PROSPECTUS SUPPLEMENT
(To Prospectus dated December 12, 1997)
$465,000,000
AFC MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 1998-2
SUPERIOR BANK FSB,
DEPOSITOR
The Series 1998-2 AFC Mortgage Loan Asset Backed Certificates will consist
of three Classes of certificates (collectively, the "Certificates"), Class 1A
(the "Class 1A Certificates"), Class 2A (the "Class 2A Certificates", and
together with the Class 1A Certificates, the "Class A Certificates") and Class
R. The Class A Certificates will have the initial principal balances set forth
below. Only the Class A Certificates are offered hereby.
The Class A Certificates will represent a senior undivided interest in a
trust fund (the "Trust Fund") created by Superior Bank FSB (the "Depositor"),
consisting of two pools of mortgage loans (collectively, the "Mortgage Pool")
secured by first and second liens on one- to four-family properties, units in
planned unit developments, individual condominium units, manufactured homes,
multifamily properties, commercial properties and mixed residential and
commercial structures (the "Mortgage Loans") originated or purchased by the
Depositor, all proceeds thereof due after the Cut-off Date with respect to the
Initial Mortgage Loans or the Subsequent Cut-off Date with respect to the
Subsequent Mortgage Loans, as such terms are defined herein (other than the
Depositor's
(continued on next page)
[FINANCIAL GUARANTY INSURANCE COMPANY LOGO]
----------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND, INCLUDING THE CERTIFICATE INSURANCE
POLICY, ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE
CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR OR ANY OF ITS AFFILIATES. NEITHER THE CLASS A CERTIFICATES
NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR OR ANY OF ITS AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Prospective investors should consider the factors set forth under "Risk
Factors" on page S-16 of this Prospectus Supplement and on page 9 of the
accompanying Prospectus.
<TABLE>
<CAPTION>
========================================================================================================================
INITIAL PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE PUBLIC DISCOUNT DEPOSITOR(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Class 1A Certificate................. $266,000,000 Variable 100% 0.27% 99.73%
- ------------------------------------------------------------------------------------------------------------------------
Per Class 2A Certificate................. $199,000,000 Variable 100% 0.27% 99.73%
- ------------------------------------------------------------------------------------------------------------------------
Total.................................... $465,000,000 N/A $465,000,000 $1,255,500 $463,744,500
========================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Depositor estimated to be $295,000.
----------------------------
The Class A Certificates are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Class A Certificates will be made
solely in book-entry form through The Depository Trust Company in the United
States or Cedel and Euroclear (each as defined herein) in Europe against payment
therefor in immediately available funds in New York, New York, on or about June
25, 1998.
----------------------------
MERRILL LYNCH & CO. J.P. MORGAN & CO.
----------------------------
The date of this Prospectus Supplement is June 17, 1998.
<PAGE>
(continued from preceding page)
Yield as described in the Prospectus), the certificate insurance policy
described herein, funds on deposit in two PreFunding Accounts to be established
with the Trustee, certain other accounts and certain other property ("Group 1"
and "Group 2"; Group 1 and Group 2, each; a "Group").
Additional Mortgage Loans are intended to be purchased by the Trust Fund
from the Depositor on or before September 23, 1998 from funds on deposit in the
Pre-Funding Accounts. On the Closing Date, the Depositor will pay to the Trustee
$100,454,855.42 for deposit in the Group 1 Pre-Funding Account and
$79,228,918.11 for deposit in the Group 2 Pre-Funding Account. Group 1 consists
of fixed-rate mortgage loans which are secured by first and second liens and
Group 2 consists of adjustable-rate mortgage loans which are secured by first
liens. The Group 2 Mortgage Loans will be subject to annual or semiannual
mortgage rate adjustments after an initial six month or twenty-four month
period, based upon changes in either the One-Year U.S. Treasury Index or the
Six-Month LIBOR Index (each, an "Index") as described herein under "The Mortgage
Pool--Group 2." The Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be entered into as of the Cut-off Date between Superior
Bank FSB, as Depositor and Servicer, and LaSalle National Bank, as Trustee. To
the extent described herein, the Class 1A and Class 2A Certificates are cross-
collateralized so that, in certain circumstances, Excess Spread and principal
collections on a Group will be available to Holders of the Class A Certificates
related to the other Group. Credit enhancement with respect to the Class A
Certificates will be provided in part by the initial overcollateralization
resulting from the sum of the related Original Group Principal Balance and the
related Original Pre-Funded Amount exceeding the related initial Class A
Principal Balance as of the Closing Date.
The Class A Certificates will be unconditionally and irrevocably guaranteed
as to payment of the related Class A Remittance Amount to the extent described
herein on each Remittance Date pursuant to the terms of the Certificate
Insurance Policy to be issued by Financial Guaranty Insurance Company.
Distributions on the Certificates will be made on the 25th day of each
month or, if such day is not a business day, then on the next business day
commencing on July 27, 1998 (each, a "Remittance Date"), to the extent and in
the manner set forth herein.
The yield to investors on the Class A Certificates will be sensitive in
varying degrees to, among other things, the rate and timing of principal
payments (including prepayments) of the Mortgage Loans and, with respect to
Group 2, to the level of the related Index. The yield to maturity of the Class A
Certificates may vary from the anticipated yield to the extent such Certificates
are purchased at a discount or premium and to the extent the rate and timing of
payments thereon is sensitive to prepayments and an increased or decreased rate
of payment of principal. Holders of the Class A Certificates purchased at a
discount should consider the risk that a slower than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield and Holders of Class A Certificates purchased at a premium
should consider the risk that a faster than anticipated rate of principal
payments could result in an actual yield that is lower than the anticipated
yield.
There is currently no secondary market for the Class A Certificates.
Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities
Inc. (the "Underwriters") intend to make a secondary market in the Class A
Certificates, but are not obligated to do so. There can be no assurance that a
secondary market for the Class A Certificates will develop or, if it does
develop, that it will continue.
As a condition of issuance, the Class 1A and Class 2A Certificates will be
rated Aaa by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's
Ratings Services, A Division of the McGraw-Hill Companies, Inc.
As described herein, a real estate mortgage investment conduit ("REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes, exclusive of the Pre-Funding Accounts and the Interest Coverage
Accounts (the "Trust Fund REMIC"). The Class A Certificates will constitute
"regular interests" and the Class R Certificates will constitute the sole class
of "residual interests" in such REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
----------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A
CERTIFICATES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "METHOD OF
DISTRIBUTION" HEREIN.
----------------------------
ADDITIONAL INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Class A Certificates. This Prospectus
S-2
<PAGE>
Supplement and the Prospectus, which forms a part of the Registration Statement,
omit certain information contained in such Registration Statement pursuant to
the Rules and Regulations of the Commission. The Registration Statement and the
exhibits thereto can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and certain of its Regional Offices located as follows: Midwest Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661;
and Northeast Regional Office, Suite 1300, Seven World Trade Center, New York,
New York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the Trust Fund are required under
the Pooling Agreement to be forwarded to holders of the Certificates ("Holders"
or "Certificateholders"). Such reports will not be examined and reported on by
an independent public accountant. See "Description of the Certificates--Reports
to Certificateholders" in the Prospectus.
THE CLASS A CERTIFICATES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED DECEMBER 12, 1997, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
S-3
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Certain capitalized terms used in this Prospectus Supplement are
defined elsewhere herein or in the Prospectus. A listing of the pages on which
some of such terms are defined is found in the "Index of Principal Definitions"
herein and in the Prospectus.
Title of Securities.....................AFC Mortgage Loan Asset Backed
Certificates, Series 1998-2, Class
1A, Class 2A and Class R (the Class
1A and Class 2A Certificates are
referred to herein as the "Class A
Certificates"; the Class A and
Class R Certificates are referred
to herein as the "Certificates";
each such class, a "Class"). The
Certificates will be issued on the
Closing Date pursuant to the
Pooling and Servicing Agreement
(the "Pooling Agreement"), dated as
of the Cut-off Date, by and among
Superior Bank FSB, as Depositor and
Servicer and the Trustee. Only the
Class A Certificates are offered
hereby.
Depositor...............................Superior Bank FSB, a federally
chartered stock savings bank (the
"Depositor"), will deposit into the
Trust Fund mortgage loans
originated or purchased by the
Depositor. See "The Depositor"
herein and in the Prospectus.
Servicer................................Superior Bank FSB (the "Servicer").
See "Pooling Agreement--The
Servicer" herein and "The Servicer"
in the Prospectus.
Trustee.................................LaSalle National Bank, a nationally
chartered bank. See "Pooling
Agreement--The Trustee" herein.
Cut-off Date............................June1, 1998 except with respect to 40 of
the Initial Mortgage Loans
representing approximately 0.928% of
the Initial Mortgage Loans, by
Original Pool Principal Balance, for
which the Cut-off Date is June 3,
1998.
Distributions...........................Distributions on the Certificates will
be made on the 25th day of each month
or, if such day is not a Business
Day, on the first Business Day
thereafter commencing July 27, 1998
(each, a "Remittance Date").
Distributions on each Remittance Date
will be made to Certificateholders of
record as of the Business Day
immediately preceding such Remittance
Date, in the case of the Class A
Certificates, and the last Business
Day of the month preceding the month
of such Remittance Date, in the case
of the Class R Certificates (each, a
"Record Date"), except that the
initial distribution on the Class R
Certificates will be made to
Certificateholders of record as of
the Closing Date and the final
distribution on the Certificates will
be made only upon presentment and
surrender of the Certificates at the
office or agency of the Trustee in
Chicago, Illinois.
Registration of Offered
Certificates...........................Holders of the Certificates may
elect to hold their Certificate
interests through The Depository
Trust Company ("DTC"), in the
United States, or Centrale de
Livraison de Valeurs Mobilieres
S.A. ("Cedel") or the Euroclear
System ("Euroclear"), in Europe.
Transfers within DTC, Cedel or
Euroclear, as the case may be, will
be in accordance with the usual
rules and operating procedures of
the relevant system. Cross-market
transfers between persons holding
directly or indirectly through DTC,
on the one hand, and counterparties
holding directly or indirectly
through Cedel or Euroclear, on the
other, will be effected in DTC
through Citibank, N.A. or The Chase
Manhattan Bank, the relevant
depositaries (collectively, the
"Depositaries") of Cedel or
Euroclear, respectively, and each a
participating member of DTC. The
Certificates will be initially
registered in the name of CEDE &
Co., the nominee of DTC. The
interests of the Certificateholders
will be represented by book-entries
on the records of DTC, its
Participants and Indirect
Participants for the benefit of the
Certificate Owners. Certificates
representing the Class A
Certificates will be issued in
definitive form only under the
limited circumstances described in
the
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus. In the case of the Class
A Certificates, all references herein
to "Holders" or "Certificateholders"
shall reflect the rights of
Certificate Owners as they may
indirectly exercise such rights
through DTC, Cedel, Euroclear and
participating members thereof, except
as otherwise specified in the
Prospectus. See "Risk
Factors-Difficulty in Pledging" and
"-Potential Delays in Receipt of
Distributions" herein and "Risk
Factors" and "Description of the
Certificates--Book-Entry Registration
and Definitive Certificates" in the
Prospectus.
The Class A Certificates................The Class 1A Certificates will have
an initial principal balance of
$266,000,000 (the initial "Class 1A
Principal Balance") as of the date
of initial issuance (the "Closing
Date"), and will accrue interest at
the Class 1A Pass-Through Rate. The
Class 2A Certificates will have an
initial principal balance of
$199,000,000 (the initial "Class 2A
Principal Balance") as of the
Closing Date, and will accrue
interest at the Class 2A
Pass-Through Rate. The Class 1A
Principal Balance and the Class 2A
Principal Balance are collectively
referred to herein as the "Class A
Principal Balance."
Each Class of the Class A Certificates
will represent a senior undivided
ownership interest in a trust fund
(the "Trust Fund") consisting
initially of two pools of Initial
Mortgage Loans (the "Group 1 Initial
Mortgage Loans" and the "Group 2
Initial Mortgage Loans") with an
aggregate principal balance of
$168,503,688.56 with respect to Group
1 and $124,143,590.83 with respect to
Group 2, as of the Cut-off Date,
after giving effect to all payments
due or deferred on or prior to the
Cut-off Date (with respect to Group
1, the "Original Group 1 Principal
Balance"; with respect to Group 2,
the "Original Group 2 Principal
Balance"; collectively, the "Original
Pool Principal Balance"), all
proceeds thereof due after the
Cut-off Date with respect to the
related Initial Mortgage Loans or the
Subsequent Cut-off Date with respect
to the related Subsequent Mortgage
Loans (other than the related
Depositor's Yield as described in the
Prospectus), a Certificate Insurance
Policy, a Pre-Funding Account with
respect to each Group, a trust
account for each Group established
with the Trustee (the "Interest
Coverage Account"), and funds on
deposit in each such account and
certain other property (each such
group of Mortgage Loans and the
related assets, "Group 1", and "Group
2"; each a "Group").
Except to the extent that Group 1 and
Group 2 are cross-collateralized as
described herein under "Description
of the Certificates-Excess Spread,
Overcollateralization and
Cross-Collateralization Provisions",
the Class 1A Certificates are related
to Group 1 and the Class 2A
Certificates are related to Group 2.
Interest Distributions on the
Class A Certificates..................As described herein, on each Remittance
Date, with respect to the Class 1A
Certificates, interest will be paid
at the Class 1A Pass-Through Rate in
an amount equal to interest accrued
during the related Accrual Period on
the Class 1A Principal Balance prior
to giving effect to principal
distributions to be made on such
date.
As described herein, on each Remittance
Date, with respect to the Class 2A
Certificates, interest will be paid
at the Class 2A Pass-Through Rate in
an amount equal to interest accrued
during the related Accrual Period on
the Class 2A Principal Balance prior
to giving effect to principal
distributions to be made on such
date.
The Class 1A Certificates will accrue
interest at the Class 1A Pass-
Through Rate which, for a particular
Remittance Date, will be equal to the
lesser of (i) One-Month LIBOR plus
0.20% per annum, and (ii) the
weighted average of the Mortgage
Rates of the Group 1 Mortgage Loans
minus, with respect to Group 1, the
sum of (a) the Servicing
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
Fee Rate, (b) the rate at which the
monthly premium payable to the
Certificate Insurer is calculated,
and (c) the rate at which the Annual
Trustee Expense Amount is calculated;
provided, however, that on any
Remittance Date on which the Servicer
does not exercise its option to
purchase the Mortgage Loans and REO
Properties as described under
"Pooling Agreement-- Termination;
Purchase of the Mortgage Loans"
herein, the rate described in clause
(i) of this sentence will be One-
Month LIBOR plus 0.60% per annum. For
purposes of calculating the Class 1A
Pass-Through Rate for any Remittance
Date, because most of the Group 1
Mortgage Loans do not provide for the
calculation of interest on an
Actual/360 Basis (which is the basis
on which interest is calculated on
the Class 1A Certificates), the basis
on which interest is computed on the
Group 1 Mortgage Loans will be deemed
adjusted to an Actual/360 Basis that
will result in the same amount of
interest being due as would be due
using the method of computation of
interest that is used to calculate
interest on the Group 1 Mortgage
Loans.
The Class 2A Certificates will accrue
interest at the Class 2A Pass-Through
Rate which, for a particular
Remittance Date will be equal to the
least of (i) One-Month LIBOR plus
0.15% per annum (the rate described
in this clause (i), the "Class 2A
LIBOR Rate"), (ii) the weighted
average of the Mortgage Rates of the
Group 2 Mortgage Loans minus, with
respect to Group 2, the sum of (a)
the Servicing Fee Rate, (b) the rate
at which the monthly premium payable
to the Certificate Insurer is
calculated, and (c) the rate at which
the Annual Trustee Expense Amount is
calculated (the rate described in
this clause (ii), the "Available
Funds Cap Rate") and (iii) the
weighted average of the Maximum
Mortgage Rates of the Group 2
Mortgage Loans minus, with respect to
Group 2, the sum of (a) the Servicing
Fee Rate, (b) the rate at which the
monthly premium payable to the
Certificate Insurer is calculated,
and (c) the rate at which the Annual
Trustee Expense Amount is calculated
(the rate described in this clause
(iii), the "Class 2A Cap Rate");
provided, however, that on any
Remittance Date on which the Servicer
does not exercise its option to
purchase the Mortgage Loans and REO
Properties as described under
"Pooling Agreement--Termination;
Purchase of the Mortgage Loans"
herein, the rate described in clause
(i) of this sentence will be One-
Month LIBOR plus 0.55% per annum. For
purposes of calculating the Class 2A
Pass-Through Rate for any Remittance
Date, because most of the Group 2
Mortgage Loans provide for the
calculation of interest on a basis
other than an Actual/360 Basis (which
is the basis on which interest is
calculated on the Class 2A
Certificates), the basis on which
interest is computed on the Group 2
Mortgage Loans will be deemed
adjusted to an Actual/360 Basis that
will result in the same amount of
interest being due as would be due
using the method of computation of
interest that is used to calculate
interest on the Group 2 Mortgage
Loans.
The Pooling Agreement also provides that
on any Remittance Date on which the
Class 2A Pass-Through Rate is based
on the Available Funds Cap Rate, the
excess of (i) that amount of interest
the Holders of Class 2A Certificates
would be entitled to receive on such
Remittance Date had interest been
calculated based on the Class 2A
LIBOR Rate (but in no event exceeding
the Class 2A Cap Rate), over (ii) the
amount of interest Class 2A
Certificateholders will receive on
such Remittance Date at the Available
Funds Cap Rate, will be carried
forward and paid on a subordinated
basis to the extent of Remaining Net
Excess Spread with respect to Group
2, as described below, to the Holders
of Class 2A Certificates on future
Remittance Dates and such amount
shall accrue interest at the then
applicable Class 2A Pass- Through
Rate, until paid or until the related
Class 2A
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Principal Balance has been reduced
to zero (the amount of such excess,
together with such accrued
interest, the "Available Funds Cap
Carry Forward Amount").
Interest payable with respect to each
Remittance Date on the Class 1A and
the Class 2A Certificates will accrue
during the period commencing on the
Remittance Date of the immediately
preceding month and ending on the day
immediately preceding the related
Remittance Date, except that with
respect to the first Remittance Date
interest payable on the Class 1A and
the Class 2A Certificates will accrue
during the period commencing on the
Closing Date and ending on the day
immediately preceding the first
Remittance Date (each such period, an
"Accrual Period"). All calculations
of interest on the Class 1A and the
Class 2A Certificates will be
computed on the basis of the actual
number of days elapsed in the Accrual
Period and a 360-day year
("Actual/360 Basis"). One-Month LIBOR
will be determined on the second
Business Day preceding the beginning
of each Accrual Period.
Principal Distributions on the
Class A Certificates..................As to any Group, Holders of the
related Class A Certificates will
be entitled to receive on each
Remittance Date (subject to the
next succeeding paragraph)
distributions in respect of
principal (the "Class A Principal
Remittance Amount") in the
respective amounts and order of
priority described herein, to the
extent of the related Amount
Available, if the Remittance Date
is prior to the related Cross-Over
Date, or to the extent of the
related Net Excess Amount
Available, if the Remittance Date
is on or after the related
Cross-Over Date, remaining after
interest distributions on the
related Classes of Class A
Certificates, and to the extent of
the amount required to reach the
related Required
Overcollateralization Amount with
respect to such Group and,
thereafter, to maintain the
Required Overcollateralization
Amount but not to exceed the
related Class A Principal Balance
then outstanding, plus any amounts
described in clauses (iv) (if such
amounts represent prior Insured
Payments with respect to such Group
or interest thereon) and (v) below.
The "Required Overcollateralization
Amount" for any Group is the
Overcollateralization Amount
required by the Certificate Insurer
with respect to such Group.
As more fully described herein,
distributions allocable to principal
on the Class A Certificates will
generally include (i) the principal
portion of all scheduled and
unscheduled payments received on the
Mortgage Loans in the related Group
during the period beginning on the
second day of the month immediately
preceding the month of the Remittance
Date and ending on the first day of
the month of the Remittance Date (the
"Due Period"), including prepayments,
the proceeds of any related insurance
policy ("Insurance Proceeds"),
proceeds received in connection with
the liquidation of defaulted Mortgage
Loans in the related Group, 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"), but
exclusive of the principal portions
of any Deferred Payments subsequently
paid by the related Mortgagor, (ii)
the principal portion of all proceeds
deposited into the Principal and
Interest Account with respect to such
Group in connection with the
repurchase or substitution of
Mortgage Loans in the related Group
for which there is defective loan
documentation or a breach of a
representation or warranty, (iii) the
Unrecovered Class A Portion with
respect to such Group, (iv) the Class
A Carry-Forward Amount with respect
to such Group, (v) any Mortgagor
payments on related Mortgage Loans or
Advances with respect to such Group
which are recovered prior to the
expiration date
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
of the Certificate Insurance Policy
from Holders of the related Class A
Certificates as a voidable
preference pursuant to a final,
non-appealable order under the
United States Bankruptcy Code (a
"Preference Amount") and (vi) any
additional amount which may be
required so that the Class 1A or
Class 2A Principal Balance for such
Remittance Date will equal the
related Scheduled Class A Principal
Balance. In addition, on any
Remittance Date prior to the
Cross-Over Date, to the extent not
previously distributed as described
herein, Excess Spread, Remaining
Net Excess Spread and Net Excess
Principal will be distributable on
account of principal to Holders of
the Class A Certificates to the
extent available and necessary to
reach, and thereafter maintain, the
Required Overcollateralization
Amount with respect to such Group.
See "Description of the
Certificates--Allocation of Amount
Available" and "--Excess Spread,
Overcollateralization and Cross-
Collateralization Provisions"
herein.
The Certificate Insurer, as subrogee of
the Class A Certificateholders to the
extent of Insured Payments, will be
entitled to any payments on the
related Class A Certificates in
respect of that portion of the
related Class A Carry-Forward Amount
representing amounts previously
covered by Insured Payments and
interest accrued thereon. See
"Description of the
Certificates--Allocation of Amount
Available" and "The Certificate
Insurer and the Certificate Insurance
Policy" herein.
The Class A Principal Remittance Amount
with respect to each Group will be
distributed to the Holders of the
related Class A Certificates until
the related Class A Principal Balance
is reduced to zero.
Mandatory Prepayments on Class A
Certificates..........................Each Class of the Class A Certificates
will be prepaid in part, on a pro
rata basis among the Certificates in
each Class in proportion to its
Principal Balance, on the September
25, 1998 Remittance Date in the event
that any amount remains on deposit in
the related Pre-Funding Account on
such Remittance Date after the
purchase by the Trust Fund of
Subsequent Mortgage Loans, if any,
with respect to the related Group.
Although no assurance can be given,
it is anticipated by the Depositor
that the principal amount of
Subsequent Mortgage Loans purchased
by the Trust Fund will require the
application of substantially all of
the Original Pre-Funded Amounts and
that there should be no material
amount of principal prepaid to the
related Class A Certificateholders
from the related Pre-Funding Account.
However, it is unlikely that the
Depositor will be able to deliver
Subsequent Mortgage Loans with an
aggregate principal balance identical
to the related Original Pre-Funded
Amount.
Excess Spread,
Overcollateralization
and Cross-Collateralization...........On any Remittance Date prior to the
Cross-Over Date with respect to a
particular Group, Holders of the
Class 1A and Class 2A Certificates
will have a right to 100% of the
related Excess Spread to fund the
amount by which the related Class A
Remittance Amount with respect to the
related Class A Certificates exceeds
the related Available Remittance
Amount for such Remittance Date. To
the extent available, the Net Excess
Spread and Excess Principal with
respect to a Group will then be
applied to cover any Available Funds
Shortfall with respect to the other
Group.
In addition, on any Remittance Date
prior to the Cross-Over Date on which
the Overcollateralization Amount for
a Group is less than the Required
Overcollateralization Amount for such
Group, the Remaining Net Excess
Spread for such Group plus the
Available Transfer Cashflow, if any,
and the Net Excess Principal, if any,
will be used to make additional
distributions of principal on the
related
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
Class of Class A Certificates until
such Overcollateralization Amount
equals the related Required
Overcollateralization Amount for
such Group.
The Pooling Agreement also provides
that, on each Remittance Date, the
balance of the Excess Spread for
Group 2 remaining after all
distributions for such Remittance
Date are made, other than the
distribution to the Class R
Certificateholders, will be used to
pay the Available Funds Cap Carry
Forward Amounts in respect of the
Class 2A Certificates for such
Remittance Date, if any.
Credit enhancement with respect to the
Class 1A Certificates will be
provided in part by the initial
Overcollateralization Amount for
Group 1 resulting from the sum of the
Original Group 1 Principal Balance
and the Original Group 1 Pre-Funded
Amount exceeding the initial Class 1A
Principal Balance as of the Closing
Date. On the Closing Date, the
initial Overcollateralization Amount
with respect to Group 1 is expected
to be approximately $2,958,543.98,
equal to 1.10% of the sum of the
Original Group 1 Principal Balance
and the Original Group 1 Pre-Funded
Amount. See "Description of the
Certificates- Excess Spread,
Overcollateralization and
Cross-Collateralization Provisions"
herein.
Credit enhancement with respect to the
Class 2A Certificates will be
provided in part by the initial
Overcollateralization Amount for
Group 2 resulting from the sum of the
Original Group 2 Principal Balance
and the Original Group 2 Pre-Funded
Amount exceeding the initial Class 2A
Principal Balance as of the Closing
Date. On the Closing Date, the
initial Overcollateralization Amount
with respect to Group 2 is expected
to be approximately $4,372,508.94,
equal to 2.15% of the sum of the
Original Group 2 Principal Balance
and the Original Group 2 Pre-Funded
Amount. See "Description of the
Certificates-Excess Spread,
Overcollateralization and Cross-
Collateralization Provisions" herein.
Prior to the related Cross-Over Date,
Excess Spread with respect to a Group
will be applied first, to cover any
Available Funds Shortfall with
respect to such Group, second, to
cover any Available Funds Shortfall
with respect to the other Group,
third, to pay the amount of any
related accrued and unpaid Annual
Trustee Expense Amount, fourth, to
reach and maintain the Required
Overcollateralization Amounts for
such Group, if necessary, fifth, to
reach and maintain the Required
Overcollateralization Amounts for the
other Group, if necessary, sixth,
with respect to the related Group, to
reimburse the Servicer for amounts to
which it is entitled under the
Pooling Agreement, and seventh, with
respect to Group 2 to pay the
Available Funds Cap Carry Forward
Amounts, if any, to the Holders of
Class 2A Certificates on a pro rata
basis among such Certificateholders,
and to distribute any remaining
amounts to the Class R
Certificateholders. After the
Cross-Over Date with respect to a
particular Group, related Excess
Spread will be applied first, to
cover any Available Funds Shortfall
with respect to the related Group,
second, to cover any Available Funds
Shortfall with respect to the other
Group, third, to pay the amount of
any related accrued and unpaid Annual
Trustee Expense Amount, fourth, to
reach and maintain the Required
Overcollateralization Amounts for the
other Group, if necessary, fifth,
with respect to the related Group, to
reimburse the Servicer for amounts to
which it is entitled under the
Pooling Agreement, and sixth, with
respect to Group 2, to pay the
Available Funds Cap Carry Forward
Amounts, if any, to the Holders of
Class 2A Certificates on a pro rata
basis among such Certificateholders,
and to distribute any remaining
amounts to the Class R
Certificateholders.
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
The "Net Excess Spread" for a Group is
the Excess Spread for such Group
remaining after the application
thereof to cover Required
Payments with respect to such Group
(other than in respect of the related
Class A Principal Remittance Amount
after the related CrossOver Date). An
"Available Funds Shortfall" with
respect to any Group means the amount
by which the Available Remittance
Amount plus Excess Spread for such
Group is less than the Required
Payments (other than in respect of
the related Class A Principal
Remittance Amount after the related
Cross-Over Date) for such Group. The
"Required Payments" with respect to
any Group means the amount required
to pay the related Class A Interest
Remittance Amount with respect to the
related outstanding Class A
Certificates, the related Class A
Principal Remittance Amount with
respect to the related outstanding
Class A Certificates, the related
Annual Trustee Expense Amount and the
related monthly premium payable to
the Certificate Insurer. The
"Remaining Net Excess Spread" for a
Group is the Net Excess Spread for
such Group remaining after the
application thereof to cover an
Available Funds Shortfall with
respect to the other Group. The
"Available Transfer Cashflow" for
each Group is the Remaining Net
Excess Spread for the other Group
remaining after the payment, if any,
of Additional Principal on the Class
A Certificates related to such other
Group. The "Net Excess Principal" for
a Group is the Excess Principal for
such Group remaining after the
application thereof to cover an
Available Funds Shortfall with
respect to the other Group. The
"Excess Principal" for a Group will
equal the lesser of (i) the portion,
if any, of the Available Principal
Amount for such Group that is not
required to be included in the
related Class A Principal Remittance
Amount for such Group for such
Remittance Date as a result of the
application of clause (a) of the
related definition of "Class A
Principal Remittance Amount" and (ii)
the amount of such portion described
in clause (i) remaining after the
application of the related Available
Remittance Amount to cover the
Required Payments for such Group. The
"Available Principal Amount" for a
Group will equal the excess of the
amount described in the related
definition of "Class A Principal
Remittance Amount" without giving
effect to clause (a) thereof over the
amount described in the definition of
"Class A Principal Remittance Amount"
after giving effect to clause (a)
thereof. The "Additional Principal"
for any Class of Class A Certificates
will equal the lesser of (i) the
amount necessary to reduce the
related Class A Principal Balance so
that the Overcollateralization Amount
for the related Group equals the
Required Overcollateralization Amount
for such Group and (ii) the sum of
(a) the Remaining Net Excess Spread
for the related Group, (b) the
Available Transfer Cashflow for such
Group and (c) the Net Excess
Principal for such Group.
The "Overcollateralization Amount" for a
Group will equal the excess, if any,
of (i) the sum of (a) the principal
balance of the related Group and (b)
the related Pre-Funding Amount over
(ii) the Class A Principal Balance
with respect to the related Class of
Class A Certificates, after giving
effect to the distributions of the
related Class A Principal Remittance
Amount on such Remittance Date. See
"Description of the
Certificates--Excess Spread,
Overcollateralization and Cross-
Collateralization Provisions" and
"--Allocation of Amount Available"
herein.
Certificate Insurance Policy............Financial Guaranty Insurance
Company, a New York stock insurance
corporation (the "Certificate
Insurer"), will issue a certificate
insurance policy (the "Certificate
Insurance Policy") pursuant to
which it will irrevocably and
unconditionally guarantee payment
to the Holders of the Class A
Certificates of the related Class A
Remittance Amount. The Certificate
Insurer only insures the timely
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
receipt of interest on the Class A
Certificates and the ultimate
receipt of principal on the Class A
Certificates. The Certificate
Insurer does not guarantee (i) any
rate of principal payments on the
Class A Certificates, other than
that set forth in the Principal
Payment Tables attached as an
exhibit to the Pooling Agreement
and provided by the Certificate
Insurer, (ii) any recovery of
payments deemed voidable
preferences under state law, (iii)
the payment of the purchase price
by the Depositor in connection with
the purchase of Mortgage Loans due
to defective documentation or a
breach of representation or
warranty or (iv) the payment of any
Available Funds Cap Carry Forward
Amount with respect to the Class 2A
Certificates for any Remittance
Date. The Certificate Insurer will
only be required to make one
Insured Payment with respect to
each Group and related Class of
Certificates relating to a
particular Remittance Date, and no
Holder of a Class A Certificate
shall be entitled to reimbursement
for any payment voided as a
preference as to which the
Certificate Insurer made a payment
under the Certificate Insurance
Policy. See "The Certificate
Insurer and the Certificate
Insurance Policy" herein.
Pursuant to the Pooling Agreement, the
Certificate Insurer will be
subrogated to the rights of the
Holders of the related Class A
Certificates to receive any payments
on such Certificates to the extent of
payments under the Certificate
Insurance Policy which remain
unreimbursed and interest accrued
thereon at the related Class A
Pass-Through Rate.
The Mortgage Pool.......................The Mortgage Pool initially will
consist primarily of two groups of
conventional Mortgage Loans (with
respect to Group 1, the "Group 1
Initial Mortgage Loans"; with
respect to Group 2, the "Group 2
Initial Mortgage Loans";
collectively, the "Initial Mortgage
Loans") evidenced by promissory
notes (the "Mortgage Notes")
secured by mortgages, deeds of
trust or other similar security
instruments (the "Mortgages")
creating a first or second lien on
one- to four-family residential
properties, units in planned unit
developments, individual
condominium units and manufactured
homes ("Single Family Properties"),
residential properties consisting
of five or more dwelling units
("Multifamily Properties"),
commercial properties ("Commercial
Properties") and mixed residential
and commercial structures ("Mixed
Use Properties"; collectively with
Single Family Properties,
Multifamily Properties and
Commercial Properties, the
"Mortgaged Properties"). Group 1 of
the Mortgage Pool will consist of
fixed-rate mortgage loans which are
secured by first and second liens
on Single Family Properties,
Multifamily Properties, Commercial
Properties and Mixed Use
Properties. Group 2 of the Mortgage
Pool will consist of
adjustable-rate mortgage loans
which are secured by first liens on
Single Family Properties. See "The
Mortgage Pool" herein.
Pursuant to the Pooling Agreement, the
Depositor has committed to sell, and
the Trust Fund will be obligated to
purchase from the Depositor, on or
before September 23, 1998, additional
Mortgage Loans (with respect to Group
1, the "Group 1 Subsequent Mortgage
Loans"; with respect to Group 2, the
"Group 2 Subsequent Mortgage Loans";
collectively, the "Subsequent
Mortgage Loans"), subject to certain
conditions described herein. See "The
Mortgage Pool" herein.
Mortgage Rate of Group 2
Mortgage Loans........................As described under "The Mortgage
Pool--Group 2", the Group 2 Mortgage
Loans have Mortgage Rates subject to
annual or semiannual adjustment after
an initial six month or twenty-four
month period, to equal the sum,
rounded to the nearest 0.125%, of the
related Index and the Gross Margin
for such Mortgage Loan, subject to
the effects of any applicable
Periodic Rate Cap, Maximum Mortgage
Rate or Minimum Mortgage Rate.
Approximately 100% of
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
the Group 2 Mortgage Loans were
originated with an initial Mortgage
Rate below the sum of the related
Index and the Gross Margin, rounded
as described herein.
Pre-Funding Accounts....................The Trustee will establish a Pre-Funding
Account with respect to each Group
(with respect to Group 1, the "Group
1 Pre-Funding Account"; with respect
to Group 2, the "Group 2 Pre-Funding
Account"; each, a "Pre-Funding
Account") into which it will deposit
upon receipt from the Depositor,
$100,454,855.42 with respect to Group
1 (the "Original Group 1 Pre-Funded
Amount") and $79,228,918.11 with
respect to Group 2 (the "Original
Group 2 Pre-Funded Amount", together
with the Original Group 1 Pre-Funded
Amount, the "Original Pre-Funded
Amounts"). The Original Pre-Funded
Amounts will be reduced during the
Funding Period by the amount thereof
used to purchase the related
Subsequent Mortgage Loans in
accordance with the Pooling Agreement
(on any date of determination, the
related Original Pre-Funded Amount as
so reduced, the "Group 1 Pre-Funded
Amount" or the "Group 2 Pre-Funded
Amount"). See "The Mortgage
Pool-Group 1-Conveyance of Group 1
Subsequent Mortgage Loans and the
Group 1 Pre-Funding Account", "-Group
2-Conveyance of Group 2 Subsequent
Mortgage Loans and the Group 2
Pre-Funding Account" herein.
Index...................................The Index applicable to the initial
Adjustment Date and any annual or
semiannual Adjustment Date thereafter
for a Group 2 Mortgage Loan will be,
(i) with respect to approximately
0.14% of the Group 2 Mortgage Loans
(by Original Group 2 Principal
Balance), a per annum rate equal to
the weekly average yield on United
States Treasury Securities adjusted
to a constant maturity of one year as
published in the Federal Reserve
Statistical Release H.15 (519), as
most recently announced as of a date
45 days prior to such Adjustment Date
(the "One-Year U.S. Treasury Index";
such Mortgage Loans, the "One-Year
U.S. Treasury Loans"), and (ii) with
respect to approximately 99.86% of
the Group 2 Mortgage Loans (by
Original Group 2 Principal Balance),
a per annum rate equal to the average
of interbank offered rates for
six-month U.S. dollar-denominated
deposits in the London market based
on quotations of major banks as
published in The Wall Street Journal
and as most recently available as of
the date specified in the related
Mortgage Note (the "Six-Month LIBOR
Index"; such Mortgage Loans, the
"Six-Month LIBOR Loans"). In the
event that the related Index
specified in a Mortgage Note is no
longer available, the Servicer will
select an alternative index for
mortgage loans on Single Family
Properties, based upon comparable
information, over which it has no
control and which is readily
verifiable by mortgagors. See "The
Mortgage Pool--Group 2" herein.
Optional Termination
by the Servicer.......................On any Remittance Date on which the
outstanding aggregate principal
balance of the Mortgage Loans in the
Trust Fund is less than or equal to
5% of the sum of the Original Pool
Principal Balance and the Original
Pre-Funded Amounts, the Servicer may
purchase all of the Mortgage Loans
and REO Properties from the Trust
Fund at a price equal to the
Termination Price. See "Pooling
Agreement-- Termination; Purchase of
Mortgage Loans" herein and
"Description of the
Certificates--Termination" in the
Prospectus.
Servicing of the Mortgage
Loans.................................The Servicer will be responsible
for the servicing of the Mortgage
Loans and will, except as provided
below, be entitled to a fee equal
to 0.65% per annum (the "Servicing
Fee Rate") of the principal balance
of each Mortgage Loan (the
"Servicing Fee"), calculated and
payable monthly from interest
actually received by the Servicer
on the Mortgage Loans, as described
herein. The Servicer is obligated
to make cash advances (each an
"Advance") in respect of delinquent
payments of interest on the
Mortgage Loans and REO Properties,
subject to the limitations
described herein. The Trustee will
be obligated to
- --------------------------------------------------------------------------------
S-12
<PAGE>
- --------------------------------------------------------------------------------
make Advances if the Servicer
fails in its obligation to do so to
the extent provided in the Pooling
Agreement. See "Description of the
Certificates--Advances" herein.
Certain Legal Aspects of the
Group 1 Mortgage Loans
and Group 2 Mortgage Loans............Approximately 3.24%, 0.39% and
1.76% of the Group 1 Initial
Mortgage Loans, by Original Group 1
Principal Balance are secured by
Multifamily Properties, Commercial
Properties and Mixed Use
Properties, respectively. For a
discussion of the risks associated
with multifamily properties,
commercial properties and mixed use
properties, see "Risk Factors"
herein and in the Prospectus and
"Certain Legal Aspects of Mortgage
Loans" in the Prospectus.
Approximately 2.89% of the Group 1
Initial Mortgage Loans, by Original
Group 1 Principal Balance and
approximately 2.83% of the Group 2
Initial Mortgage Loans by Original
Group 2 Principal Balance are secured
by permanently affixed Manufactured
Homes (as defined in the Prospectus,
and the related loans "Manufactured
Home Loans"). For a discussion of the
risks associated with manufactured
homes, see "Risk Factors" herein and
in the Prospectus and "Certain Legal
Aspects of Mortgage Loans" in the
Prospectus.
Approximately 24.24% of the Group 1
Initial Mortgage Loans, by Original
Group 1 Principal Balance, are
secured by second mortgages which are
subordinate to a mortgage lien on
such Group 1 Mortgage Loan (such
senior lien, a "First Lien"). For a
discussion of the risks associated
with second mortgage loans, see "Risk
Factors" herein and in the Prospectus
and "Certain Legal Aspects of
Mortgage Loans" in the Prospectus.
Approximately 25.33% of the Group 1
Initial Mortgage Loans, by Original
Group 1 Principal Balance, provide
for the payment of the unamortized
principal balance of the Group 1
Initial Mortgage Loan in a single
payment at the maturity of the Group
1 Initial Mortgage Loan that is
substantially greater than the
preceding monthly payment (the
"Balloon Loans"). None of the Group 2
Initial Mortgage Loans, by Original
Group 2 Principal Balance, are
Balloon Loans. For a discussion of
the risks associated with Balloon
Loans, see "Risk Factors" herein and
in the Prospectus.
Approximately 21.71% of the Group 1
Initial Mortgage Loans, by Original
Group 1 Principal Balance provide for
substantially equal payments to be
made every 28 days (each, a "Periodic
Payment" and each such loan, a
"Periodic Payment Loan"), each of
which may have an increased final
payment (balloon payment). For a
discussion of the risks associated
with Periodic Payment Loans, see
"Risk Factors" herein.
Ratings.................................As a condition of issuance, the
Class 1A and Class 2A Certificates
will be rated Aaa by Moody's
Investors Service, Inc. ("Moody's")
and "AAA" by Standard & Poor's
Ratings Services, A Division of The
McGraw-Hill Companies, Inc.
("Standard & Poor's"). The security
ratings of the Class 1A and Class
2A Certificates should be evaluated
independently from similar ratings
on other types of securities. A
security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time
by the rating agencies. In general,
ratings address credit risk and do
not address the likelihood or rate
of prepayments. In addition, the
ratings by Moody's and S&P will not
address the likelihood of any
Available Funds Cap Carry Forward
Amount being paid to the Class 2A
- --------------------------------------------------------------------------------
S-13
<PAGE>
Certificateholders. See "Ratings"
herein and in the Prospectus, and
"Risk Factors--Limited Nature of
Ratings" in the Prospectus.
Certain Federal Income Tax
Consequences..........................A real estate mortgage investment
conduit ("REMIC") election will be
made with respect to the Trust Fund
REMIC for federal income tax
purposes. Upon the issuance of the
Class A Certificates, Thacher
Proffitt & Wood, counsel to the
Depositor, will deliver its opinion
generally to the effect that,
assuming compliance with all
provisions of the Pooling Agreement,
for federal income tax purposes, the
Trust Fund REMIC will qualify as a
REMIC under Sections 860A through
860G of the Internal Revenue Code of
1986 (the "Code").
For federal income tax purposes, the
Class R Certificates will be the sole
Class of "residual interests" and the
Class A Certificates will be the
"regular interests" in such REMIC and
will generally be treated as debt
instruments of the Trust Fund REMIC.
For federal income tax information
reporting purposes, the Class A
Certificates will not be treated as
having been issued with original
issue discount. With respect to the
Class 1A Certificates, the prepayment
assumptions that will be used in
determining the rate of accrual of
market discount and premium, if any,
for federal income tax purposes will
be 2% per annum of the then
outstanding principal balance of the
Group 1 Mortgage Loans in the first
month of the life of the Group 1
Mortgage Loans and an additional 1.2%
per annum in each month thereafter
until the twenty-first month and in
each month thereafter during the life
of the Group 1 Mortgage Loans, 26%
per annum each month. With respect to
the Class 2A Certificates, the
prepayment assumption that will be
used in determining the rate of
accrual of market discount and
premium, if any, for federal income
tax purposes will be 28% CPR. No
representation is made that the
Mortgage Loans will prepay at these
rates or at any other rate.
In general, the Class A Certificates
will be treated as assets described
in Section 7701(a)(19)(C) of the
Code, "real estate assets" under
Section 856(c)(4)(A) of the Code
generally in the same proportion that
the assets of the Trust Fund REMIC
would be so treated. Moreover, if 95%
or more of such assets qualify for
any of the foregoing treatments at
all times during a calendar year, the
Class A Certificates will qualify for
the corresponding status in their
entirety for that calendar year. In
addition, the Class A Certificates
will be "qualified mortgages" within
the meaning of Section 860G(a)(3) of
the Code. In addition, interest on
the Class A Certificates will be
treated as "interest on obligations
secured by mortgages on real
property" under Section 856(c)(3)(B)
of the Code generally to the extent
that such Class A Certificates are
treated as "real estate assets" under
Section 856(c)(4)(A) of the Code.
Amounts held in the Trustee Expense
Accounts and the Reserve Accounts may
not be treated as assets described in
the foregoing sections of the Code.
In addition, to the extent that the
Mortgage Loans represent loans
secured by mixed residential and
commercial structures, such loans
will be treated as assets described
in Section 7701(a)(19)(C) of the Code
only if the residential use of the
property securing such loans exceeds
80% of the property's entire use. See
"Certain Federal Income Tax
Consequences--REMICs--
Characterization of Investments in
REMIC Certificates" in the
Prospectus.
Prospective investors are advised to
consult their own tax advisors
concerning the federal income tax
characterization of an investment in
the Certificates.
Forfurther information regarding the
federal income tax consequences of
investing in the Class A
Certificates, see "Certain Federal
Income Tax Consequences" herein and
in the Prospectus.
- --------------------------------------------------------------------------------
S-14
<PAGE>
- --------------------------------------------------------------------------------
ERISA Considerations....................A fiduciary of any employee benefit
plan or other retirement
arrangement, and any other entity
that may be deemed to be investing
plan assets, including insurance
companies, as applicable, subject to
the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should
carefully review with its legal
advisors whether the purchase or
holding of Class A Certificates could
give rise to a transaction prohibited
or not otherwise permissible under
ERISA or the Code. The U.S.
Department of Labor has issued
individual exemptions, Prohibited
Transaction Exemption 90-29 to
Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Prohibited
Transaction Exemption 90-23 to J.P.
Morgan Securities Inc. (the
"Exemptions"). It is believed that
the Exemptions would generally exempt
from the application of certain of
the prohibited transaction provisions
of ERISA, and the excise taxes
imposed on such prohibited
transactions by Section 4975(a) and
(b) of the Code and Section 502(i) of
ERISA, transactions relating to the
purchase, sale and holding of
pass-through certificates such as the
Class A Certificates and the
servicing and operation of asset
pools such as the Mortgage Pool,
provided that certain conditions are
satisfied. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment........................Although at their initial issuance
the Class 1A Certificates will be
rated Aaa by Moody's and "AAA" by
Standard & Poor's, the Class 1A
Certificates will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA") because Group 1 includes
Mortgage Loans which are secured by
second liens.
The Class 2A Certificates will not
constitute "mortgage related
securities" for purposes of SMMEA
until such time as the balance of the
related Pre-Funding Account is
reduced to zero, which is expected to
occur on or before September 25,
1998. At such time, the Class 2A
Certificates will constitute
"mortgage related securities" for
purposes of SMMEA so long as they are
rated in one of the two highest
rating categories by at least one
nationally recognized statistical
rating organization.
Institutions whose investment activities
are subject to review by federal and
state regulatory authorities should
consult with their counsel or the
applicable authorities to determine
whether an investment in any Class 1A
or Class 2A Certificate complies with
applicable guidelines, policy
statements or restrictions. See
"Legal Investment" herein and in the
Prospectus.
- --------------------------------------------------------------------------------
S-15
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Class A Certificates:
LIMITED LIQUIDITY
There is currently no secondary market for the Class A Certificates. While
the Underwriters currently intend to make a secondary market in the Class A
Certificates, they are under no obligation to do so. There can be no assurance
that a secondary market for the Class A Certificates will develop or, if it does
develop, that it will provide Holders of Class A Certificates with liquidity of
investment or that it will continue for the life of the Class A Certificates.
The Class A Certificates will not be listed on any securities exchange.
DIFFICULTY IN PLEDGING
Since transactions in Class A Certificates can be effected only through
DTC, Cedel or Euroclear, their Participants and Indirect Participants, the
ability of a Certificate Owner to pledge a Class A Certificate to persons or
entities that do not participate in the DTC, Cedel or Euroclear systems, or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing such Certificates. See "Description
of the Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
POTENTIAL DELAYS IN RECEIPT OF DISTRIBUTIONS
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants which will thereafter credit
them to the accounts of Certificate Owners either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
CERTAIN RISKS OF THE MORTGAGE LOANS
Group 1
Approximately 18.55%, 12.88%, 7.70% and 5.11% of the Group 1 Initial
Mortgage Loans, by Original Group 1 Principal Balance, are located in New York,
Florida, Pennsylvania and California, respectively.
Considerable uncertainty exists with respect to the regional economies and
real estate markets. In addition, regardless of its location, manufactured
housing generally depreciates in value. Accordingly, when coupled with a
deteriorating real estate market in a particular region, the value of the
mortgaged property improved by a manufactured home could be or become lower than
the outstanding principal balance of the mortgage loans it secures.
Approximately 3.24% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, are secured by residential properties consisting of
five or more dwelling units ("Multifamily Properties", and the related loans,
"Multifamily Loans"). Approximately 0.39% of the Group 1 Initial Mortgage Loans,
by Original Group 1 Principal Balance, are secured by commercial properties
("Commercial Properties", and the related loans, "Commercial Loans").
Approximately 1.76% of the Group 1 Initial Mortgage Loans are secured by mixed
residential and commercial structures ("Mixed Use Properties", and the related
loans, "Mixed Use Loans"). Multifamily Loans, Commercial Loans and Mixed Use
Loans are generally viewed as exposing the lender to a greater risk of loss than
Mortgage Loans secured by one- to four-family residential properties, units in
planned unit developments, individual condominium units or manufactured homes
("Single Family Properties", and the related loans, "Single Family Loans").
Multifamily lending, commercial lending and mixed use lending typically involves
larger loans, and repayment is typically dependent upon the successful operation
of the related mortgaged property. Income from and the market value of the
mortgaged property would be adversely affected if space in the mortgaged
property could not be leased, if tenants were unable to meet their obligations
or if for any other reason rental payments could not be collected. Successful
operation of an income-producing mortgaged property is dependent upon, among
other factors, economic conditions generally and in the geographic area,
operating costs and the performance of the management agent, if any. In some
cases, that operation may be subject to circumstances outside the control of the
borrower or lender, including but not limited to the quality or stability of
surrounding neighborhoods, the development of competing properties or
businesses, maintenance expenses (including energy costs), rent control or
stabilization laws and changes in the tax laws. If the cash flow from a
particular mortgaged property is reduced (for example, if leases are not
renewed, if tenants default or if rental rates decline), the borrower's ability
to repay the loan may be impaired and the resale value of the particular
property may decline. For further information regarding the primary risk to
holders of Mortgage Loans secured by multifamily properties, commercial
properties and mixed use properties, see "Risk Factors" and "Certain Legal
Aspects of Mortgage Loans" in the Prospectus.
S-16
<PAGE>
Approximately 2.89% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance are secured by a lien on real estate to which a
Manufactured Home (as defined in the Prospectus) is deemed permanently affixed.
Under the laws of most states, a Manufactured Home that has been permanently
attached to its site becomes subject to real estate title and recording laws. In
order to perfect a security interest in a Manufactured Home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the Uniform Commercial Code or record a real estate
mortgage or deed of trust under the real estate laws of the state where the home
is located. Such filing or recordation must be made in the real estate records
office of the county where the Manufactured Home is located. With respect to the
Manufactured Home Loans, the Depositor records or causes to be recorded a real
estate mortgage or deed of trust where the related Manufactured Home is located.
The Depositor also obtains a manufactured housing unit (ALTA 7) endorsement from
each title insurer of a Manufactured Home Loan stating that the insurer agrees
that the related manufactured housing unit is included within the term "land"
when used in the title policy. If however, the Manufactured Home is deemed not
permanently attached to the real estate, under the laws of most states, it will
be considered personal property and perfection of a security interest in such
Manufactured Home is effected, depending on applicable state law, either by
noting the security interest on the certificate of title for the Manufactured
Home or by filing a financing statement under the Uniform Commercial Code with
the office of the Secretary of State and, in some states, the office of the
county clerk of the state where the home is located. Consequently, if a
determination is made that the Manufactured Home is considered personal
property, other parties could obtain an interest in the Manufactured Home which
is prior to the security interest retained by the Trust Fund.
