<PAGE> 1
Filed pursuant to Rule No. 424(b)(5)
Registration No. 033-99344
PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 25, 1996)
$330,000,000 (APPROXIMATE)
EQCC HOME EQUITY LOAN TRUST 1996-2
EQCC HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1996-2
$123,556,000 CLASS A-1 CERTIFICATES, 6.15 % PASS-THROUGH RATE
$103,241,000 CLASS A-2 CERTIFICATES, 6.70 % PASS-THROUGH RATE
$ 40,703,000 CLASS A-3 CERTIFICATES, 7.125% PASS-THROUGH RATE
$ 46,564,000 CLASS A-4 CERTIFICATES, 7.50 % PASS-THROUGH RATE
$ 15,936,000 CLASS A-5 CERTIFICATES, 7.85 % PASS-THROUGH RATE
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
DEPOSITORS
EQUICREDIT CORPORATION OF AMERICA
SERVICER
The EQCC Home Equity Loan Asset Backed Certificates, Series 1996-2 (the
"Certificates"), will consist of six classes of Certificates designated as (i)
Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class
A-4 Certificates and Class A-5 Certificates (collectively, the "Class A
Certificates") and (ii) the Class R Certificates. Only the Class A Certificates
are offered hereby. The Certificates represent fractional undivided interests in
a trust fund to be designated as EQCC Home Equity Loan Trust 1996-2 (the "Trust"
or the "Trust Fund"), initially consisting primarily of (i) a pool (the "Initial
Mortgage Pool") of fixed-rate mortgage loans (each, an "Initial Mortgage Loan")
secured by mortgages,
(continues on following page)
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.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
HEREIN AT PAGE S-18 AND IN THE PROSPECTUS AT PAGE 14 THEREOF.
<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT DEPOSITORS(1)(2)
Per Class A-1 Certificate..................... 99.9140625% 0.21075% 99.7033125%
Per Class A-2 Certificate..................... 99.9843750% 0.25000% 99.7343750%
Per Class A-3 Certificate..................... 99.9218750% 0.35000% 99.5718750%
Per Class A-4 Certificate..................... 99.9687500% 0.50000% 99.4687500%
Per Class A-5 Certificate..................... 99.8437500% 0.60000% 99.2437500%
Total......................................... $329,806,437.19 $989,393.27 $328,817,043.92
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</TABLE>
(1) Plus accrued interest, if any, from May 15, 1996.
(2) Before deducting expenses, estimated to be $650,000.
The Class A Certificates are offered by the several Underwriters, when, as and
if issued by the Trust, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
the delivery of the Class A Certificates, in book-entry form, will be made
through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme or the Euroclear System on or about May 15, 1996 (the "Closing Date")
against payment in immediately available funds.
SALOMON BROTHERS INC
CS FIRST BOSTON
LEHMAN BROTHERS
The date of this Prospectus Supplement is April 25, 1996
<PAGE> 2
(continuation of cover page)
deeds of trust or other instruments (each, a "Mortgage") creating a first or
second lien on one- to four-family dwellings (each, a "Mortgaged Property") to
be deposited into the Trust Fund by the Depositors and originated by or
purchased and re-underwritten by EquiCredit Corporation of America
("EquiCredit", the "Representative" or an "Originator"), EquiCredit
Corporation/Ala. & Miss., California/EquiCredit Corporation, EquiCredit
Corporation of In., EquiCredit Corporation of Pa. or EquiCredit Corporation of
SC (each, an "Originator") for the holders of the Certificates (the
"Certificateholders"), (ii) all monies received on the Mortgage Loans on and
after the Cut-off Date (as defined herein) (other than the Representative's
Yield, as described herein, and amounts received on and after the Cut-off Date
in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date),
(iii) the Securities Insurance Policy described herein, (iv) amounts on deposit
in the Pre-Funding Account and the Capitalized Interest Account and (v) certain
other property. The Mortgage Loans will be serviced by EquiCredit (in its
capacity as servicer, the "Servicer"). The Certificates will be issued pursuant
to a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") to
be entered into among the Servicer, the Depositors and First Bank National
Association, as trustee (the "Trustee").
