section 856(c)(5)(A) of the Code.
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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)(5)(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 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
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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 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
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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 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 would be irrevocable.
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
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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 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
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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."
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,"
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residual interests without "significant value" 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 "--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
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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 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.
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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 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 tentative 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
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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.
Mark-to-Market Rules
On December 28, 1993, the IRS released temporary 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 "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from the
mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995,
which provide that any REMIC Residual Certificate acquired after January 4,
1995, will not be treated as a security and therefore generally 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
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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. The Code as of the date of this Prospectus provides for a top
marginal tax rate of 39.6% for individuals and a maximum marginal rate for
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
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
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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 (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.
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In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual 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.
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.
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 provided by the later of 30 days
after the end of the quarter for which the information was
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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, 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. 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.
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.
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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 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.
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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 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.
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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 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:
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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 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.
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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.
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INDEX OF PRINCIPAL DEFINITIONS
Accrual Certificates.......................................................3, 21
Accrued Certificate Interest..................................................22
Affiliated Sellers............................................................15
Alliance......................................................................21
Alliance Funding Division.....................................................21
Amount Available..............................................................33
ARM Loans.....................................................................15
Bankruptcy Code...............................................................11
Bankruptcy Loan...............................................................11
Bankruptcy Plan...............................................................11
Book-Entry Certificates.......................................................22
CEDEL Participants............................................................28
CERCLA........................................................................13
Certificate Account........................................................2, 16
Certificate Balance............................................................3
Certificate Owners............................................................27
Certificateholders............................................................ii
Certificates...................................................................1
Code...........................................................................4
Commission....................................................................ii
Compensating Interest.........................................................25
Contracts.....................................................................15
Convertible Mortgage Loan.....................................................16
Covered Trust.............................................................12, 39
CPR...........................................................................19
Credit Support..............................................................i, 3
Curtailment....................................................................5
Cut-off Date...................................................................4
Deferred Interest.............................................................10
Definitive Certificates.......................................................22
Depositor..................................................................1, 21
Determination Date............................................................22
DOL...........................................................................65
DTC.......................................................................ii, 26
Due Period.....................................................................5
Effective Date ...............................................................21
Eligible Account..............................................................32
ERISA......................................................................7, 65
Euroclear Participants........................................................28
Exchange Act..................................................................ii
FDIC..........................................................................13
FHLMC.........................................................................48
First Liens...................................................................10
FTC Rule......................................................................49
Garn-St Germain Act...........................................................47
Indirect Participants.........................................................27
Insurance Proceeds............................................................32
L/C Bank......................................................................40
Lee...........................................................................21
Lee Servicing Division........................................................21
Liquidation Proceeds..........................................................32
Manufactured Homes............................................................15
Mark-to-Market Regulations....................................................60
Monthly Advance............................................................5, 24
Moody's.......................................................................31
Mortgage Loan Purchase Price..................................................30
<PAGE>
Mortgage Loan Schedule........................................................29
Mortgage Loans.................................................................i
Mortgage Notes................................................................14
Mortgage Pool...............................................................i, 1
Mortgage Rate..............................................................1, 16
Mortgaged Properties..........................................................14
Mortgagor.....................................................................10
Multifamily Loan..................................................14, 18, 34, 66
Multifamily Properties............................................10, 14, 41, 46
Net Liquidation Proceeds......................................................32
Net Mortgage Rate.............................................................25
Nonrecoverable Monthly Advance................................................24
Nonrecoverable Servicing Advances.............................................34
Note Margin...................................................................20
Offered Certificates...........................................................i
OTS...........................................................................21
Parties in Interest...........................................................65
Pass-Through Rate..............................................................3
Permitted Instruments.........................................................32
Plan Payment..................................................................11
Plans.........................................................................65
Pooling and Servicing Agreement................................................3
Pre-Funding Account...........................................................33
Principal and Interest Account.............................................2, 16
Principal Prepayment...........................................................5
Qualified Substitute Mortgage Loan............................................30
Rating Agency..................................................................7
Record Date...................................................................22
Released Mortgaged Property Proceeds..........................................32
Relief Act................................................................13, 50
REMIC Regular Certificates.....................................................6
REMIC Residual Certificates....................................................6
Remittance Date................................................................4
REO Property..................................................................32
S&P...........................................................................31
Sellers.......................................................................15
Senior Certificates........................................................3, 21
Servicing Fee.................................................................36
Single Family Loan....................................................14, 18, 19
Single Family Properties..................................................10, 14
SMMEA.........................................................................67
SPA...........................................................................19
Stripped Interest Certificates................................................21
Stripped Principal Certificates............................................3, 21
Sub-Servicer..................................................................35
Sub-Servicing Agreement.......................................................35
Subordinate Certificates...................................................3, 21
Termination Price.............................................................26
Title V.......................................................................48
Trust Assets..................................................................ii
Trust Fund.....................................................................i
Trustee........................................................................1
Trustee's Mortgage File.......................................................30
Unaffiliated Sellers..........................................................15
Voting Rights.................................................................14
Warranting Party..............................................................30
Window Period Loans...........................................................47
<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, 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-3
Risk Factors ................................. S-12
The Mortgage Pool.............................. S-13
Certain Yield and Prepayment Considerations.... S-20
The Depositor.................................. S-23
The Servicer................................... S-29
Description of the Certificates................ S-31
The Trustee.................................... S-41
The Certificate Insurance Policy and the
Certificate Insurer........................... S-42
Certain Federal Income Tax Consequences........ S-44
ERISA Considerations........................... S-45
Method of Distribution......................... S-47
Ratings........................................ S-48
Legal Matters.................................. S-48
Prospectus
Summary of Prospectus.......................... 1
Risk Factors................................... 8
Description of the Trust Funds................. 14
Use of Proceeds ............................... 17
Yield Considerations........................... 17
The Depositor.................................. 21
The Servicer................................... 21
Description of the Certificates................ 21
Description of the Pooling and Servicing
Agreements .................................. 29
Description of Credit Support.................. 39
Certain Legal Aspects of Mortgage Loans........ 41
Certain Federal Income Tax Consequences........ 50
State and Other Tax Consequences............... 65
ERISA Considerations........................... 65
Legal Investment............................... 67
Method of Distribution......................... 67
Legal Matters.................................. 68
Financial Information.......................... 68
Rating......................................... 69
Index of Principal Definitions................. 70
Until , 199 , 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.