See "Certain Legal Aspects of Mortgage Loans - Contracts" in the Prospectus.
Approximately 24.24% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, are secured by second liens, and the related First
Liens are not included in the Mortgage Pool. The weighted average of the Second
Mortgage Ratios for Group 1 Initial Mortgage Loans secured by second liens on
real property is approximately 33.51%. The "Second Mortgage Ratio" for each
Group 1 Initial Mortgage Loan secured by a second lien is calculated as the
outstanding principal balance of such Group 1 Initial 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 Group 1 Initial Mortgage
Loan and (ii) the outstanding principal balance as of the Cut-off Date of such
Group 1 Initial Mortgage Loan. For further information regarding the primary
risk to holders of Mortgage Loans secured by second liens see "Risk
Factors--Risks Associated with the Mortgage Loans and Mortgaged Properties" and
"Certain Legal Aspects of Mortgage Loans" in the Prospectus.
All of the Group 1 Initial Mortgage Loans have been originated since
October 31, 1996. No Group 1 Initial Mortgage Loan has an unexpired term to
maturity as of the Cut-off Date of less than approximately 53.23 months. The
weighted average remaining term to maturity of the Group 1 Initial Mortgage
Loans as of the Cut-off Date is approximately 237.23 months. The rate of default
of second mortgage loans may be greater than that of mortgage loans secured by
first liens on comparable properties.
Approximately 25.33% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, are Balloon Loans which 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. Approximately 21.76% of
the Group 1 Initial Mortgage Loans, by Original Group 1 Principal Balance, are
Periodic Payment Loans (as defined herein). More specifically, approximately
21.71% of the Group 1 Initial Mortgage Loans, by Original Group 1 Principal
Balance, are Periodic Payment Loans the Mortgage Notes of which provide that the
Mortgagors have the option, at any time during the term of the related Periodic
Payment Loan, to use a limited number of payment vouchers provided to them at
origination in order to defer payment of the principal portion of the
corresponding Periodic Payment (as defined herein) and pay only the interest
portion due on such payment date. Any principal deferred in such a manner will
not result in an increase or reduction of the principal balance of the related
Periodic Payment Loan on such payment date and will be due in full on the final
maturity date of such Periodic Payment Loan, thus creating a balloon payment.
Accordingly, the final payment due on the related Mortgage Note may be
substantially greater than any other previous payment (depending on how many
interest only vouchers are used by the Mortgagor). Because borrowers of Balloon
Loans are required to make a relatively large single payment upon maturity, it
is possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing mortgage loans.
Group 2
Approximately 14.64%, 11.68%, 9.28%, 8.73% and 8.29% of the Group 2 Initial
Mortgage Loans, by Original Group 2 Principal Balance, are located in New York,
Pennsylvania, Michigan, New Jersey and Colorado, respectively.
Considerable uncertainty exists with respect to the regional economies and
real estate markets. In addition, regardless of its location, manufactured
housing generally depreciates in value. Accordingly, when coupled with a
S-17
<PAGE>
deteriorating real estate market in a particular region, the value of the
mortgaged property improved by a manufactured home could be or become lower than
the outstanding principal balance of the mortgage loan it secures.
Approximately 2.83% of the Group 2 Initial Mortgage Loans, by Original
Group 2 Principal Balance, are secured by a lien on real estate to which a
Manufactured Home is permanently affixed. For a discussion of the risks
associated with manufactured homes, see "--Certain Risks of The Mortgage
Loans--Group 1" above.
All of the Group 2 Initial Mortgage Loans have been originated since August
20, 1996. No Group 2 Initial Mortgage Loan has an unexpired term to maturity as
of the Cut-off Date of less than approximately 178.00 months. The weighted
average remaining term to maturity of the Group 2 Initial Mortgage Loans as of
the Cut-off Date is approximately 357.07 months.
UNDERWRITING STANDARDS FOR MULTIFAMILY LOANS, COMMERCIAL LOANS, MIXED USE LOANS
AND MANUFACTURED HOME LOANS
Under the Depositor's underwriting standards for Multifamily Loans,
Commercial Loans and Mixed Use Loans, the critical factors in underwriting a
Multifamily Loan, Commercial Loan or Mixed Use Loan are the ability of the
Mortgaged Property to generate adequate cash flow to support the mortgage,
operating expenses of the property, and to a lesser extent, the financial
capabilities and managerial ability of the borrower. Therefore, changes in cash
flow of the Multifamily Properties, Commercial Properties and Mixed Use
Properties may have a greater effect on the delinquency, foreclosure and loss
experience of the Multifamily Loans, Commercial Loans and Mixed Use Loans than
on residential mortgage loans originated in accordance with FNMA or FHLMC
underwriting guidelines. No assurance can be given that the values of the
Multifamily Properties, Commercial Properties and the Mixed Use Properties have
remained or will remain at the levels in effect on the dates of origination of
the related Multifamily Loans, Commercial Loans and Mixed Use Loans. If the cash
flow of the Multifamily Properties, Commercial Properties and Mixed Use
Properties decline after the dates of origination of the Multifamily Loans,
Commercial Loans and Mixed Use Loans, then the rates of delinquencies,
foreclosures and losses on the Multifamily Loans, Commercial Loans and Mixed Use
Loans may increase and such increase may be substantial.
The mortgage loan programs pertaining to Multifamily Loans, Mixed Use
Loans, Commercial Loans and Manufactured Home Loans described in "Description of
the Mortgage Pool--Underwriting" in this Prospectus Supplement were recently
implemented by the Depositor and have produced a relatively low total volume of
mortgage loans. Because all of the Multifamily Loans, Mixed Use Loans,
Commercial Loans and Manufactured Home Loans being sold to the Trust Fund were
underwritten in accordance with these programs, the Depositor does not have
historical delinquency, foreclosure or loss experience with respect to its
Multifamily Loan, Mixed Use Loan, Commercial Loan or Manufactured Home Loan
programs that may provide a basis for purposes of estimating the future
delinquency, foreclosure or loss experience on mortgage loans similar to the
Multifamily Loans, Mixed Use Loans, Commercial Loans and Manufactured Home Loans
included in the Trust Fund.
THE SUBSEQUENT MORTGAGE LOANS
The Subsequent Mortgage Loans may have characteristics different from those
of the Initial Mortgage Loans in the related Group. However, each Subsequent
Mortgage Loan must satisfy the eligibility criteria referred to herein, as
applicable, under "The Mortgage Pool--Group 1--Conveyance of Group 1 Subsequent
Mortgage Loans and the Group 1 Pre-Funding Account" and "--Group 2--Conveyance
of Group 2 Subsequent Mortgage Loans and the Group 2 Pre-Funding Account" at the
time of its conveyance to the Trust Fund and be underwritten in accordance with
the criteria set forth herein, as applicable, under "The Depositor--Underwriting
Criteria--Group 1" and "--Group 2".
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the related Pre-Funding Account
have not been fully applied to the purchase of Subsequent Mortgage Loans by the
Trust Fund by the end of the Funding Period, the Holders of the related Class A
Certificates will receive, pro rata, a prepayment of principal in an amount
equal to the related Pre-Funded Amount remaining in the related Pre-Funding
Account on the first Remittance Date following the termination of the Funding
Period. Such prepayment, in general, will have the same effect on Class A
Certificateholders as prepayments on the Mortgage Loans. See "Certain Yield and
Prepayment Considerations" herein and "Yield Considerations" in the Prospectus.
CERTAIN TRUTH-IN-LENDING CONSIDERATIONS
It is possible that some Mortgage Loans included in the Mortgage Pool will
be subject to the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Riegle Act") which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to
Regulation Z, the implementing regulation of the Federal Truth-In-Lending Act.
These provisions impose additional disclosure and other requirements on
creditors with respect to non-purchase money mortgage loans with high interest
rates or high
S-18
<PAGE>
up-front fees and charges. In general, mortgage loans within the purview of the
Riegle Act have annual percentage rates over 10 percentage points greater than
the yield on Treasury Securities of comparable maturity and/or fees and points
which exceed the greater of 8% of the total loan amount or $400 (the $400 amount
is adjusted annually based on changes in the Consumer Price Index for the prior
year). The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all claims
and defenses that the consumer could assert against the creditor, including,
without limitation, the right to rescind the mortgage loan. The Depositor will
represent and warrant in the Pooling Agreement that each of the Mortgage Loans
was originated in compliance with all applicable laws, including the
Truth-in-Lending Act as amended. The Depositor, upon breaching any such
representation and warranty, will be required by the Pooling Agreement to
repurchase the related Mortgage Loan at a price equal to the principal amount
thereof plus accrued interest thereon. The amount of such purchase price will be
treated as a Principal Prepayment of the related Mortgage Loan.
THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the Initial Mortgage Loans for each Group (and not the Subsequent
Mortgage Loans) and is based on the related Group as of the Cut-off Date.
Subsequent Mortgage Loans are intended to be purchased by the Trust Fund
from the Depositor from time to time on or before September 23, 1998, from funds
on deposit in the related Pre-Funding Account. The Initial Mortgage Loans and
the Subsequent Mortgage Loans, if available, will be originated or purchased by
the Depositor, and sold by the Depositor to the Trust Fund. The Pooling
Agreement will provide that the Mortgage Loans in the related Groups, following
the conveyance of the related Subsequent Mortgage Loans, must conform to certain
specified characteristics described below under "--Group 1--Conveyance of Group
1 Subsequent Mortgage Loans and the Group 1 Pre-Funding Account" and "--Group
2--Conveyance of Group 2 Subsequent Mortgage Loans and the Group 2 Pre-Funding
Account". Funds on deposit in the Group 1 Pre-Funding Account will only be used
to purchase Group 1 Subsequent Mortgage Loans and funds on deposit in the Group
2 Pre-Funding Account will only be used to purchase Group 2 Subsequent Mortgage
Loans. In the sole discretion of the Certificate Insurer, Subsequent Mortgage
Loans with characteristics varying from those described herein may be purchased
by the Trust Fund; provided, however, that the addition of such Mortgage Loans
will not materially affect the aggregate characteristics of the entire Mortgage
Pool.
Prior to the issuance of the Certificates, Mortgage Loans may be removed
from the Mortgage Pool as a result of incomplete documentation or otherwise, if
the Depositor deems such removal necessary or appropriate, and may be prepaid at
any time. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Certificates unless including such
mortgage loans would materially alter the characteristics of the Mortgage Pool
as described herein. The Depositor believes that the information set forth
herein will be representative of the characteristics of the Mortgage Pool as it
exists at the time the Certificates are issued, although the range of interest
rates borne by the related Mortgage Notes ("Mortgage Rates") and maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary as described herein.
GROUP 1
PAYMENTS ON THE GROUP 1 MORTGAGE LOANS
Approximately 72.85% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, provide for substantially equal monthly payments
(except, in the case of a Balloon Loan, for the final monthly payment) that are
allocated to principal and interest according to the daily simple interest
method (the "Simple Interest Loans"). Each monthly payment with respect to
substantially all of the Simple Interest Loans consists of an installment of
interest which is calculated according to the simple interest method on the
basis of the outstanding principal balance of the Simple Interest Loan
multiplied by the stated note rate and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the last
day interest was satisfied and the denominator of which is 365 days (the "Simple
Interest Method"), as opposed to the customary method, on which 30 days of
interest is owed each month irrespective of the day on which the payment is
received. As payments are received, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a Mortgagor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. However, if the next succeeding payment is made on the
due date, a greater amount will be allocated to interest than would be the case
if the previous payment had also been on the due date.
S-19
<PAGE>
Conversely, if a Mortgagor pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the Simple Interest Loan will
amortize in the manner described in the preceding paragraph. However, if the
Mortgagor consistently makes scheduled payments after the scheduled due date the
Simple Interest Loan will amortize more slowly than scheduled. Any remaining
unpaid principal is payable on the final maturity date of the Simple Interest
Loan.
With respect to all of the Group 1 Mortgage Loans, the Mortgagor is
required to pay interest only to the date of prepayment in the case of Principal
Prepayments and Curtailments.
Approximately 21.76% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance provide for substantially equal payments to be made
every 28 days (each, a "Periodic Payment" and each such loan, a "Periodic
Payment Loan"). Each Periodic Payment consists of an installment of interest
which is calculated according to the customary method, applied on a 28/364 day
basis, so that each payment is applied first to accrued and unpaid interest as
if the payment were made on its due date, regardless of when the payment is
actually received, and the remainder, if any, to the unpaid principal balance.
Although partial prepayments of principal on Periodic Payment Loans are applied
on scheduled Periodic Payment dates, with no resulting reduction in interest
payable for the period in which the partial prepayment is made, the related
Mortgagors are required to pay interest only to the date of prepayment if
accompanied by a prepayment of principal in full. In addition, approximately
21.71% of the Group 1 Initial Mortgage Loans, by Original Group 1 Principal
Balance, are Periodic Payment Loans the Mortgage Notes of which provide that the
Mortgagors have the option at any time during the term of the related Periodic
Payment Loan, to use a limited number of payment vouchers provided to them at
origination in order to defer payment of the principal portion of the
corresponding Periodic Payment and pay only the interest portion due on such
payment date. Any principal deferred in such a manner will be due in full on the
maturity date of the related Periodic Payment Loan.
Approximately 18.23% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, are Mortgage Loans for which the Mortgagor has
elected, pursuant to the terms of the related Mortgage Note, to defer the first
two or first three payments due (each, a "Deferred Payment") on the related
payment date thereunder ("Deferred Payment Loans") and the principal balance
conveyed to the Trust Fund has been reduced by the principal amount so deferred.
If the Mortgagor has not prepaid the loan before a certain date and the maturity
date is not otherwise accelerated by the Servicer, such Deferred Payments will
be forgiven. On the Closing Date and, if necessary, on any Subsequent Transfer
Date, the Depositor will deposit into the Group 1 Interest Coverage Account an
amount to be applied by the Trustee to cover the interest portion of Deferred
Payments. To the extent such Deferred Payments are not forgiven, the Servicer
will retain Deferred Payments collected for payment to the Depositor as part of
the Depositor's Yield.
Approximately 0.93% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, provide that the Mortgage Rate stated therein will be
reduced by 2% during the first twelve month period of the loan, and reduced by
1% during the second twelve month period of the loan, after which such Mortgage
Rate will apply (each such loan, a "Temporary Buydown Loan").
The initial Group 1 (the "Initial Group 1") consists of the Group 1 Initial
Mortgage Loans with an aggregate principal balance outstanding as of the Cut-off
Date, after deducting all payments of principal due or deferred on or before
such date, of $168,503,688.56 (the "Original Group 1 Principal Balance"). The
Group 1 Initial Mortgage Loans consist of conventional, fixed-rate Mortgage
Loans secured by first or second liens on one- to four-family residential
properties, units in planned unit developments, individual condominium units and
manufactured homes ("Single Family Properties"), residential properties
consisting of five or more dwelling units ("Multifamily Properties"), commercial
properties ("Commercial Properties") and mixed residential and commercial
structures ("Mixed Use Properties"; collectively with Single Family Properties,
Commercial Properties and Multifamily Properties, the "Mortgaged Properties"),
with original terms to maturity of up to 360 months. Approximately 75.76% of the
Group 1 Initial Mortgage Loans, by Original Group 1 Principal Balance, were
originated and underwritten by the Depositor and the remainder of the Group 1
Initial Mortgage Loans were purchased and re-underwritten by the Depositor. In
each case the underwriting was performed in accordance with the criteria set
forth under "The Depositor--Underwriting Criteria--Group 1" herein. The
predecessor of the Depositor began originating and purchasing mortgage loans
pursuant to its Fixed Rate Mortgage Program in 1985, pursuant to its Fixed Rate
Mortgage Program-Multifamily and Mixed Use Properties in September 1994 and
pursuant to its Manufactured Home Loan Program in March 1997. See "The
Depositor--Loan Origination History" herein.
Approximately 24.24% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, are secured by second liens with a First Lien on the
related underlying Mortgaged Property. The related First Liens are
S-20
<PAGE>
not included in Group 1. With respect to the remainder of the Group 1 Initial
Mortgage Loans there exists no other mortgage lien senior to that of such Group
1 Initial Mortgage Loans.
As of the Cut-off Date, none of the Group 1 Initial Mortgage Loans were
contractually delinquent for thirty or more days (two or more payments missed).
Since the origination of the Group 1 Mortgage Loans, four Group 1 Initial
Mortgage Loans have been contractually delinquent for thirty days (two payments
missed) on one occasion prior to the Cut-off Date.
Each Group 1 Initial Mortgage Loan was originated on or after October 31,
1996.
As of the Cut-off Date, the weighted average Mortgage Rate of the Group 1
Initial Mortgage Loans is approximately 10.593% per annum. All of the Group 1
Initial Mortgage Loans have Mortgage Rates as of the Cut-off Date ranging from
approximately 5.800% to 15.100%.
In addition, the Group 1 Initial Mortgage Loans will have the following
characteristics as of the Cut-off Date (expressed, where applicable, as a
percentage of the related Original Group 1 Principal Balance):
None of the Group 1 Initial Mortgage Loans will have had a first
payment date prior to December 1, 1996 and none of the Group 1 I Initial
Mortgage Loans will have a remaining term to maturity of less than
approximately 53.23 months. The latest maturity date of any of the Group 1
Initial Mortgage Loans will be July 1, 2028.
Approximately 17.65% of the Group 1 Initial Mortgage Loans will be
Mortgage Loans the proceeds of which were used to purchase a Mortgaged
Property. The proceeds of not more than approximately 10.23% of the Group 1
Initial Mortgage Loans will be used to refinance an existing mortgage loan
and not more than approximately 72.12% of the Group 1 Initial Mortgage
Loans will be cash-out loans.
No more than approximately 0.63% of the Group 1 Initial Mortgage Loans
will be secured by Mortgaged Properties located in any one zip code area.
Based on representations of Mortgagors at origination, approximately
18.65% of the Group 1 Initial Mortgage Loans will be secured by investor
properties and approximately 91.66% of the Group 1 Initial Mortgage Loans
will be secured by owner-occupied properties. The apparent discrepancy in
these percentages results from there being approximately 10.31% of the
Group 1 Initial Mortgage Loans that are secured by units in properties
consisting of two- to four-family dwelling units, Multifamily Properties
and Mixed Use Properties partially occupied by the Mortgagor as the
Mortgagor's primary residence and partially rented out as investor
property, and Commercial Properties partially occupied by the Mortgagor as
the Mortgagor's primary place of business.
Approximately 25.33% of the Group 1 Initial Mortgage Loans are Balloon
Loans.
Approximately 21.71% of the Group 1 Initial Mortgage Loans are
Periodic Payment Loans which allow the Mortgagor to use a number of
interest only payment vouchers and which, if used, may create a balloon
payment.
None of the Group 1 Initial Mortgage Loans provide for negative
amortization.
None of the Group 1 Initial Mortgage Loans will be insured by any
primary mortgage insurance policy.
The principal balances of the Group 1 Mortgage Loans as set forth in
the following tables are as reduced by the principal portion of any
Deferred Payments.
S-21
<PAGE>
The following table sets forth the Range of Principal Balances of the Group
1 Initial Mortgage Loans as of the Cut-off Date:
GROUP 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF PRINCIPAL BALANCE BALANCE BALANCE LOANS
- ------------------------------- --------------- ----------- ---------
$ 0.01 - $ 10,000.00 $ 59,159.50 0.03% 6
$ 10,000.01 - $ 20,000.00 4,640,897.23 2.75 291
$ 20,000.01 - $ 30,000.00 9,437,580.07 5.60 376
$ 30,000.01 - $ 40,000.00 13,262,200.15 7.87 378
$ 40,000.01 - $ 50,000.00 12,935,914.40 7.68 287
$ 50,000.01 - $ 60,000.00 14,787,614.07 8.78 268
$ 60,000.01 - $ 70,000.00 13,213,494.19 7.84 204
$ 70,000.01 - $ 80,000.00 11,130,109.72 6.61 149
$ 80,000.01 - $ 90,000.00 9,417,276.18 5.59 111
$ 90,000.01 - $100,000.00 7,655,119.95 4.54 80
$100,000.01 - $110,000.00 7,129,801.48 4.23 68
$110,000.01 - $120,000.00 5,774,478.23 3.43 50
$120,000.01 - $130,000.00 6,138,328.04 3.64 49
$130,000.01 - $140,000.00 5,272,730.00 3.13 39
$140,000.01 - $150,000.00 4,500,248.01 2.67 31
$150,000.01 - $160,000.00 3,413,486.45 2.03 22
$160,000.01 - $170,000.00 3,111,532.90 1.85 19
$170,000.01 - $180,000.00 4,571,142.40 2.71 26
$180,000.01 - $190,000.00 3,345,027.02 1.99 18
$190,000.01 - $200,000.00 3,322,185.93 1.97 17
$200,000.01 - $250,000.00 8,762,129.28 5.20 39
$250,000.01 - $300,000.00 5,749,986.54 3.41 21
$300,000.01 - $350,000.00 1,934,577.93 1.15 6
$350,000.01 - $400,000.00 2,644,642.82 1.57 7
$400,000.01 - $450,000.00 1,723,071.59 1.02 4
$450,000.01 - $500,000.00 1,482,431.00 0.88 3
$500,000.01 - $550,000.00 530,000.00 0.31 1
$600,000.01 - $650,000.00 648,000.00 0.38 1
$900,000.01 - $950,000.00 935,523.48 0.56 1
$950,000.01 - $975,000.00 975,000.00 0.58 1
--------------- ------ ---
Totals....................... $168,503,688.56 100.00% 2,573
=============== ====== =====
S-22
<PAGE>
The following table sets forth the Geographic Distribution of the Group 1
Initial Mortgage Loans as of the Cutoff Date:
GROUP 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
GEOGRAPHIC DISTRIBUTION BALANCE BALANCE LOANS
- -------------------------------- --------------- ---------- ---------
Alabama $ 89,500.40 0.05% 2
Arizona 2,396,582.84 1.42 52
Arkansas 54,494,67 0.03 1
California 8,608,213.49 5.11 102
Colorado 5,725,251.54 3.40 97
Connecticut 6,029,357.29 3.58 73
Delaware 169,951.83 0.10 4
District of Columbia 343,326.55 0.20 4
Florida 21,704,214.00 12.88 429
Georgia 4,383,390.56 2.60 56
Idaho 623,159.76 0.37 12
Illinois 6,625,027.53 3.93 86
Indiana 3,881,236.29 2.30 73
Kentucky 848,344.24 0.50 15
Louisiana 34,400.00 0.02 1
Maine 224,862.14 0.13 1
Maryland 3,002,154.09 1.78 45
Massachusetts 3,077,953.68 1.83 45
Michigan 7,411,099.70 4.40 125
Minnesota 1,113,774.25 0.66 24
Mississippi 43,897.28 0.03 1
Missouri 519,934.67 0.31 11
Montana 29,427.59 0.02 1
Nevada 922,411.65 0.55 15
New Hampshire 1,078,702.16 0.64 13
New Jersey 7,686,059.54 4.56 92
New Mexico 698,180.35 0.42 13
New York 31,262,369.79 18.55 313
North Carolina 5,005,331.73 2.97 82
North Dakota 1,066,339.87 0.63 25
Ohio 7,080,338.70 4.20 104
Oklahoma 1,315,689.46 0.78 31
Oregon 2,956,995.05 1.76 51
Pennsylvania 12,969,892.02 7.70 244
Rhode Island 1,125,069.01 0.67 20
South Carolina 2,053,080.98 1.22 36
South Dakota 241,753.24 0.14 6
Tennessee 1,911,121.09 1.13 35
Texas 1,476,672.35 0.88 22
Utah 3,129,496.99 1.86 62
Virginia 1,250,924.33 0.74 21
Washington 7,406,225.05 4.40 114
West Virginia 98,935.48 0.06 2
Wisconsin 828,545.33 0.49 12
--------------- ------ -----
Totals ...................... $168,503,688.56 100.00% 2,573
=============== ====== =====
S-23
<PAGE>
The following table sets forth the original Combined Loan-to-Value Ratios
(as defined below) of the Group 1 Initial Mortgage Loan as of the Cut-off Date:
GROUP 1
PERCENT BY NUMBER OF
ORIGINAL COMBINED PRINCIPAL PRINCIPAL MORTGAGE
LOAN-TO- VALUE RATIO BALANCE BALANCE LOANS
- ---------------------------- --------------- -------- ---------
10.01% -- 15.00% $ 14,801.53 0.01% 1
15.01% -- 20.00% 56,725.03 0.03 3
20.01% -- 25.00% 284,015.90 0.17 9
25.01% -- 30.00% 542,645.79 0.32 15
30.01% -- 35.00% 637,092.84 0.38 18
35.01% -- 40.00% 1,002,836.29 0.59 23
40.01% -- 45.00% 1,578,985.16 0.94 35
45.01% -- 50.00% 3,667,612.96 2.18 51
50.01% -- 55.00% 2,523,762.19 1.50 45
55.01% -- 60.00% 4,146,479.67 2.46 66
60.01% -- 65.00% 7,160,811.90 4.25 123
65.01% -- 70.00% 16,297,451.74 9.67 210
70.01% -- 75.00% 19,919,341.97 11.82 249
75.01% -- 80.00% 38,314,476.65 22.74 604
80.01% -- 85.00% 38,941,121.33 23.11 589
85.01% -- 90.00% 33,404,516.53 19.82 531
90.01% -- 91.00% 11,011.08 0.01 1
--------------- ------ -----
Totals $168,503,688.56 100.00% 2,573
=============== ====== =====
The original "Combined Loan-to-Value Ratios" shown on the table above are
equal, with respect to each Group 1 Initial Mortgage Loan, to (i) the sum of (a)
the original principal balance of such Mortgage Loan at the date of origination
plus (b) the then outstanding principal balance of any related First Lien,
divided by (ii) the Collateral Value of the related Mortgaged Property. The
"Collateral Value" of a Mortgaged Property is the lesser of (x) the appraised
value based on an appraisal made by or for the originator of the Initial
Mortgage Loan of the related Group by an independent fee appraiser (or, in
certain instances, by a licensed in-house appraiser of the Depositor) at the
time of the origination of the related Initial Mortgage Loan and (y) the sales
price of such Mortgaged Property at such time of origination. With respect to an
Initial Mortgage Loan for which the proceeds were used to refinance an existing
mortgage loan, the Collateral Value is the appraised value of the related
Mortgaged Property based upon the appraisal obtained at the time of refinancing.
S-24
<PAGE>
The following table sets forth the Mortgage Rates borne by the Mortgage
Notes relating to the Group 1 Initial Mortgage Loans as of the Cut-off Date:
GROUP 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MORTGAGE RATES BALANCE BALANCE LOANS
- ---------------------------- ---------------- ---------- ---------
5.750 -- 5.999% $ 38,038.55 0.02% 1
6.000 -- 6.249% 260,850.00 0.16 2
6.250 -- 6.499% 495,500.00 0.29 2
6.500 -- 6.749% 114,617.92 0.07 1
7.250 -- 7.499% 501,691.86 0.30 4
7.500 -- 7.749% 102,293.39 0.06 2
7.750 -- 7.999% 3,870,854.76 2.30 33
8.000 -- 8.249% 3,229,020.50 1.92 34
8.250 -- 8.499% 4,245,837.93 2.52 47
8.500 -- 8.749% 4,680,870.92 2.78 60
8.750 -- 8.999% 6,964,472.53 4.13 93
9.000 -- 9.249% 7,117,914.06 4.23 88
9.250 -- 9.499% 7,623,854.08 4.53 101
9.500 -- 9.749% 9,792,143.13 5.81 113
9.750 -- 9.999% 9,846,014.31 5.84 144
10.000 -- 10.249% 7,226,577.11 4.29 118
10.250 -- 10.499% 10,215,085.53 6.06 149
10.500 -- 10.749% 10,779,018.36 6.40 187
10.750 -- 10.999% 13,701,371.43 8.13 212
11.000 -- 11.249% 9,498,235.01 5.64 153
11.250 -- 11.499% 10,469,118.26 6.21 164
11.500 -- 11.749% 9,778,679.21 5.80 154
11.750 -- 11.999% 12,085,429.29 7.17 202
12.000 -- 12.249% 4,349,167.31 2.58 94
12.250 -- 12.499% 5,036,484.80 2.99 90
12.500 -- 12.749% 4,587,743.43 2.72 78
12.750 -- 12.999% 3,758,962.64 2.23 80
13.000 -- 13.249% 2,345,884.06 1.39 42
13.250 -- 13.499% 1,304,487.64 0.77 37
13.500 -- 13.749% 1,859,234.30 1.10 35
13.750 -- 13.999% 791,188.47 0.47 14
14.000 -- 14.249% 695,337.54 0.41 19
14.250 -- 14.499% 478,385.01 0.28 10
14.500 -- 14.749% 133,532.30 0.08 6
14.750 -- 14.999% 363,292.92 0.22 3
15.000 -- 15.249% 162,500.00 0.10 1
--------------- ------ -----
Totals....................... $168,503,688.56 100.00% 2,573
=============== ====== =====
S-25
<PAGE>
The following table sets forth the number of Remaining Months to Maturity
of the Group 1 Initial Mortgage Loans as of the Cut-off Date:
GROUP 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
REMAINING MONTHS TO MATURITY BALANCE BALANCE LOANS
- ------------------------------ --------------- ---------- ---------
48.01 -- 60.00 $ 659,246.42 0.39% 29
60.01 -- 72.00 128,740.26 0.08 5
72.01 -- 84.00 99,436.50 0.06 5
84.01 -- 96.00 515,687.49 0.31 15
96.01 -- 108.00 516,468.73 0.31 12
108.01 -- 120.00 7,852,227.79 4.66 204
120.01 -- 132.00 1,678,373.39 1.00 39
132.01 -- 144.00 474,379.71 0.28 9
144.01 -- 156.00 1,568,325.35 0.93 19
156.01 -- 168.00 580,660.00 0.34 11
168.01 -- 180.00 70,849,028.42 42.04 1,126
180.01 -- 192.00 2,490,684.48 1.48 46
192.01 -- 204.00 525,637.55 0.31 8
204.01 -- 216.00 735,097.23 0.44 9
216.01 -- 228.00 1,680,780.33 1.00 27
228.01 -- 240.00 23,562,724.26 13.98 397
240.01 -- 252.00 869,409.62 0.51 17
252.01 -- 264.00 144,971.22 0.09 2
276.01 -- 288.00 1,853,683.55 1.10 18
288.01 -- 300.00 5,712,779.09 3.39 58
300.01 -- 312.00 535,721.97 0.32 11
312.01 -- 324.00 241,203.89 0.14 5
324.01 -- 336.00 371,154.58 0.22 6
336.01 -- 348.00 31,984.94 0.02 1
348.01 -- 361.00 44,825,281.79 26.60 494
--------------- ------ -----
Totals ........................ $168,503,688.56 100.00% 2,573
=============== ====== =====
S-26
<PAGE>
The following table sets forth the distribution of the Group 1 Initial
Mortgage Loans by the Depositor's Underwriting Class as of the Cut-off Date:
GROUP 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
UNDERWRITING CLASS BALANCE BALANCE LOANS
- --------------------------- --------------- ---------- ---------
AAA $ 6,866,082.87 4.08% 95
AA 38,222,940.12 22.68 489
ANIV 29,187,622.77 17.32 396
I 49,728,122.34 29.51 768
II 13,346,445.49 7.92 249
III 6,965,345.86 4.13 113
III-SE 4,911,262.93 2.91 76
IIB 5,639,082.68 3.35 113
IV 12,848,524.49 7.63 254
V 788,259.01 0.47 20
--------------- ------ -----
Totals ........................ $168,503,688.56 100.00% 2,573
=============== ====== =====
The following table sets forth the Property Types of the Group 1
Initial Mortgage Loans:
GROUP 1
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
PROPERTY TYPES BALANCE BALANCE LOANS
- --------------------------- --------------- ---------- ---------
Single Family (attached/detached) $130,056,424.99 77.18% 2,133
Condominium 4,019,864.42 2.39 66
Two-to-Four Family 17,070,998.52 10.13 171
Planned Unit Development 3,402,742.53 2.02 51
Manufactured Homes 4,866,278.98 2.89 109
Multi Family 5,451,877.15 3.24 24
Mixed Use 2,969,518.30 1.76 16
Commercial Properties 665,983.67 0.39 3
--------------- ------ -----
Totals ......................... $168,503,688.56 100.00% 2,573
=============== ====== =====
CONVEYANCE OF GROUP 1 SUBSEQUENT MORTGAGE LOANS
AND THE GROUP 1 PRE-FUNDING ACCOUNT
Under the Pooling Agreement, following the initial issuance of the
Certificates, the Depositor has committed to sell, and the Trust Fund will be
obligated to purchase from the Depositor, on or before September 23, 1998,
subject to the availability thereof, additional conventional, fixed-rate
residential Mortgage Loans (the "Group 1 Subsequent Mortgage Loans") secured by
first or second liens on Single Family Properties, Multifamily Properties,
Commercial Properties and Mixed Use Properties which will be originated and
underwritten or purchased and re-underwritten by the Depositor. In each case the
underwriting will be performed in accordance with the criteria set forth herein
under "The Depositor--Underwriting Criteria--Group 1". Group 1 Subsequent
Mortgage Loans will be transferred to the Trust Fund pursuant to Subsequent
Transfer Instruments (the "Group 1 Subsequent Transfer Instruments") between the
Depositor and the Trustee. In connection with the purchase of Group 1 Subsequent
Mortgage Loans on such dates of transfer (the "Group 1 Subsequent Transfer
Dates"), the Trust Fund will be required to pay the Depositor from amounts on
deposit in the related Pre-Funding Account a cash purchase price of 100% of the
principal balance thereof as already reduced by the principal portion of any
Deferred Payments. The Depositor will designate the close of
S-27
<PAGE>
business on the day prior to the related Group 1 Subsequent Transfer Date as the
cut-off date (a "Group 1 Subsequent Cut-off Date") with respect to the related
Subsequent Mortgage Loans purchased on such date and, as a result, the Trust
Fund will not be required to pay accrued interest with respect thereto.
Therefore, the aggregate principal balance of Group 1 after the Closing Date
will increase by an amount equal to the aggregate principal balance of the
related Group 1 Subsequent Mortgage Loans so purchased and the amount in the
Group 1 Pre-Funding Account will decrease accordingly.
With respect to Group 1, the Trustee will establish a Pre-Funding Account
(the "Group 1 Pre-Funding Account") into which it will deposit upon receipt from
the Depositor $100,454,855.42 (the "Original Group 1 Pre-Funded Amount"), to be
used to purchase the Group 1 Subsequent Mortgage Loans. The Original Group 1
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Group 1 Subsequent Mortgage Loans in accordance with
the Pooling Agreement (on any date of determination, the Original Group 1 Pre-
Funded Amount as so reduced, the "Group 1 Pre-Funded Amount"). During the period
(the "Group 1 Funding Period") from the Closing Date until the earlier of (i)
the date on which the amounts on deposit in the Group 1 Pre-Funding Accounts are
zero or (ii) September 23, 1998, the related Group 1 Pre-Funded Amount will be
maintained in the related Group 1 Pre-Funding Account.
Any conveyance of Group 1 Subsequent Mortgage Loans on a Group 1 Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each such Group 1 Subsequent Mortgage Loan must satisfy the representations
and warranties specified in the Group 1 Subsequent Transfer Instrument and the
Pooling Agreement; (b) the Depositor will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of the
Certificateholders; (c) the Depositor will deliver certain opinions of counsel
with respect to the validity of the conveyance of such Subsequent Mortgage
Loans; (d) as of the respective Subsequent Cut-off Date, the Group 1 Subsequent
Mortgage Loans will satisfy the following criteria: (i) such Group 1 Subsequent
Mortgage Loan may not be 30 or more days contractually delinquent as of the
related Group 1 Subsequent Cut-off Date; (ii) the original term to maturity of
such Subsequent Mortgage Loan will not be less than 60 months and will not
exceed 360 months; (iii) such Subsequent Mortgage Loan may not provide for
negative amortization; (iv) such Subsequent Mortgage Loan will have a Mortgage
Rate not less than 5.5%; (v) such Subsequent Mortgage Loan will be underwritten
in accordance with the criteria set forth under "The Depositor--Underwriting
Criteria--Group 1" herein; (vi) such Subsequent Mortgage Loan will have been
serviced by the Servicer since origination or purchase by the Depositor; (vii)
such Subsequent Mortgage Loan will not have a Combined Loan-to-Value Ratio
greater than 92%; and (viii) such Subsequent Mortgage Loans will have (A) as of
the end of the Group 1 Funding Period, a weighted average number of months since
origination of not over 4 months and (B) not over 20% by aggregate principal
balance with a first payment date no later than November, 1998. In addition,
following the purchase of any Group 1 Subsequent Mortgage Loan by the Trust
Fund, the Group 1 Mortgage Loans (including the related Group 1 Subsequent
Mortgage Loans) as of the end of the Group 1 Funding Period will: (i) have a
weighted average Mortgage Rate of at least 10%; (ii) have a weighted average
remaining term to stated maturity of not more than 285 months and not less than
210 months; (iii) have a weighted average Combined Loan-to-Value Ratio of not
more than 81%; (iv) have not in excess of 35% by aggregate principal balance of
Group 1 Mortgage Loans that are Balloon Loans; (v) have no Group 1 Mortgage Loan
with a principal balance in excess of $975,000; (vi) not have in excess of 14%
by aggregate principal balance of Group 1 Mortgage Loans secured by non-owner
occupied Mortgaged Properties; (vii) not have a concentration of Mortgaged
Properties in a single zip code in excess of 5% by aggregate principal balance
of Group 1 Mortgage Loans; (viii) not have in excess of 10% by aggregate
principal balance of Group 1 Mortgage Loans secured by Mortgaged Properties that
are condominiums; (ix) have at least 68% by aggregate principal balance of Group
1 Mortgage Loans secured by fee simple interests in attached or detached Single
Family Properties (including units in planned unit developments); (x) not have
in excess of 15% by aggregate principal balance of Group 1 Mortgage Loans
secured by Multifamily Properties and Mixed Use Properties; (xi) not have in
excess of 8% by aggregate principal balance of Group 1 Mortgage Loans secured by
Manufactured Homes; and (xii) not have in excess of 5% by aggregate principal
balance of Group 1 Mortgage Loans secured by Commercial Properties. In the sole
discretion of the Certificate Insurer, Group 1 Subsequent Mortgage Loans with
characteristics varying from those set forth in this paragraph may be purchased
by the Trust Fund; provided, however, that the addition of such Mortgage Loans
will not materially affect the aggregate characteristics of Group 1.
GROUP 2
Payments on the Group 2 Mortgage Loans
The initial Group 2 (the "Initial Group 2") consists of the Group 2 Initial
Mortgage Loans with an aggregate principal balance outstanding as of the Cut-off
Date, after deducting all payments of principal due or deferred on or before
such date, of $124,143,590.83 (the "Original Group 2 Principal Balance"). The
Group 2 Initial Mortgage Loans consist of conventional, adjustable-rate Mortgage
Loans secured by first liens on Single Family Properties with original
S-28
<PAGE>
terms to maturity of up to 360 months. Approximately 46.85% of the Group 2
Initial Mortgage Loans, by Original Group 2 Principal Balance, were originated
and underwritten by the Depositor, and the remainder of the Group 2 Initial
Mortgage Loans were purchased and re-underwritten by the Depositor. In each case
the underwriting was performed in accordance with the criteria set forth herein
under "The Depositor--Underwriting Criteria--Group 2". The Depositor began
originating and purchasing mortgage loans pursuant to its Adjustable Rate First
Mortgage Program in the fourth calendar quarter of 1992.
The Group 2 Initial Mortgage Loans have Mortgage Rates subject to annual or
semiannual adjustment after an initial six month or twenty-four month period on
the day of the month specified in the related Mortgage Note (each such date, an
"Adjustment Date") to equal the sum, rounded to the nearest 0.125%, of (i)(A)
with respect to 0.14% of the Group 2 Mortgage Loans, by Original Group 2
Principal Balance, the weekly average yield on United States Treasury Securities
adjusted to a constant maturity of one year, as published in the Federal Reserve
Statistical Release H.15 (519), as most recently announced as of a date 45 days
prior to such Adjustment Date (the "One-Year U.S. Treasury Index"; such Mortgage
Loans, the "One-Year U.S. Treasury Loans"), and (B) with respect to 99.86% of
the Group 2 Mortgage Loans, by Original Group 2 Principal Balance, a per annum
rate equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks as published in The Wall Street Journal and as most recently available as
of the date specified in the related Mortgage Note (the "Six-Month LIBOR Index";
such Mortgage Loans, the "Six-Month LIBOR Loans"; the One-Year U.S. Treasury
Index and the Six-Month LIBOR Index, each, an "Index") and (ii) a fixed
percentage amount specified in the related Mortgage Note (the "Gross Margin");
provided, however, that the Mortgage Rate will not increase or decrease on any
Adjustment Date by more than (i) 2% with respect to the One-Year U.S. Treasury
Loans or (ii) 1% with respect to the Six-Month LIBOR Loans, or, with respect to
the initial Adjustment Date, not increase by more than 2%, with respect to the
Six-Month LIBOR Loans that are subject to an adjustment after an initial
twenty-four month period (each, a "Periodic Rate Cap"). All the Group 2 Initial
Mortgage Loans provide that over the life of the Mortgage Loan the Mortgage Rate
will in no event be more than the fixed percentage set forth in the Mortgage
Note (such rate, the "Maximum Mortgage Rate"). Approximately 94.50% of the Group
2 Initial Mortgage Loans, all of which are Six-Month LIBOR Loans that are
subject to an adjustment after an initial twenty-four month period, provide that
the Mortgage Rate may be 1% lower than the initial Mortgage Rate (such rate, the
"Minimum Mortgage Rate"). Each of the remaining Group 2 Initial Mortgage Loans
provide that in no event will the Mortgage Rate be less than the initial
Mortgage Rate. Effective with the first payment due on a Group 2 Initial
Mortgage Loan after each related Adjustment Date, the monthly payment will be
adjusted to an amount which will fully amortize the outstanding principal
balance of such Group 2 Initial Mortgage Loan over its remaining term, and pay
interest at the Mortgage Rate as so adjusted. Approximately 100% of the Group 2
Initial Mortgage Loans were originated with a Mortgage Rate less than the sum of
(i) the related Index at the time the initial Mortgage Rate was established and
(ii) the Gross Margin, such sum rounded as described above.
If an Index ceases to be published or is otherwise unavailable, the
Servicer will select an alternative index for mortgage loans on comparable
properties, based upon comparable information, over which it has no control and
which is readily verifiable by Mortgagors.
Approximately 6.03% of the Group 2 Initial Mortgage Loans, by Original
Group 2 Principal Balance are Mortgage Loans for which the Mortgagor has
elected, pursuant to the terms of the related Mortgage Note, to defer the first
and second payment due (a "Deferred Payment") on the related payment date
thereunder ("Deferred Payment Loans") and the principal balance conveyed to the
Trust has been reduced by the principal amount so deferred. If the Mortgagor has
not prepaid the loan before a certain date and the maturity date is not
otherwise accelerated by the Servicer, such Deferred Payments will be forgiven.
On the Closing Date and, if necessary, on any Subsequent Transfer Date, the
Depositor will deposit into the Group 2 Interest Coverage Account an amount to
be applied by the Trustee to cover the interest portion of Deferred Payments. To
the extent such Deferred Payments are not forgiven, the Servicer will retain
Deferred Payments collected for payment to the Depositor as part of the
Depositor's Yield.
Approximately 4.08% of the Group 2 Initial Mortgage Loans, by Original
Group 2 Principal Balance, provide that the Mortgage Rate stated therein will be
reduced by 2% during the first twelve month period of the loan, and reduced by
1% during the second twelve month period of the loan, after which such Mortgage
Rate, as subject to adjustment, will apply (each such loan, a "Temporary Buydown
Loan").
As of the Cut-off Date, none of the Group 2 Initial Mortgage Loans were
contractually delinquent for thirty or more days (two or more payments missed).
Since the origination of the Group 2 Initial Mortgage Loans, four of the Group 2
Initial Mortgage Loans have been contractually delinquent for thirty days (two
payments missed) on one occasion prior to the Cut-off Date.
Each Group 2 Initial Mortgage Loan was originated on or after August 20,
1996, and has an initial or next Adjustment Date on or before July 1, 2000.
S-29
<PAGE>
In addition, the Group 2 Initial Mortgage Loans have the following
characteristics as of the Cut-off Date (expressed, where applicable, as a
percentage of the Original Group 2 Principal Balance):
The weighted average Mortgage Rate of the Group 2 Initial Mortgage Loans
will be approximately 10.244%. The Group 2 Initial Mortgage Loans will have
Mortgage Rates ranging from approximately 6.125% to 13.875% and Gross
Margins ranging from approximately 3.500% to 10.000%. The weighted average
Gross Margin will be approximately 6.730%.
The Group 2 Initial Mortgage Loans will have Minimum Mortgage Rates ranging
from approximately 6.625% to 12.875% and Maximum Mortgage Rates ranging
from approximately 12.750% to 19.875%. The weighted average Minimum
Mortgage Rate of the Group 2 Initial Mortgage Loans will be approximately
9.372% and the weighted average Maximum Mortgage Rate of the Group 2
Initial Mortgage Loans will be approximately 16.317%.
None of the Group 2 Initial Mortgage Loans will have had a first payment
date prior to October 1, 1996 and none of the Group 2 Initial Mortgage
Loans will have a remaining term to maturity of less than approximately
178.00 months. The latest maturity date of any of the Group 2 Initial
Mortgage Loans will be July 1, 2028.
Approximately 45.91% of the Group 2 Initial Mortgage Loans will be Mortgage
Loans the proceeds of which were used to purchase a Mortgaged Property. The
proceeds of not more than approximately 10.17% of the Group 2 Initial
Mortgage Loans will be used to refinance an existing mortgage loan and the
proceeds of not more than approximately 43.92% of the Group 2 Initial
Mortgage Loans will be cash-out mortgage loans.
No more than approximately 0.99% of the Group 2 Initial Mortgage Loans will
be secured by Mortgaged Properties located in any one zip code area.
Based on representations of Mortgagors at origination, approximately 16.19%
of the Group 2 Initial Mortgage Loans will be secured by investor
properties and approximately 94.18% of the Group 2 Initial Mortgage Loans
will be secured by owner-occupied properties. The apparent discrepancy in
these percentages results from there being approximately 10.37% of the
Group 2 Initial Mortgage Loans that are secured by units in properties
consisting of two- to four-family dwelling units partially occupied by the
Mortgagor as the Mortgagor's primary residence and partially rented out as
investor property.
None of the Group 2 Initial Mortgage Loans provide for negative
amortization.
None of the Group 2 Initial Mortgage Loans will be insured by any primary
mortgage insurance policy.
The principal balances of the Group 2 Mortgage Loans as set forth in the
following tables are as reduced by the principal portion of any Deferred
Payments.
S-30
<PAGE>
The following table sets forth the Range of Principal Balances of the
Group 2 Initial Mortgage Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF PRINCIPAL BALANCE BALANCE BALANCE LOANS
- --------------------------- --------------- ---------- ---------
$ 10,000.01 -- $ 20,000.00 $ 207,689.26 0.17% 11
$ 20,000.01 -- $ 30,000.00 794,489.77 0.64 31
$ 30,000.01 -- $ 40,000.00 2,493,198.17 2.01 70
$ 40,000.01 -- $ 50,000.00 4,604,770.02 3.71 101
$ 50,000.01 -- $ 60,000.00 5,531,878.70 4.46 100
$ 60,000.01 -- $ 70,000.00 6,394,247.58 5.15 98
$ 70,000.01 -- $ 80,000.00 7,003,077.58 5.64 93
$ 80,000.01 -- $ 90,000.00 6,766,514.96 5.45 79
$ 90,000.01 -- $100,000.00 5,914,799.52 4.77 62
$100,000.01 -- $110,000.00 8,271,232.36 6.66 79
$110,000.01 -- $120,000.00 6,629,957.36 5.34 57
$120,000.01 -- $130,000.00 5,379,779.57 4.33 43
$130,000.01 -- $140,000.00 7,063,020.28 5.69 52
$140,000.01 -- $150,000.00 6,144,841.38 4.95 42
$150,000.01 -- $160,000.00 4,651,471.24 3.75 30
$160,000.01 -- $170,000.00 5,760,232.07 4.64 35
$170,000.01 -- $180,000.00 4,371,566.56 3.52 25
$180,000.01 -- $190,000.00 2,224,168.55 1.79 12
$190,000.01 -- $200,000.00 2,748,123.71 2.21 14
$200,000.01 -- $250,000.00 8,389,918.76 6.76 38
$250,000.01 -- $300,000.00 7,162,712.15 5.77 26
$300,000.01 -- $350,000.00 3,906,035.75 3.15 12
$350,000.01 -- $400,000.00 2,224,111.16 1.79 6
$400,000.01 -- $450,000.00 4,237,352.17 3.41 10
$450,000.01 -- $500,000.00 1,951,817.96 1.57 4
$500,000.01 -- $550,000.00 509,951.51 0.41 1
$600,000.01 -- $650,000.00 1,892,082.73 1.52 3
$900,000.01 -- $950,000.00 914,550.00 0.74 1
--------------- ------ -----
Totals ...................... $124,143,590.83 100.00% 1,135
=============== ====== =====
S-31
<PAGE>
The following table sets forth the Geographic Distribution of the Group 2
Initial Mortgage Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
GEOGRAPHIC DISTRIBUTION BALANCE BALANCE LOANS
- --------------------------- --------------- ---------- ---------
Arizona $ 2,283,734.44 1.84% 27
Arkansas 210,871.21 0.17 3
California 2,295,369.12 1.85 12
Colorado 10,285,484.72 8.29 70
Connecticut 4,761,796.08 3.84 36
Delaware 846,158.99 0.68 9
District of Columbia 394,955.41 0.32 3
Florida 7,508,010.80 6.05 85
Georgia 3,020,606.70 2.43 25
Illinois 6,311,418.36 5.08 60
Indiana 3,388,087.34 2.73 46
Iowa 46,359.85 0.04 1
Kansas 229,171.92 0.18 3
Kentucky 129,521.18 0.10 3
Louisiana 172,437.72 0.14 2
Maryland 2,204,305.92 1.78 20
Massachusetts 1,004,678.00 0.81 8
Michigan 11,525,355.49 9.28 107
Minnesota 664,656.95 0.54 7
Missouri 89,338.54 0.07 2
Montana 112,000.00 0.09 2
Nevada 618,609.19 0.50 4
New Jersey 10,843,438.79 8.73 83
New Mexico 596,403.46 0.48 6
New York 18,177,302.27 14.64 116
North Carolina 3,507,594.46 2.83 33
Ohio 4,331,170.72 3.49 63
Oklahoma 104,750.76 0.08 2
Oregon 560,582.90 0.45 5
Pennsylvania 14,499,324.29 11.68 175
Rhode Island 124,893.47 0.10 2
South Carolina 1,098,496.74 0.88 16
Texas 1,990,726.07 1.60 22
Utah 6,640,085.92 5.35 47
Vermont 345,734.01 0.28 2
Virginia 442,481.43 0.36 6
Washington 2,108,102.09 1.70 14
Wisconsin 669,575.52 0.54 8
--------------- ------ -----
Totals ................... $124,143,590.83 100.00% 1,135
=============== ====== =====
S-32
<PAGE>
The following table sets forth the Original Loan-to-Value Ratios (as
defined below) of the Group 2 Initial Mortgage Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIO BALANCE BALANCE LOANS
- ----------------------------- ------------ ---------- ---------
10.01% -- 15.00 % $ 20,000.00 0.02% 1
20.01% -- 25.00 % 20,000.00 0.02 1
25.01% -- 30.00 % 179,755.41 0.14 2
30.01% -- 35.00 % 180,877.26 0.15 3
35.01% -- 40.00 % 906,381.59 0.73 5
40.01% -- 45.00 % 455,852.73 0.37 6
45.01% -- 50.00 % 549,739.20 0.44 6
50.01% -- 55.00 % 1,211,238.16 0.97 13
55.01% -- 60.00 % 2,367,915.58 1.91 21
60.01% -- 65.00 % 4,920,144.75 3.96 41
65.01% -- 70.00 % 7,421,978.64 5.98 68
70.01% -- 75.00 % 12,495,092.24 10.06 111
75.01% -- 80.00 % 35,303,657.40 28.44 334
80.01% -- 85.00 % 26,530,886.81 21.37 263
85.01% -- 90.00 % 31,580,071.06 25.44 260
--------------- ------ -----
Totals .................. $124,143,590.83 100.00% 1,135
=============== ====== =====
The original "Loan-To-Value Ratios" ("LTV") shown on the previous table are
equal, with respect to each Group 2 Initial Mortgage Loan, to (i) the principal
balance of such Group 2 Initial Mortgage Loan at the date of origination,
divided by (ii) the Collateral Value of the related Mortgaged Property.