On the Closing Date, approximately $33,465,601.79 (the "Pre-Funded Amount") will
be deposited in the name of the Trustee in the Pre-Funding Account. The Pooling
and Servicing Agreement provides that additional mortgage loans (the "Subsequent
Mortgage Loans," and together with the Initial Mortgage Loans, the "Mortgage
Loans") may be deposited in the Trust by the Depositors from time to time on or
before August 15, 1996 from funds on deposit in the Pre-Funding Account. Each
Subsequent Mortgage Loan so deposited will have been originated or purchased and
re-underwritten by one of the Originators and will be identified on or before
the Closing Date for deposit in the Trust as described herein. Although no
assurance can be given, it is expected that all of the funds on deposit in the
Pre-Funding Account will be fully utilized to acquire Subsequent Mortgage Loans
on the Closing Date.
On the Closing Date an amount will be deposited in the name of the Trustee in
the Capitalized Interest Account. The Capitalized Interest Account will be
applied by the Trustee to cover shortfalls in interest and for certain fees
accrued on the Class A Certificates during the Funding Period (as described
herein) attributable to the pre-funding feature.
Distributions on the Certificates will be made, to the extent of funds available
therefor, on the fifteenth day of each month, or, if such day is not a business
day, then on the next business day, commencing on June 17, 1996 (each, a
"Payment Date"). The Class A Certificates will accrue interest during each
Accrual Period at the rates shown above. See "Description of the
Certificates -- Interest" herein.
On or before the issuance of the Certificates, the Servicer will obtain from
Financial Guaranty Insurance Company (the "Insurer") a securities guaranty
surety bond in favor of the Trustee for the benefit of the Certificateholders
relating to the Class A Certificates (the "Securities Insurance Policy"). The
Securities Insurance Policy will provide for 100% coverage of the Class A
Remittance Amount (as defined herein) due on the Class A Certificates on each
Payment Date.
<TABLE>
<S> <C>
FINANCIAL GUARANTY INSURANCE
COMPANY [FGIC LOGO]
</TABLE>
FGIC IS A REGISTERED SERVICE MARK USED BY FINANCIAL GUARANTY INSURANCE COMPANY
UNDER LICENSE FROM ITS PARENT COMPANY, FGIC CORPORATION, A PRIVATE
COMPANY NOT AFFILIATED WITH ANY U.S. GOVERNMENTAL AGENCY.
There is currently no secondary market for the Class A Certificates. The
Underwriters intend to make a secondary market in the Class A Certificates, but
are not obligated to do so. There can be no assurance that a secondary market
for the Class A Certificates will develop or, if one does develop, that it will
continue. None of the Class A Certificates will be listed on any securities
exchange.
It is a condition to the issuance of the Class A Certificates that they be rated
Aaa by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's Ratings
Services.
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., the nominee of DTC. The interests of
owners of the Class A Certificates will be represented by book-entries on the
records of DTC and participating members thereof. See "Description of the
Certificates -- Registration of the Class A Certificates" herein.
As described herein an election will be made to treat certain assets in the
Trust Fund as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes. The Class A Certificates will constitute "regular
interests" in the REMIC and the Class R Certificates will constitute the sole
class of "residual interests" in the REMIC. For a description of certain tax
consequences of owning the Certificates, including, without limitation, original
issue discount, see "Summary of Terms -- REMIC Election and Tax Status" herein
and "Certain Federal Income Tax Consequences" in the Prospectus.
S-2
<PAGE> 3
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE REPRESENTATIVE, THE SERVICER, EITHER DEPOSITOR, ANY ORIGINATOR OR ANY OF
THEIR AFFILIATES. NONE OF THE CERTIFICATES OR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
REPRESENTATIVE, THE SERVICER, EITHER DEPOSITOR, ANY ORIGINATOR OR ANY OF THEIR
AFFILIATES.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CLASS A
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE CLASS A CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS DATED APRIL 25, 1996 OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. PURCHASERS ARE URGED TO READ
BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
REPORTS TO HOLDERS
Unless and until the Class A Certificates are issued in definitive
certificated form, periodic reports concerning the assets of the Trust are
required to be forwarded to Cede & Co. ("Cede") as nominee of The Depository
Trust Company ("DTC") and registered holder of the Class A Certificates. See
"Description of the Securities -- Reports to Holders" in the Prospectus. Any
reports forwarded to holders will not contain financial information that has
been examined and reported upon by, with an opinion expressed by, an independent
public or certified public accountant. The Depositors will file with the
Securities and Exchange Commission (the "Commission") such periodic reports with
respect to the Trust as are required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations of the Commission
thereunder.