======================================================
======================================================
$______________
AFC Mortgage Loan Asset
Backed Certificates,
Series 199__
Class A Certificates,
% Pass-Through Rate
Superior Bank FSB
Depositor
_____________________________
PROSPECTUS SUPPLEMENT
_____________________________
[UNDERWRITER]
Dated ___________, 199_
======================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3)
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing fee for registration statement................. $ 303,030.30
Legal fees and expenses............................... 200,000.00
Accounting fees and expenses.......................... 75,000.00
Trustee's fees and expenses (including counsel fees) 85,000.00
Printing and engraving fees........................... 100,000.00
Rating agency fees.................................... 300,000.00
Blue Sky and legal investment fees and expenses....... 10,000.00
Miscellaneous......................................... 25,000.00
--------------
Total.......................................... $ 1,098,030.30
==============
Indemnification of Directors and Officers (Item 15 of Form S-3)
The Pooling and Servicing Agreements pursuant to which the Certificates
being registered will be issued (each, a "Pooling and Servicing Agreement") will
provide that neither the Registrant nor any director, officer, employee or agent
of the Registrant will be under any liability to the trust fund created
thereunder (the "Trust Fund") or the holders of the Certificates issued
thereunder for any action taken or for refraining from the taking of any action
in good faith pursuant to the Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that neither the Registrant nor any such person
will be protected against any breach of warranties or representations made in
the Pooling and Servicing Agreement, or against any liability which would
otherwise be imposed by reason of misfeasance, bad faith or negligence in the
performance of obligations or duties thereunder, or by reason of reckless
disregard of such obligations or duties thereunder. The Pooling and Servicing
Agreements will further provide that the Registrant and any director, officer,
employee or agent of the Registrant will be entitled to indemnification by the
related Trust Fund and will be held harmless by the Trust Fund against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement or the Certificates issued thereunder, other
than any loss, liability or expense (i) related to any specific mortgage loan or
mortgage loans comprising the Trust Fund (except any such loss, liability or
expense otherwise reimbursable pursuant to the related Pooling and Servicing
Agreement); (ii) incurred by reason of misfeasance, bad faith or negligence in
the performance of obligations or duties under the Pooling and Servicing
Agreement, or by reason of reckless disregard of such obligations or duties
thereunder; (iii) incurred in connection with any violation by it of any state
or federal securities laws; or (iv) imposed by any taxing authority if such
loss, liability or expense is not specifically reimbursable pursuant to the
terms of the Pooling and Servicing Agreements.
The underwriter who executes an Underwriting Agreement in the form filed as
Exhibit 1.1 to the Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Act from certain
information furnished to the Registrant by or on behalf of such underwriter.
II-1
<PAGE>
Exhibits (Item 16 of Form S-3)
Exhibits --
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
5.1 -- Opinion of Thacher Proffitt & Wood with respect to legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included with Exhibit 5.1).
23.1 -- Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.1
and Exhibit 8.1).
25.1 -- Power of Attorney (included on page II-4).
- ---------
* Previously filed as an Exhibit to Registration Statement on Form S-11 and
incorporated herein by reference.
Undertakings (Item 17 of Form S-3)
A. Undertakings Pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; provided however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
II-2
<PAGE>
B. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, as amended,
Superior Bank FSB certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Oakbrook Terrace, State of Illinois, on the 7th
day of February, 1997.