S-33
<PAGE>
The following table sets forth the Mortgage Rates borne by the Mortgage
Notes relating to the Group 2 Initial Mortgage Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MORTGAGE RATES BALANCE BALANCE LOANS
- ----------------------------- ------------ ---------- ---------
6.000 -- 6.249% $ 139,500.00 0.11% 1
6.750 -- 6.999% 120,939.73 0.10 2
7.000 -- 7.249% 244,321.13 0.20 2
7.250 -- 7.499% 486,103.99 0.39 3
7.500 -- 7.749% 954,863.31 0.77 9
7.750 -- 7.999% 2,048,457.21 1.65 15
8.000 -- 8.249% 1,102,904.32 0.89 11
8.250 -- 8.499% 3,779,351.80 3.04 23
8.500 -- 8.749% 4,277,046.73 3.45 37
8.750 -- 8.999% 3,083,225.03 2.48 35
9.000 -- 9.249% 7,134,530.61 5.75 59
9.250 -- 9.499% 10,414,867.80 8.39 86
9.500 -- 9.749% 9,898,052.16 7.97 83
9.750 -- 9.999% 14,926,720.28 12.02 117
10.000 -- 10.249% 7,271,450.76 5.86 72
10.250 -- 10.499% 8,351,037.09 6.73 74
10.500 -- 10.749% 9,338,185.77 7.52 88
10.750 -- 10.999% 7,806,164.83 6.29 78
11.000 -- 11.249% 3,908,860.67 3.15 39
11.250 -- 11.499% 4,050,280.42 3.26 49
11.500 -- 11.749% 5,144,050.11 4.14 53
11.750 -- 11.999% 5,244,218.54 4.22 58
12.000 -- 12.249% 4,305,254.88 3.47 45
12.250 -- 12.499% 3,029,826.64 2.44 25
12.500 -- 12.749% 2,004,898.30 1.62 17
12.750 -- 12.999% 2,194,739.02 1.77 23
13.000 -- 13.249% 1,631,969.65 1.31 15
13.250 -- 13.499% 940,312.05 0.76 11
13.500 -- 13.749% 270,889.75 0.22 4
13.750 -- 13.999% 40,568.25 0.03 1
--------------- ------ -----
Totals ................... $124,143,590.83 100.00% 1,135
=============== ====== =====
S-34
<PAGE>
The following table sets forth the number of Remaining Months to Maturity
of the Group 2 Initial Mortgage Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
REMAINING MONTHS TO MATURITY BALANCE BALANCE LOANS
- ----------------------------- ------------ ---------- ---------
169 -- 180.99 $ 213,136.64 0.17% 5
229 -- 240.99 1,242,901.22 1.00 20
337 -- 348.99 1,007,918.54 0.81 7
349 -- 357.99 10,993,111.81 8.86 105
358 -- 358.99 32,029,164.59 25.80 281
359 -- 359.99 49,103,472.88 39.55 428
360 -- 361.00 29,553,885.15 23.81 289
--------------- ------ -----
Totals....................... $124,143,590.83 100.00% 1,135
=============== ====== =====
The following table sets forth the distribution of the Group 2 Initial
Mortgage Loans that are Six-Month LIBOR Loans by Month of Next Rate Adjustment
as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MONTH OF NEXT RATE ADJUSTMENT BALANCE BALANCE LOANS
- ----------------------------- --------------- ---------- ---------
July 1998 $ 450,459.39 0.36% 5
August 1998 63,669.12 0.05 1
September 1998 491,511.47 0.40 4
October 1998 1,837,017.49 1.48 17
November 1998 2,703,864.33 2.18 21
December 1998 1,115,694.72 0.90 10
January 1999 78,392.56 0.06 1
February 1999 275,906.82 0.22 2
June 1999 142,620.93 0.12 1
July 1999 160,433.93 0.13 1
August 1999 151,904.43 0.12 1
September 1999 93,309.07 0.08 1
October 1999 173,057.52 0.14 2
November 1999 530,085.23 0.43 6
December 1999 507,322.20 0.41 3
January 2000 1,661,568.63 1.34 12
February 2000 1,121,882.50 0.90 14
March 2000 5,562,569.44 4.49 54
April 2000 30,443,309.95 24.56 269
May 2000 47,149,929.12 38.03 418
June 2000 29,006,501.65 23.40 285
July 2000 251,675.00 0.20 5
--------------- ------ -----
Totals .................... $123,972,685.50 100.00% 1,133
=============== ====== =====
As of the Cut-off Date, the two One-Year U.S. Treasury Loans in the Initial
Group 2 have an aggregate principal balance as of the Cut-off Date of
$170,905.33 and the month of next rate adjustment will be in September 1998 and
March 1999, respectively.
S-35
<PAGE>
The following table sets forth the distribution of the Gross Margins set
forth in the Mortgage Notes relating to the Group 2 Initial Mortgage Loans that
are Six-Month LIBOR Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
GROSS MARGIN BALANCE BALANCE LOANS
- ----------------------------- --------------- ---------- ---------
3.500 -- 3.749% $ 69,939.73 0.06% 1
4.000 -- 4.249% 80,941.38 0.06 1
4.250 -- 4.499% 739,670.51 0.60 6
4.500 -- 4.749% 701,087.22 0.57 9
4.750 -- 4.999% 1,579,642.73 1.27 10
5.000 -- 5.249% 4,423,671.40 3.57 37
5.250 -- 5.499% 2,914,512.99 2.35 33
5.500 -- 5.749% 8,956,611.15 7.22 84
5.750 -- 5.999% 6,200,619.69 5.00 71
6.000 -- 6.249% 9,195,361.93 7.42 76
6.250 -- 6.499% 22,387,144.25 18.06 181
6.500 -- 6.749% 10,216,265.20 8.24 89
6.750 -- 6.999% 9,876,961.14 7.97 82
7.000 -- 7.249% 6,602,795.77 5.33 72
7.250 -- 7.499% 10,805,516.80 8.72 96
7.500 -- 7.749% 4,685,996.74 3.78 49
7.750 -- 7.999% 4,109,061.03 3.31 38
8.000 -- 8.249% 8,267,233.27 6.67 89
8.250 -- 8.499% 2,779,002.87 2.24 28
8.500 -- 8.749% 1,581,352.47 1.28 15
8.750 -- 8.999% 2,620,407.58 2.11 19
9.000 -- 9.249% 2,719,029.68 2.19 25
9.250 -- 9.499% 1,022,124.64 0.82 8
9.500 -- 9.749% 1,095,084.14 0.88 10
9.750 -- 9.999% 267,082.94 0.22 2
10.000 -- 10.249% 75,568.25 0.06 2
--------------- ------ -----
Totals .............. $123,972,685.50 100.00% 1,133
=============== ====== =====
As of the Cut-off Date, the Gross Margins set forth in the Mortgage Notes
relating to the two One-Year U.S. Treasury Loans in the Initial Group 2 are
6.900% and 8.250%, respectively.
S-36
<PAGE>
The following table sets forth the distribution of the Maximum Mortgage
Rates set forth in the Mortgage Notes relating to the Group 2 Initial Mortgage
Loans that are Six-Month LIBOR Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MAXIMUM MORTGAGE RATES BALANCE BALANCE LOANS
- ----------------------------- --------------- ---------- ---------
12.750 -- 12.999% $ 69,939.73 0.06% 1
13.250 -- 13.499% 300,000.00 0.24 1
13.500 -- 13.749% 388,495.58 0.31 4
13.750 -- 13.999% 659,443.41 0.53 6
14.000 -- 14.249% 1,080,113.28 0.87 11
14.250 -- 14.499% 3,149,567.66 2.54 18
14.500 -- 14.749% 3,770,646.73 3.04 33
14.750 -- 14.999% 2,810,122.60 2.27 33
15.000 -- 15.249% 7,684,838.80 6.20 63
15.250 -- 15.499% 10,600,971.79 8.55 88
15.500 -- 15.749% 10,221,960.86 8.25 86
15.750 -- 15.999% 16,162,366.53 13.04 124
16.000 -- 16.249% 7,288,815.33 5.88 71
16.250 -- 16.499% 8,851,046.60 7.14 77
16.500 -- 16.749% 9,687,157.08 7.81 90
16.750 -- 16.999% 8,130,267.26 6.56 81
17.000 -- 17.249% 3,908,860.67 3.15 39
17.250 -- 17.499% 3,804,293.36 3.07 48
17.500 -- 17.749% 5,386,509.14 4.35 55
17.750 -- 17.999% 5,397,586.09 4.35 60
18.000 -- 18.249% 4,305,254.88 3.47 45
18.250 -- 18.499% 3,159,601.27 2.55 27
18.500 -- 18.749% 2,162,326.99 1.74 19
18.750 -- 18.999% 2,194,739.02 1.77 23
19.000 -- 19.249% 1,631,969.65 1.32 15
19.250 -- 19.499% 940,312.05 0.76 11
19.500 -- 19.749% 184,910.89 0.15 3
19.750 -- 19.999% 40,568.25 0.03 1
--------------- ------ -----
Totals .................. $123,972,685.50 100.00% 1,133
=============== ====== =====
As of the Cut-off Date, the Maximum Mortgage Rates set forth in the
Mortgage Notes relating to the two One-Year U.S. Treasury Loans in the Initial
Group 2 are 16.125% and 17.875%, respectively.
S-37
<PAGE>
The following table sets forth the distribution of Minimum Mortgage Rates
set forth in the Mortgage Notes relating to the Group 2 Initial Mortgage Loans
that are Six-Month LIBOR Loans as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MINIMUM MORTGAGE RATES BALANCE BALANCE LOANS
- ----------------------------- --------------- ---------- ---------
6.500 -- 6.749% $ 388,495.58 0.31% 4
6.750 -- 6.999% 703,883.14 0.57 6
7.000 -- 7.249% 1,080,113.28 0.87 11
7.250 -- 7.499% 3,279,615.20 2.65 16
7.500 -- 7.749% 3,621,337.24 2.92 32
7.750 -- 7.999% 2,632,922.60 2.12 32
8.000 -- 8.249% 7,165,290.90 5.78 59
8.250 -- 8.499% 10,180,271.37 8.21 85
8.500 -- 8.749% 10,010,366.87 8.08 82
8.750 -- 8.999% 15,986,062.35 12.90 123
9.000 -- 9.249% 7,678,363.23 6.19 74
9.250 -- 9.499% 8,405,565.70 6.78 75
9.500 -- 9.749% 9,879,025.97 7.97 94
9.750 -- 9.999% 8,374,293.28 6.76 82
10.000 -- 10.249% 3,904,956.66 3.15 39
10.250 -- 10.499% 4,613,208.82 3.72 53
10.500 -- 10.749% 5,322,996.82 4.29 53
10.750 -- 10.999% 5,101,507.93 4.12 59
11.000 -- 11.249% 4,368,840.68 3.52 45
11.250 -- 11.499% 2,193,590.18 1.77 24
11.500 -- 11.749% 2,198,587.21 1.77 19
11.750 -- 11.999% 2,625,795.34 2.12 26
12.000 -- 12.249% 1,702,287.86 1.37 16
12.250 -- 12.499% 2,133,541.46 1.72 17
12.500 -- 12.749% 381,197.58 0.31 6
12.750 -- 12.999% 40,568.25 0.03 1
--------------- ------ -----
Totals $123,972,685.50 100.00% 1,133
......................... =============== ====== =====
As of the Cut-off Date, the Minimum Mortgage Rates set forth in the
Mortgage Notes relating to the two One-Year U.S. Treasury Loans in the Initial
Group 2 are 10.125% and 11.875%, respectively.
S-38
<PAGE>
The following table sets forth the distribution of the Group 2 Initial
Mortgage Loans by Underwriting Class as of the Cut-off Date:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
UNDERWRITING CLASS BALANCE BALANCE LOANS
- -------------------------- --------------- ---------- ---------
AA $ 7,821,566.32 6.30% 76
ANIV 20,179,414.39 16.26 151
I 38,932,065.90 31.36 333
II 11,961,822.62 9.64 126
III 8,968,933.74 7.22 92
SE 5,128,702.17 4.13 38
IIB 8,912,358.63 7.18 104
IV 20,111,477.07 16.20 194
V 2,127,249.99 1.71 21
--------------- ------ -----
Totals ................ $124,143,590.83 100.00% 1,135
=============== ====== =====
The following table sets forth the Number of Months Since Origination
of the Group 2 Initial Mortgage Loans:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MONTHS SINCE ORIGINATION BALANCE BALANCE LOANS
- -------------------------- --------------- ----------- ---------
0 $ 30,254,426.65 24.37% 299
0.01 -- 1 49,607,806.39 39.96 438
1.01 -- 2 32,280,327.44 26.00 286
2.01 -- 12 11,135,732.74 8.97 106
12.01 -- 24 865,297.61 0.70 6
--------------- ------ -----
Totals .................... $124,143,590.83 100.00% 1,135
=============== ====== =====
The following table sets forth the Property Types of the Group 2 Initial
Mortgage Loans:
GROUP 2
PERCENT BY NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
PROPERTY TYPES BALANCE BALANCE LOANS
- -------------------------- --------------- ---------- ---------
Single Family (attached/detached) $100,202,404.21 80.72% 907
Condominium 2,449,697.19 1.97 30
Two-to-Four Family 14,786,319.86 11.91 126
Planned Unit Development 3,189,688.22 2.57 24
Manufactured Homes 3,515,481.35 2.83 48
--------------- ------ -----
Totals............................ $124,143,590.83 100.00% 1,135
=============== ====== =====
S-39
<PAGE>
CONVEYANCE OF GROUP 2 SUBSEQUENT MORTGAGE LOANS
AND THE GROUP 2 PRE-FUNDING ACCOUNT
Under the Pooling Agreement, following the initial issuance of the
Certificates, the Depositor has committed to sell, and the Trust Fund will be
obligated to purchase from the Depositor, on or before September 23, 1998,
subject to the availability thereof, additional conventional, adjustable-rate
residential Mortgage Loans (the "Group 2 Subsequent Mortgage Loans", together
with the Group 1 Subsequent Mortgage Loans, the "Subsequent Mortgage Loans")
secured by first liens on Single Family Properties which will be originated and
underwritten or purchased and re-underwritten by the Depositor. In each case the
underwriting will be performed in accordance with the criteria set forth herein
under "The Depositor--Underwriting Criteria--Group 2". Group 2 Subsequent
Mortgage Loans will be transferred to the Trust Fund pursuant to Subsequent
Transfer Instruments (the "Group 2 Subsequent Transfer Instruments", together
with the Group 1 Subsequent Transfer Instruments, the "Subsequent Transfer
Instruments") between the Depositor and the Trustee. In connection with the
purchase of Group 2 Subsequent Mortgage Loans on such dates of transfer (the
"Group 2 Subsequent Transfer Dates", together with the Group 1 Subsequent
Transfer Dates, the "Subsequent Transfer Dates"), the Trust Fund will be
required to pay to the Depositor from amounts on deposit in the related Group 2
Pre-Funding Account a cash purchase price of 100% of the principal balance
thereof as already reduced by the principal portion of any Deferred Payments.
The Depositor will designate the close of business on the day prior to the Group
2 Subsequent Transfer Date as the cut-off date (the "Group 2 Subsequent Cut-off
Date", together with the Group 1 Subsequent Cut-off Date, the "Subsequent
Cut-off Dates") with respect to the Group 2 Subsequent Mortgage Loans purchased
on such date and, as a result, the Trust Fund will not be required to pay
accrued interest with respect thereto. Therefore, the aggregate principal
balance of Group 2 after the Closing Date will increase by an amount equal to
the aggregate principal balance of the Group 2 Subsequent Mortgage Loans so
purchased and the amounts in the Group 2 Pre-Funding Account will decrease
accordingly.
With respect to Group 2, the Trustee will establish a Pre-Funding Account
(the "Group 2 Pre-Funding Account", together with the Group 1 Pre-Funding
Account, the "Pre-Funding Accounts") into which it will deposit upon receipt
from the Depositor, $79,228,918.11 (the "Original Group 2 Pre-Funded Amount") to
be used to purchase Group 2 Subsequent Mortgage Loans. The Original Group 2
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Group 2 Subsequent Mortgage Loans in accordance with
the Pooling Agreement (on any date of determination, the Original Group 2
Pre-Funded Amount as so reduced, the "Group 2 Pre-Funded Amount", together with
the Group 1 Pre-Funded Amount, the "Pre-Funded Amounts"). During the period (the
"Group 2 Funding Period", together with the Group 1 Funding Period, the "Funding
Periods") from the Closing Date until the earlier of (i) the date on which the
amount on deposit in the Group 2 Pre-Funding Account is zero and (ii) September
23, 1998, the Group 2 Pre-Funded Amount will be maintained in the Group 2
Pre-Funding Account.
Any conveyance of Group 2 Subsequent Mortgage Loans on a Group 2 Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each such Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the Group 2 Subsequent Transfer Instrument and the
Pooling Agreement; (b) the Depositor will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of the
Certificateholders; (c) the Depositor will deliver certain opinions of counsel
with respect to the validity of the conveyance of such Subsequent Mortgage
Loans; (d) as of the respective Subsequent Cut-off Date the Group 2 Subsequent
Mortgage Loans will satisfy the following criteria: (i) such Subsequent Mortgage
Loan may not be 30 or more days contractually delinquent as of the related Group
2 Subsequent Cut-off Date; (ii) the original term to maturity of such Subsequent
Mortgage Loan will not be less than 180 months and will not exceed 360 months;
(iii) such Subsequent Mortgage Loan may not provide for negative amortization;
(iv) such Subsequent Mortgage Loan will have a Gross Margin not less than 3.50%;
(v) such Subsequent Mortgage Loan will be underwritten in accordance with the
criteria set forth under "The Depositor--Underwriting Criteria--Group 2" herein;
(vi) such Subsequent Mortgage Loan will have been serviced by the Servicer since
origination or purchase by the Depositor; (vii) such Subsequent Mortgage Loan
will not have a Loan-to-Value Ratio greater than 92%; (viii) such Subsequent
Mortgage Loan will have a Maximum Mortgage Rate not less than 12%; and (ix) such
Subsequent Mortgage Loans will have (A) as of the end of the Group 2 Funding
Period, a weighted average number of months since origination of not over 4
months and (B) not over 20% by aggregate principal balance with a first payment
date no later than November, 1998. In addition, following the purchase of any
Group 2 Subsequent Mortgage Loan by the Trust Fund, the Group 2 Mortgage Loans
(including the Group 2 Subsequent Mortgage Loans) as of the end of the Group 2
Funding Period will: (i) have a weighted average Gross Margin of at least 5.50%
and a weighted average coupon of at least 9.70%; (ii) have a weighted average
remaining term to stated maturity of not more than 358.5 months and not less
than 290 months; (iii) have a weighted average Loan-to-Value Ratio of not more
than 83%; (iv) have no Group 2 Mortgage Loan with a principal balance in excess
of $975,000; (v) not have in excess of 12% by aggregate principal balance of
Group 2 Mortgage Loans secured by nonowner occupied Mortgaged Properties; (vi)
not have a concentration of Mortgaged Properties in a single zip code in excess
of 5% by aggregate principal balance of Group 2 Mortgage Loans; (vii) have
S-40
<PAGE>
at least 73% by aggregate principal balance of Group 2 Mortgage Loans secured by
fee simple interests in attached or detached Single Family Properties (including
units in planned unit developments); (viii) not be secured by Multifamily
Properties; (ix) not be secured by Mixed Use Properties; (x) not be secured by
Commercial Properties and (xi) not have in excess of 6% by aggregate principal
balance of the Group 2 Mortgage Loans secured by Manufactured Homes. In the sole
discretion of the Certificate Insurer, Group 2 Subsequent Mortgage Loans with
characteristics varying from those set forth in this paragraph may be purchased
by the Trust Fund; provided, however, that the addition of such Group 2 Mortgage
Loans will not materially affect the aggregate characteristics of Group 2.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
DELAY IN DISTRIBUTIONS
The effective yield to the Class A Certificateholders will be slightly
lower than the yield otherwise produced by the related Class A Pass-Through Rate
because the distribution of such interest will not be made until the 25th day
(or, if such day is not a Business Day, on the first Business Day thereafter) of
the month following the month in which interest accrues on the Mortgage Loans
(without any additional distribution of interest or earnings thereon in respect
of such delay). A "Business Day" is any day other than Saturday or Sunday, or a
day on which banking institutions in the States of New York, Illinois or New
Jersey are authorized or obligated by law or executive order to be closed. See
"Description of the Certificates" herein.
PREPAYMENT CONSIDERATIONS AND RISKS
Substantially all of the Mortgage Loans may be prepaid by the Mortgagors at
any time without a prepayment penalty; however, upon prepayment of a Deferred
Payment Loan, the Deferred Payments may be due and payable. Any prepayment
charges and Deferred Payments collected shall be retained by the Servicer and
paid to the Depositor.
Interest shortfalls on the Mortgage Loans due to principal prepayments
("Principal Prepayments") and curtailments ("Curtailments") will be covered to
the extent described herein and in the Prospectus by payments of Compensating
Interest by the Servicer and any shortfalls not covered by such payments that
would otherwise be borne by the Class A Certificates will be covered by
distributions of Excess Spread from the related Group, Net Excess Spread and
Excess Principal from the other Group (prior to the related Cross-Over Date),
and payments pursuant to the Certificate Insurance Policy, subject to the
limitations described herein. Because in the absence of such shortfalls the
Excess Spread will, prior to the related Cross-Over Date, be used to accelerate
payments of principal on the related Class A Certificates, and in certain
circumstances, the Class A Certificates with respect to the other Group,
application of Excess Spread to cover any interest shortfalls will reduce
accelerated payments of principal to the Class A Certificates.
To the extent that the Original Pre-Funded Amount with respect to a Group
has not been fully applied to the purchase of related Subsequent Mortgage Loans
by the Trust Fund by the end of the related Funding Period, the Holders of the
related Class A Certificates will receive, pro rata, a prepayment of principal
in an amount equal to (a) the lesser of (i) the Pre-Funded Amount remaining in
the related Pre-Funding Account on the first Remittance Date following the
termination of the Funding Period and (ii) the related outstanding Class A
Principal Balance. Although no assurance can be given, it is anticipated by the
Depositor that the principal amount of Subsequent Mortgage Loans sold to the
Trust Fund will require the application of substantially all of the Original
Pre-Funded Amounts and that there should be no material amount of principal
prepaid to the related Class A Certificateholders from the related Pre-Funding
Account. However, it is unlikely that the Depositor will be able to deliver
Subsequent Mortgage Loans with an aggregate principal balance identical to the
related Original Pre-Funded Amounts, with the result that some prepayment of the
related Class A Certificates will occur on the September 25, 1998 Remittance
Date.
In addition, the yield to maturity of the Class A Certificates will depend
on whether, to what extent, and the timing with respect to which, Excess Spread,
Available Transfer Cashflow and Net Excess Principal is used to accelerate
payments of principal on such Class A Certificates. With respect to any Group,
on any Remittance Date on which the Overcollateralization Amount equals the
Required Overcollateralization Amount, Excess Spread, Available Transfer
Cashflow and Net Excess Principal will not be applied to accelerate payments of
principal on such Class A Certificates. In addition, on any such date,
distributions in respect of principal to the related Class A Certificates may
only equal that amount necessary to maintain the Required Overcollateralization
Amount with respect to a Group, which amount may be zero, therefore reducing the
rate of principal payments allocated to the related Class A Certificates.
Greater than anticipated prepayments of principal will increase the yield
on Class A Certificates purchased at a price less than par. Greater than
anticipated prepayments of principal will decrease the yield on Class A
Certificates purchased at a price greater than par. The effect on an investor's
yield due to principal prepayments on the Mortgage Loans occurring at a rate
that is faster (or slower) than the rate anticipated by the investor in the
period
S-41
<PAGE>
immediately following the issuance of the Class A Certificates will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted average life of the Class A Certificates will
also be affected by the amount and timing of delinquencies and defaults on the
Mortgage Loans and the recoveries, if any, on defaulted Mortgage Loans and
foreclosed properties.
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates is directly related to the rate of payments of
principal on the Mortgage Loans in the related Group, which may be in the form
of scheduled and unscheduled payments. In particular, a reduction in the rate of
principal payments will occur when interest only vouchers are used to defer
principal payments and interest only payments are made under the Periodic
Payment Loans. In general, when the level of prevailing interest rates for
similar loans significantly declines, the rate of prepayment is likely to
increase, although the prepayment rate is influenced by a number of other
factors, including general economic conditions and homeowner mobility. The rate
of principal payments will in turn be affected by the amortization schedules
(which will change periodically to accommodate adjustments to the Mortgage Rates
on Group 2 Mortgage Loans) and by the rate of Principal Prepayments and
Curtailments on the related Mortgage Loans (including, for this purpose,
prepayments resulting from (i) refinancings, (ii) liquidations due to defaults,
casualties and condemnations and (iii) repurchases by the Depositor or the
Servicer). The rate of default on second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions to
related Class A Certificateholders of amounts of principal which would otherwise
be distributed over the remaining terms of the related Mortgage Loans. The
Mortgage Loans may be prepaid by the Mortgagors at any time without a prepayment
penalty and the Mortgagor is required to pay interest only to the date of
prepayment, except with respect to the Deferred Payment Loans which may require
the Mortgagor to pay, in addition, the Deferred Payments.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Although the Servicer has no obligation to do so, the Servicer may purchase
from the Trust Fund a Mortgage Loan which is delinquent in payment 90 days or
more. The purchase price for such Mortgage Loan will be equal to 100% of the
Principal Balance thereof plus accrued and unpaid interest thereon.
In addition, the Servicer may, at its option, with written notice to the
Certificateholders and the Trustee, purchase from the Trust Fund all of the
outstanding Mortgage Loans and REO Properties, and thus effect the early
retirement of the related Class A Certificates, on any Remittance Date on which
the outstanding aggregate principal balance of the Mortgage Loans is less than
or equal to 5% of the sum of the Original Pool Principal Balance and the
Original Pre-Funded Amounts. See "Pooling Agreement--Termination; Purchase of
Mortgage Loans" herein and "Description of the Certificates--Termination" in the
Prospectus.
CLASS 1A CERTIFICATES
PREPAYMENT CONSIDERATIONS
The Class 1A Pass-Through Rate for each Remittance Date will be equal to
the lesser of (i) One-Month LIBOR plus 0.20% per annum, and (ii) the weighted
average of the Mortgage Rates of the Group 1 Mortgage Loans minus, with respect
to Group 1, the sum of (a) the Servicing Fee Rate, (b) the rate at which the
monthly premium payable to the Certificate Insurer is calculated and (c) the
rate at which the Annual Trustee Expense Amount is calculated. However, on any
Remittance Date on which the Servicer does not exercise its option to purchase
the Mortgage Loans and REO Properties as described under "Pooling
Agreement--Termination; Purchase of the Mortgage Loans" herein, the rate
provided in each clause (i) of the Class 1A Pass-Through Rate will be One-Month
LIBOR plus 0.60% per annum. Disproportionate principal payments (whether
resulting from Principal Prepayments or Curtailments) on Group 1 Mortgage Loans
having Mortgage Rates higher or lower than the related, then current, Class 1A
Pass-Through Rate may also affect the yield on the related Class 1A
Certificates. The yield to maturity of the Class 1A Certificates may be lower
than that otherwise produced if disproportionate principal payments (including
Principal Prepayments) are made on Group 1 Mortgage Loans having Mortgage Rates
that exceed the Class 1A Pass-Through Rate.
EFFECT OF MORTGAGE LOAN YIELD ON CLASS 1A PASS-THROUGH RATE
The Class 1A Pass-Through Rate is based upon, among other factors as
described above, the value of an index ("One-Month LIBOR") which is different
from the fixed rates applicable to the Group 1 Mortgage Loans, as described
under "The Mortgage Pool-Group 1" herein. See "Description of the
Certificates-Calculation of One-Month LIBOR" herein. Each Group 1 Mortgage Loan
bears a fixed rate whereas the Class 1A Pass-Through Rate adjusts monthly and
may be based upon One-Month LIBOR. Because the Mortgage Rates on the Group 1
Mortgage Loans are fixed, such rates will not change in response to changes in
market interest rates. Accordingly, if mortgage market interest rates or market
yields for securities similar to the Class 1A Certificates were to rise, the
market value of the Class 1A
S-42
<PAGE>
Certificates may decline in cases where the Class 1A Pass-Through Rate did not
increase accordingly. One-Month LIBOR may respond to economic and market
factors, while the Mortgage Rate on the Group 1 Mortgage Loans will be fixed.
One-Month LIBOR may increase to a level at which the amount of interest
collected on all of the Group 1 Mortgage Loans during the related Accrual Period
may be insufficient to pay interest on the Class 1A Certificates at the Class 1A
Pass-Through Rate calculated using One-Month LIBOR. The Class 1A Certificates do
not contain any "carry-forward" or "catch-up" feature if the amount of interest
paid is so limited.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement with
respect to Group 1 is based on a constant annual rate of prepayment relative to
the then outstanding principal balance of the related Mortgage Loans applied
monthly during the period indicated of the life of the Group 1 Mortgage Loan.
The prepayment model does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Group 1 Mortgage Loans. The Depositor does not make any representation about the
appropriateness of any prepayment model.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments
(including balloon payments) on the Group 1 Mortgage Loans are received in a
timely manner and prepayments of Group 1 Mortgage Loans in full are made at the
indicated scenario level (each, a "Prepayment Model") set forth in the tables;
(ii) the Servicer exercises its right of optional termination described above;
(iii) distributions are made on the 25th day of each calendar month regardless
of the day on which the Remittance Date actually occurs, commencing in July
1998; (iv) the Group 1 Mortgage Loans have been aggregated into 7 hypothetical
Initial Mortgage Loans and 14 hypothetical Subsequent Mortgage Loans, 6 of which
are hypothetical Temporary Buydown Loans with the characteristics set forth in
the first following table and the Group 1 Subsequent Mortgage Loans are
purchased by August 27, 1998 resulting in no mandatory prepayment of the Class
1A Certificates on September 25, 1998; (v) no losses on the Group 1 Mortgage
Loans have occurred; (vi) the sum of the Servicing Fee and fees payable out of
the Trust Fund to the Trustee and the Certificate Insurer, respectively, equals
approximately 0.78% per annum of the scheduled principal balance of the Group 1
Mortgage Loans for each Remittance Date; (vii) no interest shortfalls will arise
in connection with prepayment in full of the Group 1 Mortgage Loans; (viii) the
initial Class 1A Pass-Through Rate is equal to 5.85625% per annum, the initial
Class 1A Principal Balance is equal to $266,000,000, (ix) the Class A Principal
Remittance Amount with respect to each of the Class 1A Certificates on each
Remittance Date occurring prior to the Step-Down Date is equal to principal
received from Group 1 plus the related Unrecovered Class A Portion for such
Remittance Date and on each Remittance Date occurring on or after the StepDown
Date is equal to that amount required to reach or maintain the Required
Overcollateralization Amount; (x) the related Excess Spread is applied in an
amount required to reach or maintain the Required Overcollateralization Amount
for Group 1 to reduce the principal balance of the related Class 1A Certificates
on each Remittance Date that is prior to the Cross-Over Date to the extent that
the amount of such current application plus such amounts applied on all prior
Remittance Dates does not exceed $32,812,942.37 for Group 1; (xi) each
Remittance Date is deemed to occur before the Cross-Over Date; (xii) the Class
1A Certificates are purchased on June 25, 1998; (xiii) no Available Funds
Shortfall with respect to Group 1 exists and Available Transfer Cashflow and Net
Excess Principal is applied to reach or maintain the Required
Overcollateralization Amount as described in the Pooling Agreement; and (xiv)
the Required Overcollateralization Amount for Group 1 is the
Overcollateralization Amount required by the Certificate Insurer at any time as
set forth in the Insurance Agreement with respect to Group 1 among the
Depositor, the Servicer, the Certificate Insurer and the Trustee. The first and
second following tables assume that there are no delinquencies on the Group 1
Mortgage Loans and that the related Interest Coverage Account has sufficient
funds on deposit to cover shortfalls in interest of the Class 1A Certificates
during the Funding Period attributable to the pre-funding feature. The
"Step-Down Date" will be the Remittance Date following the later to occur of (i)
the thirtieth Remittance Date and (ii) the date on which the then outstanding
Group 1 Principal Balance is equal to 50% of the sum of the Original Group 1
Pre-Funded Amount and the Original Group 1 Principal Balance.
S-43
<PAGE>
<TABLE>
<CAPTION>
GROUP 1
HYPOTHETICAL MORTGAGE LOANS
REMAINING
ORIGINAL REMAINING MONTHS TO
AMORTIZATION AMORTIZATION BALLOON
MORTGAGE TERM TERM PAYMENT
PRINCIPAL BALANCE INTEREST RATE (IN MONTHS) (IN MONTHS) (IN-MONTHS)
----------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Group 1 Initial Mortgage Loans:
$10,885,527.98............................. 10.734% 113 112 N/A
$33,262,505.26............................. 10.790% 177 176 N/A
$27,733,248.81............................. 10.494% 237 235 N/A
$ 708,640.52............................. 7.229%(1) 334 332 N/A
$53,239,985.27............................. 10.480% 350 348 N/A
$41,821,562.80............................. 10.738% 360 358 178
$ 852,217.92............................. 7.083%(1) 360 360 180
Subsequent Group 1 Mortgage Loans (first
subsequent transfer balance as of July
27, 1998):
$ 3,244,748.38............................. 10.734% 120 120 N/A
$ 9,914,857.61............................. 10.790% 180 180 N/A
$ 8,266,701.83............................. 10.494% 240 240 N/A
$ 211,230.93............................. 7.229%(1) 334 334 N/A
$15,869,726.86............................. 10.480% 360 360 N/A
$12,466,133.77............................. 10.738% 360 360 180
$ 254,028.35............................. 7.083%(1) 360 360 180
Subsequent Group 1 Mortgage Loans (second
subsequent transfer balance as of
August 27, 1998):
$ 3,244,748.38............................. 10.734% 120 120 N/A
$ 9,914,857.61............................. 10.790% 180 180 N/A
$ 8,266,701.83............................. 10.494% 240 240 N/A
$ 211,230.93............................. 7.229%(1) 334 334 N/A
$15,869,726.86............................. 10.480% 360 360 N/A
$12,466,133.77............................. 10.738% 360 360 180
$ 254,028.35............................. 7.083%(1) 360 360 180
</TABLE>
- -------------
(1) Temporary Buydown Loan which assumes the Mortgage Rate increases 1% in
month twelve and an additional 1% in month twenty-four.
Since the following table was prepared on the basis of the assumptions in
the preceding paragraphs, there are discrepancies between the characteristics of
the actual Group 1 Mortgage Loans and the characteristics of the mortgage loans
assumed in preparing such tables. Any such discrepancy may have an effect upon
the percentages of the Principal Balance outstanding of the Class 1A
Certificates and the weighted average life of the Class 1A Certificates set
forth in the tables. In addition, since the actual Group 1 Mortgage Loans and
the Trust Fund have characteristics which differ from those assumed in preparing
the tables set forth below, the distributions of principal on the Class 1A
Certificates may be made earlier or later than as indicated in the tables.
S-44
<PAGE>
It is not likely that the Group 1 Mortgage Loans will prepay to maturity at
any of the Prepayment Models specified in the tables below or that all Group 1
Mortgage Loans will prepay at the same rate. In addition, the diverse remaining
terms to maturity of the Group 1 Mortgage Loans (which include recently
originated Group 1 Mortgage Loans) could produce slower or faster distributions
of principal than are indicated in the following tables at the Prepayment Model
specified even if the weighted average of the remaining terms to maturity of the
Group 1 Mortgage Loans equals those assumed.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
The model used in this Prospectus Supplement with respect to the Class 1A
Certificates is the prepayment assumption (the "Prepayment Assumption") which
represents the assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. With respect to the Class 1A Certificates, a 100% Prepayment
Assumption assumes a constant prepayment rate of 2% per annum of the then
outstanding principal balance of such Mortgage Loans in the first month of the
life of the Mortgage Loans and an additional 1.2% per annum in each month
thereafter until the twenty-first month. Beginning in the twenty-first month and
in each month thereafter during the life of the Mortgage Loans, a 100%
Prepayment Assumption assumes a constant prepayment rate of 26% per annum. As
used in the table entitled "Prepayment Scenarios", 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption i.e., no
prepayments. Correspondingly, 100% Prepayment Assumption assumes prepayment
rates equal to 100% of the Prepayment Assumption and so forth. In comparison,
the model used in this Prospectus Supplement with respect to Group 2 (a
"Prepayment Model") is based on a Constant Prepayment Rate more fully defined
herein under the caption "Certain Yield and Prepayment Considerations--Class 2A
Certificates--Prepayment Model". A "Constant Prepayment Rate" or "CPR"
represents a constant annual rate of payment relative to the then outstanding
principal balance of the related Mortgage Loans applied monthly during the
indicated portion of the life of the Group 2 Mortgage Loan.
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Group 1(1) ...... 0% 50% 100% 150% 200%
Group 2(2) ...... 10% 20% 28% 35% 45%
</TABLE>
- --------------
(1) As a percentage of the Prepayment Assumption.
(2) As a conditional prepayment rate (CPR).
Based on the foregoing assumptions, the following tables indicate the
projected weighted average life of each Class of the Class 1A Certificates.
S-45
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 1A
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100
June 25, 1998................................ 100 100 100 100 100
June 25, 1999................................ 95 90 86 81 76
June 25, 2000................................ 92 76 62 49 37
June 25, 2001................................ 90 64 44 29 18
June 25, 2002................................ 88 54 32 17 8
June 25, 2003................................ 85 45 23 10 0
June 25, 2004................................ 83 38 16 6 0
June 25, 2005................................ 80 32 12 0 0
June 25, 2006................................ 76 27 8 0 0
June 25, 2007................................ 73 22 6 0 0
June 25, 2008................................ 69 18 0 0 0
June 25, 2009................................ 66 15 0 0 0
June 25, 2010................................ 62 13 0 0 0
June 25, 2011................................ 58 10 0 0 0
June 25, 2012................................ 53 8 0 0 0
June 25, 2013................................ 37 0 0 0 0
June 25, 2014................................ 28 0 0 0 0
June 25, 2015................................ 26 0 0 0 0
June 25, 2016................................ 24 0 0 0 0
June 25, 2017................................ 21 0 0 0 0
June 25, 2018................................ 19 0 0 0 0
June 25, 2019................................ 17 0 0 0 0
June 25, 2020................................ 16 0 0 0 0
June 25, 2021................................ 14 0 0 0 0
June 25, 2022................................ 13 0 0 0 0
June 25, 2023................................ 11 0 0 0 0
June 25, 2024................................ 9 0 0 0 0
June 25, 2025................................ 0 0 0 0 0
Weighted Average Life (1)(2) years........ 13.60 5.68 3.41 2.47 1.94
Weighted Average Life (1)(3) years........ 13.68 5.83 3.53 2.53 1.99
</TABLE>
- -------------
(1) The weighted average life of a Class 1A Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 1A Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 1A Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
(3) Assumes that the Class 1A Certificates remain outstanding to their maturity
date.
S-46
<PAGE>
As with fixed-rate obligations generally, the rate of prepayment on a pool
of mortgage loans is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
mortgage loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. The Depositor
makes no representation as to the particular factors that will affect the
prepayment of the Group 1 Mortgage Loans, as to the relative importance of such
factors, as to the percentage of the principal balance of the Group 1 Mortgage
Loans that will be paid as of any date or as to the overall rate of prepayment
on the Group 1 Mortgage Loans.
CLASS 2A CERTIFICATES
PREPAYMENT CONSIDERATIONS
The Class 2A Pass-Through Rate for each Remittance Date will be equal to
the least of (i) One-Month LIBOR plus 0.15% per annum, (ii) the weighted average
of the Mortgage Rates of the Group 2 Mortgage Loans minus, with respect to Group
2, the sum of (a) the Servicing Fee Rate, (b) the rate at which the monthly
premium payable to the Certificate Insurer is calculated and (c) the rate at
which the Annual Trustee Expense Amount is calculated and (iii) the weighted
average of the Maximum Mortgage Rates of the Group 2 Mortgage Loans minus, with
respect to Group 2, the sum of (a) the Servicing Fee Rate, (b) the rate at which
the monthly premium payable to the Certificate Insurer is calculated and (c) the
rate at which the Annual Trustee Expense Amount is calculated; provided, that on
any Remittance Date on which the Servicer does not exercise its option to
purchase the Mortgage Loans and REO Properties as described under "Pooling
Agreement-Termination; Purchase of the Mortgage Loans" herein, the rate provided
in clause (i) of this sentence will be One-Month LIBOR plus 0.55% per annum.
Disproportionate principal payments (whether resulting from Principal
Prepayments or Curtailments) on Group 2 Mortgage Loans having Mortgage Rates
higher or lower than the related, then current, Class 2A Pass-Through Rate may
also affect the yield on the related Class 2A Certificates. The yield to
maturity of the Class 2A Certificates will be lower than that otherwise produced
if disproportionate principal payments (including Principal Prepayments) are
made on Group 2 Mortgage Loans having Mortgage Rates that exceed the Class 2A
Pass-Through Rate.
EFFECT OF MORTGAGE LOAN YIELD ON CLASS 2A PASS-THROUGH RATE
The Class 2A Pass-Through Rate is based upon, among other factors as
described above, the value of an index ("One-Month LIBOR") which is different
from the value of the Indices applicable to the Group 2 Mortgage Loans, as
described under "The Mortgage Pool-Group 2" herein. See "Description of the
Certificates-Calculation of One-Month LIBOR" herein. Each Group 2 Mortgage Loan
adjusts annually or semiannually based upon the related Index whereas the Class
2A Pass-Through Rate on the Class 2A Certificates adjusts monthly and may be
based upon One-Month LIBOR. One-Month LIBOR and the Indices applicable to the
Mortgage Loans may respond differently to economic and market factors, and there
is not necessarily any correlation between them. In addition, the Mortgage Loans
are subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage
Rates. Thus, it is possible, for example, that One-Month LIBOR may rise during
periods in which the Indices on the Mortgage Loans are stable or are falling or
that, even if both One-Month LIBOR and such Indices rise during the same period,
One-Month LIBOR may increase to a level at which the amount of interest
collected on all Group 2 Mortgage Loans during the related Accrual Period may be
insufficient to pay interest on the Class 2A Certificates at the Class 2A
Pass-Through Rate calculated using One-Month LIBOR. In such an event, the
resulting interest differential amount will be borne by the Class 2A
Certificates by operation of the Available Funds Cap Rate.
In addition, a number of factors affect the performance of One-Month LIBOR
and may cause One-Month LIBOR to move in a different manner from other indices.
To the extent that One-Month LIBOR may reflect changes in the general level of
interest rates less quickly than other indices, in a period of rising interest
rates, increases in the yield to Class 2A Certificateholders due to such rising
interest rates may occur later than that which would be produced by other
indices, and in a period of declining rates, One-Month LIBOR may remain higher
than other market interest rates.
All of the Group 2 Mortgage Loans are adjustable-rate mortgage loans
("ARMs"). As is the case with conventional fixed-rate mortgage loans, ARMs may
be subject to a greater rate of principal prepayments in a declining interest
rate environment. For example, if prevailing interest rates were to fall
significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates were to remain constant because the availability of
fixed-rate mortgage loans at competitive interest rates may encourage mortgagors
to refinance their ARMs to "lock in" lower fixed interest rates. The rate of
payments (including prepayments) on pools of mortgage loans is influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. No assurances can be given
S-47
<PAGE>
as to the rate of prepayments on the Group 2 Mortgage Loans in stable or
changing interest rate environments and the Depositor makes no representations
as to the particular factors that will affect the prepayment of the Group 2
Mortgage Loans.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. As described above, the Prepayment Model with
respect to Group 2 is based on a CPR. The Prepayment Model does not purport to
be either a historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of any pool
of mortgage loans, including the Group 2 Mortgage Loans. The Depositor does not
make any representation about the appropriateness of any Prepayment Model.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments on the
Group 2 Mortgage Loans are received in a timely manner and prepayments of Group
2 Mortgage Loans in full are made at the indicated CPR set forth in the table
entitled "Prepayment Scenarios"; (ii) the Servicer exercises its right of
optional termination on the earliest permissible date as described above; (iii)
distributions are made on the 25th day of each calendar month regardless of the
day on which the Remittance Date actually occurs, commencing in July, 1998; (iv)
the Group 2 Mortgage Loans have been aggregated into 17 hypothetical Group 2
Initial Mortgage Loans and 8 hypothetical Group 2 Subsequent Mortgage Loans,
three of which are hypothetical Temporary Buydown Loans with characteristics set
forth in the first following table; and the Group 2 Subsequent Mortgage Loans
are purchased by August 27, 1998 resulting in no mandatory prepayment of the
Class 2A Certificates on September 25, 1998; (v) no losses on the Group 2
Mortgage Loans have occurred; (vi) the sum of the Servicing Fee and the fees
payable to the Trustee and the Certificate Insurer, respectively, equals
approximately 0.78% per annum of the scheduled principal balance of the Group 2
Mortgage Loans for each Remittance Date; (vii) no interest shortfalls will arise
in connection with prepayment in full of the Group 2 Mortgage Loans; (viii) the
initial Class 2A Pass-Through Rate is equal to 5.80625% per annum and the
initial Class 2A Principal Balance is equal to $199,000,000; (ix) the Class A
Principal Remittance Amount with respect to the Class 2A Certificates on each
Remittance Date occurring prior to the Step-Down Date is equal to principal
received from Group 2 plus the related Unrecovered Class A Portion for such
Remittance Date and on each Remittance Date occurring on or after the Step-Down
Date is equal to that amount required to reach or maintain the Required
Overcollateralization Amount; (x) the Excess Spread is applied in an amount
required to reach or maintain the Required Overcollateralization Amount to
reduce the principal balance of the Class 2A Certificates on each Remittance
Date that is prior to the Cross-Over Date to the extent that the amount of such
current application plus such amounts applied on all prior Remittance Dates does
not exceed $26,438,426.16; for Group 2, (xi) each Remittance Date is deemed to
occur before the Cross-Over Date; (xii) the Class 2A Certificates are purchased
on June 25, 1998; (xiii) the One-Year U.S. Treasury Index remains at a constant
rate equal to 5.46% and the Six-Month LIBOR Index remains at a constant rate
equal to 5.75%, with respect to any Adjustment Date; and (xiv) no Available
Funds Shortfall with respect to Group 2 exists and Available Transfer Cashflow
and Net Excess Principal is applied to reach or maintain the Required
Overcollateralization Amount as described in the Pooling Agreement. The third
following table also assumes that (i) there are no delinquencies on the Group 2
Mortgage Loans; (ii) the Group 2 Interest Coverage Account has sufficient funds
on deposit to cover shortfalls in interest on the Class 2A Certificates during
the Funding Period attributable to the pre-funding feature; and (iii) the
Required Overcollateralization Amount for Group 2 is the Overcollateralization
Amount required by the Certificate Insurer at any time as set forth in the
Insurance Agreement with respect to Group 2 among the Depositor, the Servicer,
the Certificate Insurer and the Trustee. The "Step-Down Date" will be the
Remittance Date following the later to occur of (i) the thirtieth Remittance
Date and (ii) the date on which the then outstanding Group 2 Principal Balance
is equal to 50% of the sum of the Original Group 2 Pre-Funded Amount and the
Original Group 2 Principal Balance.
S-48
<PAGE>
<TABLE>
<CAPTION>
GROUP 2 HYPOTHETICAL SIX-MONTH LIBOR LOANS
MONTHS ORIGINAL REMAINING
TO MORTGAGE MAXIMUM MINIMUM TERM TO TERM TO
RATE INTEREST GROSS INTEREST INTEREST MATURITY MATURITY
PRINCIPAL BALANCE CHANGE RATE MARGIN RATE RATE (IN-MONTHS) (IN-MONTHS)
----------------- ------ -------- ------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Group 2 Initial Mortgage Loans:
$ 1,005,639.98 2 11.139% 7.680% 16.783% 10.783% 360 354
$ 1,837,017.49 4 10.391% 7.253% 16.391% 10.391% 360 358
$ 2,703,864.33 5 10.748% 7.385% 16.554% 10.554% 360 357
$ 1,115,694.72 6 9.532% 6.449% 15.532% 9.532% 360 359
$ 354,299.38 8 9.501% 5.228% 15.501% 8.501% 360 344
$ 454,959.29 13 10.534% 6.220% 16.534% 9.534% 360 349
$ 266,366.59 16 11.067% 6.490% 17.067% 10.067% 360 352
$ 1,037,407.43 17 10.247% 6.351% 16.247% 9.247% 360 353
$ 1,661,568.63 19 10.638% 6.836% 16.638% 9.638% 360 355
$ 1,121,882.50 20 11.239% 7.167% 17.239% 10.239% 360 356
$ 4,501,947.57 21 10.755% 7.199% 16.755% 9.755% 360 357
$28,928,525.09 22 10.286% 6.801% 16.286% 9.286% 359 357
$ 5,060,946.47 22 8.263%(1) 6.800% 16.263% 9.263% 360 358
$45,218,689.38 23 10.236% 6.653% 16.236% 9.236% 358 357
$28,703,876.65 24 10.349% 6.592% 16.346% 9.349% 357 357
Subsequent Group 2 Mortgage Loans (first subsequent transfer
balance as of July 27, 1998):
$ 2,125,926.13 6 10.505% 7.236% 16.372% 10.372% 360 360
$35,819,038.94 24 10.316% 6.696% 16.315% 9.316% 360 360
$ 1,614,957.77 24 8.263%(1) 6.800% 16.263% 9.263% 360 360
Subsequent Group 2 Mortgage Loans (second subsequent
transfer balance as of August 27, 1998):
$ 2,125,926.13 6 10.505% 7.236% 16.372% 10.372% 360 360
$35,819,038.94 24 10.316% 6.696% 16.315% 9.316% 360 360
$ 1,614,957.77 24 8.263%(1) 6.800% 16.263% 9.263% 360 360
</TABLE>
- --------------
(1) Temporary Buydown Loan which assumes the Mortgage Rate increases 1% in
month twelve. Beginning in month twenty-four the Mortgage Rate adjusts
every six months based on the Six-Month LIBOR Index.