S-3
<PAGE> 4
SUMMARY OF TERMS
The following Summary of Terms is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus Supplement and
in the Prospectus. Capitalized terms used but not otherwise defined shall have
the meanings ascribed to such terms in the Prospectus.
Issuer..................... EQCC Home Equity Loan Trust 1996-2.
Securities Offered......... Approximately $123,556,000 Class A-1 Certificates,
having a Pass-Through Rate equal to 6.15% per
annum. Approximately $103,241,000 Class A-2
Certificates, having a Pass-Through Rate equal to
6.70% per annum. Approximately $40,703,000 Class
A-3 Certificates, having a Pass-Through Rate equal
to 7.125% per annum. Approximately $46,564,000
Class A-4 Certificates, having a Pass-Through Rate
equal to 7.50% per annum. Approximately $15,936,000
Class A-5 Certificates, having a Pass-Through Rate
equal to 7.85% per annum. The Class A-1
Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates and Class A-5
Certificates are collectively referred to herein as
the "Class A Certificates." The original principal
amount of any Class of Class A Certificates may be
increased or decreased by up to 5%. In addition to
the Class A Certificates, the EQCC Home Equity Loan
Asset Backed Certificates, Series 1996-2 will
include the Class R Certificates (together with the
Class A Certificates, the "Certificates"). Only the
Class A Certificates are offered hereby. The
Certificates will be issued pursuant to a Pooling
and Servicing Agreement to be dated as of May 1,
1996 among the Servicer, the Depositors and the
Trustee (the "Pooling and Servicing Agreement").
Depositors................. EQCC Receivables Corporation, a corporation
organized under the laws of the State of Delaware,
and EQCC Asset Backed Corporation, a corporation
organized under the laws of the State of Delaware
(together, the "Depositors"). All of the
outstanding common stock of each of the Depositors
is owned by one or more of the Originators (as
defined below).
Representative and
Originators.............. EquiCredit Corporation of America, a corporation
organized under the laws of the State of Delaware
("EquiCredit", the "Representative" and an
"Originator"), and EquiCredit Corporation/Ala. &
Miss., a corporation organized under the laws of
the State of Florida, California/EquiCredit
Corporation, a corporation organized under the laws
of the State of California, EquiCredit Corporation
of In., a corporation organized under the laws of
the State of Indiana, EquiCredit Corporation of
Pa., a corporation organized under the laws of the
Commonwealth of Pennsylvania, and EquiCredit
Corporation of SC, a corporation organized under
the laws of the State of South Carolina (each, an
"Originator"). Each Originator (other than
EquiCredit) is a wholly-owned subsidiary of the
Representative. See "The Depositors, the Servicer,
the Representative and the Originators" in the
Prospectus and "The Originators and the Servicer --
Origination, Foreclosure and Loss Experience"
herein.
Servicer................... EquiCredit (in its capacity as servicer, the
"Servicer"). See "The Depositors, the Servicer, the
Representative and the Originators" in the
Prospectus.
S-4
<PAGE> 5
Trustee.................... First Bank National Association, a national banking
association, organized under the laws of the United
States and having its principal place of business
in the State of Minnesota (the "Trustee"). See "The
Trustee" herein.
Cut-off Date............... May 1, 1996 (the "Cut-off Date"). References herein
to the Cut-off Date shall mean the date of
origination in the case of Mortgage Loans
originated after May 1, 1996.
Closing Date............... May 15, 1996 (the "Closing Date").
Payment Date............... The fifteenth calendar day of each month or, if
such day is not a business day, the first business
day following such fifteenth calendar day,
commencing on June 17, 1996 (each, a "Payment
Date").
Determination Date......... The seventh business day of the month in which the
related Payment Date occurs (each, a "Determination
Date").