SUPERIOR BANK FSB
By: /s/ William C. Bracken
-------------------------------------
Name: William C. Bracken
Title: Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William C. Bracken, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for and in his or her name, place and stead, in any and all capacities, to sign
any or all amendments or supplements (including post-effective amendments) to
this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
might or could be done in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Neal T. Halleran Director and President February 7, 1997
- --------------------------- (Principal Executive Officer)
(Neal T. Halleran)
/s/ William C. Bracken Senior Vice President and Chief February 7, 1997
- ---------------------------
(William C. Bracken) Financial Officer (Principal
Financial and Accounting
Officer)
/s/ Nelson L. Stephenson Director February 7, 1997
- ---------------------------
(Nelson L. Stephenson)
/s/ Glen Miller Director February 7, 1997
- ---------------------------
(Glen Miller)
/s/ Marc A. Weisman Director February 7, 1997
- ---------------------------
(Marc A. Weisman)
/s/ Monte Kurs Director February 7, 1997
- ---------------------------
(Monte Kurs)
II-5
<PAGE>
EXHIBIT INDEX
Exhibit Location of Exhibit
Sequential in
Number Description of Document Numbering System
- ------ ----------------------- ----------------
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
5.1 -- Opinion of Thacher Proffitt & Wood with respect
to legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect
to certain tax matters (included with Exhibit 5.1).
23.1 -- Consent of Thacher Proffitt & Wood (included as
part of
Exhibit 5.1 and Exhibit 8.1).
25.1 -- Power of Attorney (included on page II-4).
- -----------
* Previously filed as an Exhibit to Registration Statement on Form S-11 and
incorporated herein by reference.
II-6
February 7, 1997
Superior Bank FSB
One Lincoln Centre
Oakbrook Terrace, Illinois 60181
Superior Bank FSB,
AFC Home Equity Loan Asset Backed Certificates
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Superior Bank FSB (the "Registrant") in connection with
the registration under the Securities Act of 1933, as amended (the "Act"), of
AFC Mortgage Loan Asset Backed Certificates (the "Certificates"), and the
related preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Certificates are issuable in series under
separate pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement"), to be executed among the Registrant as depositor, Lee
Servicing Company, a division of Superior Bank FSB, as servicer, and a trustee
to be identified in the prospectus supplement for such series of Certificates.
Each Pooling and Servicing Agreement will be substantially in the form filed as
an Exhibit to the Registration Statement. This opinion is rendered pursuant to
Items 601(5) and (8) of Regulation S-K promulgated by the Securities and
Exchange Commission.
In connection with rendering this opinion letter, we have examined the form
of the Pooling and Servicing Agreement contained as an Exhibit to the
Registration Statement, the Registration Statement and such other documents as
we have deemed necessary. As to matters of fact, we have examined and relied
upon representations or certifications of officers of the Registrant or public
officials. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents submitted to us as
copies. We have assumed that all parties, other than the Registrant, had the
corporate power and authority to enter into and perform all obligations
thereunder. As to such parties, we have also assumed the due
<PAGE>
Superior Bank FSB Page 2.
February 7, 1997
authorization by all requisite corporate action, the due execution and delivery
and the validity, binding effect and enforceability of such documents.
In rendering this opinion letter, we express no opinion as to the laws of
any jurisdiction other than the federal laws of the United States and the laws
of the State of New York, nor do we express any opinion, on any issue not
expressly addressed below. In rendering this opinion letter, we have not passed
upon and do not pass upon the application of "doing business" or the securities
laws of any jurisdiction.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a series of Certificates has
been duly authorized by all necessary action and duly executed and delivered by
the parties thereto, such Pooling and Servicing Agreement will be a legal and
valid obligation of the Registrant, enforceable in accordance with its terms,
except as enforceability may be limited by (a) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other similar laws
affecting the enforcement of the rights of creditors and (b) general principles
of equity, whether enforcement is sought in a proceeding in equity or at law.
2. When a Pooling and Servicing Agreement for a series of Certificates has
been duly authorized by all necessary action and duly executed and delivered by
the parties thereto, and when the Certificates of such series have been duly
executed and authenticated in accordance with the provisions of that Pooling and
Servicing Agreement, and issued and sold as contemplated in the Registration
Statement, the prospectus and prospectus supplement delivered in connection
therewith, such Certificates will be legally and validly issued and outstanding,
fully paid and non-assessable, and the holders of such Certificates will be
entitled to the benefits of that Pooling and Servicing Agreement.
3. The description of federal income tax consequences appearing under the
heading "Certain Federal Income Tax Consequences" in the prospectus contained in
the Registration Statement, while not purporting to discuss all possible federal
income tax consequences of an investment in Certificates, is accurate with
respect to those tax consequences which are discussed.
This opinion letter is rendered for the sole benefit of the addressee
hereof, and no other person or entity is entitled to rely hereon. Copies of this
opinion letter may not be furnished to any other person or entity, nor may any
portion of this opinion letter be quoted, circulated or referred to in any other
document.
<PAGE>
Superior Bank FSB Page 3.
February 7, 1997
We hereby consent to the filing of this opinion letter as an Exhibit to the
Registration Statement, and to the use of our name in the prospectus included in
the Registration Statement under the heading "Legal Matters", and in the
prospectus supplement for any series of Certificates in which our name appears
under the heading "Legal Matters" and/or "Certain Federal Income Tax
Consequences", without admitting that we are "experts" within the meaning of the
Act and the rules and regulations thereunder with respect to any part of the
Registration Statement including this Exhibit.
Very truly yours,
/s/ THACHER PROFFITT & WOOD