<TABLE>
<CAPTION>
GROUP 2 HYPOTHETICAL ONE-YEAR U.S. TREASURY LOANS
MONTHS ORIGINAL REMAINING
TO MORTGAGE MAXIMUM MINIMUM TERM TO TERM TO
RATE INTEREST GROSS INTEREST INTEREST MATURITY MATURITY
PRINCIPAL BALANCE CHANGE RATE MARGIN RATE RATE (IN-MONTHS) (IN-MONTHS)
----------------- ------ -------- ------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Group 2 Initial Mortgage Loans:
$ 84,926.47 3 10.125% 6.900% 16.125% 10.125% 360 357
$ 85,978.86 9 13.500% 8.250% 17.875% 11.875% 360 339
subsequent Group 2 Mortgage Loans (first subsequent
transfer balance as of July 27, 1998):
$ 54,536.22 12 11.823% 7.579% 17.005% 11.005% 360 360
Subsequent Group 2 Mortgage Loans (second subsequent transfer balance as of
August 27, 1998):
$ 54,536.22 12 11.823% 7.579% 17.005% 11.005% 360 360
</TABLE>
S-49
<PAGE>
Since the following tables were prepared on the basis of the assumptions in
the preceding paragraphs, there are discrepancies between the characteristics of
the actual Group 2 Mortgage Loans and the characteristics of the mortgage loans
assumed in preparing such table. Any such discrepancy may have an effect upon
the percentages of the Class 2A Principal Balance outstanding and the weighted
average life of the Class 2A Certificates set forth in the tables. In addition,
since the actual Group 2 Mortgage Loans and the Trust Fund have characteristics
which differ from those assumed in preparing the table set forth below, the
distributions of principal on the Class 2A Certificates may be made earlier or
later than as indicated in the table.
It is not likely that the Group 2 Mortgage Loans will prepay to maturity at
the Prepayment Model specified in the tables below or that all Group 2 Mortgage
Loans will prepay at the same rate. In addition, the diverse remaining terms to
maturity of the Group 2 Mortgage Loans (which include recently originated Group
2 Mortgage Loans) could produce slower or faster distributions of principal than
are indicated in the table at the various percentages of the Prepayment Model
specified even if the weighted average of the remaining terms to maturity of the
Group 2 Mortgage Loans equals those assumed.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
The model used in this Prospectus Supplement with respect to the Class 2A
Certificates is based on a percentage of CPR as shown in the table entitled
"Prepayment Scenarios". See "Certain Yield and Prepayment Considerations--Class
1A Certificates--Prepayment Model" above.
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of the Class 2A Certificates.
S-50
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS 2A
CERTIFICATES OUTSTANDING AT THE RESPECTIVE
PREPAYMENT MODELS SET FORTH BELOW
REMITTANCE DATE Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100% 100 100
June 25, 1998................................ 100 100 100 100 100
June 25, 1999................................ 86 77 69 62 52
June 25, 2000................................ 76 60 47 38 26
June 25, 2001................................ 68 46 34 25 15
June 25, 2002................................ 60 37 24 16 8
June 25, 2003................................ 53 29 17 10 0
June 25, 2004................................ 47 23 12 7 0
June 25, 2005................................ 42 18 9 0 0
June 25, 2006................................ 37 15 6 0 0
June 25, 2007................................ 33 12 5 0 0
June 25, 2008................................ 30 9 0 0 0
June 25, 2009................................ 26 7 0 0 0
June 25, 2010................................ 23 6 0 0 0
June 25, 2011................................ 21 5 0 0 0
June 25, 2012................................ 18 4 0 0 0
June 25, 2013................................ 16 0 0 0 0
June 25, 2014................................ 14 0 0 0 0
June 25, 2015................................ 12 0 0 0 0
June 25, 2016................................ 11 0 0 0 0
June 25, 2017................................ 9 0 0 0 0
June 25, 2018................................ 8 0 0 0 0
June 25, 2019................................ 7 0 0 0 0
June 25, 2020................................ 6 0 0 0 0
June 25, 2021................................ 5 0 0 0 0
June 25, 2022................................ 4 0 0 0 0
June 25, 2023................................ 3 0 0 0 0
June 25, 2024................................ 2 0 0 0 0
June 25, 2025................................ 0 0 0 0 0
Weighted Average Life (1)(2) years........ 7.73 4.00 2.75 2.10 1.54
Weighted Average Life (1)(3) years........ 7.74 4.08 2.84 2.20 1.60
</TABLE>
- -------------
(1) The weighted average life of a Class 2A Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class 2A Certificate to the stated Remittance Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class 2A Certificate.
(2) Assumes Servicer exercises its right of optional termination at the
earliest permissible date.
(3) Assumes that the Class 2A Certificates remain outstanding to their
maturity.
The rate of prepayment on a pool of mortgage loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments. The Depositor makes no representation as to
the particular factors that will affect the prepayment of the Group 2 Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Group 2 Mortgage Loans that will be paid as of any
date or as to the overall rate of prepayment on the Group 2 Mortgage Loans.
LIMITATION ON ADJUSTMENTS
Although each of the Group 2 Mortgage Loans bears interest at an adjustable
Mortgage Rate, the adjustments of the Mortgage Rate for any Group 2 Mortgage
Loan will not exceed the Periodic Rate Cap and the Mortgage Rate will in no
event exceed the Maximum Mortgage Rate or be less than the Minimum Mortgage Rate
for such Group 2
S-51
<PAGE>
Mortgage Loan, regardless of the level of interest rates generally or the rate
otherwise produced by adding the related Index and the Gross Margin. In
addition, such adjustments will be subject to rounding to the nearest 0.125%.
THE DEPOSITOR
For further information regarding the Depositor, see "The Depositor" in the
Prospectus.
LOAN ORIGINATION HISTORY
The Depositor originates mortgage loans on Single Family Properties,
Multifamily Properties, Commercial Properties, Mixed Use and Manufactured Home
Properties nationwide and purchases mortgage loans from lenders, mortgage
bankers, and brokers on a wholesale basis. The Depositor conducts loan
origination and/or wholesale operations in a number of jurisdictions, including
Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Idaho, Illinois, Iowa, Indiana, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Montana, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, West Virginia and Wisconsin. The dollar
amounts of first and second mortgage loans originated and purchased by the
Depositor, collectively, during the nine month period ended March 31, 1998 and
twelve month periods ended June 30, 1997, 1996 and 1995 were approximately
$1,140,070,000, $998,988,000, $727,307,000 and $470,938,000, respectively.
UNDERWRITING CRITERIA
All of the Mortgage Loans were or will be originated or purchased by the
Depositor and are or will be serviced by the Servicer. All mortgage loan
applications are underwritten, and properties appraised, prior to origination
and/or purchase by the Depositor. All loans are reviewed and approved by a loan
officer of the Depositor, each of whom has specific credit limits based on
experience and seniority. However, only seventeen senior loan officers can
approve loan applications from $150,001-$250,000, only thirteen executive
officers of the Depositor can approve loan applications from $250,001-$325,000,
only five senior executive officers of the Depositor can approve loan
applications from $325,001-$400,000 and only two senior executive officers of
the Depositor can approve loan applications from $400,001-$500,000. All loan
applications over $500,000 require the approval of two specific senior executive
officers of the Depositor and ratification by the Board of Directors of the
Depositor.
Borrower loan applications are reviewed through a combination of reviews of
credit bureau reports and/or individual certifications. Income is determined
through various means, including applicant interviews, written verifications
with employers and review of pay stubs and tax returns, and a determination is
made that the borrower has a sufficient level of disposable income to satisfy
debt repayment requirements.
Substantially all properties of the Depositor are appraised by independent
fee appraisers approved by the Depositor in advance of funding, although in rare
instances the appraisal may be performed by a licensed in-house appraiser of the
Depositor. In addition, as part of the Depositor's quality control audit
procedures, approximately one of every ten properties with respect to a loan
originated by the Depositor is then reappraised by a different appraiser and
approximately 10% of all loans originated or purchased are reunderwritten. With
respect to Manufactured Homes, standard FNMA Manufactured Housing appraisal
guidelines are used by both staff and independent fee appraisers. Loans are
closed through approved attorneys, title insurers or agents of title insurers
and escrow companies, and are insured by major title companies. The Depositor
makes loans primarily on suburban and urban single family homes in major
metropolitan areas. In addition, the Depositor makes loans secured by investor
properties which include a commercial unit. Loans secured by multifamily
properties and mixed residential and commercial structures are also made where
the loan proceeds may be used by the borrower for business purposes.
The maximum permitted combined loan-to-value ratio and debt-to-income ratio
guidelines for each underwriting program and class are set forth herein under
"The Depositor-Underwriting Criteria-Group 1" and "The Depositor-Underwriting
Criteria-Group 2". Approximately 18.49% of the Group 1 Initial Mortgage Loans
(by Original Group 1 Principal Balance) were underwritten to Classes IIB, III,
III-SE, IV, IV-PI and V. Approximately 36.44% of the Group 2 Initial Mortgage
Loans, by Original Group 2 Principal Balance, were underwritten to Classes, IIB,
III, SE, IV and V.
GROUP 1
Single Family Loans.
Approximately 91.72% of the Group 1 Initial Mortgage Loans, by Original
Group 1 Principal Balance, were originated or purchased by the Depositor
pursuant to its Fixed-Rate Mortgage Program Underwriting Guidelines. The
Fixed-Rate Mortgage Program Underwriting Guidelines are primarily intended to
evaluate a borrower's credit standing
S-52
<PAGE>
and ability to repay a mortgage loan and to assess the value of the related
mortgaged property as collateral for such mortgage loan.
The Group 1 Mortgage Loans are originated primarily for borrowers who are
refinancing existing debt, which may include mortgage loans. Therefore, the
related mortgage may be either a senior or junior lien. In general, the
borrowers, in connection with certain lower numbered and earlier alphabetically
designated underwriting classes, have a history of paying consumer and prior
mortgage debt predominantly in a timely manner or, instead, in connection with
certain higher numbered and later alphabetically designated underwriting
classes, may have payment histories that include up to three payments missed on
a prior mortgage obligation and/or, in some cases, major derogatory credit items
such as outstanding judgments or prior bankruptcies.
The Fixed-Rate Mortgage Program allows originations of mortgage loans
secured by primary residences or investment properties.
Several different underwriting classes are used to categorize borrowers'
creditworthiness. In addition to general Fixed-Rate Mortgage Program
Underwriting Guidelines, each class has guidelines relating to maximum permitted
combined loan-to-value ratio, maximum permitted debt-to-income ratio and
acceptable consumer credit and mortgage credit delinquencies and defaults.
Generally, higher numbered underwriting classes (as set forth in the table
below) permit a greater number of derogatory credit items than the lower
numbered underwriting classes.
Each underwriting class has guidelines and standards for the type of
income, employment and asset verification performed prior to closing the loan.
In general, the Fixed-Rate Mortgage Program does not require verification of the
source of the borrower's assets to close the loan because this is not deemed to
be a critical credit factor in the case of a refinanced mortgage loan. The
Fixed-Rate Mortgage Program Class AA, Class I, Class II and Class IIB generally
require the verification of employment and income that is stated on the
borrower's application. The Class ANIV, Class III and Class III-SE program
guidelines generally require verification of employment without verification of
income that must be stated on the application. The Class III-SE program is
intended for self-employed borrowers. The Class IV program generally requires
the verification of income that is stated on the application. The Class IV-PI
program generally requires the verification of fifty percent 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-53
<PAGE>
<TABLE>
<CAPTION>
FIXED-RATE MORTGAGE PROGRAM
SINGLE FAMILY LOANS
MAXIMUM
PERMITTED MAXIMUM
COMBINED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT-TO-INCOME
CLASS PROPERTY TYPE RATIO RATIO
------------ ------------- ------------- --------------
<S> <C> <C> <C>
AA Owner Occupied One- to Four-Family 80% 45%
Owner Occupied Condominium/Townhouse/PUD 85% 45%
Non-Owner Occupied One- to Four-Family 80% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 75% 45%
ANIV Owner Occupied One- to Four-Family 75% 40%
Owner-Occupied Condominium/Townhouse/PUD 80% 40%
Non-Owner Occupied One- to Four-Family 75% 40%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 40%
I Owner Occupied One- to Four-Family 80% 50%
Owner Occupied Condominium/Townhouse/PUD 85% 50%
Non-Owner Occupied One- to Four-Family 80% 50%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 50%
II Owner Occupied One- to Four-Family 75% 50%
Owner Occupied Condominium/Townhouse/PUD 80% 50%
Non-Owner Occupied One- to Four-Family 75% 50%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 50%
IIB Owner Occupied One- to Four-Family 75% 50%
Owner Occupied Condominium/Townhouse/PUD 75% 50%
Non-Owner Occupied One- to Four-Family 75% 50%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 50
III Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 75% 45%
Non-Owner Occupied One- to Four-Family 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 60% 45%
III-SE Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 75% 45%
Non-Owner Occupied One- to Four-Family 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 60% 45%
IV Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 70% 45%
Non-Owner Occupied One- to Four-Family 65% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 55% 45%
IV-PI Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 70% 45%
Non-Owner Occupied One- to Four-Family 65% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 55% 45%
V Owner Occupied One- to Four-Family 65% 45%
Owner Occupied Condominium/Townhouse/PUD 55% 45%
Non-Owner Occupied One- to Four-Family 55% 45%
</TABLE>
The maximum permitted combined loan-to-value ratio may be increased by 5%
for Classes AA, ANIV, I, II, IIB, III, III-SE, IV and IV-PI on only owner
occupied one- to four-family dwellings, if the borrowers have exhibited an
excellent mortgage payment history, verified for the most recent twelve month
period.
Further adjustments to both the maximum permitted combined loan-to-value
ratio and the maximum permitted debt-to-income ratio are available only on owner
occupied one- to four-family dwellings, 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%.
The Rate Add-on Feature is no longer available on any other property type but,
rather, has been incorporated into the maximum permitted combined loan-to-value
ratio and the maximum permitted debt-to-income ratio at origination.
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, except with respect to Class AA and
Class I which is 5% of the sale price. For all classes with the exception of V,
if the property is an owner-occupied one- to four-family residence, a seller
financed subordinate mortgage loan is allowed. However, in no case can a seller
financed subordinate loan exceed 20% of the purchase price.
S-54
<PAGE>
On a case-by-case basis, the Depositor may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
class guidelines warrants an underwriting exception. Compensating factors may
include, but are not limited to, low combined loan-to-value ratio, low
debt-to-income ratio, good credit history, stable employment and duration of
residence at the applicant's current address.
Manufactured Home Loans. The Manufactured Home Loans included in the
initial Group 1 (approximately 2.89% of the Group 1 Initial Mortgage Loans, by
Original Group 1 Principal Balance) were originated or purchased by the
Depositor pursuant to its Manufactured Home Loan Program. The Manufactured Home
Loan Program allows origination of fixed-rate and adjustable-rate mortgage loans
secured only by first liens on manufactured homes that have been permanently
affixed to a permanent foundation and to the real property. In addition, the
Manufactured Home Loan Program allows origination of fully amortizing loans
only, with a standard amortization term of ten (10), fifteen (15) or twenty (20)
years for multi-wide properties and fifteen (15) years for single-wide
properties. Thirty (30) year and twenty-five (25) year amortizations may also be
permitted, subject to certain limitations, for loans secured by multi-wide
properties. Subject to certain limitations, the Manufactured Home, if
multi-wide, may be a second/vacation home.
The Depositor's underwriting standards under the Manufactured Home Loan
Program are primarily intended to evaluate a borrower's credit standing and
ability to repay a mortgage loan and to assess the value of the manufactured
home and underlying real estate as collateral for such mortgage loan. In
general, the Depositor's underwriting guidelines with respect to eligible
borrowers under the Manufactured Home Loan Program are the same as those under
the Depositor's Fixed-Rate Mortgage Program or Adjustable-Rate Mortgage Program,
as the case may be.
The Manufactured Home Loan Program underwriting guidelines with respect to
eligible properties are, in general, the same as those for the Fixed-Rate
Mortgage Program or Adjustable-Rate Mortgage Program, as the case may be, with
necessary modifications due to the nature of the product. The Manufactured Home
must be constructed pursuant to Federal Manufactured Home Construction and
Safety Standards and the property must be zoned 1-4 family residential. The
wheels, axles and trailer hitch must have been removed and the home must be
permanently affixed to a permanent foundation on the real estate. The Depositor
requires a manufactured housing unit (ALTA 7) endorsement from each title
insurer of a Manufactured Home Loan stating that the insurer agrees that the
related manufactured housing unit is included within the term "land" when used
in the title policy. Each underwriting class, in addition to standard Fixed-Rate
Mortgage Program guidelines or Adjustable-Rate Mortgage Program guidelines, as
the case may be, has guidelines as to the maximum permitted combined
loan-to-value ratio based on the size of the manufactured home (single-wide or
multi-wide). Generally, higher numbered underwriting classes (as set forth in
the table below) permit a greater number of derogatory credit items than the
lower numbered underwriting classes.
MANUFACTURED HOME LOAN 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 Single-wide 85% 45%
Owner Occupied Multi-wide 90% 45%
ANIV Owner Occupied Single-wide 75% 45%
Owner Occupied Multi-wide 85% 45%
I Owner Occupied Single-wide 80% 50%
Owner Occupied Multi-wide 90% 50%
II Owner Occupied Single-wide 75% 50%
Owner Occupied Multi-wide 85% 50%
IIB Owner-Occupied Multi-wide 75% 45%
III Owner Occupied Single-wide 70% 45%
Owner Occupied Multi-wide 80% 45%
III-SE Owner Occupied Single-wide 70% 45%
Owner Occupied Multi-wide 80% 45%
IV Owner Occupied Multi-wide 70% 45%
V Owner Occupied Multi-wide 50% 45%
</TABLE>
Multifamily Loans and Mixed Use Loans. The Multifamily and Mixed Use Loans
included in the Initial Group 1 (approximately 5.00% of the Group 1 Initial
Mortgage Loans, by Original Group 1 Principal Balance) were originated or
purchased by the Depositor pursuant to its Fixed Rate Mortgage
Program--Multifamily and Mixed Use. The Depositor primarily underwrites loans
for 5 to 50 unit apartment buildings in Colorado, Connecticut, Delaware,
S-55
<PAGE>
Florida, Georgia, Illinois, Indiana, Massachusetts, Maryland, Michigan, Montana,
New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island,
Virginia, Washington and the District of Columbia under the Fixed-Rate Mortgage
Program--Multifamily and Mixed Use.
The Depositor's underwriting standards under the Fixed Rate Mortgage
Program--Multifamily and Mixed Use are primarily intended to assess the ability
of the mortgaged property to generate adequate cash flow to support the mortgage
and to a lesser extent, the financial capabilities and managerial ability of the
mortgagor. In determining whether a loan should be granted, the Depositor
considers the reliability of the income stream from investment property, the
debt service coverage ratios and the adequacy of such property as collateral for
the mortgage loan, the creditworthiness of the mortgagor and the mortgagor's
management experience. The "debt service coverage ratio" or "DSCR" with respect
to a Mortgaged Property means (a) the net operating income for the related
Mortgaged Property used in underwriting the related Mortgage Loan divided by (b)
the annual debt service (principal and interest) for such Mortgage Loan. While
their primary consideration in underwriting a mortgage loan is the mortgaged
property, sufficient documentation on the mortgagor is required to establish the
financial strength and ability of the borrower to successfully operate the
mortgaged property and meet the obligations of the note and deed of trust.
Under the Fixed Rate Mortgage Program--Multifamily and Mixed Use, the
amount of the mortgage loan is not more than 75% of the appraised value. The
debt service coverage ratio ("DSCR") is not less than 1.2.
The Fixed Rate Mortgage Program--Multifamily and Mixed Use requires the
inspection of the property and records regarding the property are inspected to
determine that the property is in compliance with current zoning requirements,
the number of buildings on the property, the type of construction materials
used, the proximity of the property to flood zones and whether there are any
negative environmental factors. The property must front on publicly dedicated
and maintained streets with provisions for adequate and safe ingress and egress.
Also, the title is reviewed to determine if there are any covenants, conditions
and restrictions or easements on the property. The properties are appraised by
independent appraisers approved by the Depositor and reviewed either by the
Depositor's property evaluation department and/or an outside consultant.
Generally, the maximum permitted combined loan-to-value ratio and minimum
permitted debt service coverage ratio guidelines for each underwriting class are
as follows:
FIXED-RATE MORTGAGE PROGRAM
MULTIFAMILY AND MIXED USE
<TABLE>
<CAPTION>
MAXIMUM
PERMITTED MINIMUM
COMBINED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT SERVICE
CLASS PROPERTY TYPE RATIO COVERAGE
------------ ------------- ------------- ------------
<S> <C> <C> <C>
AA Owner Occupied.............................. 75% 1.20%
Non-Owner Occupied.......................... 70% 1.20%
I Owner Occupied.............................. 75% 1.25%
Non-Owner Occupied.......................... 70% 1.25%
II Owner Occupied.............................. 65% 1.20%
Non-Owner Occupied.......................... 60% 1.20%
IV Owner Occupied.............................. 55% 1.35%
Non-Owner Occupied.......................... 50% 1.35%
V Owner Occupied.............................. 55% 1.35%
Non-Owner Occupied.......................... 50% 1.35%
</TABLE>
Commercial Loans. The Commercial Loans included in the Initial Group 1
(approximately 0.39% of the Group 1 Initial Mortgage Loans, by Original Group 1
Principal Balance) were originated or purchased by the Depositor pursuant to its
Commercial Property Program. Under this program the Depositor primarily
underwrites loans for 3 to 50 unit buildings without a residential component.
The properties primarily consist of commercial and/or office space with a
minimum of three tenants.
The Depositor's underwriting standards under the Commercial Property
Program are primarily intended to assess the ability of the mortgaged property
to generate adequate cash flow to support the mortgage and to a lesser extent,
the financial capabilities and managerial ability of the mortgagor. In
determining whether a loan should be granted, the Depositor considers the
reliability of the income stream from investment property, the DSCRs and the
adequacy of such property as collateral for the mortgage loan, the
creditworthiness of the mortgagor and the mortgagor's management experience.
While the primary consideration in underwriting a mortgage loan under this
program is the mortgaged property, sufficient documentation on the mortgagor is
required to establish the financial strength and ability of the borrower to
successfully operate the mortgaged property and meet the obligations of the note
and deed of trust.
S-56
<PAGE>
Under the Commercial Property Program, the amount of the mortgage loan is
not more than 70% of the appraised value. The DSCR is not less than 1.25.
The Commercial Property Program requires the inspection of the property and
records regarding the property to determine that the property is in compliance
with current zoning requirements, the number of buildings on the property, the
type of construction materials used, the proximity of the property to flood
zones and whether there are any negative environmental factors. The property
must front on publicly dedicated and maintained streets with provisions for
adequate and safe ingress and egress. Also, the title is reviewed to determine
if there are any covenants, conditions and restrictions or easements on the
property. The properties are appraised by independent appraisers approved by the
Depositor and reviewed either by the Depositor's property evaluation department
and/or an outside consultant. Generally, the maximum permitted CLTV and minimum
permitted DSCR guidelines for each underwriting class are as follows:
COMMERCIAL PROPERTY PROGRAM
<TABLE>
<CAPTION>
MAXIMUM
PERMITTED MINIMUM
COMBINED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT SERVICE
CLASS PROPERTY TYPE RATIO COVERAGE RATIO
------------ ------------- ------------- --------------
<S> <C> <C> <C>
A Owner Occupied.............................. 70% 1.25%
Non-Owner Occupied.......................... 65% 1.25%
I Owner Occupied.............................. 70% 1.30%
Non-Owner Occupied.......................... 65% 1.30%
II Owner Occupied.............................. 65% 1.35%
Non-Owner Occupied.......................... 60% 1.35%
IV Owner Occupied.............................. 55% 1.45%
Non-Owner Occupied.......................... 50% 1.45%
V Owner Occupied.............................. 55% 1.45%
Non-Owner Occupied.......................... 50% 1.45%
</TABLE>
GROUP 2
Single Family Loans. Approximately 97.17% of the Group 2 Initial Mortgage
Loans, by Original Group 2 Principal Balance, were originated or purchased by
the Depositor pursuant to its Adjustable-Rate First Mortgage Program
underwriting guidelines. The Adjustable-Rate First Mortgage Program guidelines
are primarily intended to evaluate a borrower's credit standing and ability to
repay a mortgage loan and to assess the value of the related mortgaged property
as collateral for such mortgage loan.
The Group 2 Mortgage Loans are originated primarily for borrowers who are
refinancing existing debt. In general, the borrowers, in connection with certain
lower-numbered and earlier alphabetically designated underwriting classes, have
a history of paying consumer and prior mortgage debt predominantly in a timely
manner or, instead, in connection with certain higher-numbered and later
alphabetically designated underwriting classes, may have payment histories that
include up to three payments missed on a prior mortgage obligation and/or, in
some cases, major derogatory credit items such as outstanding judgments or prior
bankruptcies.
Several different underwriting classes are used to categorize the
creditworthiness of borrowers. In addition to general Adjustable-Rate First
Mortgage Program guidelines, each class has guidelines relating to maximum
permitted loan-to-value ratio, maximum permitted debt-to-income ratio and
acceptable consumer credit and mortgage credit delinquencies and defaults.
Generally, higher-numbered underwriting classes (as set forth in the table
below) permit a greater number of derogatory credit items than the lower
numbered underwriting classes.
Each underwriting class has guidelines and standards for the type of
income, employment and asset verification performed prior to closing the loan.
In general, the Adjustable-Rate First Mortgage Program does not require
verification of the source of the borrower's assets to close the loan because
this is not deemed to be a critical credit factor in the case of a refinanced
mortgage loan. The Adjustable-Rate First Mortgage Program Class AA, Class I,
Class II and Class IIB generally require the verification of employment and
income that is stated on the borrower's application. The Class ANIV, Class III
and Class SE program guidelines generally require verification of employment
without verification of income that must be stated on the application. The Class
SE program is intended for self-employed borrowers. The Class IV program
generally requires the verification of income that is stated on the application
without verification of employment and the Class V program generally requires
the verification of all income that can be verified by independent means.
Generally, the maximum permitted loan-to-value ratio and maximum permitted
debt-to-income ratio guidelines for each underwriting class are as follows:
S-57
<PAGE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE FIRST MORTGAGE PROGRAM
MAXIMUM MAXIMUM
PERMITTED PERMITTED
UNDERWRITING LOAN-TO-VALUE DEBT-TO-INCOME
CLASS PROPERTY TYPE RATIO RATIO
------------ ------------- ------------- --------------
<S> <C> <C> <C>
AA Owner Occupied One- to Four-Family 80% 45%
Owner Occupied Condominium/Townhouse/PUD 85% 45%
Non-Owner Occupied One- to Four-Family 80% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 75% 45%
ANIV Owner Occupied One- to Four-Family 75% 40%
Owner Occupied Condominium/Townhouse/PUD 80% 40%
Non-Owner Occupied One- to Four-Family 75% 40%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 40%
I Owner Occupied One- to Four-Family 80% 45%
Owner Occupied Condominium/Townhouse/PUD 85% 45%
Non-Owner Occupied One- to Four-Family 80% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 45%
II Owner Occupied One- to Four-Family 75% 45%
Owner Occupied Condominium/Townhouse/PUD 80% 45%
Non-Owner Occupied One- to Four-Family 75% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 45%
IIB Owner Occupied One- to Four-Family 75% 45%
Owner Occupied Condominium/Townhouse/PUD 75% 45%
Non-Owner Occupied One- to Four-Family 75% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 70% 45%
SE Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 75% 45%
Non-Owner Occupied One- to Four-Family 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 60% 45%
III Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 75% 45%
Non-Owner Occupied One- to Four-Family 70% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 60% 45%
IV Owner Occupied One- to Four-Family 70% 45%
Owner Occupied Condominium/Townhouse/PUD 70% 45%
Non-Owner Occupied One- to Four-Family 65% 45%
Non-Owner Occupied Condominium/Townhouse/PUD 55% 45%
V Owner Occupied One- to Four-Family 65% 45%
Owner Occupied Condominium/Townhouse/PUD 55% 45%
Non-Owner Occupied One- to Four-Family 55% 45%
</TABLE>
The maximum permitted loan-to-value ratio may be increased 5% for Class AA,
ANIV, I, II, IIB, SE, III and IV on one- to four-family dwellings only, if the
borrowers have exhibited an excellent mortgage payment history, verified for the
most recent twelve month period.
Further adjustments to both maximum permitted loan-to-value ratio and
maximum permitted debt-to-income ratio are available on only one- to four-family
dwellings, 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
S-58
<PAGE>
maximum of 10%. The Rate Add-on Feature is no longer available on any other
property type but, rather, has been incorporated into the maximum permitted
combined loan-to-value ratio and the maximum permitted debt-to-income ratio at
origination.
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, except with respect to Class AA and
Class I which is 5% of the sale price. For all classes with the exception of V,
if the property is an owner-occupied one- to four-family residence, a seller
financed subordinate mortgage loan is allowed. However, in no case can a seller
financed subordinate loan exceed 20% of the purchase price.
On a case-by-case basis, the Depositor may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
guidelines of a particular class warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment and time
in residence at the applicant's current address.
Manufactured Home Loans. All of the Manufactured Home Loans included in the
Initial Group 2 (approximately 2.83% of the Group 2 Initial Mortgage Loans, by
Original Group 2 Principal Balance) were originated or purchased by the
Depositor pursuant to its Manufactured Home Loan Program as described above
under the caption "The Depositor-Underwriting Criteria-Group 1".
DESCRIPTION OF THE CERTIFICATES
The Series 1998-2 AFC Mortgage Loan Asset Backed Certificates will consist
of three Classes of certificates, Class 1A, Class 2A and Class R (the Class 1A
Certificates and Class 2A Certificates are referred to herein as the "Class A
Certificates"; the Class A and Class R Certificates are referred to herein as
the "Certificates"; each such class, a "Class"). Only the Class 1A and Class 2A
Certificates are offered hereby.
The Class 1A Certificates will have an initial Class 1A Principal Balance
of $266,000,000; the Class 2A Certificates will have an initial Class 2A
Principal Balance of $199,000,000. The Class R Certificates will have no
principal balance. In certain circumstances, the Class R Certificates may
receive distributions in respect of principal on the Mortgage Loans. The rights
of the Class R Certificateholders to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the Class A
Certificateholders to the extent described herein.
On each Remittance Date, with respect to the Class A Certificates, interest
will be paid at the related Class A Pass-Through Rate in an amount equal to
interest accrued during the related Accrual Period on the related Class A
Principal Balance prior to giving effect to principal distributions to be made
on such date.
Interest payable with respect to each Remittance Date on the Class A
Certificates will accrue during the period commencing on the Remittance Date of
the immediately preceding month and ending on the day immediately preceding the
related Remittance Date, except that with respect to the first Remittance Date
interest payable on the Class A Certificates will accrue during the period
commencing on the Closing Date and ending on the day immediately preceding the
first Remittance Date (each such period, an "Accrual Period"). All calculations
of interest on the Class A Certificates will be computed on the basis of the
actual number of days elapsed in the Accrual Period and a 360-day year.
Each of the Class A Certificates represents fractional undivided ownership
interests in a Trust Fund consisting of Group 1 and Group 2, created and held
pursuant to the Pooling Agreement. Each Group includes (i) the related Mortgage
Loans (including the related Initial Mortgage Loans and any related Subsequent
Mortgage Loans) and all proceeds thereof due after the Cut-off Date and related
Subsequent Cut-off Date, (ii) the related Certificate Account, the related
Principal and Interest Account, the related Trustee Expense Account, the related
Pre-Funding Account and subject to certain limitations, the related Interest
Coverage Account and related Reserve Account, and such assets as from time to
time are deposited in such accounts, including amounts on deposit therein and
invested in Permitted Instruments, (iii) any related REO Property, (iv) the
Trustee's rights under all insurance policies with respect to the related
Mortgage Loans required to be maintained pursuant to the Pooling Agreement and
any Insurance Proceeds and (v) the Certificate Insurance Policy.
S-59
<PAGE>
Distributions on the Class A Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter commencing on July 27, 1998 (each, a "Remittance Date"),
to the persons in whose names such Certificates are registered (which,
initially, will be CEDE & Co., the nominee of DTC) as of the Business Day
immediately preceding such Remittance Date (each, a "Record Date").
Distributions on each Remittance Date will be made by check mailed to the
address of the person entitled thereto as it appears on the Certificate Register
or, in the case of Class A Certificates if such Holder of record owns Class A
Certificates with an initial Class A Principal Balance in excess of $5,000,000,
and who has so notified the Trustee in writing in accordance with the Pooling
Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, the final distribution
in retirement of the Class A Certificates will be made only upon presentment and
surrender of such Certificate at the Corporate Trust Office of the Trustee. On
each Remittance Date, a Holder of a Class A Certificate will receive such
Holder's Percentage Interest of the amounts required to be distributed with
respect to such Class A Certificates. The "Percentage Interest" evidenced by a
Certificate will equal the percentage derived by dividing the denomination of
such Certificate by the aggregate denominations of all Certificates of such
Class.
REGISTRATION OF CERTIFICATES
The Class A Certificates will be issued in book-entry form. The Class A
Certificates will be issued in minimum dollar denominations of $100,000 and
integral multiples of $1,000 in excess thereof (except that a single certificate
of each of the Class 1A and Class 2A Certificates may be issued in a different
amount which is less than the related minimum dollar denomination). The assumed
final maturity date of the Class A Certificates is July 25, 2028, which is
thirty years after the first Remittance Date.
Holders of Certificates may hold their Certificates through DTC (in the
United States) or Cedel or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems.
The Certificates will initially be registered in the name of CEDE & Co.,
the nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for Cedel and
The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Depositary" and collectively the "Depositaries").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedel or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax
S-60
<PAGE>
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences" and "Global Clearance, Settlement and Tax Documentation
Procedures" in Annex I hereto.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
1934 Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including 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
S-61
<PAGE>
States tax laws and regulations. See "Certain Income Tax Consequences". Cedel or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Agreement on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
THE PRINCIPAL AND INTEREST ACCOUNTS
The Servicer shall establish and maintain an account for each Group (with
respect to Group 1, the "Group 1 Principal and Interest Account"; with respect
to Group 2, the "Group 2 Principal and Interest Account"; each, a "Principal and
Interest Account"), which shall be an Eligible Account, on behalf of the
Certificateholders. The Servicer shall deposit therein payments and collections
received or made by it in connection with the related Mortgage Loans (net of the
Servicing Fee) subsequent to the Cut-off Date or related Subsequent Cut-off
Date, as the case may be (to the extent not applied in computing the aggregate
principal balance of the related Mortgage Loans as of such date). The Servicer
may withdraw funds from a Principal and Interest Account only for the purposes
set forth in the Pooling Agreement, including but not limited to the following:
(i) to effect the remittance to the Trustee on the twenty-second day
of each month (or if such day is not a Business Day, on the immediately
following Business Day) of the Excess Spread and the amounts set forth in
clause (i) of the definition of the Available Remittance Amount;
(ii) subject to the limitations set forth in the Pooling Agreement, to
pay the Servicer for any accrued and unpaid Servicing Fees with respect to
related Mortgage Loans and to reimburse itself for related unreimbursed
Advances and Servicing Advances and any amount used to cover shortfalls in
interest on newly originated Mortgage Loans as described below under
"--Advances." The Servicer's right to pay itself unpaid Servicing Fees, and
to reimburse itself for unreimbursed Servicing Advances and amounts used to
cover any such interest shortfalls, is limited to late collections on the
related Mortgage Loan, and such other amounts as may be collected by the
Servicer from the related Mortgagor or otherwise with respect to the
related Mortgage Loan in respect of which such unreimbursed amounts are
owed. The Servicer's right to reimbursement for unreimbursed Advances is
limited to late collections of interest on any Mortgage Loan; provided that
the Servicer shall not be entitled to reimbursement from Liquidation
Proceeds for Advances made as described in subsection (c) of the paragraph
under the caption "Advances" herein. The Servicer's right to such
reimbursements is senior to the rights of Holders of Certificates;
(iii) to withdraw any amount received from a Mortgagor on a related
Mortgage Loan that is recoverable and sought to be recovered as a
Preference Amount;
(iv) to make investments in Permitted Instruments and to pay itself
interest earned in respect of Permitted Instruments or on funds deposited
in the related Principal and Interest Account;
(v) to pay itself the Servicing Fee and any other permitted servicing
compensation to the extent not previously retained or paid; and
(vi) to withdraw funds necessary for the conservation and disposition
of any REO Property.
THE CERTIFICATE ACCOUNT
The Trustee shall establish and maintain an account for each Group (with
respect to Group 1, the "Group 1 Certificate Account"; with respect to Group 2,
the "Group 2 Certificate Account"; each, a "Certificate Account"), which shall
be an Eligible Account, on behalf of the Certificateholders. The Trustee shall,
promptly upon receipt, deposit in the related Certificate Account and retain
therein the following: (i) the related Available Remittance Amount for such
Remittance Date; (ii) the related Excess Spread for such Remittance Date; and
(iii) any amount required to be deposited by the Servicer in connection with any
losses on Permitted Instruments.
The Trustee shall withdraw funds from the Certificate Account for
distribution to Certificateholders as described below under "--Allocation of
Amount Available" and as otherwise provided in the Pooling Agreement.
S-62
<PAGE>
CALCULATION OF ONE-MONTH LIBOR
On the second Business Day preceding the beginning of each Accrual Period
(each such date, an "Interest Determination Date"), the Trustee will determine
One-Month LIBOR for such Accrual Period with respect to the Class A
Certificates. One-Month LIBOR will be the rate for deposits in United States
dollars for a term equal to the relevant Accrual Period which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. The first
Accrual Period shall begin on the Closing Date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
rates at which deposits in United States dollars are offered by the Reference
Banks at approximately 11:00 a.m., London time, on that day to banks in the
London interbank market for a term equal to the relevant Accrual Period. The
Trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided as requested, the rate for that day
will be the arithmetic mean of the rates quoted by major banks in New York City,
selected by the Servicer, at approximately 11:00 a.m., New York City time, on
that day for loans in United States dollars to leading European banks for a term
equal to the relevant Accrual Period. If on any Interest Determination Date, the
Trustee is unable to determine One Month LIBOR for an Accrual Period, One Month
LIBOR for such Accrual Period shall be One Month LIBOR as determined on the
previous Interest Determination Date; provided, however, that One-Month LIBOR
for an Accrual Period shall not be based on One-Month LIBOR for the previous
Accrual Period for three consecutive Accrual Periods. If One-Month LIBOR for an
Accrual Period would be based on One-Month LIBOR for the previous Accrual Period
for the second consecutive Accrual Period, the Trustee will select a comparable
alternative Index (over which the Trustee has no control) used for determining
one-month Eurodollar lending rates that is calculated and published (or
otherwise made available) by an independent third party.
"Telerate Page 3750" means the display page currently so designated on the
Associated Press-Dow Jones Telerate Service (or such other page as may replace
the page on that service for the purpose of displaying comparable rates or
prices) and "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class 1A and Class 2A Certificates for the related Accrual Period shall (in
the absence of manifest error) be final and binding.
ALLOCATION OF AMOUNT AVAILABLE
On or before each Remittance Date, the Servicer will determine the
Overcollateralization Amount for each Group after giving effect to the
distribution of the related Class A Principal Remittance Amount to the related
Class A Certificates on such Remittance Date and the amount of the related Net
Excess Spread.
On each Remittance Date, the Trustee will withdraw from each Certificate
Account the related Amount Available, and make distributions thereof in the
following order of priority and to the extent of available funds.
Notwithstanding the foregoing, on any Remittance Date, in the event that the
Amount Available with respect to a particular Group is insufficient to
distribute the entire amount of the related Class A Interest Remittance Amount,
such Amount Available shall be distributed by the Trustee among the related
Class A Certificateholders in proportion to the total respective distributions
of such amounts on each such Class of Certificates that would otherwise be
payable on such Remittance Date.
GROUP 1
With respect to the Class 1A Certificates and Group 1:
If the Remittance Date is prior to the Cross-Over Date, the Trustee shall
distribute the indicated amounts in the following order of priority:
(X)(i) to the Class 1A Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the Amount Available with respect to Group 1; and
(B) the Class A Interest Remittance Amount with respect to the
Class 1A Certificates;
S-63
<PAGE>
(ii) to the Class 1A Certificateholders (subject to the last paragraph
under "--Allocation of Amount Available"), to be applied to reduce the
Class 1A Principal Balance, to the extent described below, until the Class
1A Principal Balance has been reduced to zero and to make payments in
respect of the amounts described in clauses (iii) (to the extent the amount
in clause (iii) represents prior Insured Payments or interest thereon) and
(v) of the definition of Class A Principal Remittance Amount below, the
lesser of:
(A) the balance of the Amount Available with respect to Group 1
after payments described in clause (X)(i) above; and
(B) the Class A Principal Remittance Amount with respect to the
Class 1A Certificates;
(iii) to the Group 1 Trustee Expense Account, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 1 after
payments described in clauses (X)(i) and (ii) above and any accrued and
unpaid Annual Trustee Expense Amount with respect to Group 1;
(iv) to the Class 1A Certificateholders to be applied to reduce the
Class 1A Principal Balance until the Class 1A Principal Balance has been
reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Group 1
after payments described in clauses (X)(i) through (iii) above; and
(B) the Additional Principal with respect to the Class 1A
Certificates;
(v) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 1 after
payments described in clauses (X)(i) through (iv) above and any expenses
paid by the Servicer and/or Depositor that were incurred in connection with
any third party claims that remain unreimbursed;
(vi) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Group 1 after payments described in
clauses (X)(i) through (v) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Group 1 previously made by the Servicer and not previously reimbursed; and
(vii) to the Class R Certificateholders, the balance of the Amount
Available with respect to Group 1, if any, after payments described in
clauses (X)(i) through (vi) above.
If the Remittance Date is on or after the Cross-Over Date, the Trustee
shall distribute the indicated amounts in the following order of priority:
(Y)(i) to the Class 1A Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the Amount Available with respect to Group 1; and
(B) the Class A Interest Remittance Amount with respect to the
Class 1A Certificates;
(ii) to the Class 1A Certificateholders (subject to the last paragraph
under "--Allocation of Amount Available"), to be applied to reduce the
Class 1A Principal Balance until the Class 1A Principal Balance has been
reduced to zero and to make payments in respect of the amounts described in
clauses (iii) (to the extent the amounts described in clause (iii)
represent prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount with respect to the Class
1A Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available with respect
to Group 1 after payments described in clause (Y)(i) above; and
(B) the Class A Principal Remittance Amount with respect to the
Class 1A Certificates;
(iii) to the Group 1 Trustee Expense Account, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 1 after
payments described in clauses (Y)(i) and (ii) above and any accrued and
unpaid Annual Trustee Expense Amount with respect to Group 1;
S-64
<PAGE>
(iv) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 1 after
payments described in clauses (Y)(i) through (iii) above and any expenses
paid by the Servicer and/or Depositor that were incurred in connection with
any third party claims that remain unreimbursed;
(v) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Group 1 after payments described in
clauses (Y)(i) through (iv) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Group 1 previously made by the Servicer and not previously reimbursed; and
(vi) to the Class R Certificateholders, the balance of the Amount
Available with respect to Group 1 after payments described in clauses
(Y)(i) through (v) above, if any.
GROUP 2
With respect to the Class 2A Certificates and Group 2:
If the Remittance Date is prior to the Cross-Over Date, the Trustee shall
distribute the indicated amounts in the following order of priority:
(X) (i) to the Class 2A Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), an amount equal
to the lesser of:
(A) the Amount Available with respect to Group 2; and
(B) the Class A Interest Remittance Amount with respect to the
Class 2A Certificates;
(ii) to the Class 2A Certificateholders (subject to the last paragraph
under "--Allocation of Amount Available"), to be applied to reduce the
Class 2A Principal Balance, to the extent described below, until the Class
2A Principal Balance has been reduced to zero and to make payments in
respect of the amounts described in clauses (iii) (to the extent the amount
in clause (iii) represents prior Insured Payments or interest thereon) and
(v) of the definition of Class A Principal Remittance Amount with respect
to the Class 2A Certificates below, the lesser of:
(A) the balance of the Amount Available with respect to Group 2
after payments described in clause (X)(i) above; and
(B) the Class A Principal Remittance Amount with respect to the
Class 2A Certificates;
(iii) to the Group 2 Trustee Expense Account, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 2 after
payments described in clauses (X)(i) and (ii) above and any accrued and
unpaid Annual Trustee Expense Amount with respect to Group 2;
(iv) to the Class 2A Certificateholders to be applied to reduce the
Class 2A Principal Balance until the Class 2A Principal Balance has been
reduced to zero, an amount equal to the lesser of:
(A) the balance of the Amount Available with respect to Group 2
after payments described in clauses (X)(i) through (iii) above; and
(B) the Additional Principal with respect to the Class 2A
Certificates;
(v) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 2 after
payments described in clauses (X)(i) through (iv) above and any expenses
paid by the Servicer and/or Depositor that were incurred in connection with
any third party claims that remain unreimbursed;
(vi) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Group 2 after payments described in
clauses (X)(i) through (v) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Group 2 previously made by the Servicer and not previously reimbursed;
(vii) to the Class 2A Certificateholders until the Class 2A Principal
Balance has been reduced to zero, an amount equal to the lesser of:
S-65
<PAGE>
(A) the balance of the Remaining Net Excess Spread with respect
to Group 2, if any, after payments described in clauses (X)(i) through
(vi) above and payments of Additional Principal, if any, to the Class
1A Certificateholders; and
(B) the Available Funds Cap Carry Forward Amount with respect to
the Class 2A Certificates, if any; and
(viii) to the Class R Certificateholders, the balance of the Amount
Available with respect to Group 2, if any, after payments described in
clauses (X)(i) through (vii) above.
If the Remittance Date is on or after the Cross-Over Date, the Trustee
shall distribute the indicated amounts in the following order of priority:
(Y) (i) to the Class 2A Certificateholders (subject to the second and
last paragraphs under "--Allocation of Amount Available"), the lesser of:
(A) the Amount Available with respect to Group 2; and
(B) the Class A Interest Remittance Amount with respect to the
Class 2A Certificates;
(ii) to the Class 2A Certificateholders (subject to the last paragraph
under "--Allocation of Amount Available"), to be applied to reduce the
Class 2A Principal Balance until the Class 2A Principal Balance has been
reduced to zero and to make payments in respect of the amounts described in
clauses (iii) (to the extent the amounts described in clause (iii)
represent prior Insured Payments or interest thereon) and (v) of the
definition of Class A Principal Remittance Amount with respect to the Class
2A Certificates below, the lesser of:
(A) the balance of the Net Excess Amount Available with respect
to Group 2 after payments described in clause (Y)(i) above; and
(B) the Class A Principal Remittance Amount with respect to the
Class 2A Certificates;
(iii) to the Group 2 Trustee Expense Account, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 2 after
payments described in clauses (Y)(i) and (ii) above and any accrued and
unpaid Annual Trustee Expense Amount with respect to Group 2;
(iv) to the Servicer and/or the Depositor, an amount equal to the
lesser of the balance of the Amount Available with respect to Group 2 after
payments described in clauses (Y)(i) through (iii) above and any expenses
paid by the Servicer and/or Depositor that were incurred in connection with
any third party claims that remain unreimbursed;
(v) to the Servicer, an amount equal to the lesser of the balance of
the Amount Available with respect to Group 2 after payments described in
clauses (Y)(i) through (iv) above and the aggregate of any Nonrecoverable
Servicing Advances and Nonrecoverable Monthly Advances with respect to
Group 2 previously made by the Servicer and not previously reimbursed;
(vi) to the Class 2A Certificateholders until the Class 2A Principal
Balance has been reduced to zero, the lesser of:
(A) the balance of the Remaining Net Excess Spread with respect
to Group 2 after payments described in clauses (Y)(i) through (v)
above and payments of Additional Principal, if any, to the Class 1A
Certificateholders; and
(B) the related Available Funds Cap Carry Forward Amount with
respect to the Class 2A Certificates, if any; and
(vii) to the Class R Certificateholders, the balance of the Amount
Available with respect to Group 2 after payments described in clauses
(Y)(i) through (vi) above, if any.
The Pooling Agreement provides that to the extent the Certificate Insurer
makes Insured Payments with respect to a Class of Class A Certificates, the
Certificate Insurer (i) will be subrogated to the rights of the Holders of such
Class A Certificates with respect to such Insured Payments, (ii) shall be
deemed, to the extent of the payments
S-66
<PAGE>
so made, to be a registered Holder of such Class A Certificates and (iii) shall
be entitled to reimbursement for such Insured Payments, with interest accrued
thereon at the related Class A Pass-Through Rate, on each Remittance Date after
the related Class A Certificateholders have received the related Class A
Remittance Amount (exclusive of any related Class A Carry-Forward Amount
representing amounts previously paid to such Certificateholders as Insured
Payments or interest accrued in respect of such Insured Payments) for such
Remittance Date.
DEFINITIONS
The "Additional Principal" for any Class 1A or Class 2A Certificate and any
Remittance Date will equal the lesser of (i) the amount necessary to reduce the
related Class A Principal Balance so that the Overcollateralization Amount for
the related Group equals the related Required Overcollateralization Amount for
such Group and (ii) the sum of (a) the Remaining Net Excess Spread for such
Group, (b) the Available Transfer Cashflow for such Group and (c) the Net Excess
Principal for such Group.
The "Amount Available" for a Group on a Remittance Date will equal the sum
of:
(i) the Available Remittance Amount for such Group (reduced by any
monthly premium payable to the Certificate Insurer);
(ii) the Excess Spread for such Group with respect to such Remittance
Date;
(iii) if an Available Funds Shortfall exists in such Group,
(a) first, the Net Excess Spread from the other Group, to the
extent of such Available Funds Shortfall; and
(b) second, the Excess Principal from the other Group, to the
extent of any remaining Available Funds Shortfall;
(iv) if such Remittance Date is prior to the Cross-Over Date, (a)
first, the Available Transfer Cashflow, to the extent necessary to reach
the Required Overcollateralization Amount for such Group; and
(b) second, the Net Excess Principal, to the extent necessary to
reach the Required Overcollateralization Amount for such Group;
(v) any amounts required to be deposited in the related Certificate
Account from the related Reserve Account; and
(vi) any Insured Payments with respect to the related Class of
Certificates.
An "Available Funds Shortfall" with respect to any Group and Remittance
Date means the amount by which the Available Remittance Amount plus Excess
Spread for such Group is less than the Required Payments (other than in respect
of the Class A Principal Remittance Amount after the related Cross-Over Date)
for such Group.
The "Available Principal Amount" for any Group and Remittance Date will
equal the excess, if any, of the amount described in the related definition of
"Class A Principal Remittance Amount" without giving effect to clause (a)
thereof over the amount described in the related definition of "Class A
Principal Remittance Amount" after giving effect to clause (a) thereof.
The "Available Remittance Amount" with respect to any Group and Remittance
Date will be the sum of the following:
(i) the sum of all amounts received or required to be paid by the
Servicer, the Depositor or any Sub-Servicer in respect of the related
Mortgage Loans (exclusive of (a) the Depositor's Yield, (b) the Excess
Spread, (c) amounts withdrawn by the Servicer from the related Principal
and Interest Account as set forth in clauses (ii), (iii), (iv), (v) and
(vi) above under the caption "--The Principal and Interest Accounts" and
any amounts not required to be deposited therein and (d) scheduled payments
received in advance of their due date for application on such due date at
the request of the related Mortgagor) during the related Due Period (or, in
the case of amounts paid by the Depositor in connection with the purchase
or substitution of a Mortgage Loan as to which there is defective loan
documentation or a breach of representation or warranty,
S-67
<PAGE>
as of the related Determination Date) and deposited into the related
Principal and Interest Account as of the related Determination Date;
(ii) the amount of any Advances and Compensating Interest payments
with respect to the related Group remitted by the Servicer for such
Remittance Date; and
(iii) any amount applied by the Trustee from funds on deposit in the
related Interest Coverage Account to cover shortfalls in interest on the
related Class A Certificates attributable to the pre-funding feature and to
cover the interest portion of Deferred Payments.