Record Date................ The calendar day immediately preceding each Payment
Date (or, if Definitive Certificates are issued,
the last calendar day of the month preceding the
month in which each such Payment Date occurs)
(each, a "Record Date").
Denominations.............. The Class A Certificates will be issued in minimum
denominations of $1,000 and integral multiples
thereof. Each Class A Certificate will represent a
percentage interest (a "Percentage Interest") in
the respective Class determined by dividing the
original dollar amount represented by such
Certificate by the Original Class A Principal
Balance (as defined herein) of such Class.
Registration of the Class A
Certificates............. The Class A Certificates will initially be issued
in a book-entry form. Persons acquiring beneficial
ownership interests in the Class A Certificates
("Certificate Owners") may elect to hold their
Certificate interests through The Depository Trust
Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("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. So long as the
Class A Certificates are Book-Entry Certificates
(as defined herein), such Certificates will be
evidenced by one or more Certificates registered in
the name of Cede & Co. ("Cede"), as the nominee of
DTC or one of the relevant depositaries
(collectively, the "European Depositaries").
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. ("Citibank") or Morgan Guaranty Trust Company
of New York ("Morgan"), the relevant depositaries
of CEDEL and Euroclear, respectively, and each a
participating member of DTC. The Class A
Certificates will initially be registered in the
name of Cede. The interests of the Class A
Certificateholders will be represented by book
entries on the records of DTC and participating
members thereof. No Certificate Owner 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
S-5
<PAGE> 6
herein. See "Risk Factors -- Book-Entry
Certificates", "Description of the Certificates --
Book-Entry Certificates" and "ANNEX I" hereto.
The Trust Property......... The EQCC Home Equity Loan Asset Backed
Certificates, Series 1996-2 (the "Certificates"),
represent interests in a trust fund to be
designated as EQCC Home Equity Loan Trust 1996-2
(the "Trust" or the "Trust Fund"), initially
consisting primarily of (i) a pool (the "Initial
Mortgage Pool") of fixed-rate mortgage loans
originated by or purchased and re-underwritten by
the Originators (each, an "Initial Mortgage Loan")
and evidenced by promissory notes or other evidence
of indebtedness (each, a "Mortgage Note") secured
by mortgages, deeds of trust or other instruments
(each, a "Mortgage") creating a first or second
lien on one- to four-family dwellings, units in
condominium developments and may include units in
planned unit developments (each, a "Mortgaged
Property"), with an aggregate principal balance of
$296,534,398.21 as of the Statistic Calculation
Date (as defined below), after giving effect to
payments received prior to the Statistic
Calculation Date (such aggregate principal balance
of the Initial Mortgage Loans as of the Cut-off
Date, after giving effect to payments received
prior to the Cut-off Date, the "Original Pool
Principal Balance"), (ii) all monies received with
respect to the Mortgage Loans on and after the
Cut-off Date (other than the Representative's
Yield, as defined below, and amounts received on
and after the Cut-off Date in respect of interest
accrued on the Mortgage Loans prior to the Cut-off
Date), (iii) an irrevocable securities guaranty
surety bond (the "Securities Insurance Policy") to
be issued on or before the Closing Date by
Financial Guaranty Insurance Company (the
"Insurer") in favor of the Trustee for the benefit
of the Class A Certificateholders, (iv) amounts on
deposit in the Pre-Funding Account (as defined
below) and the Capitalized Interest Account (as
defined below), (v) certain rights of the
Depositors under the Transfer Agreement and (vi)
amounts on deposit in the Spread Account and
certain other property. The Initial Mortgage Loans
will be deposited into the Trust on the Closing
Date.
The statistical information presented herein
concerning the Initial Mortgage Pool is based on
such pool as of April 10, 1996 (such date, the
"Statistic Calculation Date"). Between the
Statistic Calculation Date and the Cut-off Date
some amortization of the Initial Mortgage Pool is
expected to occur. In addition, certain loans
included in the Initial Mortgage Pool as of the
Statistic Calculation Date may prepay in full, or
may be determined not to meet the eligibility
requirements for the final Initial Mortgage Pool,
and thus may not be included in the final Initial
Morgage Pool. While the statistical distribution of
the characteristics as of the Cut-off Date for the
final Initial Mortgage Pool will vary somewhat from
the statistical distribution of such
characteristics as of the Statistic Calculation
Date as presented herein, such variance is not
expected to be material. In addition, the actual
Mortgage Pool may vary from the description below
due to a number of factors, including prepayments
or the purchase of Subsequent Mortgage Loans.