The "Available Transfer Cashflow" for each Group and Remittance Date will
equal the Remaining Net Excess Spread for the other Group remaining after the
payment, if any, of Additional Principal on the Class A Certificates related to
such other Group.
The "Class 1A Pass-Through Rate" for any Remittance Date will be a rate
equal to the lesser of (i) One-Month LIBOR plus 0.20% per annum, and (ii) the
weighted average of the Mortgage Rates of the Group 1 Mortgage Loans minus, with
respect to Group 1, the sum of (a) the Servicing Fee Rate, (b) the rate at which
the monthly premium payable to the Certificate Insurer is calculated and (c) the
rate at which the Annual Trustee Expense Account is calculated (the "Class 1A
Cap Rate"); provided, however, that on any Remittance Date on which the Servicer
does not exercise its option to purchase the Mortgage Loans and REO Properties
as described under "Pooling Agreement--Termination; Purchase of the Mortgage
Loans" herein, the rate provided in clause (i) will be One-Month LIBOR plus
0.60% per annum. One-Month LIBOR will be determined on the second Business Day
preceding the beginning of each Accrual Period with respect to the Class 1A
Certificates. For purposes of calculating the Class 1A Pass-Through Rate for any
Remittance Date, because most of the Group 1 Mortgage Loans do not provide for
the calculation of interest on an Actual/360 Basis (which is the basis on which
interest is calculated on the Class 1A Certificates), the basis on which
interest is computed on the Group 1 Mortgage Loans will be deemed adjusted to an
Actual/360 Basis that will result in the same amount of interest being due as
would be due using the method of computation of interest that is used to
calculate interest on the Group 1 Mortgage Loans.
The "Class 2A Pass-Through Rate" for any particular Remittance Date will be
equal to the least of (i) One- Month LIBOR plus 0.15% per annum (the rate
described in this clause (i), the "Class 2A LIBOR Rate") (ii) the weighted
average of the Mortgage Rates of the Group 2 Mortgage Loans minus, with respect
to Group 2, the sum of (a) the Servicing Fee Rate, (b) the rate at which the
monthly premium payable to the Certificate Insurer is calculated and (c) the
rate at which the Annual Trustee Expense Account is calculated and (iii) the
weighted average of the Maximum Mortgage Rates of the Group 2 Mortgage Loans
minus, with respect to Group 2, the sum of (a) the Servicing Fee Rate, (b) the
rate at which the monthly premium payable to the Certificate Insurer is
calculated and (c) the rate at which the Annual Trustee Expense Account is
calculated (the rate described in this clause (iii), the "Class 2A Cap Rate");
provided, that on any Remittance Date on which the Servicer does not exercise
its option to purchase the Mortgage Loans and REO Properties as described under
"Pooling Agreement-Termination; Purchase of the Mortgage Loans" herein, the rate
described in clause (i) will be One-Month LIBOR plus 0.55% per annum. One-Month
LIBOR will be determined on the second Business Day preceding the beginning of
each Accrual Period with respect to the Class 2A Certificates. For purposes of
calculating the Class 2A Pass-Through Rate for any Remittance Date, because most
of the Group 2 Mortgage Loans provide for the calculation of interest on a basis
other than an Actual/360 Basis (which is the basis on which interest is
calculated on the Class 2A Certificates), the basis on which interest is
computed on the Group 2 Mortgage Loans will be deemed adjusted to an Actual/360
Basis that will result in the same amount of interest being due as would be due
using the method of computation of interest that is used to calculate interest
on the Group 2 Mortgage Loans.
The "Class A Carry-Forward Amount", with respect to the Class 1A or Class
2A Certificates and for any Remittance Date, is the sum of (i) the amount, if
any, by which (A) the related Class A Remittance Amount with respect to each
such Class of Class A Certificates as of the immediately preceding Remittance
Date exceeded (B) the amount of the actual distribution, exclusive of any
related Insured Payment, to the related Classes of Class A Certificateholders
made on such immediately preceding Remittance Date and (ii) interest on the
amount, if any, described in clause (i) above (to the extent that the amount in
clause (i) above represents Insured Payments), at the
S-68
<PAGE>
Class 1A Pass-Through Rate with respect to Group 1, and the Class 2A
Pass-Through Rate with respect to Group 2 from such immediately preceding
Remittance Date.
The "Class A Interest Remittance Amount" with respect to each Class of
Class A Certificates for any Remittance Date will be the interest accrued at the
related Class A Pass-Through Rate for the related Accrual Period on the related
Class A Principal Balance immediately prior to such Remittance Date. All
calculations of interest on the Class A Certificates will be computed on the
basis of the actual number of days elapsed in the related Accrual Period and a
360-day year.
The "Class A Principal Balance" for any Class of Class A Certificates as of
any date of determination is equal to the related initial Class A Principal
Balance reduced by the sum of (A) all amounts (including that portion of Insured
Payments, if any, made in respect of principal) distributed to such Class A
Certificateholders in respect of principal on all previous Remittance Dates on
account of amounts described in clauses (i), (ii), (iii) (to the extent the
amount in clause (iii) represents a right to receive principal not previously
covered by Insured Payments), (iv) and (vi) of the definition of Class A
Principal Remittance Amount, (B) all other amounts previously distributed to the
related Class A Certificateholders constituting Additional Principal in
reduction of the related Class A Principal Balance and (C) all amounts
previously distributed to the related Class A Certificateholders as a mandatory
prepayment as described below under "--Mandatory Prepayments on Class A
Certificates" (only on the Remittance Date occurring on September 25, 1998).
The "Class A Principal Remittance Amount" with respect to any Class of
Class A Certificates and the related Group and Remittance Date will be equal to
the least of (a) that amount required to reach the Required
Overcollateralization Amount with respect to such related Group or thereafter,
to maintain such Required Overcollateralization Amount on such Remittance Date,
(b) the related Class A Principal Balance and the amounts described in clauses
(iii) (to the extent the amount in clause (iii) represents prior Insured
Payments with respect to the related Group or interest thereon) and (v) below
and (c) the sum of the following amounts relating to such Group:
(i) the principal portion of all scheduled and unscheduled payments
received on the related Mortgage Loans during the Due Period including all
Principal Prepayments, Curtailments, other excess payments of principal in
respect of the related Mortgage Loans, Insurance Proceeds, Released
Mortgaged Property Proceeds and Net Liquidation Proceeds, but exclusive of
the principal portions of any Deferred Payments subsequently paid by the
related Mortgagor;
(ii) an amount equal to the Unrecovered Class A Portion with respect
to the related Class A Certificate;
(iii) the Class A Carry-Forward Amount with respect to the related
Class A Certificate;
(iv) the principal portion of all proceeds deposited in the Principal
and Interest Account with respect to the related Group as of the related
Determination Date in connection with the purchase or substitution of a
Mortgage Loan as to which there is defective loan documentation or a breach
of a representation or warranty;
(v) any amounts recovered from the related Class A Certificateholders
during the related Due Period that constituted a Mortgagor payment on a
related Mortgage Loan or an Advance with respect to the related Group that
was recovered as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court having competent jurisdiction; and
(vi) the amount, if any, by which (A) the related Class A Principal
Balance 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)(ii) above under "--Allocation of
Amount Available--Group 1" and clause (X)(ii) above under "--Allocation of
Amount Available--Group 2" and applied to reduce the related Class A
Principal Balance, exceeds (B) the related Scheduled Class A Principal
Balance for such Remittance Date as set forth in the related Principal
Payment Table (the "Principal Payment Table") attached as an exhibit to the
Pooling Agreement and provided by the Certificate Insurer.
S-69
<PAGE>
As to the final Remittance Date in connection with the purchase by the
Servicer of all the related Mortgage Loans and REO Properties pursuant to the
Pooling Agreement, the related Class A Principal Remittance Amount shall be that
amount described in clause (b) of the definition of Class A Principal Remittance
Amount above with respect to the related Group and such Remittance Date.
The "Class A Remittance Amount" for any Class of Class A Certificates and
any Remittance Date is equal to the sum of the related Class A Interest
Remittance Amount and the related Class A Principal Remittance Amount for such
Remittance Date.
The "Cross-Over Date" with respect to a Group is the date on and after
which the amount specified by the Certificate Insurer and set forth in the
Insurance Agreement, among the Depositor, the Servicer, the Certificate Insurer
and the Trustee (the "Subordinated Amount"), is reduced to zero.
The "Excess Principal" for any Group and Remittance Date will equal the
lesser of (i) the portion, if any, of the Available Principal Amount for the
related Group that is not required to be included in the related Class A
Principal Remittance Amount for such Group for such Remittance Date as a result
of the application of clause (a) of the related definition of "Class A Principal
Remittance Amount" and (ii) the amount of such portion described in clause (i)
remaining after the application of the related Available Remittance Amount to
cover the Required Payments for such Group.
The "Excess Spread" with respect to Group 1, for any Remittance Date, is an
amount equal to the sum of (a) the excess of (x) all payments received or
advanced on account of interest on the Group 1 Mortgage Loans during the related
Due Period over (y) the sum of (i) the sum of the related Class A Interest
Remittance Amount for the Class 1A Certificates for such Remittance Date, (ii)
one-twelfth of the Annual Trustee Expense Amount with respect to Group 1, (iii)
the monthly premium payable to the Certificate Insurer with respect to Group 1,
and (iv) the Servicing Fee with respect to Group 1 for such Remittance Date and
(b) with respect to the July 27, 1998, August 25, 1998 and September 25, 1998
Remittance Dates only, an amount with respect to the Group 1 Pre-Funded Amount
determined by the Certificate Insurer and deposited into the Group 1 Interest
Coverage Account by the Depositor on the Closing Date.
The "Excess Spread" with respect to Group 2, for any Remittance Date, is an
amount equal to the sum of (a) the excess of (x) all payments received or
advanced on account of interest on the Group 2 Mortgage Loans during the related
Due Period over (y) the sum of (i) the Class A Interest Remittance Amount for
the Class 2A Certificates for such Remittance Date, (ii) one-twelfth of the
Annual Trustee Expense Amount with respect to Group 2, (iii) the monthly premium
payable to the Certificate Insurer with respect to Group 2, and (iv) the
Servicing Fee with respect to Group 2 for such Remittance Date and (b) with
respect to the July 27, 1998, August 25, 1998 and September 25, 1998 Remittance
Dates only, an amount with respect to the Group 2 Pre-Funded Amount determined
by the Certificate Insurer and deposited into the Group 2 Interest Coverage
Account by the Depositor on the Closing Date.
The "Net Excess Amount Available" is the sum of the amounts described in
clauses (i) and (vi) of the definition of Amount Available.
The "Net Excess Principal" for any Group and Remittance Date will equal the
Excess Principal for such Group remaining after the application thereof to cover
an Available Funds Shortfall with respect to the other Group.
The "Net Excess Spread" for any Group and Remittance Date will equal the
Excess Spread for such Group remaining after the application thereof to cover
Required Payments with respect to such Group (other than in respect of the
related Class A Principal Remittance Amount after the related Cross-Over Date).
The "Overcollateralization Amount" for any Group and Remittance Date will
equal the excess, if any, of (i) the sum of (a) the related Group Principal
Balance and (b) the related Pre-Funded Amount over (ii) the related Class A
Principal Balance after giving effect to the distributions of the related Class
A Principal Remittance Amount on such Remittance Date.
The "Remaining Net Excess Spread" for any Group and Remittance Date will
equal the Net Excess Spread for such Group remaining after the application
thereof to cover an Available Funds Shortfall with respect to the other Group.
The "Required Overcollateralization Amount" for any Group is the
Overcollateralization Amount required by the Certificate Insurer at any time and
set forth in the Insurance Agreement.
S-70
<PAGE>
The "Required Payments" for any Group and Remittance Date will equal the
amount required to pay the Class A Interest Remittance Amount with respect to
the related Class A Certificates, the Class A Principal Remittance Amount with
respect to the related Class A Certificates, and the Annual Trustee Expense
Amount and the monthly premium payable to the Certificate Insurer in respect of
such Group.
The "Scheduled Class A Principal Balance" with respect to each Class of
Class 1A or Class 2A Certificates specified in the Principal Payment Table for
the Remittance Date in each of the months commencing with July 27, 1998 and
ending with July 25, 2003, inclusive, is equal to the related initial Class A
Principal Balance; and the related Scheduled Class A Principal Balance specified
in the related Principal Payment Table for the Remittance Date in each of the
months commencing after July 25, 2003 is computed based upon the assumed related
Class 1A or Class 2A Principal Balance on such date based upon (i) a 0%
Prepayment Assumption, (ii) a weighted average coupon (A) with respect to the
Group 1 Mortgage Loans of 10.655% for Balloon Loans and 10.569% for non-Balloon
Loans and (B) with respect to Group 2 Mortgage Loans of 0% for Balloon Loan and
10.244% for non-Balloon Loans, (ii) a weighted average remaining amortization
term (A) with respect to the Group 1 Mortgage Loans of 358.41 months for Balloon
Loans and 257.18 months for non-Balloon Loans, and in the case of Balloon Loans,
a balloon payment of principal due in 178.41 months and an otherwise normal
amortization of the Group 1 Mortgage Loans since the Cut-off Date and (B) with
respect to Group 2 Mortgage Loans of 0 months for Balloon Loans and 357.07
months for non-Balloon Loans, and in the case of Balloon Loans, a balloon
payment of principal due in 0 months and an otherwise normal amortization of the
Group 2 Mortgage Loans since the Cut-off Date.
The "Unrecovered Class A Portion" with respect to each Class of Class A
Certificates and any Remittance Date is an amount equal to the excess, if any,
of (A) the related Class A Principal Balance minus the sum of (i) all amounts
(excluding that portion of Insured Payments with respect to the related Group,
if any, to be made in respect of principal) to be distributed to the related
Class A Certificateholders in respect of principal on such Remittance Date on
account of amounts described in clauses (i), (iii) (to the extent the amount in
clause (iii) represents a right to receive principal not previously covered by
an Insured Payment), (iv) and (vi) of the definition of Class A Principal
Remittance Amount, (ii) all other amounts to be distributed to the related Class
A Certificateholder constituting Additional Principal to the extent necessary to
reach the Required Overcollateralization Amount for the related Group and (iii)
all amounts distributed to the related Class A Certificateholders as a mandatory
prepayment as described below under "--Mandatory Prepayments on Class A
Certificates" (only on the Remittance Date occurring on September 25, 1998),
over (B) the sum of (i) the related Group Principal Balance plus (ii) the
related Pre-Funded Amount minus the sum of (x) the principal portion of the
monthly payments received during the related Due Period and deposited in the
related Principal and Interest Account and all Principal Prepayments,
Curtailments, other excess payments of principal, Insurance Proceeds, Net
Liquidation Proceeds, Released Mortgaged Property Proceeds and net income from
any REO Property with respect to the related Group to the extent applied by the
Servicer as recoveries of principal in respect of the related Mortgage Loans,
which will be distributed to the related Class A Certificateholders on such
Remittance Date, plus (y) the aggregate of, as to each related Mortgage Loan
which was liquidated (each, a "Liquidated Mortgage Loan") during the related Due
Period, an amount (not less than zero or greater than the related principal
balance) equal to the excess of (i) the principal balance of such Liquidated
Mortgage Loan over (ii) the principal portion of the related Net Liquidation
Proceeds to be distributed to the related Class A Certificateholders on such
Remittance Date.
MANDATORY PREPAYMENTS ON CLASS A CERTIFICATES
Each Class of the Class A Certificates will be prepaid, on a pro rata basis
among the Certificates in each Class in proportion to its principal balance, on
the September 25, 1998 Remittance Date to the extent that any amount remains on
deposit in the related Pre-Funding Account with respect to the related Group on
such Remittance Date. The related Class A Principal Balance will be reduced by
an amount equal to the lesser of (i) the amount then on deposit in the related
Pre-Funding Account and (ii) the related outstanding Class A Principal Balance.
Although no assurance can be given, it is anticipated by the Depositor that the
principal amount of related Subsequent Mortgage Loans sold to the Trust Fund
will require the application of substantially all of the related Original
Pre-Funded Amounts and that there should be no material amount of principal
prepaid to the related Class A Certificateholders from the related Pre-Funding
Accounts. However, it is unlikely that the Depositor will be able to deliver
related Subsequent Mortgage Loans with an aggregate principal balance identical
to the related Original Pre-Funded Amounts.
S-71
<PAGE>
INTEREST COVERAGE ACCOUNT AND RESERVE ACCOUNT
The Depositor will establish for the benefit of each Class of the Class A
Certificateholders a trust account for each Group (with respect to Group 1, the
"Group 1 Interest Coverage Account"; with respect to Group 2, the "Group 2
Interest Coverage Account"; each, an "Interest Coverage Account"). On the
Closing Date and, if necessary, on each Subsequent Transfer Date, the Depositor
will deposit in each such account a cash amount as required by the Certificate
Insurer and specified in the Pooling Agreement (with respect to Group 1, the
"Group 1 Interest Coverage Amount"; with respect to Group 2, the "Group 2
Interest Coverage Amount"; each, an "Interest Coverage Amount"). Funds on
deposit in the related Interest Coverage Account will be applied by the Trustee
to cover shortfalls in the related Class A Interest Remittance Amount
attributable to (i) the pre-funding feature during the Funding Period and (ii)
the deferment of interest feature with respect to certain of the Mortgage Loans.
During the Funding Period, such shortfall initially will exist because while the
related Class A Certificateholders are entitled to receive interest accruing on
the related Class A Principal Balance, the related Class A Principal Balance
during the Funding Period will be greater than the aggregate principal balance
of the Initial Mortgage Loans with respect to such Group on the Closing Date.
Upon conveyance of related Subsequent Mortgage Loans to the Trust Fund, funds on
deposit in the related Interest Coverage Account related to the pre-funding
feature will be released by the Trustee to the Depositor to the extent not
necessary to cover such shortfalls. Approximately 13.05% of the Initial Mortgage
Loans, by Original Principal Balance, are Deferred Payment Loans and the
principal balance conveyed to the Trust Fund has been reduced by the principal
amount so deferred. If the Mortgagor has not prepaid the loan before a certain
date and the maturity date is not otherwise accelerated by the Servicer, such
Deferred Payments will be forgiven. During the Funding Period, funds on deposit
in the related Interest Coverage Account will be available to cover the interest
portion of Deferred Payments. In addition, it is possible that some of the
Subsequent Mortgage Loans transferred to the Trust Fund will contain such
deferment of payments feature. Upon termination of the Funding Period, that
amount necessary to cover the interest portion of the Deferred Payments with
respect to any Subsequent Mortgage Loans, will be transferred by the Trustee
from the related Interest Coverage Account into a related reserve account (each,
a "Reserve Account") which shall be a part of the Trust Fund REMIC. Upon
termination of the Funding Period, any amounts remaining in the Interest
Coverage Accounts will be released by the Trustee to the Depositor. To the
extent such Deferred Payments are not forgiven, the Servicer will retain
Deferred Payments collected for payment to the Depositor as part of the
Depositor's Yield.
ADVANCES
Not later than the close of business on the twenty-second day of each month
(or if such day is not a Business Day, on the following Business Day) (the
"Determination Date"), the Servicer shall remit to the Trustee for deposit in
the Certificate Account with respect to the related Group an amount (an
"Advance"), to be distributed on the related Remittance Date, equal to the sum
of (a) the interest portions of the aggregate amount of monthly payments on the
Mortgage Loans with respect to the related Group (net of the Servicing Fee, the
Annual Trustee Expense Amount and, after the Cross-Over Date, the Excess Spread)
due during the related Due Period, but delinquent as of the close of business on
the first day of the month in which such Remittance Date occurs, (b) with
respect to each REO Property that was acquired during or prior to the related
Due Period and which was not disposed of during such Due Period, an amount equal
to the excess, if any, of interest on the principal balance deemed to apply to
such REO Property for the most recently ended calendar month at the related
Mortgage Rate (net of the Servicing Fee, the Annual Trustee Expense Amount and,
after the Cross-Over Date, the Excess Spread) over the net income from such
property for such Due Period, (c) with respect to each Remittance Date, the
amount necessary on the first, second, third and fourth Remittance Dates to pay
30 days' interest with respect to each non-delinquent newly originated Mortgage
Loan in the related Group that has not had a first payment date as of the
Closing Date (net of the Servicing Fee and the Annual Trustee Expense Amount)
and (d) with respect to each Remittance Date, if pursuant to the Pooling
Agreement the Servicer has previously reimbursed itself for an Advance described
in clause (c) above, then an amount equal to such amount previously reimbursed.
The Servicer is required to make an Advance out of its own funds or out of funds
in the Principal and Interest Account with respect to the related Group that do
not constitute the related Amount Available with respect to the related Group
for such Remittance Date.
S-72
<PAGE>
EXCESS SPREAD, OVERCOLLATERALIZATION AND CROSS-COLLATERALIZATION PROVISIONS
On any Remittance Date prior to the Cross-Over Date, Holders of the Class
1A and Class 2A Certificates will have a first priority right to 100% of the
related Excess Spread to fund the amount by which the related Class A Remittance
Amount exceeds the related Available Remittance Amount for such Remittance Date.
To the extent available, the Net Excess Spread and Excess Principal with respect
to a Group will then be applied to cover any Available Funds Shortfall with
respect to the other Group.
In addition, on any Remittance Date prior to the Cross-Over Date on which
the Overcollateralization Amount for a Group is less than the Required
Overcollateralization Amount for such Group, the Remaining Net Excess Spread,
the Available Transfer Cashflow, and the Net Excess Principal, if any, will be
used to make additional distributions of principal on the related Class A
Certificates until such Overcollateralization Amount equals the related Required
Overcollateralization Amount for such Group.
The Pooling Agreement also provides that on any Remittance Date on which
the Class 2A Pass-Through Rate is based on the Available Funds Cap Rate, the
excess of (i) that amount of interest the Holders of the related Class 2A
Certificates would be entitled to receive on such Remittance Date had interest
been calculated based on the Class 2A LIBOR Rate (but in no event exceeding the
Class 2A Cap Rate), over (ii) the amount of interest such Class 2A
Certificateholders will receive on such Remittance Date at the Available Funds
Cap Rate, will be carried forward and paid on a subordinated basis to the extent
of Remaining Net Excess Spread with respect to Group 2, as described below, to
the Holders of the related Class 2A Certificates on future Remittance Dates and
such amount shall accrue interest at the then applicable Class 2A Pass-Through
Rate, until paid or until the related Class 2A Principal Balance has been
reduced to zero (the amount of such excess, together with such accrued interest,
the "Available Funds Cap Carry Forward Amount").
Credit enhancement with respect to the Class A Certificates will be
provided in part by the initial Overcollateralization Amount for the related
Group resulting from the sum of the related Original Group Principal Balance and
the related Original Pre-Funded Amount exceeding the related initial Class A
Principal Balance as of the Closing Date. On the Closing Date, the initial
Overcollateralization Amount with respect to Group 1 is expected to be
$2,958,543.98, equal to 1.10% of the sum of the Original Group 1 Principal
Balance and the Original Group 1 Pre- Funded Amount and the initial
Overcollateralization Amount with respect to Group 2 is expected to be
$4,372,508.94, equal to 2.15% of the sum of the Original Group 2 Principal
Balance and the Original Group 2 Pre-Funded Amount.
Prior to the related Cross-Over Date, Excess Spread with respect to a Group
will be applied first, to cover any Available Funds Shortfall with respect to
such Group, second, to cover any Available Funds Shortfall with respect to the
other Group, third, to pay the amount of any related accrued and unpaid Annual
Trustee Expense Amount, fourth, to reach and maintain the Required
Overcollateralization Amounts for the related Group, if necessary, fifth, to
reach and maintain the Required Overcollateralization Amounts for the other
Group, if necessary, sixth, with respect to the related Group, to reimburse the
Servicer for amounts to which it is entitled, and seventh, with respect to Group
2, to pay the related Available Funds Cap Carry Forward Amount, if any, to the
Holders of Class 2A Certificates on a pro rata basis among such
Certificateholders, and to distribute any remaining amounts to the Class R
Certificateholders. After the Cross-Over Date, Excess Spread with respect to a
Group, will be applied, first, to cover any Available Funds Shortfall, second,
to cover any Available Funds Shortfall with respect to the other Group, third,
to pay the amount of any related accrued and unpaid Annual Trustee Expense
Amount, fourth, to reach and maintain the Required Overcollateralization Amount
for the other Group, if necessary, fifth, with respect to the related Group, to
reimburse the Servicer, and sixth, with respect to Group 2, to pay the related
Available Funds Cap Carry Forward Amount, if any, to the Holders of Class 2A
Certificates on a pro rata basis among such Certificateholders and to distribute
any remaining amounts to the Class R Certificateholders.
Application of the Additional Principal will have the effect of
accelerating the rate of payment of principal of the Class A Certificates until
the Cross-Over Date. Application of funds in accordance with the foregoing is
intended to create and maintain a positive Overcollateralization Amount equal to
the Required Overcollateralization Amount and thereby provide a cushion against
ultimate losses rather than to maintain a regular cash flow to Holders of Class
A Certificates or to guarantee against current losses. There can be no assurance
that the Required Overcollateralization
S-73
<PAGE>
Amount will be attained or maintained. In addition, the Required
Overcollateralization Amount may be reduced at the discretion of the Certificate
Insurer.
POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement") dated as of June 1, 1998, among the
Depositor, the Servicer and LaSalle National Bank, as Trustee, a form of which
agreement is filed as an exhibit to the Registration Statement of which this
Prospectus Supplement is a part. A copy of the Pooling Agreement as executed
will be included in the Current Report on Form 8-K relating to the Class A
Certificates, which will be filed by the Depositor with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Certificates. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the Trust Fund, the terms and
conditions of the Pooling Agreement and the Certificates. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Pooling Agreement. Requests should be
addressed to Superior Bank FSB, 135 Chestnut Ridge Road, Montvale, New Jersey
07645, Attention: President.
THE SERVICER
For further information regarding the Servicer, see "The Servicer" in the
Prospectus.
The Servicer, as of March 31, 1998, serviced approximately $2,834,053,000
of mortgage loans (including the Mortgage Loans and mortgage loans not
originated or purchased by the Depositor) for major commercial banks, savings
and loan associations and brokerage houses across the country.
Statements are provided for all mortgage loans serviced. Mortgagors are
instructed to forward all payments, along with a coupon detachable from the
statement, to a lockbox account. Available funds are then transferred from the
lockbox account to the related Principal and Interest Account. Ten days after a
missed payment, phone calls to the borrower are initiated by the Servicer and on
the sixteenth day, an automated mailgram is sent. Follow-up calls by experienced
collection personnel are made as required to promote prompt payment and to
counsel the borrower. At the second missed payment, generally, an on-site
interview is scheduled with the borrower and the mortgaged property is
inspected. If foreclosure is necessary, the Servicer's Litigation Department
supervises and monitors all litigation procedures (including bankruptcy
proceedings) conducted by the foreclosing attorneys. If title passes to the
mortgagee, the Servicer's real estate division will immediately insure that the
mortgaged property is preserved and protected. Upon extensive review and
analysis, a disposition strategy is developed and the property is aggressively
marketed.
The following table and discussion set forth certain information concerning
the delinquency and loss experience on mortgage loans secured by single family
properties, multifamily properties and mixed residential and commercial
structures (including the Mortgage Loans originated or purchased by the
Depositor and serviced by the Servicer).
S-74
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND LOSS EXPERIENCE(1)
($ IN THOUSANDS)
For the Year Ended June 30 Nine Months
------------------------------------- Ended
1995 1996 1997 March 31,1998(5)
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Total Outstanding Principal Balance............... $ 913,267 $1,332,113 $1,904,232 $2,514,025
Number of Loans................................... 12,895 18,420 26,119 34,221
Period of Delinquency(2):
30-59 Days(3)
Principal Balance....................... $ 7,654 $ 14,299 $ 39,594 $ 41,221
Number of Loans......................... 93 210 526 510
Percent Delinquency by Dollar........... 0.84% 1.07% 2.08% 1.64%
60-89 Days
Principal Balance....................... $ 2,242 $ 6,419 $ 15,252 $ 23,451
Number of Loans......................... 36 82 186 230
Percent Delinquency by Dollar........... 0.25% 0.48% 0.80% 0.93%
90 Days or More
Principal Balance....................... $ 14,101 $ 39,110 $ 77,465 $ 124,334
Number of Loans......................... 192 431 813 1,297
Percent Delinquency by Dollar........... 1.54% 2.94% 4.07% 4.95%
Total Delinquency
Principal Balance....................... $ 23,997 $ 59,828 $ 132,311 $ 189,006
Number of Loans......................... 321 723 1,525 2,037
Percent Delinquency by Dollar........... 2.63% 4.49% 6.95% 7.52%
Average Outstanding Principal Balance............. $ 768,136 $1,104,163 $1,624,031 $2,189,316
Net Gains/(Losses) on Liquidated Loans............ (326) $ (1,684) $ (8,092) $ (10,845)
Net Gains/(Losses) as a Percent of Average
Outstanding Principal Balance................ (0.04)% (0.15)% (0.50)% (0.66)%
Net Gains/(Losses) on Liquidated Loans
including advances(4)........................ $ (326) $ (1,703) $ (8,161) $ (10,958)
Net Gains/(Losses) as a Percent
of Average Outstanding
Principal Balance (4)........................ (0.04)% (0.15)% (0.50)% (0.67)%
</TABLE>
- -------------
(1) This table includes fixed-rate and adjustable-rate mortgage loans.
(2) Includes mortgage loans in the process of foreclosure and mortgaged
properties acquired through foreclosure or deed in lieu of foreclosure.
(3) Represents two payments missed.
(4) Includes all net recorded servicer advances through date of liquidation
less recoveries of such advances. (5) Percentages for the nine month period
ended March 31, 1998 are annualized.
The number of outstanding mortgage loans originated pursuant to the
Adjustable-Rate First Mortgage Program in the Servicer's loan portfolio, and the
total principal balance of such loans, as of March 31, 1998 were approximately
9,629 and $1,089,348,000, respectively, as of June 30, 1997 were approximately
6,906 and $793,336,000, respectively, as of June 30, 1996 were approximately
4,179 and $472,639,000, respectively, and as of June 30, 1995 were approximately
2,710 and $291,801,000, respectively. As of March 31, 1998, only 682 of such
adjustable-rate mortgage loans were delinquent.
At March 31, 1998 with respect to the mortgage loans set forth in the
preceding table, 127 properties (representing $13,214,000 in principal balance
of such loans) were acquired through foreclosure of the related mortgage loans
or through deed in lieu of foreclosure and were not liquidated. The average
length of ownership of foreclosed properties has historically been 6.12 months
with an average loss (including accrued and unpaid interest) per property of
$42,525.
The delinquency and loss experience percentages in the preceding table are
calculated on the basis of all conventional mortgage loans serviced for the
Depositor as of the end of the periods indicated. However, because the total
amount of loans serviced by the Servicer has rapidly increased over these
periods as a result of new originations, the total amount of loans serviced as
of the end of any indicated period will include many loans that will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial continuous additions
of newly originated loans to the total amount of loans serviced, the delinquency
percentages indicated in the preceding table would be higher and could be
substantially higher.
S-75
<PAGE>
YEAR 2000 COMPLIANCE
Superior Bank FSB ("Superior") is a federally chartered and insured savings
association, regulated by the Office of Thrift Supervision ("OTS"). Pursuant to
OTS and Federal Financial Institutions Examination Counsel guidelines, Superior
initiated a comprehensive program to study the impact on its computer systems in
order to be year 2000 compliant. This study involves identifying affected
systems and/or applications and implementing appropriate modifications or
replacements of hardware and software maintained by Superior. The study also
involves receiving assurance that similar actions have or are being taken by
third party service providers that are relied upon by Superior. In addition,
Superior is taking necessary steps to receive assurance that its borrowers on
income producing properties are taking necessary steps to address their year
2000 issues so that income to cover debt service will not be interrupted.
Under this program, Superior has identified computer systems that will
require either modification, upgrade or replacement. Superior anticipates that
in-house personnel will be primarily responsible for completing these tasks and
although outside contractors may be used, the costs will not be significant. As
such Superior believes that the planned modifications, upgrades and replacement
of existing systems, along with third party confirmation, will be completed in a
timely fashion to assure year 2000 compliance, and any related costs will not
have a materially adverse impact on the results of operations, cash flows or
financial condition of Superior. However, in the event that any of Superior's
third party servicers or agents do not successfully and timely achieve year 2000
compliance, Superior's business or operations could be materially adversely
affected.
THE TRUSTEE
LaSalle National Bank ("LaSalle"), a nationally chartered commercial bank
located in Chicago, Illinois, will be named Trustee pursuant to the Pooling
Agreement. LaSalle has accepted appointment as the certificate registrar and
paying agent pursuant to the Pooling Agreement. The Trustee may resign at any
time in the manner set forth in the Pooling Agreement, in which event the
Servicer will be obligated to appoint a successor trustee. The Trustee may be
removed if it ceases to be eligible to continue as such under the Pooling
Agreement, if it becomes insolvent or if it fails to perform in accordance with
the Pooling Agreement. The Trustee may also be removed by the Depositor without
cause, as long as the Certificate Insurer consents to such removal. Any
resignation or removal of the Trustee and appointment of a successor trustee
will not become effective until the acceptance of appointment by a successor
trustee. The Trustee may appoint a custodian to hold the Mortgage Loans and has
initially appointed itself to act in such capacity. The Depositor may maintain
other banking relationships in the ordinary course of business with the Trustee
and any custodian.
PAYMENT OF EXPENSES
In order to provide for the payment of the fees and expenses of the
Trustee, the Trustee will establish and maintain an account for each Group (with
respect to Group 1, the "Group 1 Trustee Expense Account"; with respect to Group
2, the "Group 2 Trustee Expense Account"; each, a "Trustee Expense Account")
into which the Trustee will deposit on each Remittance Date, one-twelfth of the
Annual Trustee Expense Amount. The "Annual Trustee Expense Amount" with respect
to each Mortgage Loan is equal to 0.010% per annum times the related Principal
Balance. Amounts on deposit in the related Trustee Expense Account will be
withdrawn pursuant to the terms of the Pooling Agreement to pay the fees and
expenses of the Trustee with respect to the related Group. On each Remittance
Date, the Trustee will pay from amounts on deposit in the related Certificate
Account, prior to making any required distributions to the Certificateholders,
an amount that is sufficient to pay the monthly premium due the Certificate
Insurer.
TERMINATION; PURCHASE OF MORTGAGE LOANS
On any Remittance Date on which the aggregate outstanding principal balance
of the Mortgage Loans in the Trust Fund is less than or equal to 5% of the sum
of the Original Pool Principal Balance and the Original Pre-Funded Amount, the
Servicer may determine to purchase and may purchase from the Trust Fund all of
the Mortgage Loans and all REO Property at a price equal to the sum of (i) 100%
of the Principal Balance of each Mortgage Loan remaining plus one month's
accrued interest thereon at the related Net Mortgage Rate and (ii) the appraised
value of any such REO Property remaining determined in accordance with the terms
of the Pooling Agreement (the "Termination Price"). See "Description of the
Certificates--Termination" in the Prospectus.
S-76
<PAGE>
In connection with any such purchase by the Servicer, the Servicer shall
remit to the Trustee for remittance to the related Certificateholders on the
final Remittance Date all amounts then on deposit in the related Principal and
Interest Account that would have constituted part of the related Available
Remittance Amount for subsequent Remittance Dates absent such purchase.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer may, pursuant to the Pooling Agreement, remove the
Servicer as servicer with respect to the Mortgage Loans of a Group upon the
occurrence and continuation beyond the applicable cure period of any of the
following events (each, an "Event of Default"), other than the event described
in clause (i)(C) below, and the Holders of the Class 1A or the Class 2A
Certificates evidencing in excess of 51% of the related Class A Principal
Balance (with respect to a Group, the "Majority Certificateholders"), with the
consent of the Certificate Insurer, which consent may not be unreasonably
withheld, may remove the Servicer as servicer of the Mortgage Loans of the
related Group upon the occurrence and continuation beyond the applicable cure
period of (a) an event described in clause (ii) below or (b) upon the failure of
the Certificate Insurer to exercise its rights to remove the Servicer upon the
occurrence of any event described in clauses (i)(A), (i)(B), (i)(D), (iii), (iv)
or (v) below:
(i)(A) an Event of Nonpayment, unless in the case of an Event of
Nonpayment described in clauses (i) or (ii) of the definition thereof, the
insufficiency described in such clauses (i) or (ii) results from a failure
of the Certificate Insurer or the Trustee to perform in accordance with its
respective obligations with respect to such Group; (B) the failure by the
Servicer to make any required Servicing Advance with respect to such Group,
to the extent such failure materially and adversely affects the interests
of the Certificate Insurer or the related Certificateholders; (C) the
failure by the Servicer to make any required Advance with respect to such
Group; or (D) any other failure by the Servicer to remit to related
Certificateholders, or to the Trustee for the benefit of the related
Certificateholders, any payment required to be made under the terms of the
Pooling Agreement with respect to the related Certificates, to the extent
such failure materially and adversely affects the interests of the
Certificate Insurer or the related Certificateholders and which continues
unremedied after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to the Servicer by
the Certificate Insurer or the Trustee or to the Servicer and the Trustee
with the consent of the Certificate Insurer; or
(ii) failure by the Servicer duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Servicer with respect to a Group as set forth in the Pooling Agreement with
respect to the related Certificates, which failure continues unremedied for
a period of 60 days after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Servicer by
the Trustee or to the Servicer and the Trustee by the Certificate Insurer
or any related Certificateholder with the consent of the Certificate
Insurer; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Servicer
and such decree or order shall have remained in force, undischarged or
unstayed for a period of 60 days; or
(iv) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to the
Servicer or of or relating to all or substantially all of the Servicer's
property and such appointment shall continue unremedied for a period of 30
days after the Servicer has received notice of such default; or
(v) the Servicer shall admit in writing its inability to pay its debts
as they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its obligations, any of
which shall continue unremedied for a period of 30 days after the Servicer
has received notice of such default; or
(vi) certain other events if required by the Certificate Insurer in
the Pooling Agreement.
S-77
<PAGE>
Upon the occurrence of the event described in clause (i)(C), and the
Servicer's failure to remedy such by twelve o'clock noon, New York City time, on
the next succeeding Business Day, the Trustee or a successor Servicer will
immediately assume the duties of the Servicer with respect to the related Group.
An "Event of Nonpayment" is defined in the Pooling Agreement as (i) with
respect to any Remittance Date, the insufficiency of amounts remitted to the
Trustee by the Servicer and available to the Trustee to pay the full amount of
the related Class A Remittance Amounts for a Group (exclusive of the related
Class A Carry-Forward Amounts that represent Insured Payments or interest
accrued in respect of Insured Payments), and the monthly premium payable to the
Certificate Insurer and (ii) the sum of all Realized Losses with respect to such
Group exceeds an amount specified in the Pooling Agreement. In certain instances
of the occurrence of an Event of Nonpayment the Trustee and the Certificate
Insurer may prohibit the termination of the Servicer with respect to a Group if
such Event of Nonpayment does not result from the action or omission of the
Servicer.
Under the Pooling Agreement, if Realized Losses and delinquencies with
respect to a Group reach certain specified levels, the Certificate Insurer has
the option to direct the Trustee to remove the Servicer with respect to such
Group.
Upon removal or resignation of the Servicer as servicer of the Mortgage
Loans, the Trustee will be the successor servicer of the Mortgage Loans of the
related Group (the "Successor Servicer"). The Trustee and any other Successor
Servicer in such capacity is entitled to the same reimbursement for advances and
servicing compensation with respect to the Mortgage Loans of the related Group
as the Servicer. See "Description of the Pooling and Servicing
Agreements--Servicing and Other Compensation and Payment of Expenses" and
"--Rights Upon Event of Default" in the Prospectus.
RECORDATION OF ASSIGNMENTS OF MORTGAGES
Assignments of the Mortgage Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except in
states such as New York where, in the opinion of counsel, such recording is not
required to protect the Trustee's interest in the Mortgage Loan against the
claim of any subsequent transferee or creditor of the Depositor.
AMENDMENT
In addition to the provisions for amendment of the Pooling Agreement
described in the Prospectus, with respect to the Certificates, the Required
Overcollateralization Amounts and the Subordinated Amounts may be reduced at the
discretion of the Certificate Insurer and, consequently, without the consent of,
or notice to, the Holders of Class A Certificates.
THE CERTIFICATE INSURER AND THE CERTIFICATE INSURANCE POLICY
The information set forth in this section and in the financial statements
of Financial Guaranty Insurance Company (the "Certificate Insurer") set forth in
Appendix A and Appendix B hereto, has been provided by the Certificate Insurer.
No representation is made by the Depositor or any of its affiliates as to the
accuracy or completeness of any such information.
Financial Guaranty Insurance Company, the Certificate Insurer, a New York
stock insurance corporation, is a monoline financial guaranty insurance company
which, since January 1984, has been a leading insurer of bonds issued by
municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations and
pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also authorized
to carry on general insurance business in the United Kingdom and to write credit
and guaranty insurance in France.
The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Certificate Insurer.
The Certificate Insurer and its holding company, FGIC Corporation, are
subject to regulation by the State of New York Insurance Department and by each
other jurisdiction in which the Certificate Insurer is licensed to write
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies
S-78
<PAGE>
and their insurance subsidiaries to register and file certain reports, including
information concerning their capital structure, ownership and financial
condition and require prior approval by the insurance department of their state
of domicile of changes in control, of dividends and of other intercorporate
transfer of assets and of transactions between insurance companies, their
parents and affiliates. The Certificate Insurer is required to file quarterly
and annual statutory financial statements and is subject to statutory
restrictions concerning the types and quality of investments, the use of policy
forms, premium rates and the size of risk that it may insure, subject to
reinsurance. Additionally, the Certificate Insurer is subject to triennial
audits by the State of New York Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that it considers to be of investment grade quality. With
respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains its own underwriting standards
that are based on those aspects of credit quality that the Certificate Insurer
deems important for the category and that take into account criteria established
for the category typically used by rating agencies. Credit criteria for
evaluating securities include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flow, including the historical and expected performance of
assets pledged for payment of securities under varying economic scenarios,
underlying levels of protection such as insurance or overcollateralization, and,
particularly in the case of long-term municipal securities, the importance of
the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities such as the Class A Certificates. If the issuer of a security insured
by the Certificate Insurer defaults on its obligations to pay such debt service,
or, in the case of a pass-through security, available funds are insufficient to
pay the insured amounts, the Certificate Insurer will make the scheduled insured
payments, without regard to any acceleration of the securities which may have
occurred, and will be subrogated to the rights of security holders to the extent
of its payments. The claims paying ability of the Certificate Insurer is rated
Aaa, AAA and AAA by Moody's, Standard & Poor's and Fitch Investors Service,
Inc., respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
As of March 31, 1998, December 31, 1997 and December 31, 1996 the
Certificate Insurer had written directly or assumed through reinsurance,
guaranties of approximately $237.8 billion, $230.2 billion and $205.0 billion
par value of securities, respectively (of which approximately 83 percent, 86
percent and 82 percent, respectively, constituted guaranties of municipal
bonds), for which it had collected gross premiums of approximately $2.16
billion, $2.14 billion and $2.05 billion, respectively. As of March 31, 1998,
the Certificate Insurer had reinsured approximately 22 percent of the risks it
had written, 29 percent through quota share reinsurance, 24 percent through
excess of loss reinsurance and 47 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1996, December 31, 1997 and March 31, 1998,
respectively. No material adverse change in the capitalization of the
Certificate Insurer has occurred since March 31, 1998.
S-79
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
(IN MILLIONS) (IN MILLIONS) (IN-MILLIONS)
------------- ------------- -------------
<S> <C> <C> <C>
Unearned Premiums.............................................. $ 682 $ 629 $ 611
Other Liabilities.............................................. 288 250 272
Stockholder's Equity(1)
Common Stock............................................. 15 15 15
Additional Paid-in Capital............................... 334 384 384
Accumulated other comprehensive income................... 38 84 69
Retained Earnings........................................ 1,297 1,470 1,518
------ ------ ------
Total Stockholder's Equity..................................... 1,684 1,953 1,986
------ ------ -------
Total Liabilities and Stockholder's Equity..................... $2,654 $2,832 $2,869
====== ====== ======
</TABLE>
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "accumulated other comprehensive income" in accordance
with the Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" adopted by the Certificate Insurer effective January
1, 1998. As this new standard only requires additional information in the
financial statements, it does not affect the Certificate Insurer's
financial position or results of operations.
For further financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer included as Appendix
A and the unaudited financial statements of the Certificate Insurer included as
Appendix B.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth under the
heading "The Certificate Insurer and the Certificate Insurance Policy" herein
and in Appendix A and Appendix B.
The Certificate Insurer will issue a certificate insurance policy for the
Class A Certificates (the "Certificate Insurance Policy"). The Certificate
Insurance Policy unconditionally guarantees the payment of Insured Payments on
the Class A Certificates. "Insured Payments" as to any Remittance Date means the
amount, if any, by which the related Class A Remittance Amount with respect to
all related Classes of the Class A Certificates (excepting amounts payable in
connection with the repurchase or substitution of defective Mortgage Loans if
such amounts are due but not paid by the Depositor) exceeds the sum of (a) the
related Available Remittance Amount (minus the monthly premium payable to the
Certificate Insurer), (b) the lesser of (1) the sum of (i) if any such
Remittance Date is prior to the Cross-Over Date, the Excess Spread deposited
into the related Certificate Account as of such Remittance Date, (ii) to the
extent of an Available Funds Shortfall, the Net Excess Spread from the other
Group, if any, and (iii) to the extent of an Available Funds Shortfall, the
Excess Principal from the other Group, if any, and (2) the related Subordinated
Amount and (c) the aggregate amount of any previous related Insured Payments for
which the Certificate Insurer has not been reimbursed by the Trustee pursuant to
the Pooling Agreement, together with that portion of the amounts described in
the immediately preceding clause (a) of the definition of Insured Payment that
represents interest accrued in respect of prior Insured Payments. The
Certificate Insurer will make each such Insured Payment (other than that portion
of an Insured Payment constituting a Preference Amount (defined below)) to the
Trustee as paying agent on
S-80
<PAGE>
the later of (a) the Remittance Date on which such Insured Payment is
distributable to the related Class A Certificateholders pursuant to the Pooling
Agreement and (b) the business day next following the day on which the
Certificate Insurer shall have received telephonic or telegraphic notice,
subsequently confirmed in writing, or written notice by registered or certified
mail, from the Trustee as paying agent specifying that an Insured Payment is
due. The Certificate Insurance Policy will provide for payment of the amount (a
"Preference Amount") of any distributions in respect of principal or interest
previously paid to a Class A Certificateholder that are subsequently recovered
from such Certificateholder prior to the expiration date of the Certificate
Insurance Policy, pursuant to a final, nonappealable order of a court of
competent jurisdiction under the United States Bankruptcy Code. Any such
payments would be made under the Certificate Insurance Policy on the second
business day following receipt by the Certificate Insurer of notice as described
above, a certified copy of such final order, assignment to the Certificate
Insurer of such Certificateholder's rights and claims with respect to such
Preference Amount and appointment of the Certificate Insurer as such
Certificateholder's agent in respect of the Preference Amount. No Holder of a
Class A Certificate shall be entitled to reimbursement for any payment avoided
as a preference as to which the Certificate Insurer previously has made a
payment under the Certificate Insurance Policy, nor is the Certificate Insurer
obligated to make any payment in respect of any Preference Amount which
represent a payment of the principal amount of the Class A Certificates prior to
the time the Certificate Insurer otherwise would have been required to make a
payment in respect of such principal.
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee.
For purposes of the Certificate Insurance Policy, "Class A
Certificateholder" as to a particular Certificate, does not include the Trust
Fund, the Servicer, any Sub-Servicer or the Depositor.
The Certificate Insurer only insures the timely receipt of interest on the
Class A Certificates and the ultimate receipt of principal on the Class A
Certificates. The Certificate Insurer does not guarantee (i) any rate of
principal payments on the Class A Certificates other than that set forth in the
related Principal Payment Table attached as an exhibit to the Pooling Agreement
and provided by the Certificate Insurer, (ii) any recovery of payments deemed
voidable preferences under state law, (iii) the payment of the purchase price by
the Depositor in connection with the purchase of Mortgage Loans due to defective
documentation or a breach of representation or warranty, or (iv) the payment of
any Available Funds Cap Carry Forward Amount with respect to Group 2 for any
Remittance Date. The Certificate Insurance Policy is non-cancelable. The
Certificate Insurance Policy expires and terminates without any action on the
part of the Certificate Insurer or any other person on the date that is one year
and one day following the date on which the Class A Certificates have been paid
in full.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Pursuant to the Pooling Agreement, the Certificate Insurer will be
subrogated to the related Class A Certificateholders to the extent of any
payment under the Certificate Insurance Policy.
In the absence of payments under the Certificate Insurance Policy,
Certificateholders will directly bear the credit and other risks associated with
their undivided interest in the Trust Fund.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling Agreement, for federal
income tax purposes, the Trust Fund REMIC will qualify as a REMIC within the
meaning of the Code.
S-81
<PAGE>
For federal income tax purposes, the Class R Certificates will be the sole
Class of "residual interests" and the Class A Certificates will be the "regular
interests" in the Trust Fund REMIC and will generally be treated as debt
instruments of the Trust Fund REMIC. See "Certain Federal Income Tax
Consequences" in the Prospectus.
For federal income tax information reporting purposes, the Class A
Certificates will not be treated as having been issued with original issue
discount. With respect to Group 1, the prepayment assumptions that will be used
in determining the rate of accrual of market discount and premium, if any, for
federal income tax purposes will be based on the assumption that subsequent to
the date of any determination, the Group 1 Mortgage Loans will prepay at a rate
of 2% per annum of the then outstanding principal balance of such Group 1
Mortgage Loans in the first month of the life of the Group 1 Mortgage Loans and
an additional 1.2% per annum in each month thereafter until the twenty-first
month, then, beginning in the twenty-first month and in each month thereafter
during the life of the Group 1 Mortgage Loans, 26% per annum each month. With
respect to Group 2, the prepayment assumptions that will be used in determining
the rate of accrual of market discount and premium, if any, for federal income
tax purposes for the REMIC will be based on the assumption that subsequent to
the date of any determination, the Group 2 Mortgage Loans will prepay at a rate
of 28% CPR. No representation is made that the Mortgage Loans will prepay at
these rates or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount", "--Market Discount" and "--Premium" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to
prepayable securities, such as the Class A Certificates. In addition, there is
considerable uncertainty concerning the application of Section 1272(a)(6) of the
Code and the OID Regulations to REMIC Regular Certificates that provide for
payments based on an adjustable rate, such as the Class A Certificates. Because
of the uncertainties concerning the application of Section 1272(a)(6) of the
Code to the Class 1A Certificates and the Class 2A Certificates and because the
rules of the OID Regulations relating to debt instruments having an adjustable
rate of interest are limited in their application in ways that could preclude
their application to the Class A Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Class A should be treated
as having been issued with original issue discount or should be governed by some
other method not yet set forth in regulations. Prospective purchasers of the
Class A Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
If the Class A Certificates are required to be treated as having been
issued with original issue discount it appears that a reasonable method of
reporting original issue discount with respect to the Class 1A Certificates and
the Class 2A Certificates, generally would be to report all income with respect
to such Certificates as original issue discount for each period, computing such
original issue discount (i) by assuming that the value of the applicable index
will remain constant for purposes of determining the original yield to maturity
of, and projecting future distributions on, such Certificates, thereby treating
such Certificates as fixed rate instruments to which the original issue discount
computation rules described in the Prospectus can be applied, and (ii) by
accounting for any positive or negative variation in the actual value of the
applicable index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See "Certain Federal Income
Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
In general the Class A Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code and as "real estate assets" under Section
856(c)(4)(A) of the Code generally in the same proportion that the assets of the
Trust Fund REMIC would be so treated. Moreover, if 95% or more of such assets
qualify for any of the foregoing treatments at all times during a calendar year,
the Class A Certificates will qualify for the corresponding status in their
entirety for that calendar year. In addition, the Class A Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code.
Furthermore, interest on the Class A Certificates will be treated as "interest
on obligations secured by mortgages on real property" under Section 856(c)(3)(B)
of the Code generally to the extent that
S-82
<PAGE>
such Class A Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. Amounts held in the Trustee Expense Accounts and the
Reserve Accounts may not be treated as assets described in the foregoing
sections of the Code. In addition, to the extent that the Mortgage Loans
represent loans secured by mixed residential and commercial structures, such
loans will be treated as assets described in Section 7701(a)(19)(C) of the Code
only if the residential use of the property securing such loans exceeds 80% of
the property's entire use. See "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investment in REMIC Certificates" in
the Prospectus.
To the extent permitted by then applicable law, any "prohibited
transactions tax", "contributions tax", tax on "net income from foreclosure
property" or state or local income or franchise tax that may be imposed on the
Trust Fund REMIC will be borne by the Servicer or Trustee in either case out of
its own funds, provided that the Servicer or the Trustee, as the case may be,
has sufficient assets to do so, and provided further that such tax arises out of
a breach of the Servicer's or the Trustee's obligations, as the case may be,
under the Pooling Agreement and in respect of compliance with then applicable
law. Any such tax not borne by the Servicer or the Trustee will be payable out
of the Trust Fund REMIC which may reduce the amounts otherwise payable to
Holders of Class A Certificates. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Prohibited
Transactions and Other Possible REMIC Taxes" in the Prospectus.
A Certificateholder that is not a "United States person" (as defined in the
Prospectus) and is not subject to federal income tax as a result of any direct
or indirect connection to the United States in addition to its ownership of a
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a Certificate, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such Certificateholder). If
the holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
The Servicer will be designated as the "tax matters person" (as defined in
Treasury regulation Section 301.6231(a)(7)-(1)(a)) with respect to the Trust
Fund REMIC, and in connection therewith will be required to hold not less than
0.01% of the Percentage Interests of the Class R Certificates.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" in the
Prospectus.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, and any other entity that may be deemed
to be investing plan assets, including insurance companies, as applicable, that
are subject to the fiduciary responsibility provisions of ERISA and Section 4975
of the Code ("Plans") should carefully review with its legal advisors whether
the purchase or holding of Class A Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or the Code.
Any Plan fiduciary which proposes to cause a Plan to purchase Class A
Certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
the Exemptions or any other prohibited transaction exemption in connection
therewith. A purchaser of a Class A Certificate should also be aware that even
if the conditions specified in one or more exemptions are met, the scope of the
relief provided by an exemption might not cover all acts which might be
construed as prohibited transactions. With respect to the applicability of
ERISA, each Group will be deemed to be a separate sub-trust within the Trust
Fund.
S-83
<PAGE>
The DOL issued individual exemptions, Prohibited Transaction Exemption
90-29 to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Prohibited Transaction Exemption 90-23 to J.P. Morgan Securities Inc. ("J.P.
Morgan") (the "Exemptions"), which generally exempt from the application of the
prohibited transaction provisions of Section 406 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of mortgage pass-through certificates underwritten or placed by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the Exemptions are satisfied. For purposes of this section "ERISA
Considerations", the term "Underwriter" shall include (a) Merrill Lynch, (b)
J.P. Morgan, (c) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with either
Merrill Lynch or J.P. Morgan and (d) any member of the underwriting syndicate or
selling group of which a person described in (a), (b) or (c) is a manager or
co-manager with respect to a Class of Certificates.
The Exemptions set forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Class A Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of Class
A Certificates by a Plan must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Exemptions only apply to Class A Certificates evidencing rights and
interests not subordinated to the rights and interests evidenced by the other
certificates of the same Trust Fund. Third, the Class A Certificates at the time
of acquisition by the Plan must be rated in one of the three highest generic
rating categories by Standard & Poor's, Moody's, Duff & Phelps Credit Rating Co.
or Fitch IBCA, Inc. Fourth, the Trustee cannot be an affiliate of any other
member of the "Restricted Group", which consists of any Underwriter, the
Depositor, the Trustee, the Servicer, any sub-servicer, the Certificate Insurer
and any mortgagor with respect to Mortgage Loans constituting more than 5% of
the aggregate unamortized principal balance of the Mortgage Loans in the related
Group as of the date of initial issuance of the Certificates. Fifth, the sum of
all payments made to and retained by the Underwriters must represent not more
than reasonable compensation for underwriting the Class A Certificates; the sum
of all payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Fund must represent not more than the fair
market value of the Mortgage Loans; and the sum of all payments made to and
retained by the Servicer and any sub-servicer must represent not more than
reasonable compensation for such person's services under the Pooling Agreement
and reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
If the general conditions of the Exemptions are satisfied, the Exemptions
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of Class A
Certificates by Plans. However, no exemption is provided from the restrictions
of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any person
who has discretionary authority or renders investment advice with respect to the
assets of such Excluded Plan. For purposes of the Certificates, an Excluded Plan
is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemptions are also satisfied, the
Exemptions may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Class A Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Class A Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
S-84
<PAGE>
Further, if certain specific conditions of the Exemptions are satisfied,
the Exemptions may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Mortgage Pool.
The Exemptions also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of the Plan's ownership of Certificates.
On July 21, 1997, the DOL issued (62 Fed. Reg. 39021) amendments to the
Exemptions, and similar exemptions issued to other underwriters (the
"Amendments") under which the Exemptions would apply, subject to the
satisfaction of certain conditions, to transactions involving a trust the assets
of which include a pre-funding account to be used subsequent to the closing of
the transaction to purchase additional assets for the trust. In its prefatory
comments to the Amendments as proposed by the DOL (62 Fed. Reg. 28502), the DOL
stated its interpretive position that a transaction which satisfied the
conditions of the Exemptions, but did not satisfy the conditions of the
Amendments as proposed could nevertheless qualify for exemptive relief if it
included a pre-funding account that was used only to acquire assets that are
specifically identified by the sponsor or originator as of the closing date, but
transferred to the trust after the closing date for administrative or other
reasons. Although the Pre-Funding Account will not satisfy the conditions of the
Amendments, it will be used by the Trustee solely to pay for the acquisition of
Subsequent Mortgage Loans in accordance with the Pooling Agreement from a fixed
pool of loans that will have been specifically identified prior to the closing
date. It is expected that all of the loans in such fixed pool, except for those
which are determined not to meet the criteria for purchase set forth in the
Pooling Agreement, will be acquired using the related Pre-Funded Amount.
Accordingly, the Depositor believes that the existence of the Pre-Funding
Account should not cause the Exemptions to be inapplicable.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemptions and (b) that the specific and general conditions set
forth in the Exemptions and the other requirements set forth in the Exemptions
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in the Exemptions, the Plan
fiduciary should consider its general fiduciary obligations under ERISA in
determining whether to purchase any Class A Certificates on behalf of a Plan.
Any Plan fiduciary considering whether to purchase a Class A Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
Although at their initial issuance the Class 1A Certificates will be rated
Aaa by Moody's and "AAA" by Standard & Poor's, the Class 1A Certificates will
not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") because Group 1 includes
Mortgage Loans which are secured by second liens.
The Class 2A Certificates will not constitute "mortgage related securities"
for purposes of SMMEA until such time as the balance of the related Pre-Funding
Account is reduced to zero. At such time the Class 2A Certificates will
constitute "mortgage related securities" for purposes of SMMEA so long as they
are rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization, and, as such, they will constitute
legal investments for certain entities to the extent provided for in SMMEA.
S-85
<PAGE>
Institutions whose investment activities are subject to review by federal
and state regulatory authorities should consult with their counsel or the
applicable authorities to determine whether an investment in the Class 1A or
Class 2A Certificates complies with applicable guidelines, policy statements or
restrictions. See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Depositor has agreed to sell to Merrill
Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. (the
"Underwriters"), and each of the Underwriters has agreed to purchase from the
Depositor, the principal amount of the Class A Certificates set forth opposite
its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
UNDERWRITERS CLASS 1A CERTIFICATES CLASS 2A CERTIFICATES
------------ --------------------- ---------------------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated............ $133,000,000 $99,500,000
J.P. Morgan Securities, Inc................................... $133,000,000 $99,500,000
------------ -----------
Total......................................................... $266,000,000 $199,000,000
</TABLE>
In the Underwriting Agreement, each of the Underwriters has agreed, subject
to the terms and conditions set forth therein, to purchase all of its respective
allocation of the Class A Certificates if any of the Class A Certificates are
purchased.
The Underwriters have advised the Depositor that they propose initially to
offer the Class A Certificates to the public at the price set forth on the cover
page hereof, and to certain dealers at such price less a concession not in
excess of 0.17% of the Certificate denominations for the Class 1A Certificates
and not in excess of 0.17% for the Class 2A Certificates. The Underwriters may
allow and such dealers may reallow a concession not in excess of 0.125% of the
Certificate denominations to certain other dealers. After the initial public
offering, the public offering price and such concessions may be changed.
Until the distribution of the Class A Certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A
Certificates. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Class A
Certificates. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Certificates.
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Depositor or any of its affiliates nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Class
A Certificates. In addition, neither the Depositor or any of its affiliates nor
any of the Underwriters makes any representation that the Underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports
S-86
<PAGE>
to Certificateholders", which will include information as to the outstanding
principal balance of the Class A Certificates and the status of any existing
credit enhancement. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Class A Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997, have
been included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing in Appendix A upon the authority of such
firm as experts in accounting and auditing.
RATINGS
As a condition of issuance, the Class 1A and Class 2A Certificates will be
rated Aaa by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Standard &
Poor's Ratings Services, A Division of the McGraw-Hill Companies, Inc.
("Standard & Poor's"). The security ratings of the Class A Certificates should
be evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the rating agencies. In
general, ratings address credit risk and do not address the likelihood or rate
of prepayment. See "Rating" and "Risk Factors--Limited Nature of Ratings" in the
Prospectus.
The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by the holders thereof of all distributions on the
underlying mortgage loans to which they are entitled. Moody's ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The rating assigned
by Moody's to the Class A Certificates does not address the possibility that the
Class A Certificateholders might suffer a lower than anticipated yield, nor does
it address the likelihood that the Available Funds Cap Carry Forward Amount will
be paid to the Class 2A Certificateholders.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of payments required thereon.
Standard & Poor's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream on the mortgage pool is adequate to
make payments required under the certificates. Standard & Poor's rating on the
Class A Certificates does not, however, constitute a statement regarding
frequency of prepayments on the Mortgage Loans nor the likelihood that the
Available Funds Cap Carry Forward Amount will be paid to the Class 2A
Certificateholders.
The Depositor does not expect a rating on the Class A Certificates by any
rating agency other than as set forth above. However, there can be no assurance
as to whether any other rating agency will rate the Class A Certificates, or, if
it does, what rating would be assigned by such other rating agency. A rating on
the Class A Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Class A Certificates as set forth above.
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be passed
upon for the Depositor by Thacher Proffitt & Wood and Lawrence S. Rigie, Esq.
and for the Underwriters by Brown & Wood LLP.
S-87
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
TERM PAGE
- ---- ----
Accrual Period .................................................... 7, 59
Actual/360 Basis .................................................. 7
Additional Principal .............................................. 10, 67
Adjustment Date ................................................... 29
Advance ........................................................... 13
Amount Available .................................................. 67
ARMs .............................................................. 47
Available Funds Cap Carry Forward Amount .......................... 7
Available Funds Cap Rate .......................................... 6
Available Funds Shortfall ......................................... 10, 67
Available Principal Amount ........................................ 10, 67
Available Remittance Amount ....................................... 67
Available Transfer Cashflow ....................................... 10, 68
Balloon Loans ..................................................... 13
Business Day ...................................................... 41
Cedel ............................................................. 4
Cedel Participants ................................................ 61
Certificate Account ............................................... 62
Certificate Insurance Policy ...................................... 10
Certificate Insurer ............................................... 10
Certificateholders ................................................ 3, 5
Certificates ...................................................... 1, 4, 59
Class ............................................................. 4, 59
Class 1A Certificates ............................................. 1
Class 1A-1 Certificates ........................................... 5
Class 1A-1 Pass-Through Rate ...................................... 5
Class 1A-1 Principal Balance ...................................... 5
Class 2A Cap Rate ................................................. 6, 68
Class 2A Certificates ............................................. 1
Class 2A LIBOR Rate ............................................... 6
Class 2A Pass-Through Rate ........................................ 68
Class 2A Principal Balance ........................................ 5
Class 2A-1 Certificates ........................................... 5
Class A Carry-Forward Amount ...................................... 68
Class A Certificates .............................................. 1, 4
Class A Interest Remittance Amount ................................ 69
Class A Principal Balance ......................................... 5
Class A Principal Remittance Amount ............................... 7, 10
Class A Remittance Amount ......................................... 70
Closing Date ...................................................... 5
Code .............................................................. 14
Combined Loan-to-Value Ratios ..................................... 24
Commercial Loans .................................................. 16
Commercial Properties ............................................. 11, 16, 20
Commission ........................................................ 2
Cooperative ....................................................... 61
S-88
<PAGE>
Cross-Over Date ................................................... 70
Curtailments ...................................................... 41
Cut-off Date ...................................................... 4
Deferred Payment .................................................. 20
Deferred Payment Loans ............................................ 20
Depositaries ...................................................... 4, 60
Depositor ......................................................... 1, 4
Determination Date ................................................ 72
DSCR .............................................................. 56
DTC ............................................................... 4
Due Period ........................................................ 7
ERISA ............................................................. 15
Euroclear ......................................................... 4
Euroclear Operator ................................................ 61
Euroclear Participants ............................................ 61
Event of Default .................................................. 77
Event of Nonpayment ............................................... 78
Excess Principal .................................................. 10
Excess Spread ..................................................... 70
Exemptions ........................................................ 15
First Lien ........................................................ 13
Funding Periods ................................................... 40
GE Capital ........................................................ 78
Gross Margin ...................................................... 29
Group ............................................................. 2, 5
Group 1 ........................................................... 5
Group 1 Certificate Account ....................................... 62
Group 1 Funding Period ............................................ 28
Group 1 Initial Mortgage Loans .................................... 5, 11
Group 1 Interest Coverage Account ................................. 72
Group 1 Interest Coverage Amount .................................. 72
Group 1 Pre-Funded Amount ......................................... 12, 28
Group 1 Pre-Funding Account ....................................... 12, 28
Group 1 Principal and Interest Account ............................ 62
Group 1 Subsequent Cut-off Date ................................... 28
Group 1 Subsequent Mortgage Loans ................................. 11, 27
Group 1 Subsequent Transfer Dates ................................. 27
Group 1 Subsequent Transfer Instruments ........................... 27
Group 2 ........................................................... 5
Group 2 Certificate Account ....................................... 62
Group 2 Funding Period ............................................ 40
Group 2 Initial Mortgage Loans .................................... 5, 11
Group 2 Interest Coverage Account ................................. 72
Group 2 Interest Coverage Amount .................................. 72
Group 2 Pre-Funded Amount ......................................... 12, 40
Group 2 Pre-Funding Account ....................................... 12
Group 2 Principal and Interest Account ............................ 62
Group 2 Subsequent Cut-off Date ................................... 40
Group 2 Subsequent Mortgage Loans ................................. 11, 40
Group 2 Subsequent Transfer Dates ................................. 40
Group 2 Subsequent Transfer Instruments ........................... 40
S-89
<PAGE>
Holders ........................................................... 3, 5
Index ............................................................. 2
Indirect Participants ............................................. 61
Initial Group 1 ................................................... 20
Initial Group 2 ................................................... 28
Initial Mortgage Loans ............................................ 11
Insurance Proceeds ................................................ 7
Insured Payments .................................................. 80
Interest Coverage Account ......................................... 5
Interest Coverage Amount .......................................... 72
Interest Determination Date ....................................... 63
J.P. Morgan ....................................................... 84
LaSalle ........................................................... 76
Liquidated Mortgage Loan .......................................... 71
LTV ............................................................... 33
Majority Certificateholders ....................................... 77
Mandatory Prepayments ............................................. 71
Manufactured Home Loans ........................................... 13
Maximum Mortgage Rate ............................................. 29
Merrill Lynch ..................................................... 84
Minimum Mortgage Rate ............................................. 29
Mixed Use Loans ................................................... 16
Mixed Use Properties .............................................. 11, 16, 20
Moody's ........................................................... 13
Mortgage Loans .................................................... 1
Mortgage Notes .................................................... 11
Mortgage Rates .................................................... 19
Mortgaged Properties .............................................. 11, 20
Mortgages ......................................................... 11
Multifamily Properties ............................................ 11, 16, 20
Net Excess Amount Available ....................................... 70
Net Excess Principal .............................................. 10
Net Excess Spread ................................................. 10
Net Liquidation Proceeds .......................................... 7
OID Regulations ................................................... 82
One-Month LIBOR ................................................... 42, 47
One-Year U.S. Treasury Index ...................................... 2, 12
One-Year U.S. Treasury Loans ...................................... 12
Original Group 1 Pre-Funded Amount ................................ 12, 28
Original Group 1 Principal Balance ................................ 5, 20
Original Group 2 Pre-Funded Amount ................................ 12
Original Group 2 Principal Balance ................................ 5, 28
Original Pool Principal Balance ................................... 5
Original Pre-Funded Amounts ....................................... 12
OTS ............................................................... 76
Overcollateralization Amount ...................................... 7, 10
Participants ...................................................... 61
Percentage Interest ............................................... 60
Periodic Payment .................................................. 13, 20
Periodic Payment Loan ............................................. 13, 20
Periodic Rate Cap ................................................. 29
S-90
<PAGE>
Plans ............................................................ 83
Pooling Agreement ................................................ 4
Pre-Funding Account .............................................. 12
Preference Amount ................................................ 8, 81
Prepayment Assumption ............................................ 45, 71
Prepayment Model ................................................. 43
Principal and Interest Account ................................... 62
Principal Payment Table .......................................... 69
Principal Prepayments ............................................ 41
Realized Losses .................................................. 78
Record Date ...................................................... 4, 60
Released Mortgaged Property Proceeds ............................. 7
Remaining Net Excess Spread ...................................... 10
REMIC ............................................................ 2
Remittance Date .................................................. 2, 4, 60
Required Overcollateralization Amount ............................ 7
Required Payments ................................................ 10
Reserve Account .................................................. 72
Riegle Act ....................................................... 18
Scheduled Class A Principal Balance .............................. 71
Servicer ......................................................... 4
Servicing Fee .................................................... 12
Servicing Fee Rate ............................................... 12
Simple Interest Loans ............................................ 19
Simple Interest Method ........................................... 19
Single Family Loans .............................................. 16
Single Family Properties ......................................... 11, 16, 20
Six-Month LIBOR .................................................. 2, 12
Six-Month LIBOR Index ............................................ 29
Six-Month LIBOR Loans ............................................ 12
SMMEA ............................................................ 15
Standard & Poor's ................................................ 13
Step-Down Date ................................................... 43
Subordinated Amount .............................................. 70
Subsequent Cut-off Dates ......................................... 40
Subsequent Mortgage Loans ........................................ 11, 40
Subsequent Transfer Dates ........................................ 40
Subsequent Transfer Instruments .................................. 40
Successor Servicer ............................................... 78
Termination Price ................................................ 76
Terms and Conditions ............................................. 61
Trigger Event .................................................... 78
Trust Fund ....................................................... 1, 5
Trust Fund REMIC ................................................. 2
Trustee Expense Account .......................................... 76
Underwriters ..................................................... 2
Underwriting Agreement ........................................... 86
Unrecovered Class A Portion ...................................... 71
S-91
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AFC Mortgage
Loan Asset Backed Certificates, Series 1998-2 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("DTC"),
Centrale de Livraison de Valeurs Mobilieres S.A. ("Cedel"), or the Euroclear
System ("Euroclear"). The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset Back
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as Direct
and Indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lockup" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that the settlement can be made on the desired
value date.
I-1
<PAGE>
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset Backed Certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to proposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to the settlement. In these cases, Cedel or
Euroclear will instruct the respective Depositary, as appropriate, to deliver
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Participant or
I-2
<PAGE>
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be backed-value to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel
Participants or Euroclear Participants.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside of the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
I-3
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The Certificate Owners of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized, in, or under the
laws of, the United States or any political subdivision thereof, or an estate
whose income is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
supervision over the administration of the trust and one or more United States
fiduciaries have authority to control all substantial decisions of the trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
<PAGE>
APPENDIX A
KPMG [LOGO]
The Global Leader
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Report of Independent Auditors.......................................... 1
Balance Sheets.......................................................... 2
Statements of Income.................................................... 3
Statements of Stockholder's Equity...................................... 4
Statements of Cash Flows................................................ 5
Notes to Financial Statements........................................... 6
<PAGE>
[LOGO] KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1997 and 1996, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1997 and 1996 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
January 23, 1998
[Logo] Member Firm of
KPMG International
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
======================================================================================
($ in Thousands, except per share amounts)
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturity securities available-for-sale
(amortized cost of $2,313,458 in 1997 and
$2,190,303 in 1996) .................................... $2,443,746 $2,250,549
Short-term investments, at cost, which approximates
market ................................................. 76,039 73,839
Cash ..................................................... 802 860
Accrued investment income ................................ 38,927 37,655
Reinsurance recoverable .................................. 8,220 7,015
Prepaid reinsurance premiums ............................. 154,208 167,683
Deferred policy acquisition costs ........................ 86,286 91,945
Property and equipment, net of accumulated depreciation
($17,346 in 1997 and $15,333 in 1996) .................. 3,142 4,696
Receivable for securities sold ........................... -- 379
Prepaid expenses and other assets ........................ 21,002 19,520
---------- ----------
Total assets ....................................... $2,832,372 $2,654,141
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums ........................................ $ 628,553 $ 681,816
Loss and loss adjustment expenses ........................ 76,926 72,616
Ceded reinsurance balances payable ....................... 3,932 10,561
Accounts payable and accrued expenses .................... 26,352 54,165
Payable to Parent ........................................ -- 1,791
Current federal income taxes payable ..................... 19,335 52,016
Deferred federal income taxes ............................ 118,522 91,805
Payable for securities purchased ......................... 5,811 4,937
---------- ----------
Total liabilities .................................. 879,431 969,707
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding ....... 15,000 15,000
Additional paid-in capital ............................... 383,511 334,011
Net unrealized gains on fixed maturity securities
available-for-sale, net of tax ......................... 84,687 39,160
Foreign currency translation adjustment, net of tax ...... (752) (429)
Retained earnings ........................................ 1,470,495 1,296,692
---------- ----------
Total stockholder's equity ......................... 1,952,941 1,684,434
---------- ----------
Total liabilities and stockholder's equity ......... $2,832,372 $2,654,141
========== ==========
See accompanying notes to financial statements.
</TABLE>
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
================================================================================
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
REVENUES:
Gross premiums written .................. $ 95,995 $ 97,027 $ 97,288
Ceded premiums .......................... (19,780) (29,376) (19,319)
-------- -------- --------
Net premiums written .................. 76,215 67,651 77,969
Decrease in net unearned premiums ....... 39,788 51,314 27,309
-------- -------- --------
Net premiums earned ................... 116,003 118,965 105,278
Net investment income ................... 127,773 124,635 120,398
Net realized gains ...................... 16,700 15,022 30,762
-------- -------- --------
Total revenues ........................ 260,476 258,622 256,438
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses ....... 12,539 2,389 (8,426)
Policy acquisition costs ................ 12,936 16,327 13,072
Decrease (Increase) in deferred policy
acquisition costs ..................... 5,659 2,923 (3,940)
Other underwriting expenses ............. 14,691 12,508 19,100
-------- -------- --------
Total expenses ........................ 45,825 34,147 19,806
-------- -------- --------
Income before provision for Federal
income taxes .......................... 214,651 224,475 236,632
-------- -------- --------
Federal income tax expense:
Current ............................... 39,133 41,548 28,913
Deferred .............................. 1,715 5,318 19,841
-------- -------- --------
Total Federal income tax expense ...... 40,848 46,866 48,754
-------- -------- --------
Net income ............................ $173,803 $177,609 $187,878
======== ======== ========
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
=============================================================================================================================
($ in Thousands)
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ON FIXED
MATURITY FOREIGN
SECURITIES CURRENCY
ADDITIONAL AVAILABLE- TRANSLATION
COMMON PAID-IN FOR-SALE, ADJUSTMENT, RETAINED
STOCK CAPITAL NET OF TAX NET OF TAX EARNINGS
------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ............................. $15,000 $334,011 $(41,773) $(1,221) $ 973,706
Net income ........................................... -- -- -- -- 187,878
Dividend paid ........................................ -- -- -- -- (25,000)
Change in fixed maturity securities
available for sale, net of tax of $56,839 .......... -- -- 105,558 -- --
Foreign currency translation adjustment .............. -- -- -- (278) --
------- -------- -------- ------- ----------
Balance, December 31, 1995 ........................... 15,000 334,011 63,785 (1,499) 1,136,584
------- -------- -------- ------- ----------
Net Income ........................................... -- -- -- -- 177,609
Dividend paid ........................................ -- -- -- -- (17,500)
Change in fixed maturity securities
available for sale, net of tax of ($13,260) ........ -- -- (24,625) -- --
Foreign currency translation adjustment .............. -- -- -- 1,070 --
------- -------- -------- ------- ----------
Balance at December 31, 1996 ......................... 15,000 334,011 39,160 (429) 1,296,692
------- -------- -------- ------- ----------
Net Income ........................................... -- -- -- -- 173,803
Capital contribution ................................. -- 49,500 -- -- --
Change in fixed maturity securities
available for sale, net of tax of $24,516 .......... -- -- 45,527 -- --
Foreign currency translation adjustment .............. -- -- -- (323) --
------- -------- -------- ------- ----------
Balance at December 31, 1997 ......................... $15,000 $383,511 $ 84,687 $ (752) $1,470,495
======= ======== ======== ======= ==========
See accompanying notes to financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
===========================================================================================================
$ in Thousands)
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
--------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 173,803 $ 177,609 $ 187,878
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums ................................ (53,263) (45,719) (29,890)
Change in loss and loss adjustment expense reserves ........ 4,310 (5,192) (20,938)
Depreciation of property and equipment ..................... 2,013 2,472 2,348
Change in reinsurance receivable ........................... (1,205) 657 6,800
Change in prepaid reinsurance premiums ..................... 13,475 (5,596) 2,581
Change in foreign currency translation adjustment .......... (497) 1,646 (427)
Policy acquisition costs deferred .......................... (12,936) (16,327) (16,219)
Amortization of deferred policy acquisition costs .......... 18,595 19,250 12,279
Change in accrued investment income, and prepaid
expenses and other assets ............................... (2,754) (7,201) 2,906
Change in other liabilities ................................ (36,233) 30,117 (12,946)
Change in deferred income taxes ............................ 1,715 5,318 19,841
Amortization of fixed maturity securities .................. 2,698 792 1,922
Change in current income taxes payable ..................... (32,681) 720 (30,827)
Net realized gains on investments .......................... (16,700) (15,022) (30,762)
--------- ----------- ---------
Net cash provided by operating activities .................... 60,340 143,524 94,546
--------- ----------- ---------
Investing Activities:
Sales and maturities of fixed maturity securities ............ 741,604 891,643 836,103
Purchases of fixed maturity securities ....................... (848,843) (1,033,345) (891,108)
Purchases, sales and maturities of short-term
investments, net............................................ (2,200) 17,193 (15,358)
Purchases of property and equipment, net ..................... (459) (854) (750)
--------- ----------- ---------
Net cash used in investing activities ........................ (109,898) (125,363) (71,113)
--------- ----------- ---------
Financing Activities:
Capital Contributions ........................................ 49,500 -- --
Dividends paid ............................................... -- (17,500) (25,000)
--------- ----------- ---------
Net cash provided by financing activities .................... 49,500 (17,500) (25,000)
--------- ----------- ---------
(Decrease) Increase in cash .................................. (58) 661 (1,567)
Cash at beginning of year .................................... 860 199 1,766
--------- ----------- ---------
Cash at end of year .......................................... $ 802 $ 860 $ 199
========= =========== =========
See accompanying notes to financial statements.
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company") is a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"). The Parent is
owned approximately ninety-nine percent by General Electric Capital
Corporation ("GE Capital") and approximately one percent by Sumitomo
Marine and Fire Insurance Company, Ltd. The Company provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 86% of the
business written since inception by the Company has been municipal bond
insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest
when due on scheduled maturity, sinking fund or other mandatory
redemption and interest payment dates to the holders of municipal
securities. The Company's insurance policies do not provide for
accelerated payment of the principal of, or interest on, the bond
insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service, the
Company will make scheduled interest and principal payments as due and
is subrogated to the rights of bondholders to the extent of payments
made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted
by regulatory authorities (see Note 3). The prior years financial
statements have been reclassified to conform to the 1997 presentation.
Significant accounting policies are as follows:
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." The Statement
defines three categories for classification of debt securities and the
related accounting treatment for each respective category. The Company
has determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's
equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining
terms of the securities. Realized gains or losses on the sale of
investments are determined on the basis of specific identification.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PREMIUM REVENUE RECOGNITION
Premiums for policies where premiums are collected in a single payment
at policy inception are earned over the period at risk, based on the
total exposure outstanding at any point in time. Financial guaranty
insurance policies exposure generally declines according to
predetermined schedules. For policies with premiums that are collected
periodically, premiums are reflected in income pro rata over the period
covered by the premium payment.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate
directly to premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance
functions, rating agency fees, state premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums
ceded to reinsurers (see Note 6). Net acquisition costs are deferred and
amortized over the period in which the related premiums are earned.
Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses is made in an amount
equal to the present value of unpaid principal and interest and other
payments due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such
reserves amounted to $76.9 million and $72.6 million at December 31,
1997 and 1996, respectively. As of December 31, 1997 and 1996, such
reserves included $35.1 million and $28.9 million, respectively,
established based on an evaluation of the insured portfolio in light of
current economic conditions and other relevant factors. As of December
31, 1997 and 1996, case-basis loss and loss adjustment expense reserves
were $41.8 million and $43.7 million, respectively. Loss and loss
adjustment expenses include amounts discounted at an interest rate
between 5.9% and 6.0% in 1997 and between 6.5% and 6.6% in 1996. The
discount rate used is based upon the risk free rate for the average
maturity of the applicable bond sector. The reserve for loss and loss
adjustment expenses is necessarily based upon estimates, however, in
management's opinion the reserves for loss and loss adjustment expenses
is adequate. However, actual results will likely differ from those
estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred
compensation. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to
statutory contingency reserves (see Note 3). The amounts deducted must
be included in taxable income upon their release from the reserves or
upon earlier release of such amounts from such reserves to cover excess
losses as permitted by insurance regulators. The amounts deducted are
allowed as deductions from taxable income only to the extent that U.S.
government non-interest bearing tax and loss bonds are purchased and
held in an amount equal to the tax benefit attributable to such
deductions.
-7-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and
equipment are depreciated straight-line over five years. Leasehold
improvements are amortized over their estimated service life or over the
life of the lease, whichever is shorter. Computer equipment and software
are depreciated over three years. Maintenance and repairs are charged to
expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of
exchange existing at December 31, 1997 and 1996 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation loss at December 31, 1997 and 1996 was $0.7
million and $0.4 million, respectively, net of tax, and is reported as a
separate component of stockholder's equity.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory-basis accounting practices
differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to
the total exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders,
regardless of whether loss contingencies actually exist,
whereas under GAAP, a reserve is established based on an
ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under
GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently payable,
while under GAAP taxes are also provided for differences
between the financial reporting and the tax bases of assets
and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal income
tax payments; and
(g) all fixed income investments are carried at amortized cost
rather than at fair value for securities classified as
available-for-sale under GAAP.
-8-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
====================================================================================================================================
The following is a reconciliation of net income and stockholder's equity presented on a GAAP basis to the corresponding amounts
reported on a statutory-basis for the periods indicated below (in thousands):
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
-------- ------------- -------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount ............................... $173,803 $1,952,941 $177,609 $1,684,434 $187,878 $1,547,881
Premium revenue recognition ..................... (4,924) (181,209) (9,358) (176,285) (22,555) (166,927)
Deferral of acquisition costs ................... 5,659 (86,286) 2,923 (91,945) (3,940) (94,868)
Contingency reserve ............................. -- (540,677) -- (460,973) -- (386,564)
Contingency reserve tax deduction (see Note 2) .. -- 95,185 -- 85,176 -- 78,196
Non-admitted assets ............................. -- (2,593) -- (3,879) -- (5,731)
Case basis loss reserves ........................ 1,377 (1,872) (3,197) (3,249) 4,048 (52)
Portfolio loss reserves ......................... 5,000 29,000 -- 24,000 (22,100) 24,000
Deferral of income taxes ........................ 1,715 72,260 5,317 70,719 19,842 64,825
Unrealized (gains) on fixed maturity
securities held at fair value, net of tax ..... -- (84,687) -- (39,160) -- (63,785)
Recognition of profit commission ................ (1,203) (7,388) (441) (6,185) 3,096 (5,744)
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) .......................... 313 10,916 313 10,603 (637) 10,290
-------- ---------- -------- ---------- -------- ----------
Statutory-basis amount .......................... $181,740 $1,255,590 $173,166 $1,093,256 $166,906 $1,001,521
======== ========== ======== ========== ======== ==========
</TABLE>
-9-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.1 million as of December 31, 1997 and 1996, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as
available-for-sale are as follows (in thousands):
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1997 COST GAINS LOSSES VALUE
- ---- ---------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies .... $ 11,539 $ 185 $-- $ 11,724
Obligations of states and
political subdivisions ....... 2,272,225 130,183 655 2,401,753
Debt securities issued by
foreign governments .......... 29,694 603 28 30,269
---------- -------- ----- ----------
Investments available-for-sale . 2,313,458 130,971 683 2,443,746
Short-term investments ......... 76,039 -- -- 76,039
---------- -------- ----- ----------
Total .......................... $2,389,497 $130,971 $ 683 $2,519,785
========== ======== ===== ==========
The amortized cost and fair values of short-term investments and of investments
in fixed maturity securities available-for-sale at December 31, 1997, by
contractual maturity date, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AMORTIZED FAIR
1997 COST VALUE
- ---- ---------- -----------
Due in one year or less ........................ $ 85,199 $ 85,395
Due after one year through five years .......... 61,168 62,955
Due after five years through ten years ......... 589,772 619,972
Due after ten years through twenty years ....... 1,604,167 1,700,193
Due after twenty years ......................... 49,191 51,270
---------- ----------
Total .......................................... $2,389,497 $2,519,785
========== ==========
-10-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1996 COST GAINS LOSSES VALUE
- ---- ---------- -------- ------ ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies .... $ 57,987 $ 373 $ 1 $ 58,359
Obligations of states and
political subdivisions ....... 2,098,486 65,254 4,854 2,158,886
Debt securities issued by
foreign governments ......... 33,830 -- 526 33,304
---------- ------- ------ ----------
Investments available-for-sale . 2,190,303 65,627 5,381 2,250,549
Short-term investments ......... 73,839 -- -- 73,839
---------- ------- ------ ----------
Total .......................... $2,264,142 $65,627 $5,381 $2,324,388
========== ======= ====== ==========
In 1997, 1996 and 1995, proceeds from sales and maturities of investments in
fixed maturity securities available-for-sale carried at fair value were $741.6
million, $891.6 million, and $836.1 million, respectively. For 1997, 1996 and
1995 gross gains of $19.1 million, $19.8 million and $36.3 million respectively,
and gross losses of $2.4 million, $4.8 million and $5.5 million respectively,
were realized on such sales.
Net investment income of the Company is derived from the following sources (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- -------- --------
Income from fixed maturity securities ...... $122,372 $119,290 $112,684
Income from short-term investments ......... 6,366 6,423 8,450
-------- -------- --------
Total investment income .................... 128,738 125,713 121,134
Investment expenses ........................ 965 1,078 736
-------- -------- --------
Net investment income ...................... $127,773 $124,635 $120,398
======== ======== ========
As of December 31, 1997, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the
Company and the Parent based upon their respective contributions to
consolidated net income. The Company also has a separate tax sharing
agreement with its Parent. Under this agreement the Company can utilize
its Parent's net operating loss to offset taxable income on a
stand-alone basis. The Company's effective federal corporate tax rate
(19.0 percent in 1997, 20.8 percent in 1996 and 20.6 percent in 1995) is
less than the corporate tax rate on ordinary income of 35 percent in
1997, 1996 and 1995.
Federal income tax expense relating to operations of the Company for
1997, 1996 and 1995 is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Current tax expense .................. $39,133 $41,548 $28,913
Deferred tax expense ................. 1,715 5,318 19,841
------- ------- -------
Federal income tax expense ........... $40,848 $46,866 $48,754
======= ======= =======
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate.. $75,128 $78,566 $82,821
Tax effect of:
Tax-exempt interest ................. (34,508) (32,609) (30,630)
Other, net .......................... 228 909 (3,437)
------- ------- -------
Provision for income taxes ............ $40,848 $46,866 $48,754
======= ======= =======
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31,
1997 and 1996 are presented below (in thousands):
1997 1996
-------- --------
Deferred tax assets:
Loss reserves ........................... $ 10,999 $ 9,249
Deferred compensation ................... 2,242 2,531
Tax over book capital gains ............. 2,996 2,144
Other ................................... 2,260 2,601
-------- --------
Total gross deferred tax assets ............. 18,497 16,525
-------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale .......... 45,601 21,086
Deferred acquisition costs .............. 30,200 32,181
Premium revenue recognition ............. 40,103 37,159
Rate differential on tax and loss bonds . 9,454 9,454
Other ................................... 11,661 8,450
-------- --------
Total gross deferred tax liabilities ........ 137,019 108,330
-------- --------
Net deferred tax liability .................. $118,522 $ 91,805
======== ========
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are
deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it
will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1997 and 1996. The
Company anticipates that the related deferred tax asset will be realized
based on future profitable business.
Total federal income tax payments during 1997, 1996 and 1995 were $71.8
million, $33.9 million, and $59.8 million, respectively.
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where warranted,
on a facultative basis. This process serves to limit the Company's
exposure on risks underwritten. In the event that any or all of the
reinsuring companies were unable to meet their obligations, the Company
would be liable for such defaulted amounts. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The Company holds collateral under reinsurance agreements
in the form of letters of credit and trust agreements in various amounts
with various reinsurers totaling $37.0 million that can be drawn on in
the event of default.
Net premiums earned are presented net of ceded earned premiums of $33.3
million, $23.7 million and $21.9 million for the years ended December
31, 1997, 1996 and 1995, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $0.2 million, $(0.8)
million and $1.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
-14-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Balance at January 1, ................ $ 72,616 $ 77,808 $ 98,746
Less reinsurance recoverable ...... 7,015 (7,672) 14,472
-------- -------- --------
Net balance at January 1, ............ 65,601 70,136 84,274
Incurred related to:
Current year ....................... 1,047 -- 26,681
Prior years ........................ 6,492 2,389 (1,207)
Portfolio reserves ................. 5,000 -- (33,900)
-------- -------- --------
Total Incurred ....................... 12,539 2,389 (8,426)
-------- -------- --------
Paid related to:
Current year ....................... (1,047) -- (197)
Prior years ........................ (8,387) (6,924) (5,515)
-------- -------- --------
Total Paid ........................... (9,434) (6,924) (5,712)
-------- -------- --------
Net balance at December 31, .......... 68,706 65,601 70,136
Plus reinsurance recoverable ........ 8,220 7,015 7,672
-------- -------- --------
Balance at December 31, .............. $ 76,926 $ 72,616 $ 77,808
======== ======== ========
The changes in incurred portfolio and case reserves principally relates to
business written in prior years. The changes are based upon an evaluation of the
insured portfolio in light of current economic conditions and other relevant
factors.
-15-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the
management of the Company's investment portfolio; and telecommunication
service charges. Approximately $4.9 million, $8.1 million and $3.2
million in expenses were incurred in 1997, 1996 and 1995, respectively,
related to such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also
provides first loss protection in the event of default. Gross premiums
written on these issues amounted to $0.5 million in 1997, $0.6 million
in 1996, and $1.3 million in 1995. As of December 31, 1997, par
outstanding on these deals before reinsurance was $112.9 million.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1997, 1996 and 1995.
(9) COMPENSATION PLANS
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit
sharing plans. Expenses incurred by the Company under compensation plans
and bonuses amounted to $5.0 million, $4.5 million and $7.5 million in
1997, 1996 and 1995, respectively, before deduction for related tax
benefits.
(10) DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $66.4 million in 1997 and 1996, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York
State Insurance Department. At December 31, 1997 and 1996, the amount of
the Company's surplus available for dividends was approximately $124.6
million and $91.8 million, respectively.
During 1997, 1996 and 1995, the Company paid dividends of $0.0, $17.5
million and $25.0 million, respectively.
(11) CAPITAL CONTRIBUTION
During 1997, the Parent made a capital contribution of $49.5 million to
the Company.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(12) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities
is included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996 are as follows (in thousands):
1997 1996
---------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial Assets
Cash
On hand and in
demand accounts ........ $ 802 $ 802 $ 860 $ 860
Short-term investments ..... $ 76,039 $ 76,039 $ 73,839 $ 73,839
Fixed maturity securities .. $2,443,746 $2,443,746 $2,250,549 $2,250,549
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of
deferred acquisition costs, and loss and loss adjustment expense
reserves. Estimated fair values of these guaranties are based on amounts
currently charged to enter into similar agreements (net of applicable
ceding commissions), discounted cash flows considering contractual
revenues to be received adjusted for expected prepayments, the present
value of future obligations and estimated losses, and current interest
rates. The estimated fair values of such financial guaranties range
between $355.7 million and $382.6 million compared to a carrying value
of $456.8 million as of December 31, 1997 and between $358.7 million and
$387.4 million compared to a carrying value of $487.8 million as of
December 31, 1996.
-17-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade quality.
The Company has established and maintains its own underwriting standards
that are based on those aspects of credit that the Company deems
important for the particular category of obligations considered for
insurance. Credit criteria include economic and social trends, debt
management, financial management and legal and administrative factors,
the adequacy of anticipated cash flows, including the historical and
expected performance of assets pledged for payment of securities under
varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be
pledged or, in some instances, that a third-party guarantee be provided
for a term of the obligation insured by a party of acceptable credit
quality obligated to make payment prior to any payment by the Company.
The types and extent of collateral pledged varies, but may include
residential and commercial mortgages, corporate debt, government debt
and consumer receivables.
As of December 31, 1997, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $108.4
billion, net of reinsurance of $31.6 billion. The Company's insured
portfolio as of December 31, 1997 was broadly diversified by geography
and bond market sector with no single debt issuer representing more than
1% of the Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1997, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
Municipal:
General obligation ..................... $ 57,244.4
Special revenue ........................ 35,526.8
Industrial revenue ..................... 405.7
Non-municipal .......................... 15,268.7
----------
Total .................................... $108,445.6
==========
The Company's gross and net exposure outstanding was $254,441.1 million
and $193,612.9 million, respectively, as of December 31, 1997.
As of December 31, 1997, the composition of principal exposure ceded to
reinsurers was as follows (in millions):
CEDED
PRINCIPAL
OUTSTANDING
-----------
Reinsurer:
Capital Re ............................. $14,909.1
Enhance Re ............................. 8,431.7
Other .................................. 8,290.7
---------
Total ................................ $31,631.5
=========
-18-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1997 by state, net of reinsurance, was as
follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
California .................................. $ 12,308.1
Pennsylvania ................................ 10,277.8
Florida ..................................... 10,181.7
New York .................................... 8,945.5
Illinois .................................... 7,203.8
Texas ....................................... 6,072.4
Michigan .................................... 4,526.3
New Jersey .................................. 4,476.2
Arizona ..................................... 3,109.2
Ohio ........................................ 2,616.1
----------
Sub-total ................................... 69,717.1
Other states ................................ 38,421.7
International ............................... 306.8
----------
Total ....................................... $108,445.6
==========
(13) COMMITMENTS
Total rent expense was $2.4 million, $2.8 million and $2.2 million in
1997, 1996 and 1995, respectively. For each of the next five years and
in the aggregate as of December 31, 1997, the minimum future rental
payments under noncancellable operating leases having remaining terms in
excess of one year approximate (in thousands):
YEAR AMOUNT
---- -------
1998 ........................................ $ 2,909
1999 ........................................ 2,909
2000 ........................................ 2,909
2001 ........................................ 2,911
2002 ........................................ --
-------
Total minimum future rental payments ........ $11,638
=======
-19-
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
MARCH 31, 1998
Balance Sheets............................................................ 1
Statements of Income...................................................... 2
Statements of Cash Flows.................................................. 3
Notes to Unaudited Interim Financial Statements........................... 4
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
================================================================================
($ in Thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,344,986 in 1998 and $2,313,458 in 1997) .................... $2,453,364 $2,443,746
Short-term investments, at cost, which approximates market ....... 116,279 76,039
Cash ............................................................. 877 802
Accrued investment income ........................................ 37,920 38,927
Reinsurance receivable ........................................... 8,561 8,220
Deferred policy acquisition costs ................................ 85,835 86,286
Property, plant and equipment net of
accumulated depreciation of $17,711 in 1998 and $17,346 in 1997 2,777 3,142
Prepaid reinsurance premiums ..................................... 148,927 154,208
Prepaid expenses and other assets ................................ 15,089 21,002
---------- ----------
Total assets ......................................... $2,869,629 $2,832,372
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums ................................................ $ 610,673 $ 628,553
Losses and loss adjustment expenses .............................. 80,232 76,926
Ceded reinsurance payable ........................................ 926 3,932
Accounts payable and accrued expenses ............................ 22,263 26,352
Current federal income taxes payable ............................. 55,296 19,335
Deferred federal income taxes payable ............................ 110,989 118,522
Payable for securities purchased ................................. 2,923 5,811
---------- ----------
Total liabilities .................................... 883,302 879,431
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at March 31,
1998 and at December 31, 1997: 10,000 shares authorized,
issued and outstanding ......................................... 15,000 15,000
Additional paid-in capital ....................................... 383,511 383,511
Accumulated other comprehensive income, net of tax ............... 69,554 83,935
Retained earnings ................................................ 1,518,262 1,470,495
---------- ----------
Total stockholder's equity ........................... 1,986,327 1,952,941
---------- ----------
Total liabilities and stockholder's equity ........... $2,869,629 $2,832,372
========== ==========
</TABLE>
See accompanying notes to unaudited interim financial statements
-1-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
================================================================================
($ in Thousands)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(UNAUDITED)
REVENUES:
Gross premiums written ............................. $ 19,831 $ 28,518
Ceded premiums ..................................... (2,144) (7,137)
-------- --------
Net premiums written ............................... 17,687 21,381
Decrease in net unearned premiums .................. 12,655 8,072
-------- --------
Net premiums earned ................................ 30,342 29,453
Net investment income .............................. 32,785 31,597
Net realized gains ................................. 13,083 6,069
-------- --------
Total revenues ................................. 76,210 67,119
-------- --------
EXPENSES:
Losses and loss adjustment expenses ................ 3,921 (249)
Policy acquisition costs ........................... 5,447 3,851
Other underwriting expenses ........................ 5,101 3,851
-------- --------
Total expenses ................................. 14,469 7,453
-------- --------
Income before provision for federal income
taxes ......................................... 61,741 59,666
Provision for federal income taxes ................. 13,975 14,233
-------- --------
Net income .................................... $ 47,766 $ 45,433
======== ========
See accompanying notes to unaudited interim financial statements
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
================================================================================
($ in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
--------- ---------
(UNAUDITED)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ................................................... $ 47,766 $ 45,433
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes ...................... 211 562
Amortization of fixed maturity securities ................ 895 227
Policy acquisition costs deferred ........................ (4,996) (2,866)
Amortization of deferred policy acquisition costs ........ 5,447 3,851
Depreciation of fixed assets ............................. 365 629
Change in reinsurance receivable ......................... (341) 29
Change in prepaid reinsurance premiums ................... 5,281 40
Foreign currency translation adjustment .................. (215) 9
Change in accrued investment income, prepaid
expenses and other assets ............................. 6,920 (2,392)
Change in unearned premiums .............................. (17,880) (8,112)
Change in losses and loss adjustment expense reserves .... 3,306 (1,903)
Change in other liabilities .............................. (7,095) (9,000)
Change in current income taxes payable ................... 35,961 13,663
Net realized gains on investments ........................ (13,083) (6,069)
--------- ---------
Net cash provided by operating activities .................... 62,542 34,101
--------- ---------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities ............. 209,199 272,200
Purchases of fixed maturity securities ....................... (231,426) (213,987)
Sales or maturities (purchases) of short-term investments, net (40,240) (91,847)
Purchases of property and equipment, net ..................... -- (277)
--------- ---------
Net cash used for investing activities ....................... (62,467) (33,911)
Increase in cash ............................................. 75 190
Cash at beginning of period .................................. 802 860
--------- ---------
Cash at end of period ........................................ $ 877 $ 1,050
========= =========
</TABLE>
See accompanying notes to unaudited interim financial statements
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
March 31, 1998 and 1997
(Unaudited)
(1) BASIS OF PRESENTATION
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments
necessary, in the opinion of management, for a fair statement of
(a) results of operations for the three months ended March 31,
1998 and 1997, (b) the financial position at March 31, 1998 and
December 31, 1997, and (c) cash flows for the three months ended
March 31, 1998 and 1997.
These interim financial statements should be read in conjunction
with the financial statements and related notes included in the
1997 audited financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(2) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed
or permitted by state insurance regulatory authorities. The
following are the significant ways in which statutory basis
accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion
to the total exposure outstanding at any point in time;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders,
regardless of whether loss contingencies actually exist,
whereas under GAAP, a reserve is established based on an
ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and tax bases
of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal
income tax payments; and
(g) all fixed income investments are carried at amortized cost,
rather than at fair value for securities classified as
"Available for Sale" under GAAP.