On the Closing Date the Pre-Funded Amount (as
defined herein) will be deposited in the name of
the Trustee into the Pre-Funding
S-6
<PAGE> 7
Account. It is intended that additional fixed-rate
mortgage loans originated or purchased and
re-underwritten by the Originators and identified
on or before the Closing Date for deposit in the
Trust (the "Subsequent Mortgage Loans," and
together with the Initial Mortgage Loans, the
"Mortgage Loans") will be transferred into the
Trust by the Depositors from time to time on or
before August 15, 1996 from funds on deposit in the
Pre-Funding Account. The Initial Mortgage Pool,
together with any Subsequent Mortgage Loans, is
referred to herein as the "Mortgage Pool." The
Subsequent Mortgage Loans may also include
additional Mortgage Loans transferred to the Trust
on the Closing Date to the extent of principal
payments received on the Initial Mortgage Loans
between the Statistic Calculation Date and the
Closing Date and the aggregate principal balance of
Initial Mortgage Loans which are determined not to
meet the related eligibility requirements. As a
result, the aggregate principal balance of the
Mortgage Pool will increase by an amount equal to
the aggregate principal balance of the Subsequent
Mortgage Loans so deposited and the amount of the
Pre-Funding Account will decrease correspondingly.
On the Closing Date, the sum of the aggregate
principal balance of the Initial Mortgage Loans as
of the Cut-off Date and the aggregate amount of the
Pre-Funding Account will equal the Original Class A
Principal Balance.
Unless otherwise noted, all percentages of Initial
Mortgage Loans herein are measured by the aggregate
principal balance of the Initial Mortgage Loans as
of the Statistic Calculation Date, and take into
account principal payments and principal
prepayments received prior to the Statistic
Calculation Date. The statistical characteristics
of the Mortgage Pool will vary upon the transfer
into the Trust of Subsequent Mortgage Loans.
As of the Statistic Calculation Date, the Initial
Mortgage Pool will consist of 6,287 fixed-rate
Mortgage Loans (of which approximately 83.98% are
secured by first Mortgages and approximately 16.02%
are secured by second Mortgages) having an
aggregate outstanding principal balance of
$296,534,398.21, a weighted average Mortgage
Interest Rate of approximately 10.59% per annum,
minimum and maximum outstanding principal balances
of approximately $5,500.00 and $246,500.00,
respectively, a weighted average Combined Loan-
to-Value Ratio of approximately 74.70%, minimum and
maximum Mortgage Interest rates of approximately
7.75% per annum and 17.64% per annum, respectively,
a weighted average original term to maturity of
approximately 174 months, a weighted average
remaining term to maturity of approximately 173
months, approximate minimum and maximum remaining
terms to maturity of approximately 34 and 360
months, respectively, and origination dates between
March 1989 and April 1996. The "Mortgage Interest
Rate" for a Mortgage Loan is the annual rate of
interest borne by such Mortgage Loan. Approximately
37.40% of the Initial Mortgage Loans are Balloon
Loans (as defined herein).
Subsequent Mortgage Loans. On or following the
Closing Date, the Depositors will transfer into the
Trust from time to time during the Funding Period
(as defined below), subject to the availability
thereof, Subsequent Mortgage Loans. The Subsequent
Mortgage Loans will
S-7
<PAGE> 8
be transferred to the Depositors pursuant to the
Transfer Agreement and to the Trust pursuant to the
Pooling and Servicing Agreement. The maximum
aggregate principal amount of Subsequent Mortgage
Loans which may be deposited in the Trust is equal
to the sum of the Pre-Funded Amount, principal
payments received on the Initial Mortgage Loans
between the Statistic Calculation Date and the
Cut-off Date and the aggregate outstanding
principal balance of Initial Mortgage Loans which
are determined not to meet the related eligibility
requirements. In connection with each deposit of
Subsequent Mortgage Loans, the applicable Depositor
will receive an amount equal to 100% of the
principal balance thereof. See "Description of the
Mortgage Pool -- Transfer of Subsequent Mortgage
Loans."