-4-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
==================================================================================================================
The following is a reconciliation of the net income and stockholder's equity of Financial Guaranty prepared
on a GAAP basis to the corresponding amounts reported on a statutory basis for the periods indicated below:
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
GAAP basis amount .................... $47,766 $1,986,327 $45,433 $1,706,316
Premium revenue recognition .......... (619) (181,828) (2,466) (178,751)
Deferral of acquisition costs ........ 451 (85,835) 985 (90,960)
Contingency reserve .................. -- (555,538) -- (474,460)
Non-admitted assets .................. -- (2,313) -- (3,257)
Case-basis losses incurred ........... 188 (1,684) (661) (3,910)
Portfolio loss reserves .............. 1,400 30,400 -- 24,000
Deferral of income tax ............... 211 72,272 569 71,274
Unrealized gains on fixed maturity
securities held at fair value, net
of taxes ........................... -- (70,446) -- (15,602)
Profit commission .................... (133) (7,522) (342) (6,528)
Contingency reserve tax deduction .... -- 72,409 -- 85,176
Allocation of tax benefits due to
Parent's net operating loss to the
Company ............................ 42 10,958 94 10,426
------- ---------- ------- ----------
Statutory basis amount ............... $49,306 $1,267,200 $43,612 $1,123,724
======= ========== ======= ==========
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend only
from earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $66.4 million
in 1997.
o Dividends may not exceed the lesser of 10 percent of its
surplus or 100 percent of adjusted net investment income,
as defined therein, for the twelve month period ending on
the preceding December 31, without the prior approval of
the Superintendent of the New York State Insurance
Department.
The amount of the Company's surplus available for dividends
during 1998 is approximately $126.7 million.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (22.6 percent
and 23.9 percent for the three months ended March 31, 1998 and
1997, respectively) is less than the statutory corporate tax rate
(35 percent in 1998 and 1997) on ordinary income due to permanent
differences between financial and taxable income, principally
tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts", the Company
reports assets and liabilities relating to reinsured contracts
gross of the effects of reinsurance. Net premiums earned are
shown net of premiums ceded of $7.4 million and $7.2 million,
respectively, for the three months ended March 31, 1998 and 1997.
(6) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standard Board issued
statement No. 130, "Reporting Comprehensive Income", which
requires enterprises to disclose comprehensive income and its
components. Comprehensive income encompasses all changes in
shareholders' equity (except those arising from transactions with
shareholders) and includes net income, net unrealized capital
gains or losses on available-for-sale securities and foreign
currency translation adjustments, net of taxes. This new standard
only changes the presentation of certain information in the
financial statements and does not affect the Company's financial
position or results of operations. The following is a
reconciliation of comprehensive income:
- 6 -
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
March 31, 1998 and 1997
(Unaudited)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1998 1997
------- ------
Net income ............................... $47,766 45,433
Other comprehensive income:
Change in unrealized investment gains,
net of taxes ....................... (14,241) (23,558)
Change in foreign exchange gains,
net of taxes ....................... (140) 6
------- ------
Comprehensive income ..................... $33,385 $21,881
======= =======
- 7 -
<PAGE>
EXHIBIT A
APPROVED FINANCIAL INFORMATION
AS OF MARCH 31, 1998
As of March 31, 1998, December 31, 1997 and 1996 the Certificate Insurer had
written directly or assumed through reinsurance, guaranties of approximately
$237.8 billion, $230.2 billion, and $205.0 billion par value of securities,
respectively (of which approximately 83 percent, 86 percent and 82 percent
constituted guaranties of municipal bonds), for which it had collected gross
premiums of approximately $2.16 billion, $2.14 billion and $2.05 billion,
respectively. As of March 31, 1998, the Certificate Insurer had reinsured
approximately 22 percent of the risks it had written, 29 percent through quota
share reinsurance, 24 percent through excess of loss reinsurance, and 47 percent
through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate Insurer as
of December 31, 1996, December 31, 1997 and March 31, 1998 respectively, on the
basis of generally accepted accounting principles. No material adverse change in
the capitalization of the Certificate Insurer has occurred since March 31, 1998.
(UNAUDITED)
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
------------- ------------- -------------
Unearned Premiums ..................... $ 682 $ 629 611
Other Liabilities ..................... 288 250 272
Stockholder's Equity(1)
Common Stock ........................ 15 15 15
Additional Paid-in Capital .......... 334 384 384
Accumulated other comprehensive
income ............................ 38 84 69
Retained Earnings ................... 1,297 1,470 1,518
------ ------ ------
Total Stockholder's Equity ............ 1,684 1,953 1,986
------ ------ ------
Total Liabilities and
Stockholder's Equity ................ $2,654 $2,832 $2,869
====== ====== ======
- ----------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "accumulated other comprehensive income" in accordance
with the Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" adopted by the Certificate Insurer effective January
1, 1998. As this new standard only requires additional information in the
financial statements, it does not affect the Certificate Insurer's
financial position or results of operations.
For further financial information concerning the Certificate Insurer, see the
audited financial statements of the Certificate Insurer included as Appendix A
and the unaudited interim financial statements of the Certificate Insurer
included as Appendix B.
Copies of the Certificate Insurer's quarterly and annual statutory statements
filed by the Certificate Insurer with the New York Insurance Department are
available upon request to Financial Guaranty Insurance Company, 115 Broadway,
New York, New York 10006, Attention: Corporate Communications Department. The
Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of
information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurance Policy" and "The
Certificate Insurer" and in Appendix A and Appendix B.
<PAGE>
PROSPECTUS
AFC MORTGAGE LOAN ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
SUPERIOR BANK FSB,
DEPOSITOR
The Certificates offered hereby and by Supplements to this Prospectus (the
"Offered Certificates") will be offered from time to time in series. Each series
of Certificates will represent in the aggregate the entire beneficial ownership
interest in a trust fund (with respect to any series, the "Trust Fund")
consisting primarily of a segregated pool (a "Mortgage Pool") of various types
of conventional or FHA insured (as defined below) single family and/or
multifamily and/or commercial first and second mortgage loans and/or
manufactured housing conditional sales contracts and installment loan agreements
and/or home improvement installment 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"). "FHA
insured" Mortgage Loans are those mortgage loans which are, to the extent
specified in the related Prospectus Supplement, partially insured by the Federal
Housing Administration ("FHA") pursuant to Title I (as defined herein). See
"Description of the Trust Funds", "Description of the Certificates",
"Description of Credit Support" and "Description of FHA Insurance under
Title I".
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.
----------
DECEMBER 12, 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
-ii-
<PAGE>
DTC participants. See "Description of the Certificates--Reports to
Certificateholders" and "Description of the Pooling and Servicing
Agreements--Evidence as to Compliance". The Depositor will file or cause to be
filed with the Commission such periodic reports with respect to each Trust Fund
as are required under the Exchange Act and the rules and regulations of the
Commission thereunder.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund, including
the amount of distribution of principal and interest and certain amounts
relating to the Mortgage Loans included in the Trust Fund, are required under
the Pooling and Servicing Agreement to be forwarded to Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, such reports
will not be examined and reported on by an independent public accountant. See
"Description of the Certificates--Reports to Certificateholders" herein.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement by
reference all documents and reports filed or caused to be filed by the
Registrant with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the
Offered Certificates of the related series. The Registrant will provide or cause
to be provided without charge to each person to whom this Prospectus is
delivered in connection with the offering of one or more classes of Offered
Certificates, upon written or oral request of such person, a copy of any or all
such reports incorporated herein by reference, in each case to the extent such
reports relate to one or more of such classes of such Offered Certificates,
other than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to Superior Bank FSB, 135 Chestnut Ridge Road, Montvale, New Jersey
07645. The Registrant has determined that its financial statements will not be
material to the offering of any Offered Certificates.
-iii-
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT...................................................... ii
AVAILABLE INFORMATION...................................................... ii
REPORTS TO CERTIFICATEHOLDERS.............................................. iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... iii
SUMMARY OF PROSPECTUS...................................................... 1
RISK FACTORS............................................................... 9
Limited Liquidity........................................................ 9
Limited Assets and Obligations........................................... 9
Average Life of Certificates; Prepayments; Yields........................ 10
Limited Nature of Ratings................................................ 10
Risks Associated With the Mortgage Loans and Mortgaged Properties........ 11
Investment in the Mortgage Loans ...................................... 11
Second Liens .......................................................... 12
Bankruptcy Proceedings ................................................ 13
Delinquent Loans ...................................................... 13
Regulatory Matters .................................................... 13
Balloon Payments ...................................................... 13
Credit Support Limitations............................................... 14
Limitation on FHA Insurance for Title I Loans ......................... 14
Enforceability........................................................... 15
The Status of the Mortgage Loans in the Event of Insolvency
of the Depositor ...................................................... 15
Limitations on Interest Payments and Foreclosures........................ 15
Environmental Risks...................................................... 15
ERISA Considerations..................................................... 16
Certain Federal Tax Considerations Regarding REMIC
Residual Certificates ................................................. 16
Control.................................................................. 16
Book-Entry Registration.................................................. 16
DESCRIPTION OF THE TRUST FUNDS............................................. 17
Mortgage Loans........................................................ 17
General ......................................................... 17
Mortgage Loan Information in Prospectus Supplements ............. 18
Payment Provisions of the Mortgage Loans ........................ 18
ARM Loans ....................................................... 19
Principal and Interest Account........................................ 19
Certificate Account................................................... 19
Pre-Funding Account................................................... 19
Credit Support........................................................ 20
USE OF PROCEEDS............................................................ 20
-iv-
<PAGE>
PAGE
----
YIELD CONSIDERATIONS....................................................... 20
General.................................................................. 20
Pass-Through Rate........................................................ 20
Timing of Payment of Interest and Principal.............................. 20
Principal Prepayments.................................................... 21
Defaults................................................................. 21
Prepayments--Maturity and Weighted Average Life.......................... 22
Other Factors Affecting Weighted Average Life............................ 23
Type of Mortgage Loan 23
Foreclosures and Payment Plans........................................... 23
Due-on-Sale Clauses ................................................... 24
THE DEPOSITOR.............................................................. 24
THE SERVICER............................................................... 24
DESCRIPTION OF THE CERTIFICATES............................................ 25
General............................................................... 25
Distributions......................................................... 25
Distributions of Interest on the Certificates......................... 25
Distributions of Principal on the Certificates........................ 26
Allocation of Losses and Shortfalls................................... 26
Example of Distributions.............................................. 26
Monthly Advances in Respect of Delinquencies.......................... 27
Compensating Interest................................................. 28
Reports to Certificateholders......................................... 28
Termination........................................................... 29
Book-Entry Registration and Definitive Certificates................... 30
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS........................ 32
Assignment of Mortgage Loans; Repurchases............................. 33
Representations and Warranties; Repurchases........................... 34
Payments on Mortgage Loans; Deposits to Principal
and Interest Account................................................ 34
Deposits to Certificate Account....................................... 36
Collection and Other Servicing Procedures............................. 36
Servicing Advances.................................................... 37
Sub-Servicers......................................................... 38
Realization Upon Defaulted Mortgage Loans............................. 38
Hazard Insurance Policies............................................. 39
Due-on-Sale Provisions................................................ 39
Servicing and Other Compensation and Payment of Expenses.............. 40
Evidence as to Compliance............................................. 40
Certain Matters Regarding the Servicer................................ 40
Events of Default..................................................... 41
Rights Upon Event of Default.......................................... 41
Amendment............................................................. 41
Duties of the Trustee................................................. 42
The Trustee........................................................... 42
-v-
<PAGE>
PAGE
----
DESCRIPTION OF CREDIT SUPPORT............................................. 42
General................................................................. 42
Subordinate Certificates................................................ 43
Cross-Support Provisions................................................ 43
Insurance or Guarantees With Respect to the Mortgage Loans.............. 43
Letter of Credit........................................................ 43
Insurance Policies and Surety Bonds..................................... 43
Reserve Funds or Spread Account......................................... 44
Overcollateralization................................................... 44
DESCRIPTION OF FHA INSURANCE UNDER TITLE I................................ 44
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................... 46
General................................................................. 47
Single Family, Multifamily and Commercial Loans......................... 47
Manufactured Home Contracts............................................. 47
The Home Improvement Contracts.......................................... 48
Foreclosure on Mortgages................................................ 49
Repossession With Respect to Manufactured Home Contracts................ 50
Second Mortgages........................................................ 51
Rights of Redemption.................................................... 52
Single Family, Multifamily and Commercial Properties ................. 52
Manufactured Homes ................................................... 52
Anti-Deficiency Legislation and Other Limitations on Lenders............ 52
Single Family, Multifamily and Commercial Properties ................. 52
Manufactured Home Contracts .......................................... 53
Enforceability of Certain Provisions.................................... 53
Single Family, Multifamily and Commercial Properties ................. 53
Manufactured Homes ................................................... 54
Leases and Rents........................................................ 54
Subordinate Financing................................................... 54
Applicability of Usury Laws............................................. 55
Consumer Protection Laws with respect to Contracts...................... 55
Environmental Legislation............................................... 56
Formaldehyde Litigation With Respect to Manufactured Home Contracts..... 56
Soldiers' and Sailors' Civil Relief Act................................. 56
Installment Contracts................................................... 56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 57
General................................................................. 57
REMICs.................................................................. 58
Classification of REMICs ............................................. 58
Characterization of Investments in REMIC Certificates ................ 58
Tiered REMIC Structures .............................................. 58
Taxation of Owners of REMIC Regular Certificates........................ 59
General .............................................................. 59
Original Issue Discount .............................................. 59
Market Discount ...................................................... 61
Premium .............................................................. 62
-vi-
<PAGE>
PAGE
----
Realized Losses ...................................................... 62
Taxation of Owners of REMIC Residual Certificates ...................... 63
General .............................................................. 63
Taxable Income of the REMIC .......................................... 63
Basis Rules, Net Losses and Distributions ............................ 65
Excess Inclusions .................................................... 65
Noneconomic REMIC Residual Certificates .............................. 66
Mark-to-Market Rules ................................................. 67
Possible Pass-Through of Miscellaneous Itemized Deductions ........... 67
Sales of REMIC Certificates .......................................... 67
Prohibited Transactions and Other Possible REMIC Taxes ............... 68
Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations .............................. 69
Termination .......................................................... 70
Reporting and Other Administrative Matters ........................... 70
Backup Withholding With Respect to REMIC Certificates ................ 71
Foreign Investors in REMIC Certificates .............................. 71
STATE AND OTHER TAX CONSEQUENCES ......................................... 71
ERISA CONSIDERATIONS ..................................................... 72
General ................................................................ 72
Plan Asset Regulations ................................................. 72
Prohibited Transaction Exemptions ...................................... 72
LEGAL INVESTMENT ......................................................... 74
METHOD OF DISTRIBUTION ................................................... 74
LEGAL MATTERS ............................................................ 75
FINANCIAL INFORMATION .................................................... 75
RATING ................................................................... 75
INDEX OF PRINCIPAL DEFINITIONS ........................................... 77
-vii-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Certificates..........AFC Mortgage Loan Asset Backed Certificates,
issuable in series (the "Certificates").
Depositor......................Superior Bank FSB, a federally chartered stock
savings bank (the "Depositor"), will deposit
into each Trust Fund Mortgage Loans originated
or purchased by the Depositor. See "The
Depositor".
Servicer ......................The servicer (the "Servicer" or "Servicing
Division") for each series of Certificates
will be Superior Bank FSB - Servicing
Division. 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 or FHA
insured mortgage loans and/or manufactured
housing conditional sales contracts and
installment loan agreements and/or home
improvement installment 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"), (iii) commercial properties
("Commercial Properties") and/or (iv) new or
used manufactured homes ("Manufactured Homes";
collectively with Single Family Properties,
Multifamily Properties and Commercial
Properties, the "Mortgaged Properties"). To
the extent specified in the related Prospectus
Supplement, some of the Mortgage Loans may be
partially insured by the FHA pursuant to Title
I ("Title I") of the National Housing Act of
1934, as amended (the "National Housing Act").
All Mortgage Loans will have been originated
by the Depositor or will have been purchased,
either directly or indirectly, by the
Depositor on or before the date of initial
issuance of the related series of Certificates
from affiliated or unaffiliated sellers,
except for Mortgage Loans purchased
subsequently with funds in a Pre-Funding
Account (as defined herein).
<PAGE>
Each Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its term
or that adjusts from time to time, or that may
be converted from an adjustable to a fixed
Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time at
the mortgagor's election, in each case as
described in the related Prospectus
Supplement. Each Mortgage Loan may provide for
scheduled payments to maturity, payments that
adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the
occurrence of certain events, and may provide
for negative amortization or accelerated
amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage
Loan may be fully amortizing or require a
balloon payment due on its stated maturity
date, in each case as described in the related
Prospectus Supplement. The Mortgage Loans may
provide for payments of principal, interest or
both, on due dates that occur monthly,
quarterly, semi-annually or at such other
interval as is specified in the related
Prospectus Supplement. See "Description of the
Trust Funds--Mortgage Loans".
(b) Principal and
Interest Account and
Certificate Account..Each Trust Fund will include one or more
accounts (collectively, the "Principal and
Interest Account") established and maintained
on behalf of the Certificateholders into which
the Servicer will, to the extent described
herein and in the related Prospectus
Supplement, deposit all payments and
collections received or advanced with respect
to the Mortgage Loans other than (i) the
Depositor's Yield (as defined herein), if any,
and (ii) payments received on or after the
Cut-off Date (as defined herein) in respect of
interest accrued on the Mortgage Loans prior
to the Cut-off Date. Each Trust Fund will also
include one or more accounts (collectively,
the "Certificate Account") established and
maintained on behalf of the Certificateholders
into which the Trustee will, to the extent
described herein and in the related Prospectus
Supplement, deposit all amounts remitted by
the Servicer from the Principal and Interest
Account and other payments and collections
received from other assets in the Trust Fund
or advanced by the Servicer. Unless otherwise
specified in the related Prospectus Supplement
funds held in the Principal and Interest
Account and the Certificate Account may be
invested in certain short-term, high quality
investments. See "Description of the Trust
Funds--Principal and Interest Account; and
"--Certificate Account", and "Description of
the Pooling and Servicing Agreements--Payments
on Mortgage Loans; Deposits to the Principal
and Interest Account and "--Deposits to
Certificate Account".
(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
2
<PAGE>
Prospectus Supplement. See "Description of the
Trust Funds--Pre-Funding Account", and
"Description of Pooling and Servicing
Agreements--Subsequent Mortgage Loans".
(d) Credit Support.......If so provided in the related Prospectus
Supplement, partial or full protection against
certain defaults and losses on the Mortgage
Loans in the related Trust Fund may be
provided to one or more classes of
Certificates of the related series in the form
of subordination of one or more other classes
of Certificates of such series or by one or
more other types of credit support, such as a
letter of credit, insurance policy, guarantee,
reserve fund, cross-collateralization,
overcollateralization or another type of
credit support, or a combination thereof (any
such coverage with respect to the Certificates
of any series, "Credit Support"). If so
specified in the related Prospectus
Supplement, some of the Mortgage Loans may be
partially insured by the FHA pursuant to Title
I. 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
3
<PAGE>
one or more other classes of Certificates of
such series (collectively, "Accrual
Certificates"); and/or (v) provide for
payments of principal sequentially, based on
specified payment schedules or other
methodologies, to the extent of available
funds, in each case as described in the
related Prospectus Supplement. Any such
classes may include classes of Offered
Certificates.
As to each series of Certificates, unless
otherwise specified in the related Prospectus
Supplement, one or more elections will be made
to treat the Trust Fund or a designated
portion thereof as a "real estate mortgage
investment conduit" or "REMIC" as defined in
the Internal Revenue Code of 1986 (the
"Code").
The Certificates will not represent an
obligation of or interest in the Depositor,
the Servicer or any of their respective
affiliates except as set forth herein, nor
will the Certificates or any Mortgage Loans be
guaranteed or insured by the Depositor or any
of its affiliates, by any governmental agency
or instrumentality or by any other person,
unless otherwise provided in the related
Prospectus Supplement. See "Risk
Factors--Limited Assets and Obligations" and
"Description of the Certificates".
Distributions of Interest of
Certificates..............Interest on each class of Offered Certificates
(other than certain classes of Stripped
Interest Certificates and Stripped Principal
Certificates) of each series will accrue at
the applicable Pass-Through Rate on the
outstanding Certificate Balance thereof and
will be distributed to Certificateholders as
provided in the related Prospectus Supplement
(each of the specified dates on which
distributions are to be made, a "Remittance
Date"). Distributions with respect to interest
on Stripped Interest Certificates may be made
on each Remittance Date on the basis of a
notional amount as described in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes
of Certificates may be reduced to the extent
of certain delinquencies and 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
4
<PAGE>
each Remittance Date to the class or classes
of Certificates entitled thereto until the
Certificate Balances of such Certificates have
been reduced to zero. Distributions of
principal on any class of Certificates
entitled thereto will be made on a pro rata
basis among all of the Certificates of such
class. Stripped Interest Certificates with no
Certificate Balance or a notional balance will
not receive distributions in respect of
principal. Distributions of principal on any
series of Certificates or with respect to one
or more classes included therein may be
reduced to the extent of delinquencies and
other contingencies described herein and in
the related Prospectus Supplement and not
otherwise covered by Credit Support, if any.
See "Description of the Certificates--
Distributions of Principal of the
Certificates".
Monthly Advances...............The Servicer, directly or through Sub-Servicers
(as defined herein), will service and
administer the Mortgage Loans included in each
Trust Fund and, unless otherwise provided in
the related Prospectus Supplement, will be
obligated as part of its servicing
responsibilities to make certain advances
(each, a "Monthly Advance") with respect to
delinquent scheduled payments of interest on
the Mortgage Loans in such Trust Fund. Monthly
Advances made by the Servicer are reimbursable
generally from subsequent recoveries in
respect of such Mortgage Loans and otherwise
to the extent described herein and in the
related Prospectus Supplement. See
"Description of the Certificates--Monthly
Advances in Respect of Delinquencies".
Compensating Interest..........Unless otherwise specified in the Prospectus
Supplement for a series of Certificates, the
Servicer will be required to remit 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
5
<PAGE>
of Credit Support or the holders of
Certificates of a specified class under the
circumstances and in the manner set forth
therein.
Depositor's Yield..............For each Mortgage Loan, the "Depositor's Yield"
represents the right to receive all prepayment
penalties and premiums collected on the
Mortgage Loan and certain other amounts if
specified in the related Prospectus
Supplement. Unless otherwise specified in the
Prospectus Supplement for a series of
Certificates, the Depositor's Yield will be
retained by the Depositor and will not be a
part of any Trust Fund.
Registration of Certificates...If so provided in the related Prospectus
Supplement, one or more classes of the Offered
Certificates will initially be represented by
one or more Certificates registered in the
name of CEDE & Co., as the nominee of The
Depository Trust Company ("DTC") in the United
States, or Centrale de Livraison de Valeurs
Mobilieres S.A. ("CEDEL") or the Euroclear
System ("Euroclear") in Europe. Transfers
within DTC, CEDEL or Euroclear, as the case
may be, will be in accordance with the usual
rules and operating procedures of the relevant
system. No person acquiring an interest in
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
"obligations secured principally by an
interest in real property" for purposes of
Section 7701(a)(19)(C) of the Code and (ii)
owned by a real estate investment trust will
be treated as "real estate assets" for
purposes of Section 856(c)(4)(A) of the Code
and interest income therefrom will be treated
as "interest on obligations secured by
mortgages on real property" for purposes of
Section 856(c)(3)(B) of the Code. In addition,
REMIC Regular Certificates will be
"obligations. . . which. . . are principally
secured by an interest in real property"
within the meaning of Section 860G(a)(3)(C) of
the Code. Moreover, if 95% or more of the
assets and the income of the REMIC qualify for
any of the foregoing treatments, the REMIC
Regular Certificates will qualify for the
foregoing treatments in their entirety.
Holders of REMIC Regular Certificates must
report income with respect thereto on the
accrual method, regardless of their method of
tax accounting generally. Holders of any class
of REMIC Regular
6
<PAGE>
Certificates issued with original issue
discount generally will be required to include
the original issue discount in income as it
accrues, which will be determined using an
initial prepayment assumption and taking into
account, from time to time, actual prepayments
occurring at a rate different than the
prepayment assumption.
REMIC Residual Certificates generally will be
treated as representing an interest in
qualifying assets and income to the same
extent described above for institutions
subject to Sections 856(c)(4)(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, (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,
7
<PAGE>
a "Rating Agency"). See "Rating" herein and in
the related Prospectus Supplement.
8
<PAGE>
RISK FACTORS
In connection with the purchase of Offered Certificates, investors should
pay particular attention to the following factors and certain other factors as
may be set forth under the caption "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Offered
Certificates of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue while Certificates
of such series remain outstanding. The Offered Certificates will not be listed
on any securities exchange. The market value of Certificates will fluctuate with
changes in prevailing rates of interest and prepayments. Consequently, a sale of
Certificates by a holder in any secondary market that may develop may be at a
discount from 100% of their original principal balance or from their purchase
price. Furthermore, secondary market purchasers may look only hereto, to the
related Prospectus Supplement and to the reports to Certificateholders delivered
pursuant to the Pooling and Servicing Agreement as described herein under the
heading "Description of the Certificates--Reports to Certificateholders";
"--Book-Entry Registration and Definitive Certificates" and "Description of the
Pooling and Servicing Agreements--Evidence as to Compliance" for information
concerning the Certificates. Issuance of the Offered Certificates in book-entry
form may also reduce the liquidity of such Certificates since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Risk Factors--Book-Entry Registration". Except to the extent
described herein and in the related Prospectus Supplement, Certificateholders
will have no redemption rights and the Certificates are subject to early
retirement only under certain specified circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates--
Termination". Each class of Offered Certificates of a series will be issued in
minimum denominations corresponding to Certificate Balances or, in the case of
Stripped Interest Certificates, notional amounts specified in the Prospectus
Supplement for such series.
LIMITED ASSETS AND OBLIGATIONS
Unless otherwise specified in the related Prospectus Supplement, a series
of Certificates will not have any claim against or security interest in the
Trust Fund for any other series. If the related Trust Fund is insufficient to
make payments on the related Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including the Principal and Interest Account, Certificate
Account and any accounts maintained as Credit Support, may be withdrawn under
certain conditions, as described in the related Prospectus Supplement. In the
event of such withdrawal, such amounts will not be available for future payment
of principal or interest on the Certificates. If so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Remittance Date in respect of which losses or
shortfalls in collections on the Mortgage Loans have been incurred, the amount
of such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations specified
in such Prospectus Supplement.
The Certificates will not represent an obligation of or interest in the
Depositor, the Servicer or any of their respective affiliates. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be obligations (if any) of the Depositor and the Servicer
pursuant to certain limited representations and warranties made with respect to
the Mortgage Loans, the Servicer's servicing obligations under the related
Pooling and Servicing Agreement (including its limited obligation to make
certain advances in the event of delinquencies with respect to interest on the
Mortgage Loans, and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Depositor or Servicer
in connection with an agreement to purchase or act as a remarketing agent with
respect to a Convertible Mortgage Loan (as defined herein) upon conversion to a
fixed rate. Except as so described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage 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.
9
<PAGE>
AVERAGE LIFE OF CERTIFICATES; PREPAYMENTS; YIELDS
Prepayments (including liquidations due to defaults and repurchases due to
conversion of Convertible Mortgage Loans to fixed interest rate loans, breaches
of representations and warranties or exercise of a repurchase option upon
default) on the Mortgage Loans in any Trust Fund generally will result in a
faster rate of principal payments on one or more classes of the related
Certificates than if payments on such Mortgage Loans were made as scheduled.
Thus, the prepayment experience on the Mortgage Loans may affect the average
life of each class of related Certificates. The rate of principal payments on
pools of mortgage loans varies between pools and from time to time is influenced
by a variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Mortgage
Loans in any Trust Fund or that the rate of payments will conform to any model
described herein or in any Prospectus Supplement. If prevailing interest rates
fall significantly below (or rise significantly above) the applicable mortgage
rates, principal prepayments are likely to be higher (or lower) than if
prevailing rates remain at the rates borne by the Mortgage Loans underlying or
comprising the Mortgage Loans in any Trust Fund. As a result, the actual
maturity of any class of Certificates could occur significantly earlier (or
later) than expected. A series of Certificates may include one or more classes
of Certificates with priorities of payment and, as a result, yields on other
classes of Certificates, including classes of Offered Certificates, of such
series may be more sensitive to prepayments on Mortgage Loans. A series of
Certificates may include one or more classes offered at a significant premium or
discount. Yields on such classes of Certificates will be sensitive, and in some
cases extremely sensitive, to prepayments on Mortgage Loans and, where the
amount of interest payable with respect to a class is disproportionately high,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A series of Certificates may include one or more
classes of Certificates ("Accrual Certificates"), including classes of Offered
Certificates, with respect to which certain accrued certificate interest will
not be distributed but rather will be added to the principal balance thereof
and, as a result, yields on such Certificates will be sensitive to (a) the
provisions of such Accrual Certificates relating to the timing of distributions
of interest thereon and (b) if such Accrual Certificates accrue interest at a
variable or adjustable Pass-Through Rate, changes in such rate. See "Yield
Considerations" herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time. No person is obligated
to maintain the rating on any Certificate. In the event the rating is revised or
withdrawn, the liquidity of the Certificates may be adversely affected.
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Pooling and Servicing
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the related Mortgage Loans will be made, the degree to
which the rate of such prepayments might differ from that originally anticipated
or the likelihood of early optional termination of the series of Certificates.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Certificate at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Certificates of the related series are entitled that is
not covered by the applicable rating.
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
10
<PAGE>
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/or home improvement installment sales contracts and installment loan
agreements and may be affected by, among other things, a decline in real estate
values. No assurance can be given that values of the Mortgaged Properties will
remain at the levels existing on the dates of origination of the related
Mortgage Loans. If the residential or commercial 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 or Commercial 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 and Commercial 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 and Commercial 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 and
11
<PAGE>
Commercial 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 and
Commercial Properties is likely to consist of a smaller number of higher balance
loans.
Additional special risks associated with particular types of Mortgage Loans
may be specified in the related Prospectus Supplement.
SECOND LIENS. Certain of the Mortgage Loans may be secured by second liens
and the related first liens ("First Liens") may not be included in the Mortgage
Pool. The primary risk to holders of Mortgage Loans secured by second liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related First Lien to satisfy fully both the First Lien and
the Mortgage Loan. In the event that a holder of the First Lien forecloses on a
Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the First Lien. The claims of the holder of
the First Lien will be satisfied in full out of proceeds of the liquidation of
the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the second lien receives any payments in respect of the Mortgage Loan.
With respect to the Mortgage Loans which are partially insured by the FHA
pursuant to Title I, however, a claim may be payable subject to certain
limitations, as described in the related Prospectus Supplement and herein. 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.
12
<PAGE>
BANKRUPTCY PROCEEDINGS. If so provided in the Prospectus Supplement for a
series of Certificates, certain of the Mortgagors may be subject to a repayment
plan (a "Bankruptcy Plan"), filed in proceedings under Chapter 7 or 13 of Title
11, United States Bankruptcy Code (the "Bankruptcy Code"). The Bankruptcy Plan
may permit the debtor to cure defaults with respect to the monthly payments due
in respect of its Mortgage Loan (such Mortgage Loan, a "Bankruptcy Loan") by
scheduling payments to pay arrearages in monthly installments, within a
reasonable time period (each such payment, a "Plan Payment"), and reinstating
the original loan payment schedule. The debtor may be required to make Plan
Payments to the bankruptcy trustee (unless otherwise ordered by the court),
which payments the bankruptcy trustee then distributes to creditors, and to
continue to make payments due under its Mortgage Note after the effectiveness of
the Bankruptcy Plan to the mortgagee named therein in accordance with the
provisions of the Bankruptcy Plan. To the extent that losses are not covered by
Credit Support, holders of the Certificates representing an interest in a Trust
Fund including Bankruptcy Loans will bear all risk of loss resulting from
default by the Mortgagors and will have to look primarily to the value of the
Mortgaged Properties for recovery of the outstanding principal and unpaid
interest of the defaulted Bankruptcy Loans.
DELINQUENT LOANS. Certain of the Mortgage Loans in a Trust Fund may be up
to three months past due as of the related Cut-off Date. The primary risk for
holders of Certificates evidencing an interest in such Trust Fund is the
increased possibility of (i) the foreclosure of such Mortgage Loan, (ii) the
Trustee taking possession of the Mortgaged Property by deed-in-lieu of
foreclosure, or (iii) the related Mortgagor becoming subject to bankruptcy
proceedings with attendant delays in payment and the further possibility that
such Mortgage Loan may become a Bankruptcy Loan.
REGULATORY MATTERS. Applicable state laws generally regulate interest rates
and other charges, require certain disclosures, and require licensing of certain
originators and servicers of Mortgage Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers and unfair and deceptive practices which may apply to the
origination, servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of The Mortgage Loans".
The Mortgage Loans are also subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and (iv)
the Real Estate Settlement Procedures Act, which requires disclosures related to
settlement services associated with any federally related mortgage loan and
establishes criminal penalties for improper referrals and fee-splitting
arrangements involving settlement service business. 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
13
<PAGE>
are required to make substantial principal payments upon maturity, the default
risk associated with Mortgage Loans with balloon payments is greater than that
associated with fully amortizing loans.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe any
Credit Support for such series, which may include letters of credit, insurance
policies, guarantees, reserve funds, cross-collateralization,
overcollateralization or other types of credit support, or combinations thereof.
Use of Credit Support will be subject to the conditions and limitations
described herein and in the related Prospectus Supplement. Moreover, such Credit
Support may not cover all potential losses or risks. For example, Credit Support
may or may not cover fraud or negligence by a mortgage loan originator or other
parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Mortgage Loans may fall primarily upon
those classes of Certificates having a lower priority of payment. Moreover, if a
form of Credit Support covers more than one pool of Mortgage Loans in a Trust
(each, a "Covered Pool") or more than one series of Certificates (each, a
"Covered Trust"), holders of Certificates evidencing an interest in a Covered
Pool or a Covered Trust will be subject to the risk that such Credit Support
will be exhausted by the claims of other Covered Pools or Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on assumptions regarding
levels of defaults, delinquencies and losses and on other factors. There can,
however, be no assurance that the loss experience on the related Mortgage Loans
will not exceed such assumed levels. See "--Limited Nature of Ratings",
"Description of the Certificates" and "Description of Credit Support".
LIMITATION ON FHA INSURANCE FOR TITLE I LOANS. The related Prospectus
Supplement will specify the number and percentage of Mortgage Loans, if any,
included in the related Trust Fund that are partially insured by the FHA
pursuant to Title I ("Title I Loans"). Unless specified in the related
Prospectus Supplement the FHA Reserves (as defined herein) allocable to a
related Trust Fund may not be transferred to the Trustee or the FHA Claims
Administrator (as defined herein) on the Closing Date. Accordingly, in the event
of an insolvency and receivership of the Depositor, the FHA may not recognize
the Trust Fund or the Certificateholders as the owners of the Title I Loans, or
any portion thereof, entitled to submit FHA claims, and neither the Trust Fund
nor the Certificateholders will have a direct right to receive insurance
payments from the FHA. See "Description of FHA Insurance Under Title I."
Since the FHA Insurance Amount (as defined herein) for the Title I Loans is
limited as described herein and in the related Prospectus Supplement, and since
the adequacy of such FHA Insurance Amount is dependent upon future events,
including reductions for the payment of FHA claims, no assurance can be given
that the FHA Insurance Amount is or will be adequate to cover the percentage of
the potential losses on the Title I Loans included in the related Trust Fund as
is typically covered by FHA insurance. If the FHA Insurance Amount for the Title
I Loans is reduced to zero, such loans will be uninsured from and after the date
of such reduction. See "Description of FHA Insurance Under Title I."
The availability of FHA insurance reimbursement following a default on a
Title I Loan is subject to a number of conditions, including strict compliance
by the originating lender of such loan, the Depositor, the FHA Claims
Administrator (as defined herein), the Servicer and any subservicer with the FHA
Regulations (as defined herein) in originating and servicing such Title I Loan,
and limits on the aggregate insurance coverage available in the FHA Reserve (as
defined herein). For example, the FHA Regulations provide that, prior to
originating a Title I Loan, a lender must exercise prudence and diligence in
determining whether the borrower and any co-maker or co-signer is solvent and an
acceptable credit risk with a reasonable
14
<PAGE>
ability to make payments on the loan. Although the Depositor will represent and
warrant that the Title I Loans have been originated and serviced in compliance
with all FHA Regulations, these regulations are susceptible to substantial
interpretation. Failure to comply with any FHA Regulations may result in a
denial of FHA claims, and there can be no assurance that the FHA's enforcement
of the FHA Regulations will not be stricter in the future. See "Description of
FHA Insurance Under Title I."
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
15
<PAGE>
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".
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".
16
<PAGE>
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 or
FHA insured mortgage loans (the "Mortgages") and/or manufactured housing
conditional sale contracts and installment loan agreements (the "Manufactured
Home Contracts") and/or home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts" collectively with
Manufactured Home Contracts, 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, Commercial 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.
No more than 10% of the Mortgage Loans in any Mortgage Pool (by original
principal balance of such Mortgage Pool) will be secured by Commercial
Properties.
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 (i) residential properties consisting of five or more
dwelling units in multi-story structures ("Multifamily Properties" and the
related loans, "Multifamily Loans") or (ii) commercial properties ("Commercial
Properties" and the related loans, "Commercial Loans") including office
buildings, retail buildings and a variety of other commercial properties as may
be described in the related Prospectus Supplement (Commercial Loans, Multifamily
Loans, Single Family Loans and the Contracts described below, collectively the
"Mortgage Loans"). If specified in the related Prospectus Supplement, the
Multifamily Properties may include mixed residential and commercial structures.
The Mortgaged Properties may include vacation, second and non-owner-occupied
homes. The Mortgaged Properties may include leasehold interests in residential
properties, the title to which is held by third party lessors. The term of any
such leasehold will exceed the term of the Mortgage Note by at least five years.
The Manufactured Home Contracts will consist of manufactured housing
conditional sales contracts and installment loan agreements each secured by a
Manufactured Home. The "Manufactured Homes" securing the Manufactured Home
Contracts will consist of manufactured homes within the meaning of both 42
United States Code Section 5402(6) and Section 25(e)(10) of the Code. 42 United
States Code Section 5402(6) 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." For purposes of Section 25(e)(10) of the Code,
a manufactured home must have a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and which is of a kind customarily used at
a fixed location.
The Home Improvement Contracts will be secured primarily by (i) Mortgages
on Single Family Properties that are generally subordinate to other mortgages on
the same Mortgaged Property, or (ii) purchase money security interests in the
home improvements financed thereby.
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
17
<PAGE>
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 and
the percentage of Mortgage Loans in the related Mortgaged Pool which are secured
by such properties, (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, (x) the range of debt service
coverage ratios for Mortgage Loans secured by Multifamily Properties or
Commercial Properties, (xi) the specific type of property securing Commercial
Loans and (xii) information regarding the payment characteristics of the
Mortgage Loans, including without limitation balloon payment and other
amortization provisions. The related Prospectus Supplement will also contain
certain other information available to the Depositor and referred to in a
general manner under "Description of the Trust Funds-- Mortgage Loans" above. If
specific information respecting the Mortgage Loans is not known to the Depositor
at the time Certificates are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in a report which will be available to
purchasers of the related Certificates at or before the initial issuance thereof
and will be filed, together with the related Pooling and Servicing Agreement, as
part of a Current Report on Form 8-K with the Commission within fifteen days
after such initial issuance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Unless otherwise specified in the
related Prospectus Supplement, all of the Mortgage Loans will (i) have original
terms to maturity of not more than 30 years and (ii) provide for payments of
principal, interest or both, on due dates that occur monthly, quarterly or
semi-annually or at such other interval as is specified in the related
Prospectus Supplement. Each Mortgage Loan may provide for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from time
to time at the Mortgagor's election, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may provide for accrual of interest on
an actual basis or a daily simple interest basis. Each Mortgage Loan may provide
for scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of certain
events, and may provide for negative amortization or accelerated amortization,
in each case as described in the related Prospectus Supplement.
18
<PAGE>
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".
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".
19
<PAGE>
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 in the related Prospectus Supplement, interest accrued for an Interest
Accrual Period for one or more
20
<PAGE>
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 and Commercial 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
21
<PAGE>
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage Loans
included in a Trust Fund and the rate at which payments are made from any Credit
Support for the related series of Certificates may affect the ultimate maturity
and the weighted average life of each class of such series. Prepayments on the
Mortgage Loans comprising a Mortgage Pool in a particular Trust Fund will
generally accelerate the rate at which principal is paid on some or all of the
classes of the Certificates of the related series.
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of Certificates may have a final scheduled Remittance Date,
which is the date on or prior to which the Certificate Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Certificates of a series will be influenced by, among other factors, the rate at
which principal on the Mortgage Loans comprising a Mortgage Pool is paid to such
class, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
In addition, the weighted average life of the Certificates may be affected
by the varying maturities of the Mortgage Loans comprising a Mortgage Pool. If
any Mortgage Loans comprising a Mortgage Pool in a particular Trust Fund have
actual terms to maturity of less than those assumed in calculating the final
scheduled Remittance Dates for the classes of Certificates of the related
series, one or more classes of such Certificates may be fully paid prior to
their respective final scheduled Remittance Dates, even in the absence of
prepayments. Accordingly, the prepayment experience of the Mortgage Pool will,
to some extent, be a function of the mix of Mortgage Rates and maturities of the
Mortgage Loans comprising such Mortgage Pool. See "Description of the Trust
Funds".
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans comprising a Mortgage Pool. Moreover, CPR and SPA were developed based
upon historical prepayment experience for Single Family Loans. Thus, it is
likely that prepayment of any Mortgage Loans comprising the Mortgage Loans for
any series will not conform to any particular level of CPR or SPA.
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
22
<PAGE>
comprising or underlying the Mortgage Loans for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE LOAN. A number of Mortgage Loans may have balloon payments
due at maturity, and because the ability of a Mortgagor to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property, there is a risk that a number of
Mortgage Loans having balloon payments may default at maturity, or that the
Servicer may extend the maturity of such a Mortgage Loan in connection with a
workout. In addition, a number of Mortgage Loans may be second mortgage loans.
The rate of default on second mortgage loans may be greater than that of
mortgage loans secured by first liens in comparable properties. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the mortgagor or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the Servicer
may, to the extent and under the circumstances set forth herein and in the
related Pooling and Servicing Agreement, be permitted to modify Mortgage Loans
that are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Certificates, thereby
lengthening the period of time elapsed from the date of issuance of a
Certificate until it is retired.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments generally will, unless otherwise specified in the
related Prospectus Supplement, (i) not increase or decrease such Mortgage Rates
by more than a fixed percentage amount on each adjustment date, (ii) not
increase such Mortgage Rates over a fixed percentage amount during the life of
any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related fixed percentage set
forth in the related Mortgage Note (the "Note Margin") (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate mortgage loans. In certain rate environments, the
prevailing rates on fixed rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on ARM Loans with the result that
the rate of prepayments may increase as a result of refinancings. There can be
no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Certificates.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class or classes of
Certificates of a series will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Certificates were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of 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.
23
<PAGE>
DUE-ON-SALE CLAUSES. Acceleration of mortgage payments as a result of
certain transfers of or the creation of encumbrances upon underlying Mortgaged
Property is another factor affecting prepayment rates that may not be reflected
in the prepayment standards or models used in the relevant Prospectus
Supplement. All of the Mortgage Loans comprising a Mortgage Pool will include
"due-on-sale" clauses that permit the lender to accelerate the maturity of the
loan if the borrower sells, transfers or conveys the property. Unless otherwise
provided in the related Prospectus Supplement, the Servicer, on behalf of the
Trust Fund, will employ its usual practices in determining whether to exercise
any such right that the Trustee may have as mortgagee to accelerate payment of
the Mortgage Loan. An ARM Loan may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Servicer or the
related Sub-Servicer, the security for the ARM Loan would not be impaired by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the related series of Certificates. See "Certain Legal Aspects of Mortgage
Loans--Enforceability of Certain Provisions" and "Description of the Pooling and
Servicing Agreements--Due-on-Sale Provisions".
THE DEPOSITOR
Superior Bank FSB (the "Depositor") is a federally chartered stock savings
bank acquired by Coast to Coast Financial Corporation, a Nevada corporation, on
December 30, 1988. The deposits of the Depositor are insured by the Savings
Association Insurance Fund of the FDIC. The Depositor is a member of the Federal
Home Loan Bank of Chicago and is subject to regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS") and the FDIC. The
Depositor maintains its principal office at One Lincoln Centre, Oakbrook
Terrace, Illinois 60181 and administrative offices for the consumer finance
operations of the Depositor at 135 Chestnut Ridge Road, Montvale, New Jersey
07645. The telephone number of the principal office of the Depositor is (708)
916-4000 and the telephone number of its administrative offices is (201)
930-1500.
On November 30, 1992, the Depositor acquired by merger the mortgage
origination and servicing operating assets utilized by Alliance Funding Company,
Inc., a Delaware corporation ("Alliance"), and its subsidiaries in mortgage
origination and servicing activities. Effective December 1, 1992 (the "Effective
Date") mortgage origination and servicing activities historically conducted by
Alliance and its mortgage banking and servicing subsidiaries began to be
conducted by two new divisions of the Depositor. These new divisions are the
Alliance Funding Division (primarily engaged in mortgage origination) (the
"Alliance Funding Division"), and the Servicing Division (primarily engaged in
mortgage servicing) (the "Servicer" or the "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 the 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 Servicing Division has conducted, primarily
from its Parkridge, New Jersey location, 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.
24
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to a Pooling and Servicing Agreement. Each series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to one or more other
classes of Certificates in respect of certain distributions on the Certificates;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Certificates"); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Certificates"); (v) provide for distributions of accrued
interest thereon only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series
(collectively, "Accrual Certificates"); and/or (vi) provide for payments of
principal sequentially, or based on specified payment schedules, to the extent
of available funds, in each case as described in the related Prospectus
Supplement. Any such classes may include classes of Offered Certificates.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts specified in the related Prospectus
Supplement. The transfer of any Offered Certificates may be registered and such
Certificates may be exchanged without the payment of any service charge payable
in connection with such registration of transfer or exchange, but the Depositor
or the Trustee or any agent thereof may require payment of a sum sufficient to
cover any tax or other governmental charge. One or more classes of Certificates
of a series may be issued in definitive form ("Definitive Certificates") or in
book-entry form ("Book-Entry Certificates"), as provided in the related
Prospectus Supplement. See "Risk Factors--Book-Entry Registration" and
"Description of the Certificates--Book-Entry Registration and Definitive
Certificates". Definitive Certificates will be exchangeable for other
Certificates of the same class and series of a like aggregate Certificate
Balance or notional amount but of different authorized denominations. See "Risk
Factors--Limited Liquidity--Limited Assets and Obligations".
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the Trustee on each Remittance Date as specified in the related
Prospectus Supplement from the available funds for such series and such
Remittance Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Certificates are registered at the close of
business on the last business day of the month preceding the month in which the
Remittance Date occurs (the "Record Date"), and the amount of each distribution
will be determined as of the date specified in the related Prospectus Supplement
(the "Determination Date"). All distributions with respect to each class of
Certificates on each Remittance Date will be allocated pro rata among the
outstanding Certificates in such class. Payments will be made either by wire
transfer in immediately available funds to the account of a Certificateholder at
a bank or other entity having appropriate facilities therefor, if such
Certificateholder has so notified the Trustee or other person required to make
such payments no later than the date specified in the related Prospectus
Supplement and, if so provided in the related Prospectus 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
25
<PAGE>
specified in the related Prospectus Supplement, and any class of Stripped
Principal Certificates that are not entitled to any distributions of interest)
will be made on each Remittance Date based on the Accrued Certificate Interest
(as defined below) for such class and such Remittance Date, subject to the
sufficiency of the portion of the Amount Available (as defined herein) allocable
to such class on such Remittance Date. Prior to the time interest is
distributable on any class of Accrual Certificates, Accrued Certificate Interest
on such class will be added to the Certificate Balance thereof on each
Remittance Date. With respect to each class of Certificates and each Remittance
Date (other than certain classes of Stripped Interest Certificates), "Accrued
Certificate Interest" will be equal to interest accrued during the related
Interest Accrual Period on the outstanding Certificate Balance thereof
immediately prior to the Remittance Date, at the applicable Pass-Through Rate.
Unless otherwise provided in the Prospectus Supplement, Accrued Certificate
Interest on Stripped Interest Certificates will be equal to interest accrued on
the outstanding notional amount thereof immediately prior to each Remittance
Date, at the applicable Pass-Through Rate. The method of determining the
notional amount for any class of Stripped Interest Certificates will be
described in the related Prospectus Supplement. Reference to notional amount is
solely for convenience in certain calculations and does not represent the right
to receive any distributions of principal. Unless otherwise provided in the
related Prospectus Supplement and unless covered by payments of Compensating
Interest as described in "--Compensating Interest", the Accrued Certificate
Interest on a series of Certificates will be reduced in the event of prepayment
interest shortfalls, which are shortfalls in collections of interest for a full
accrual period resulting from prepayments prior to the due date in such accrual
period on the Mortgage Loans in the Trust Fund for such series. The particular
manner in which such shortfalls are to be allocated among some or all of the
classes of Certificates of that series will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will also describe the
extent to which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise be
added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including applicable law,
delinquencies, losses and deferred interest on or in respect of the Mortgage
Loans in the related Trust Fund. See "Risk Factors--Average Life of
Certificates; Prepayments; Yields" and "Yield Considerations".
DISTRIBUTIONS OF PRINCIPAL ON THE CERTIFICATES
The Certificates of each series, other than certain classes of Stripped
Interest Certificates, will have a "Certificate Balance" which, at any time,
will equal the then maximum amount that the holder will be entitled to receive
in respect of principal out of the future cash flow on the Mortgage Loans and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon from time to time, and if and to the extent so provided in the
related Prospectus Supplement, by the amount of losses incurred in respect of
the related Mortgage Loans, may be increased in respect of Deferred Interest on
the related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Certificates prior to the Remittance Date
on which distributions of interest are required to commence, will be increased
by any Accrued Certificate Interest. The initial aggregate Certificate Balance
of all classes of Certificates 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 199_ and that the Remittance Date is the twenty-fifth day of each month:
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
June 1, 199_................................................. 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, 199_.......................................... 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 30, 199_................................................ Record Date (the last day of the month immediately
preceding the month of the related Remittance
Date). Distributions on July 25, 199_ will be made
to Certificateholders of record at the close of
business on June 30, 199_.
July 22, 199_................................................ 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, 199_, 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, 199_..................................... 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, 199_.
July 25, 199_................................................ 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.
</TABLE>
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;
27
<PAGE>
provided, however, that unless otherwise provided in the related Prospectus
Supplement, any such Monthly Advance will be reimbursable from any amounts
available in the Certificate Account, after distributions to Certificateholders,
to the extent that the Servicer shall determine in its good faith business
judgment that such advance (a "Nonrecoverable Monthly Advance") is not
ultimately recoverable from late collections of interest. If so specified in the
related Prospectus Supplement, the obligations of the Servicer to make Monthly
Advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
COMPENSATING INTEREST
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will remit to the Trustee for deposit in the Certificate Account, not
later than the close of business on each Determination Date and with respect to
each Mortgage Loan in the related Trust Fund for which a Principal Prepayment or
Curtailment was received during the related Due Period, from and to the extent
of amounts otherwise payable to it as servicing compensation, an amount equal to
the difference between (a) 30 days' interest on the principal balance of such
Mortgage Loan as of the beginning of the related Due Period at the Mortgage
Rate, net of the per annum rate at which the Servicer's Servicing Fee accrues
(the "Net Mortgage Rate"), and (b) the amount of interest actually received on
each such Mortgage Loan for such Due Period, net of the Servicer's Servicing
Fees (such difference, "Compensating Interest").
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;
28
<PAGE>
(xi) in the case of Certificates with a variable Pass-Through Rate,
the Pass-Through Rate applicable to such Remittance Date, as calculated in
accordance with the method specified in the related Prospectus Supplement;
(xii) in the case of Certificates with an adjustable Pass-Through
Rate, for statements to be distributed in any month in which an adjustment
date occurs, the adjustable Pass-Through Rate applicable to the next
succeeding Remittance Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xiii) certain delinquency and foreclosure information;
(xiv) the Servicing Fees and Trustee's fees and such other information
as Certificateholders may reasonably request which is produced or available
in the ordinary course of the Servicer's business; and
(xv) as to any series which includes Credit Support, certain
information regarding any payments thereunder or coverage provided and the
remaining availability thereof.
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.
29
<PAGE>
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.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositories which in turn will hold such
positions in customers' securities accounts in the depositories' names on the
books of DTC. Unless otherwise provided in the related Prospectus Supplement for
a series of Certificates, Citibank, N.A. will act as depositary for CEDEL and
Morgan Guaranty Trust Company of New York will act as depositary for Euroclear
(in such capacities, individually the "Depositary" and collectively the
"Depositories").
Transfers between Participants (as defined below) will occur in accordance
with DTC rules. Transfers between CEDEL Participants and Euroclear Participants
(each as defined below) will occur in accordance with their respective rules and
operating procedures.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, owners of
Offered Certificates ("Certificate Owners") or prospective owners, as the case
may be, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Offered Certificates may do so only through Participants and Indirect
Participants. In addition, such Certificate Owners will receive all
distributions of principal and interest on the Offered Certificates from the
Trustee or the applicable paying agent through DTC and its Participants. Under a
book-entry format, Certificateholders may receive payments after the related
Remittance Date because, while payments are required to be forwarded to CEDE &
Co., as nominee for DTC, on each such date, DTC will forward such payments to
its Participants which thereafter will be required to forward them to Indirect
Participants or Certificate Owners. Unless otherwise provided in the related
Prospectus Supplement, the only "Certificateholder" (as such term is used in the
related Pooling and Servicing Agreement) will be CEDE & Co., as nominee of DTC,
and the Certificate Owners will not be recognized by the Trustee as
Certificateholders under the Pooling and Servicing Agreement. Certificate Owners
will be permitted to exercise the rights of Certificate Owners under the related
Pooling and Servicing Agreement only indirectly through DTC and its Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain other entities, the ability of a
Certificate Owner to pledge Certificates to persons or entities that do not
participate in the DTC system,
30
<PAGE>
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 Depositories.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative established
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific clearance accounts.
31
<PAGE>
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.
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.
32
<PAGE>
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
cause the Mortgage Loans included in the related Trust Fund to be assigned to
the Trustee, together with all principal and interest received by or on behalf
of the Depositor on or with respect to such Mortgage Loans on and after the
Cut-off Date, other than the Depositor's Yield and amounts received on and after
the Cut-off Date in respect of interest accrued prior to the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to the
Depositor in exchange for the Mortgage Loans and the other assets comprising the
Trust Fund for such series. Each Mortgage Loan will be identified in a schedule
(the "Mortgage Loan Schedule") appearing as an exhibit to the related Pooling
and Servicing Agreement. Unless otherwise provided in the related Prospectus
Supplement, such schedule will include detailed information in respect of each
Mortgage Loan included in the related Trust Fund, including without limitation,
the address of the related Mortgaged Property, the Mortgage Rate and, if
applicable, the applicable index, margin, adjustment date and any rate cap
information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the appraised value,
the loan-to-value ratio as of the date indicated and the scheduled payment of
principal and interest.
With respect to each Mortgage Loan (other than the Contracts), the
Depositor will, unless otherwise provided in the related Prospectus Supplement,
deliver or cause to be delivered to the Trustee (or to the custodian acting on
behalf of the Trustee, if set forth in the Prospectus Supplement with respect to
a series of Certificates) certain loan documents, including the Mortgage Note
endorsed, without recourse, to the order of the Trustee, the Mortgage with
evidence of recording indicated thereon and an assignment of the Mortgage to the
Trustee with evidence of recording thereon (except as otherwise set forth in the
Prospectus Supplement and 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. Except as
otherwise set forth in the Prospectus Supplement, 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 property 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
33
<PAGE>
unreimbursed Servicing Advances (as defined herein) made by the Servicer, which
purchase price shall be deposited in the Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, this
repurchase or substitution obligation constitutes the sole remedy available to
holders of Certificates or the Trustee for omission of, or a material defect in,
a constituent document.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series, with
respect to each Mortgage Loan included in the related Trust Fund, the Depositor
will make or assign certain representations and warranties, as of a specified
date (the person making such representations and warranties, the "Warranting
Party") covering, by way of example, the following types of matters: (i) the
accuracy of the information set forth for such Mortgage Loan on the Mortgage
Loan Schedule; (ii) the existence of title insurance insuring the lien priority
of the Mortgage Loan; (iii) the authority of the Depositor to sell the Mortgage
Loan; (iv) the payment status of the Mortgage Loan and the status of payments of
taxes, assessments and other charges affecting the related Mortgaged Property;
(v) the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard insurance
coverage on the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, in the
event of a breach of any such representation or warranty, the Warranting Party
will be obligated to cure such breach or repurchase or replace the affected
Mortgage Loan as described below. Since the representations and warranties may
not address events that may occur following the date as of which they were made,
the Warranting Party will have a cure, repurchase or substitution obligation in
connection with a breach of such a representation and warranty only if the
relevant event that causes such breach occurs prior to such date. Such party
would have no such obligations if the relevant event that causes such breach
occurs after such date. However, the Depositor will not include any Mortgage
Loan in the Trust Fund for any series of Certificates if anything has come to
the Depositor's attention that would cause it to believe that the
representations and warranties made in respect of such Mortgage Loan will not be
accurate and complete in all material respects as of the date of initial
issuance of the related series of Certificates.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Servicer and/or Trustee
will be required to notify promptly the relevant Warranting Party of any breach
of any representation or warranty made by or on behalf of it in respect of a
Mortgage Loan that materially and adversely affects the value of such Mortgage
Loan or the interests therein of the Certificateholders. If such Warranting
Party cannot cure such breach within 60 days following the date on which such
Warranting Party discovered such breach or was notified of such breach, then
such Warranting Party will be obligated to, on the Determination Date next
succeeding the end of such 60 day period, either (i) repurchase such Mortgage
Loan from the Trustee at the Mortgage Loan Purchase Price therefor or (ii) if
during the first two years following the initial issuance of the related
Certificates, or thereafter if an opinion of counsel is provided, replace such
Mortgage Loan with one or more Qualified Substitute Mortgage Loans, provided
that if the aggregate outstanding balance of such Qualified Substitute Mortgage
Loan is less than the outstanding principal balance of the defective Mortgage
Loan plus accrued and unpaid interest thereon, the Warranting Party shall also
remit for distribution to the holders of Certificates an amount equal to such
shortfall. This repurchase or substitution obligation will constitute the sole
remedy available to holders of Certificates or the Trustee for a breach of
representation by a Warranting Party.
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
34
<PAGE>
related Mortgage Loans, which must be either (A) an account or accounts
maintained with an institution whose deposits are insured by the FDIC, the
unsecured and uncollateralized debt obligations of which shall be rated "A" or
better by Standard and Poor's, a Division of the McGraw-Hill Companies, Inc.
("S&P"), and A2 or better by Moody's Investors Service, Inc. ("Moody's") and in
one of the two highest short-term rating categories by S&P and in the highest
short-term rating category by Moody's and which is either (i) a federal savings
and loan association duly organized, validly existing and in good standing under
the federal banking laws, (ii) an institution duly organized, validly existing
and in good standing under the applicable banking laws of any state, (iii) a
national banking association duly organized, validly existing and in good
standing under the federal banking laws, (iv) a principal subsidiary of a bank
holding company, or (v) if required by the related Pooling and Servicing
Agreement, approved in writing by the provider of Credit Support and S&P or (B)
a trust account or accounts (which shall be a "special deposit account")
maintained with the trust department of a federal or state chartered depository
institution or trust company, having capital and surplus of not less than
$50,000,000, acting in its fiduciary capacity (the account or accounts described
in (A) or (B), an "Eligible Account"). Amounts on deposit in the Principal and
Interest Account may be invested in certain high quality instruments ("Permitted
Instruments"). Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in the Principal and Interest
Account will be paid to the Servicer or its designee as additional servicing
compensation and the Servicer shall be responsible for any losses thereon. The
Principal and Interest Account may be maintained with an institution that is an
affiliate of the Servicer, if applicable, provided that such institution meets
the standards set forth above. If permitted by each Rating Agency and so
specified in the related Prospectus Supplement, a Principal and Interest Account
may contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage loans
belonging to the Servicer or serviced or master serviced by it on behalf of
others.
The Servicer will deposit or cause to be deposited in the Principal and
Interest Account for each Trust Fund within one business day of receipt of good
funds, unless otherwise provided in the Pooling and Servicing Agreement and
described in the related Prospectus Supplement, the following payments and
collections received by the Servicer or on its behalf on or subsequent to the
Cut-off Date (other than any amounts representing the Depositor's Yield and
amounts received on or after the Cut-off Date in respect of interest accrued on
the Mortgage Loans prior to the Cut-off Date):
(i) all payments on account of principal, including Principal
Prepayments, Curtailments and other excess payments of principal, on the
Mortgage Loans (net of the Depositor's Yield, if any);
(ii) all payments on account of interest on the Mortgage Loans (net of
amounts received on and after the Cut-off Date in respect of interest
accrued on the Mortgage Loans prior to the Cut-off Date);
(iii) all proceeds of the hazard insurance policies (to the extent
such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the normal servicing
procedures of the Servicer or the related Sub-Servicer, subject to the
terms and conditions of the related Mortgage and Mortgage Note) and/or all
proceeds from FHA Insurance (with respect to any Mortgage Loan partially
insured by the FHA pursuant to Title I included in the Mortgage Pool)
(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.
35
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
foregoing requirements for deposit in the Principal and Interest Account may be
net of any portion thereof retained by the Servicer as its servicing
compensation which need not, to the extent permitted by the related Pooling and
Servicing Agreement, be deposited in the Principal and Interest Account. See
"Description of the Pooling and Servicing Agreements--Servicing and Other
Compensation and Payment of Expenses".
DEPOSITS TO CERTIFICATE ACCOUNT
The Trustee will, as to each Trust Fund, establish and maintain or cause to
be established and maintained a Certificate Account which must be an Eligible
Account.
The Trustee will deposit or cause to be deposited in the Certificate
Account for each Trust Fund, unless otherwise provided in the Pooling and
Servicing Agreement and described in the related Prospectus Supplement, the
following amounts (collectively, the "Amount Available") received on or
subsequent to the Cut-off Date:
(i) all amounts transferred to the Trustee by the Servicer from the
Principal and Interest Account;
(ii) any Monthly Advances and Compensating Interest remitted to the
Trustee by the Servicer as described under "Description of the
Certificates--Monthly Advances in respect of Delinquencies--Compensating
Interest";
(iii) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Certificates as
described under "Description of Credit Support";
(iv) all income or gain from investments of funds on deposit in the
Certificate Account and any amount required to be deposited by the Servicer
in connection with losses realized on investments of funds in the
Certificate Account; and
(v) the Termination Price.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the original principal
amount of a series of Certificates may exceed the principal balance of the
Mortgage Loans initially being delivered to the Trustee. Cash in an amount equal
to such difference will be deposited into a separate trust account (the
"Pre-Funding Account") maintained with 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, FHA
insurance 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.
36
<PAGE>
The Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans.
Consistent with the foregoing, the Servicer may at its own discretion waive any
late payment charge, prepayment charge, assumption fee or any penalty interest
in connection with the prepayment of a Mortgage Loan or any other fee or charge
which the Servicer would be entitled to retain as servicing compensation and may
waive, vary or modify any term of any Mortgage Loan or consent to the
postponement of strict compliance with any such term or in any manner grant
indulgence to any Mortgagor, subject to the limitations set forth in the related
Pooling and Servicing Agreement. In the event the Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Servicer
will nonetheless make payment of any required Monthly Advances with respect to
the payments so extended to the same extent as if such installment were due,
owing and delinquent and had not been deferred.
Under a Pooling and Servicing Agreement, a Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Servicer may, among other
things, grant a period of temporary indulgence (generally up to four months) to
a Mortgagor or may enter into a plan providing for repayment by such Mortgagor
of delinquent amounts within a specified period (generally up to one year) from
the date of execution of the plan. However, unless otherwise specified in the
related Prospectus Supplement, the Servicer must first determine that any such
waiver or extension will not impair the coverage of any related insurance policy
or materially adversely affect the security for such Mortgage Loan or Contract.
In addition, unless otherwise specified in the related Prospectus Supplement, if
a material default occurs or a payment default is reasonably foreseeable with
respect to a Multifamily Loan or a Commercial 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 or Commercial 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 or a Commercial 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 or Commercial 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 or Commercial Loan, the Mortgaged
Property, the Mortgagor, the presence of an acceptable party to assume the
Multifamily Loan or Commercial 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, flood and FHA 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".
37
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may recover Servicing Advances, if not theretofore recovered from the
mortgagor on whose behalf such Servicing Advance was made, from late collections
on the related Mortgage Loan, including Liquidation Proceeds, Released Mortgaged
Property Proceeds, Insurance Proceeds and such other amounts as may be collected
by the Servicer from the mortgagor or otherwise relating to the Mortgage Loan.
To the extent the Servicer, in its good faith business judgment, determines that
such Servicing Advances will not be ultimately recoverable from late
collections, Insurance Proceeds, Released Mortgaged Property Proceeds or
Liquidation Proceeds on the related Mortgage Loans ("Nonrecoverable Servicing
Advances"), unless otherwise provided in the related Prospectus Supplement, the
Servicer may be reimbursed from distributions of the Amount Available after
distributions to the Certificateholders. The Servicer is not required to make
any Servicing Advance which it determines would be a Nonrecoverable Servicing
Advance.
SUB-SERVICERS
A Servicer may delegate its servicing obligations in respect of the
Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Servicer will remain obligated under the related Pooling and Servicing
Agreement. The sub-servicing agreement between a Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") will be consistent with the terms of the related
Pooling and Servicing Agreement and will not result in a withdrawal or
downgrading of the rating of any class of Certificates issued pursuant to such
Pooling and Servicing Agreement. Although each Sub-Servicing Agreement will be a
contract solely between the Servicer and the Sub-Servicer, the related Pooling
and Servicing Agreement will provide that, if for any reason the Servicer for
such series of Certificates is no longer acting in such capacity, the Trustee or
any successor Servicer must recognize the Sub-Servicer's rights and obligations
under such Sub-Servicing Agreement.
The Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Servicer's compensation pursuant to
the related Pooling and Servicing Agreement is sufficient to pay such fees. Each
Sub-Servicer will be reimbursed by the Servicer for certain expenditures which
it makes, generally to the same extent 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.
With respect to a Home Improvement Contract secured by a lien on a
Mortgaged Property in default, the Servicer will decide whether to foreclose
upon the Mortgaged Property or write off the principal balance of such Home
Improvement Contract as a bad debt or take an unsecured note. Realization on
other defaulted Contracts may be accomplished through repossession and
subsequent resale of the underlying Manufactured Home or home improvement. In
connection with such decision, the Servicer will, following usual practices in
connection with senior and junior mortgage servicing activities or repossession
and resale activities, estimate the proceeds expected to be received and the
expenses expected to be incurred in connection with such foreclosure or
repossession and resale to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. To the extent that a Home Improvement
Contract secured by a lien on a Mortgaged Property is junior to another lien on
the related Mortgaged Property, following any default thereon, unless
foreclosure proceeds for such Home Improvement Contract are expected to at least
satisfy the related senior mortgage loan in full and to pay foreclosure costs,
it is likely that such Home Improvement Contract will be written off as bad debt
with no foreclosure proceeding. See "Risk Factors--Risks Associated with the
Mortgage Loans and Mortgaged Properties--Second Liens" herein.
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".
38
<PAGE>
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
Unless otherwise stated in the related Prospectus Supplement, 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. See "Risk Factors-Credit Support
Limitations-Hazard Insurance with respect to Title I Loans". Generally, if at
the origination of the Mortgage Loan or at any time during the term of the
Mortgage Loan, the Servicer determines that the Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available)
and the Servicer determines that such insurance is necessary in accordance with
accepted mortgage servicing practices of prudent lending institutions, the
Servicer will cause to be purchased a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier, in an amount representing
coverage not less than the lesser of (a) the outstanding principal balance of
the Mortgage Loan and any First Lien and (b) the maximum amount of insurance
available under the National Flood Insurance Act of 1968, the Flood Disaster
Protection Act of 1973 or the National Flood Insurance Act of 1994, as amended.
The Servicer will also be required to maintain on REO Property, to the extent
such insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1994, as amended, and the Servicer
determines that such insurance is necessary in accordance with accepted mortgage
servicing practices of prudent lending institutions, flood insurance in an
amount equal to that required above. Any amounts collected by the Servicer under
any such policies (other than amounts to be applied to 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.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Home Improvement Contracts may decline
as the principal balances owing thereon decrease, and since residential
properties have historically appreciated in value over time, hazard insurance
proceeds could be insufficient to restore fully the damaged property in the
event of a partial loss.
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
39
<PAGE>
Mortgagor remains liable thereon. The Servicer may also be authorized under the
related Pooling and Servicing Agreement, subject to certain approvals, to enter
into a substitution of liability agreement with such person, pursuant to which
the original Mortgagor is released from liability and such person is substituted
as Mortgagor and becomes liable under the Mortgage Note.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a portion of the
interest payment on each Mortgage Loan (the "Servicing Fee") which amount will
be set forth in the Prospectus Supplement with respect to a series of
Certificates. Since the Servicer's primary compensation is a percentage of the
principal balance of each Mortgage Loan, such amounts will decrease in
accordance with the amortization schedule of each Mortgage Loan. Unless
otherwise provided in the related Prospectus Supplement, the Servicer may
retain, as additional servicing compensation, all assumption fees, modification
fees and other administrative fees, late payment charges, release fees, bad
check charges, any other servicing-related fees (other than the Depositor's
Yield), Net Liquidation Proceeds not otherwise required to be deposited into the
Principal and Interest Account pursuant to the related Pooling and Servicing
Agreement, interest or other income which may be earned on funds held in the
Principal and Interest Account, Certificate Account and any other account
created under the related Pooling and Servicing Agreement. The Pooling and
Servicing Agreement and Prospectus Supplement with respect to a series of
Certificates will set forth any other amounts payable to the Servicer. Any
Sub-Servicer will receive a portion of the Servicer's compensation as its
sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Servicer or Trustee
may, to the extent provided in the related Prospectus Supplement, pay certain
expenses incurred, including, without limitation, payment of the fees and
disbursements of the Trustee and the obligor under an instrument of Credit
Support, if any. The Pooling and Servicing Agreement and Prospectus Supplement
with respect to a series of Certificates may provide that additional accounts be
established by the Servicer or the Trustee into which the Servicer or the
Trustee will deposit amounts sufficient to pay such fees.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date specified in the
Pooling and Servicing Agreement, there will be furnished to the related Trustee
a report of a firm of independent certified public accountants stating that (i)
it has obtained a letter of representation regarding certain matters from the
management of the Servicer which includes an assertion that the Servicer has
complied with certain minimum mortgage loan servicing standards identified in
the Uniform Single Attestation 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.
40
<PAGE>
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, Events of Default under the related Pooling and Servicing
Agreement will consist of (i) any failure by the Servicer to distribute or cause
to be distributed to Certificateholders, or to remit to the Trustee for
distribution to Certificateholders, any required payment that continues
unremedied after the giving of written notice of such failure to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by any Certificateholder; (ii) any failure by the Servicer to make any required
Servicing Advance, to the extent such failure materially and adversely affects
the interests of the Certificateholders, or any required Monthly Advance to the
extent of the full amount; (iii) any failure by the Servicer duly to observe or
perform in any material respect any of its other covenants or obligations under
the Pooling and Servicing Agreement which continues unremedied for no more than
sixty days after the giving of written notice of such failure to the Servicer by
the Trustee, the provider of Credit Support, if applicable, or the Depositor, or
to the Servicer, the Depositor and the Trustee by any Certificateholder; and
(iv) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities, receivership or similar proceedings and certain actions by or
on behalf of the Servicer indicating its insolvency or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, so long as an Event of Default under a Pooling and Servicing
Agreement remains unremedied, the Trustee at the direction of holders of
Certificates evidencing not less than 51% of the Voting Rights, shall, terminate
all of the rights and obligations of the Servicer under the Pooling and
Servicing Agreement relating to such Trust Fund and in and to the Mortgage
Loans, whereupon the Trustee will succeed to all of the responsibilities, duties
and liabilities of the Servicer under the Pooling and Servicing Agreement
(except that if the Trustee is prohibited by law from obligating itself to make
advances regarding delinquent mortgage loans, then the Trustee will not be so
obligated) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, in the event that the
Trustee is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the 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.
41
<PAGE>
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.
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".
42
<PAGE>
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.
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, including FHA insurance 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.
43
<PAGE>
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 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.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Mortgage Loans contained in a Trust Fund may be Title I
Loans as described below and in the related Prospectus Supplement. The
regulations, rules and procedures promulgated by the FHA under Title I (the "FHA
Regulations") contain the requirements under which lenders approved for
participation in the Title I Program (the "Title I Lenders") may obtain
insurance against a portion of losses incurred with respect to eligible loans
that have been originated and serviced in accordance with FHA Regulations,
subject to the amount of insurance coverage available in such Title I Lender's
FHA Reserve, as described below and in the related Prospectus Supplement. While
FHA Regulations permit the Secretary of the Department of Housing and Urban
Development ("HUD"), subject to statutory limitations, to waive a Title I
Lender's noncompliance with FHA Regulations if enforcement would impose an
injustice on the lender, in general, an insurance claim against the FHA may be
denied or surcharged if the Title I Loan to which it relates does not strictly
satisfy the requirements of the National Housing Act and FHA Regulations.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will either serve as or contract with the person specified in the
Prospectus Supplement to serve as the Administrator for FHA claims (each an "FHA
Claims Administrator") pursuant to an FHA claims administration agreement (the
"FHA Claims Administration Agreement"). The FHA Claims Administrator will be
responsible for administering, processing and submitting FHA claims with respect
to the Title I Loans. The Certificateholders will be dependent on the FHA Claims
Administrator to (i) make claims on the Title I Loans in accordance with FHA
Regulations and (ii) remit all FHA insurance proceeds received from the FHA in
accordance
44
<PAGE>
with the related agreement. The Certificateholders' rights relating to the
receipt of payment from and the administration, processing and submission of FHA
claims by any FHA Claims Administrator is limited and governed by the related
agreement and the FHA Claims Administration Agreement and these functions are
obligations of the FHA Claims Administrator, but not the FHA.
Under Title I, the FHA maintains an FHA insurance coverage reserve account
(an "FHA Reserve") for each Title I Lender. The amount in each Title I Lender's
FHA Reserve is a maximum of 10% of the amounts disbursed, advanced or expended
by a Title I Lender in originating or purchasing eligible loans registered with
the FHA for Title I insurance, with certain adjustments permitted or required by
FHA Regulations. The balance of such FHA Reserve is the maximum amount of
insurance claims the FHA is required to pay to the related Title I Lender.
Mortgage Loans to be insured under Title I will be registered for insurance by
the FHA. Following either the origination or transfer of loans eligible under
Title I, the Title I Lender will submit such loans for FHA insurance coverage
within its FHA Reserve by delivering a transfer of note report or through an
electronic submission to the FHA in the form prescribed under the FHA
Regulations (the "Transfer Report"). The increase in the FHA insurance coverage
for such loans in the Title I Lender's FHA Reserve will occur on the date
following the receipt and acknowledgment by the FHA of the Transfer Report for
such loans. The insurance available to any Trust Fund will be subject to the
availability, from time to time, of amounts in each Title I Lender's FHA
Reserve, which will initially be limited to the amount specified in the related
Prospectus Supplement (the "FHA Insurance Amount").
If so provided in the related Prospectus Supplement the Trustee or FHA
Claims Administrator may accept an assignment of the FHA Reserve for the related
Title I Loans, notify FHA of such assignment and request that the portion of the
Depositor's FHA Reserves allocable to such Title I Loans be transferred to such
Trustee or the FHA Claims Administrator on the Closing Date. Alternatively, in
the absence of such provision, the FHA Reserves may be retained by the Depositor
and, upon an insolvency and receivership of the Depositor, the related Trustee
will notify FHA and request that the portion of the Depositor's FHA Reserves
allocable to the Title I Loans be transferred to the Trustee or the FHA Claims
Administrator. Although each Trustee will request such a transfer of reserves,
FHA is not obligated to comply with such a request, and may determine that it is
not in FHA's interest to permit such transfer of reserves. In addition, FHA has
not specified how insurance reserves might be allocated in such event, and there
can be no assurance that any reserve amount, if transferred to the Trustee or
the FHA Claims Administrator, as the case may be, would not be substantially
less than 10% of the outstanding principal amount of the related Title I Loans.
It is likely that the Depositor, the Trustee or the FHA Claims Administrator
would be the lender of record on other Title I Loans, so that any FHA Reserves
that are retained, or permitted to be transferred, would become commingled with
FHA Reserves available for other Title I Loans. FHA also reserves the right to
transfer reserves with "earmarking" (segregating such reserves so that they will
not be commingled with the reserves of the transferee) if it is in FHA's
interest to do so.
Under Title I, the FHA will reduce the insurance coverage available in a
Title I Lender's FHA Reserve with respect to loans insured under such Title I
Lender's contract of insurance by (i) the amount of FHA insurance claims
approved for payment related to such loans and (ii) the amount of reduction of
the Title I Lender's FHA Reserve by reason of the sale, assignment or transfer
of loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA.
Unlike certain other government loan insurance programs, loans under Title
I (other than loans in excess of $25,000) are not subject to prior review by the
FHA. The FHA disburses insurance proceeds with respect to defaulted loans for
which insurance claims have been filed by a Title I Lender prior to any review
of such loans. A Title I Lender is required to repurchase a Title I Loan from
the FHA that is determined to be ineligible for insurance after insurance claim
payments for such loan have been paid to such lender. Under the FHA Regulations,
if the Title I Lender's obligation to repurchase the Title I Loan is
unsatisfied, the FHA is permitted to offset the unsatisfied obligation against
future insurance claim payments owed by the FHA to such lender. FHA Regulations
permit the FHA to disallow an insurance claim with respect to any loan that does
not qualify for insurance for a period of up to two years after the claim is
made and to require the Title I Lender that has submitted the insurance claim to
repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
45
<PAGE>
Subject to certain limitations described below, eligible Title I Loans are
generally insured by the FHA for 90% of an amount equal to the sum of (i) the
net unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default to
the date of the initial submission of the insurance claim, plus 15 calendar days
(the total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) title examination costs, (v) fees for required
inspections by the lenders or its agents, up to $75, and (vi) origination fees
up to a maximum of 5% of the loan amount. However, the insurance coverage
provided by the FHA is limited to the extent of the balance in the Title I
Lender's FHA Reserve maintained by the FHA. Accordingly if sufficient insurance
coverage is available in such FHA Reserve, then the Title I Lender bears the
risk of losses on a Title I Loan for which a claim for reimbursement is paid by
the FHA of at least 10% of the unpaid principal, uncollected interest earned to
the date of default, interest from the date of default to the date of the
initial claim submission and certain expenses. Unlike most other FHA insurance
programs, the obligation of the FHA to reimburse a Title I Lender for losses in
the portfolio of insured loans held by such Title I Lender is limited to the
amount in an FHA Reserve maintained on a lender-by-lender basis and not on a
loan-by- loan basis.
In general, the FHA will insure Home Improvement Contracts up to $25,000
for a Single Family Property, with a maximum term of 20 years. The FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multifamily homes. If the loan
amount is $15,000 or more, the FHA requires a drive-by appraisal, the current
tax assessment value, or a full Uniform Residential Appraisal Report dated
within 12 months of the closing to verify the property's value. The maximum loan
amount on transactions requiring an appraisal is the amount of equity in the
property shown by the market value determination of the property.
With respect to the Title I Loans, the FHA Regulations do not require that
a borrower obtain title or fire and casualty insurance. However, if the related
Mortgaged Property is located in a flood hazard area, flood insurance in an
amount at least equal to the loan amount is required. In addition, the FHA
Regulations do not require that the borrower obtain insurance against physical
damage arising from earth movement (including earthquakes, landslides and
mudflows). Accordingly, if a Mortgaged Property that secures a Title I Loan
suffers any uninsured hazard or casualty losses, holders of the related series
of Certificates that are secured in whole or in part by such Title I Loan may
bear the risk of loss to the extent that such losses are not recovered by
foreclosure on the defaulted loans or from any FHA insurance proceeds. Such loss
may be otherwise covered by amounts available from the credit enhancement
provided for the related series of Certificates, if specified in the related
Prospectus Supplement.
Following a default on a Title I Loan insured by the FHA, the Servicer,
either directly or through a subsidiary, may, subject to certain conditions and
mandatory loss mitigation procedures, either commence foreclosure proceedings
against the improved property securing the loan, if applicable, or submit a
claim to FHA, but may submit a claim to FHA after proceeding against the
improved property only with the prior approval of the Secretary of HUD. The
availability of FHA Insurance following a default on a Title I Loan is subject
to a number of conditions, including strict compliance with FHA Regulations in
originating and servicing the Title I Loan. Failure to comply with FHA
Regulations may result in a denial of or surcharge on the FHA insurance claim.
Prior to declaring a Title I Loan in default and submitting a claim to FHA, the
Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 days' written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is related
to a valid objection to faulty contractor performance. In such event, the
Servicer or other entity as specified in the related Prospectus Supplement will
seek to obtain payment by or a judgment against the borrower, and may resubmit
the claim to FHA following such a judgment.
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.
46
<PAGE>
GENERAL
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL LOANS. Each Single Family,
Multifamily and Commercial 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 and Commercial
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.
MANUFACTURED HOME CONTRACTS. Under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by the
majority of states. Such financing statements are effective for five years and
must be renewed at the end of each five years. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Servicer will be required under the related Pooling and Servicing
Agreement to effect such notation or delivery of the required documents and
fees, and to obtain possession of the certificate of title, as appropriate under
the laws of the state in which any Manufactured Home is registered. In the event
the Servicer fails, due to clerical errors or otherwise, to effect such notation
or delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few states),
the Trustee may not have a first priority security interest in the Manufactured
Home securing a Contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention by the
borrowers to move them, courts in many states have held that manufactured homes
may, under certain circumstances, become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state where
the home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, Manufactured Home
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
47
<PAGE>
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 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 Manufactured Home 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.
THE HOME IMPROVEMENT CONTRACTS. The Home Improvement Contracts, other than
those Home Improvement Contracts that are unsecured or secured by mortgages on
real estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the UCC. Pursuant to the UCC, the
sale of chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related agreement, the Depositor will
transfer physical possession of the contracts to the Trustee or a designated
custodian or may retain possession of the contracts as custodian for the
Trustee. In addition, the Depositor will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee's
ownership of the contracts. Unless otherwise specified in the related Prospectus
Supplement, the contracts will not be stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
48
<PAGE>
The contracts that are secured by the home improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such home improvements to secure all or part of the purchase price of such home
improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such home improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the home improvement being financed.
So long as the home improvement has not become subject to the real estate
law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful" (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equity principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
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
49
<PAGE>
exact status of title and because the physical condition of the property may
have deteriorated during the foreclosure proceedings, a third party may be
unwilling to purchase the property at a foreclosure sale. Until recently,
potential buyers were confronted with the 1980 decision of the United States
Court of Appeals for the Fifth Circuit in Durrett v. Washington National
Insurance Company. The court in Durrett held that even a non-collusive,
regularly conducted foreclosure sale was a fraudulent transfer under section 67d
of the former Bankruptcy Act (section 548 of the current United States
Bankruptcy Code) and, therefore, could be rescinded in favor of the bankrupt's
estate, if (i) the foreclosure sale was held while the debtor was insolvent and
not more than one year prior to the filing of the bankruptcy petition, and (ii)
the price paid for the foreclosed property did not represent "fair
consideration" ("reasonably equivalent value" under the United States Bankruptcy
Code). However, on May 23, 1994, Durrett was effectively overruled by the United
States Supreme Court in BFP v. Resolution Trust Corporation, as Receiver for
Imperial Federal Savings and Loan Association, et al., in which the Court held
that "'reasonably equivalent value', for foreclosed property, is the price in
fact received at the foreclosure sale, so long as all the requirements of the
State's foreclosure law have been complied with".
For these reasons, it is common for the lender to purchase the property
from the trustee, referee or other court officer for an amount equal to the
principal amount of the indebtedness secured by the mortgage or deed of trust,
accrued and unpaid interest and the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
and trustee's fees, which may be recovered by a lender. In some states there is
a statutory minimum purchase price which the lender may offer for the property.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including the obligation to pay taxes, obtain casualty insurance and
to make such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage to the first
mortgagee prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the first mortgage in the event the mortgagor is
in default thereunder, in either event adding the amounts expended to the
balance due on the second loan, and may be subrogated to the rights of the first
mortgagee. In addition, in the event that the foreclosure of a second mortgage
triggers the enforcement of a "due-on-sale" clause, the second mortgagee may be
required to pay the full amount of the first mortgage to the first mortgagee.
Accordingly, with respect to those Mortgage Loans which are second mortgage
loans, if the lender purchases the property, the lender's title will be subject
to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
Under the REMIC provisions of the Code and the Pooling and Servicing
Agreement with respect to a series of Certificates, the Servicer may be required
to hire an independent contractor to operate any REO Property. The costs of such
operation may be significantly greater than the cost of direct operation by the
Servicer.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the REMIC with respect to its acquisition (by foreclosure or
otherwise) and disposition of REO Property, and any such taxes or fees imposed
may reduce Liquidation Proceeds with respect to such REO Property, as well as
distributions payable to the Certificateholders.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOME 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
50
<PAGE>
the real estate under the law of the state where it is located, repossession of
such home in the event of a default by the obligor will generally be governed by
the UCC (except in Louisiana). Article 9 of the UCC provides the statutory
framework for the repossession of manufactured housing. While the UCC as adopted
by the various states may vary in certain small particulars, the general
repossession procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin).
The self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a defense
to repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be accomplished
either by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of the lease of
the site on which it is located and the condition of the unit. In many
cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgement in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
SECOND MORTGAGES
Some of the Mortgage Loans may be secured by second mortgages or deeds of
trust, which are junior to first mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed of
trust or a junior mortgage are subordinate in lien and in payment to those of
the holder of the senior mortgage or deed of trust, including the prior rights
of the senior mortgagee or beneficiary to receive and apply hazard insurance and
condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure
on the property. Upon 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.
51
<PAGE>
RIGHTS OF REDEMPTION
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL PROPERTIES. In some states, after
sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
MANUFACTURED HOMES. While state laws do not usually require notice to be
given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL 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 and Commercial
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
52
<PAGE>
enforcing the assignment, and the legal proceedings necessary to resolve the
issue could be time-consuming, with resulting delays in the lender's receipt of
the rents.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. These laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting
Act, and related statutes. These federal laws impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the applicable laws. In some cases, this liability may
affect assignees of the Mortgage Loans. In particular, failure to comply with
certain requirements of the Federal Truth-in-Lending Act, as implemented by
Regulation Z, could jeopardize the enforceability of the Mortgage Loans and
subject both the originators and the assignees of such obligations to monetary
penalties.
MANUFACTURED HOME 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, MULTIFAMILY AND COMMERCIAL PROPERTIES. All of the Single
Family, Multifamily and Commercial 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
53
<PAGE>
enforcement of a due-on-sale clause in connection with current transfers of
property underlying Window Period Loans unless the property underlying such
Window Period Loan is located in one of the five "window period states"
identified below. Due-on-sale clauses contained in mortgage loans originated by
federal savings and loan associations or federal savings banks are fully
enforceable pursuant to regulations of the Office of Thrift Supervision,
successor to the Federal Home Loan Bank Board, which preempt state law
restrictions on the enforcement of due-on-sale clauses.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. The Federal Home
Loan Mortgage Corporation ("FHLMC") has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states", five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
MANUFACTURED HOMES. Generally, manufactured housing contracts contain
provisions prohibiting the sale or transfer of the related manufactured homes
without the consent of the obligee on the contract and permitting the
acceleration of the maturity of such contracts by the obligee on the contract
upon any such sale or transfer that is not consented to. Unless otherwise
provided in the related Prospectus Supplement, the Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause to
be exercised its rights to accelerate the maturity of the related Contracts
through enforcement of due-on-sale clauses, subject to applicable state law. In
certain cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
due-on-sale clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting 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.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower 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. In addition, if bankruptcy or similar
proceedings are commenced by or in respect of the borrower, the lender's ability
to collect the rents may be adversely affected. In the event of borrower
default, the amount of rent the lender is able to collect from the tenants can
significantly affect the value of the lender's security interest.
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
54
<PAGE>
of action by the senior lender. Moreover, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges. Title V also provides that, subject to
conditions (among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit), state usury limitations shall not apply to any loan that is
secured by a first lien on certain kinds of manufactured housing. In any state
in which application of Title V was expressly rejected or a provision limiting
discount points or other charges has been adopted, no Contract which imposes
finance charges or provides for discount points or charges in excess of
permitted levels has been included in the Trust Fund.
In the Pooling and Servicing Agreement, the Depositor represents and
warrants that each Mortgage Loan was originated in compliance with applicable
state law, including usury laws, 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, the Real Estate Settlement
Procedures 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. In
particular, failure to comply with certain requirements of the Federal
Truth-in-Lending Act, as implemented by Regulation Z, could result in obligors'
rescinding the contracts against either originators or assignees, and subject
both originators and assignees of such obligations to monetary penalties.
Contracts and other forms of mortgages often contain provisions obligating
the obligor to pay late charges if payments are not timely made. In addition to
limitations imposed by the FHA with respect to Title 1 Loans, 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 goods, subject to a maximum liability equal to the amounts paid by
the obligor on the Contract.
55
<PAGE>
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 MANUFACTURED HOME 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 Manufactured Home 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 Manufactured Home Contract and may be unable to collect
amounts still due under the Manufactured Home 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 Manufactured Home Contract for a breach of representation and warranty
and (ii) the Servicer or the Trustee were unsuccessful in asserting any claim of
contribution or subrogation on behalf of the Certificateholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Mortgage Loans. Any shortfall in interest collections resulting
from the application of the Relief Act 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.
INSTALLMENT CONTRACTS
The Mortgage Pool may also consist of installment sales contracts. Under an
installment sales contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
56
<PAGE>
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is pursued if the borrower has filed
the Installment Contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post- foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally the lender's procedures for obtaining possession and
clear title under an Installment Contract in a given state are simpler and less
time consuming and costly than are the procedures for foreclosing and obtaining
clear title to a property subject to one or more liens.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and it
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses certificates ("REMIC Certificates")
representing interests in a Trust Fund, or a portion thereof, which the Trustee
will covenant to elect to have treated as a real estate mortgage investment
conduit ("REMIC") under Sections 860A through 860G (the "REMIC Provisions") of
the Code. The Prospectus Supplement for each series of Certificates will
indicate whether a REMIC election (or elections) will be made for the related
Trust Fund and, if such an election is to be made, will identify all "regular
interests" and "residual interests" in the REMIC. If a REMIC election will not
be made for a Trust Fund, the federal income tax consequences of the purchase,
ownership and disposition of the related Certificates will be set forth in the
related Prospectus Supplement. For purposes of this tax discussion, references
to a "Certificateholder" or a "holder" are to the beneficial owner of a
Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
57
<PAGE>
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, unless otherwise provided in the related Prospectus Supplement,
the REMIC Certificates will be "real estate assets" within the meaning of
Section 856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. Moreover, if 95% or more of the assets of the
REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar year. Interest (including original issue discount) on
the REMIC Regular Certificates and income allocated to the class of REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The Servicer will report those determinations to Certificateholders in
the manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances the Mortgage Loans may not be treated entirely as
assets described in the foregoing sections. If so, the related Prospectus
Supplement will describe the Mortgage Loans that may not be so treated. The
REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property will qualify
as "real estate assets" under Section 856(c)(4)(A) of the Code.
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.
58
<PAGE>
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans...secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor, the Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, or at a "qualified floating rate", an
"objective rate" a combination of a single fixed rate and one or more "qualified
floating rates" or one "qualified inverse floating rate", or a combination of
"qualified floating rates" or at an "objective rate" that does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each
59
<PAGE>
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
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
60
<PAGE>
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 may not be revoked without the consent of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount
61
<PAGE>
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 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.
62
<PAGE>
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" 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.
63
<PAGE>
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 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.
64
<PAGE>
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.
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.
65
<PAGE>
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 alternative
minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute "noneconomic" residual interests will
be subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor is
also required to make a reasonable investigation to determine such transferee's
historic payment of its debts and ability to continue to pay its debts as they
come due in the future. Prior to purchasing a REMIC Residual Certificate,
prospective purchasers should consider the possibility that a purported transfer
of such REMIC Residual Certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described rules
which would result in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
66
<PAGE>
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate acquired on or after January 4, 1995
is not treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of Servicing Fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as provided in the following two paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code.
The Taxpayer Relief Act of 1997 (the "Act") reduces the maximum rates on
long-term capital gains recognized on capital assets held by individual
taxpayers for more than eighteen months as of the date of disposition (and would
further reduce the maximum rates on such gains in the year 2001 and thereafter
for certain individual taxpayers who meet specified conditions). The capital
gains rate for capital assets held by individual taxpayers for more than twelve
months but less than eighteen months was not changed by the Act ("mid-term
rate"). The Act does not change the capital gain rates for corporations.
Prospective investors should consult their own tax advisors concerning these tax
law changes.
67
<PAGE>
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires a REMIC Residual Certificate,
or acquires any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Code) during the
period beginning six months before, and ending six months after, the date of
such sale, such sale will be subject to the "wash sale" rules of Section 1091 of
the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that the REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (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
68
<PAGE>
in the related Prospectus Supplement, it is not anticipated that any REMIC will
recognize "net income from foreclosure property" subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on net income from foreclosure property or state or local
income or franchise tax that may be imposed on the REMIC will be borne by the
related Servicer or the Trustee in either case out of its own funds, provided
that the Servicer or the Trustee, as the case may be, has sufficient assets to
do so, and provided further that such tax arises out of a breach of the
Servicer's or the Trustee's obligations, as the case may be, under the related
Pooling and Servicing Agreement and in respect of compliance with applicable
laws and regulations. Any such tax not borne by the Servicer or the Trustee will
be charged against the related Trust Fund resulting in a reduction in amounts
payable to holders of the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Such a tax
would be generally imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (i) residual interests in
such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the related Pooling and Servicing Agreement, and will be discussed
more fully in any Prospectus Supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(not including instrumentalities described in Section 168(h)(2)(D) of the Code
or the Federal Home Loan Mortgage Corporation), (ii) any organization (other
than a cooperative described in Section 521 of the Code) that is exempt from
federal income tax, unless it is subject to the tax imposed by Section 511 of
the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity for
taxable years beginning after December 31, 1997, notwithstanding the preceding
two sentences, in the case of a REMIC Residual Certificate held by an "electing
large partnership", all interests in such partnership shall be treated as held
by disqualified organizations (without regard to whether the record holders of
the partnership furnish statements described in the
69
<PAGE>
preceding sentence) and the amount that is subject to tax under the second
preceding sentence is excluded from the gross income of the partnership
allocated to the partners (in lieu of allocating to the partners a deduction for
such tax paid by the partners).
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such REMIC Residual Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Servicer, which generally will hold at least a nominal amount of
REMIC Residual Certificates, will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects.
As the tax matters person, the Servicer will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee, as tax matters person, and the IRS concerning any such
REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the Servicer will not have, such regulations only require
that information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee, unless otherwise stated in the related Prospectus
Supplement.
70
<PAGE>
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.
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding
and information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, (except, in the case of a partnership, to the
extent provided in regulations) or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust to the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the related REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences". Prospective investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Certificates offered hereunder. State tax law may differ substantially
from the corresponding federal tax law, and the discussion above does not
purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore,
71
<PAGE>
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 or 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.
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
72
<PAGE>
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." Whether or not a pool of assets constitutes a "mortgage
pool" will depend on the assets to be securitized. Not all the assets
securitized under this Prospectus will meet these requirements. If PTCE 83-1 may
be applicable, the Prospectus Supplement for the series of Certificates will
discuss the assets to be securitized.
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.
If PTCE 83-1 may be applicable, 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
73
<PAGE>
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, or restrictions on a Plan's acquisition of Certificates.
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:
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
74
<PAGE>
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.
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
75
<PAGE>
or of the degree by which such prepayments might differ from those originally
anticipated. As a result, certificateholders might suffer a lower than
anticipated yield, and, in addition, holders of Stripped Interest Certificates
in extreme cases might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
76
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Accrual Certificates...................................................4, 10, 25
Accrued Certificate Interest..................................................26
Act...........................................................................67
Affiliated Sellers............................................................17
Alliance......................................................................24
Alliance Funding Division.....................................................24
Amount Available..............................................................36
ARM Loans.....................................................................18
Bankruptcy Code...............................................................13
Bankruptcy Loan...............................................................13
Bankruptcy Plan...............................................................13
Book-Entry Certificates.......................................................25
CEDEL..........................................................................6
CEDEL Participants............................................................31
CERCLA........................................................................15
Certificate Account.........................................................2,19
Certificate Balance............................................................3
Certificate Owners............................................................30
Certificateholders............................................................ii
Certificates...................................................................1
Code...........................................................................4
Commercial Properties..........................................................1
Commission....................................................................ii
Compensating Interest.........................................................28
Contracts ....................................................................17
Convertible Mortgage Loan.....................................................19
Covered Trust.............................................................14, 42
CPR...........................................................................22
Credit Support..............................................................i, 3
Curtailment....................................................................5
Cut-off Date...................................................................4
Deferred Interest ............................................................11
Definitive Certificates.......................................................25
Depositor..................................................................1, 24
Determination Date............................................................25
DOL...........................................................................72
DTC....................................................................ii, 6, 30
Due Period.....................................................................5
Effective Date................................................................24
Eligible Account..............................................................35
ERISA .....................................................................7, 72
Euroclear......................................................................6
Euroclear Participants........................................................31
Exchange Act..................................................................ii
FDIC..........................................................................15
FHA ...........................................................................i
FHA Claims Administration Agreement...........................................44
FHA Claims Administrator......................................................44
FHA Insurance Amount..........................................................45
FHA insured....................................................................i
FHA Regulations...............................................................44
FHA Reserve...................................................................45
FHLMCx........................................................................54
First Liens...................................................................12
FTC Rule......................................................................55
Garn-St Germain Act...........................................................53
HUD...........................................................................44
77
<PAGE>
Indirect Participants.........................................................30
Installment Contract..........................................................56
Insurance Proceeds............................................................35
L/C Bank......................................................................43
Lee...........................................................................24
Lee Servicing Division........................................................24
Liquidation Proceeds..........................................................35
Manufactured Home Contracts...................................................17
Manufactured Homes.............................................................1
Monthly Advance............................................................5, 27
Moody's.......................................................................35
Mortgage Loan Purchase Price..................................................33
Mortgage Loan Schedule........................................................33
Mortgage Loans.............................................................i, 17
Mortgage Notes................................................................17
Mortgage Pool...............................................................i, 1
Mortgage Rate..............................................................2, 18
Mortgaged Properties.......................................................1, 17
Mortgages.....................................................................17
Mortgagor.....................................................................11
Multifamily Loan..........................................................37, 73
Multifamily Loans ............................................................17
Multifamily Properties.....................................................1, 17
National Housing Act...........................................................1
Net Liquidation Proceeds......................................................35
Net Mortgage Rate ............................................................28
New Regulations...............................................................71
Nonrecoverable Monthly Advance................................................28
Nonrecoverable Servicing Advances.............................................38
Note Margin...................................................................23
Offered Certificates...........................................................i
OTS...........................................................................24
Parties in Interest...........................................................72
Pass-Through Rate .............................................................3
Permitted Instruments.........................................................35
Plan Payment..................................................................13
Plans.........................................................................72
Pooling and Servicing Agreement................................................3
Pre-Funding Account...........................................................36
Principal and Interest Account.............................................2, 19
Principal Prepayment...........................................................5
Qualified Substitute Mortgage Loan............................................33
Rating Agency..................................................................8
Record Date...................................................................25
Released Mortgaged Property Proceeds..........................................35
Relief Act................................................................15, 56
REMIC Regular Certificates.....................................................6
REMIC Residual Certificates....................................................6
Remittance Date................................................................4
REO Property..................................................................35
S&P...........................................................................35
Sellers.......................................................................18
Senior Certificates........................................................3, 25
Servicing Fee.................................................................40
Single Family Loans...........................................................17
Single Family Properties...................................................1, 17
SMMEA.........................................................................74
SPA...........................................................................22
Stripped Interest Certificates................................................25
78
<PAGE>
Stripped Principal Certificates............................................3, 25
Sub-Servicer..................................................................38
Sub-Servicing Agreement.......................................................38
Subordinate Certificates...................................................3, 25
Termination Price ............................................................29
Title I........................................................................1
Title I Lenders...............................................................44
Title I Loans.................................................................14
Title V.......................................................................55
Transfer Report...............................................................45
Trust Assets..................................................................ii
Trust Fund.....................................................................i
Trustee........................................................................1
Trustee's Mortgage File.......................................................33
Unaffiliated Sellers..........................................................17
Voting Rights.................................................................16
Warranting Party..............................................................34
Window Period Loans...........................................................53
79
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement.............................................S-4
Risk Factors................................................................S-16
The Mortgage Pool...........................................................S-19
Certain Yield and Prepayment Considerations.................................S-41
The Depositor...............................................................S-52
Description of the Certificates.............................................S-59
Pooling Agreement...........................................................S-74
The Certificate Insurer and the Certificate
Insurance Policy............................................................S-78
Certain Federal Income Tax Consequences.....................................S-81
ERISA Considerations........................................................S-83
Legal Investment............................................................S-85
Method of Distribution......................................................S-86
Experts.....................................................................S-87
Ratings.....................................................................S-87
Legal Matters...............................................................S-87
Index of Principal Definitions..............................................S-88
Global Clearance, Settlement and Tax Documentation Procedures................I-1
PROSPECTUS
Summary of Prospectus..........................................................1
Risk Factors...................................................................9
Description of the Trust Funds................................................17
Use of Proceeds ..............................................................20
Yield Considerations..........................................................20
The Depositor.................................................................24
The Servicer..................................................................24
Description of the Certificates...............................................25
Description of the Pooling and Servicing Agreements...........................32
Description of Credit Support.................................................42
Description of FHA Insurance Under Title 1....................................44
Certain Legal Aspects of Mortgage Loans.......................................46
Certain Federal Income Tax Consequences.......................................57
State And Other Tax Consequences..............................................71
ERISA Considerations..........................................................72
Legal Investment..............................................................74
Method of Distribution........................................................74
Legal Matters.................................................................75
Financial Information.........................................................75
Rating........................................................................75
Index of Principal Definitions............................... ................77
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT 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.
================================================================================
$465,000,000
AFC MORTGAGE LOAN
ASSET BACKED CERTIFICATES
SERIES 1998-2
SUPERIOR BANK FSB,
DEPOSITOR
$266,000,000 CLASS 1A CERTIFICATES
VARIABLE PASS-THROUGH RATE
$199,000,000 CLASS 2A CERTIFICATES
VARIABLE PASS-THROUGH RATE
_______________________
PROSPECTUS SUPPLEMENT
_______________________
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
JUNE 17, 1998
================================================================================