Pre-Funding Account........ On the Closing Date approximately $33,465,601.79
(the "Pre-Funded Amount") will be deposited in the
Pre-Funding Account. During the period (the
"Funding Period") from the Closing Date until the
earlier of (i) the date on which the amount on
deposit in the Pre-Funding Account is less than or
equal to $100,000, or (ii) August 15, 1996, the
Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Pre-Funding Account will
be reduced during the Funding Period by the amount
thereof used to acquire Subsequent Mortgage Loans
in accordance with the Pooling and Servicing
Agreement. On the first Payment Date immediately
following the Funding Period, any Pre-Funded Amount
remaining at the end of the Funding Period (net of
reinvestment income payable to the Class R
Certificateholders) will be distributed pro rata to
the holders of the Class A Certificates in
reduction of the Principal Balance of their
Certificates, resulting in a partial principal
prepayment of such Certificates. Although no
assurance can be given, it is expected that all of
the funds on deposit in the Pre-Funding Account
will be utilized to acquire Subsequent Mortgage
Loans on the Closing Date. It is not expected that
there will be a material amount of principal
prepaid to the holders of the Class A Certificates
from the Pre-Funding Account; however, it is
unlikely that the Depositors will deliver
Subsequent Mortgage Loans with an aggregate
principal balance which exactly matches the
original Pre-Funded Amount. The transfer of
Subsequent Mortgage Loans to the Trust on a
Subsequent Transfer Date (as defined herein) (other
than the Closing Date) is subject to the
satisfaction of the criteria described herein under
"Description of the Mortgage Pool -- Transfer of
Subsequent Mortgage Loans" and to the receipt of
confirmation from the Rating Agencies that the
addition of such Subsequent Mortgage Loans will not
result in a reduction or withdrawal of the initial
rating of any Class of Class A Certificates. If, as
a result of the failure to receive such
confirmation, the Depositors are unable to transfer
Subsequent Mortgage Loans into the Trust, and as a
result, the entire Pre-Funded Amount is not applied
to the acquisition of Subsequent Mortgage Loans,
principal prepayments to holders of Class A
Certificates will occur on the first Payment Date
immediately following the Funding Period.
Capitalized Interest
Account.................... On the Closing Date an amount will be deposited in
the Capitalized Interest Account. The Capitalized
Interest Account will be applied by the Trustee to
cover shortfalls in interest and in certain fees
accrued during the Funding Period on the Class A
Certificates attributable to
S-8
<PAGE> 9
the pre-funding feature. Any amounts remaining in
the Capitalized Interest Account and not used for
such purpose on the first Payment Date immediately
following the Funding Period are required to be
paid directly to the Class R Certificateholders on
such Payment Date.
The Certificates........... The Class A-1 Certificates will have an aggregate
principal balance of approximately $123,556,000
(the "Original Class A-1 Principal Balance") as of
the date of issuance and will accrue interest at a
rate equal to 6.15% per annum (the "Class A-1
Pass-Through Rate"). The Class A-2 Certificates
will have an aggregate principal balance of
approximately $103,241,000 (the "Original Class A-2
Principal Balance") as of the date of issuance and
will accrue interest at a rate equal to 6.70% per
annum (the "Class A-2 Pass-Through Rate"). The
Class A-3 Certificates will have an aggregate
principal balance of approximately $40,703,000 (the
"Original Class A-3 Principal Balance") as of the
date of issuance and will accrue interest at a rate
equal to 7.125% per annum (the "Class A-3
Pass-Through Rate). The Class A-4 Certificates will
have an aggregate principal balance of
approximately $46,564,000 (the "Original Class A-4
Principal Balance") as of the date of issuance and
will accrue interest at a rate equal to 7.50% per
annum (the "Class A-4 Pass-Through Rate"). The
Class A-5 Certificates will have an aggregate
principal balance of approximately $15,936,000 (the
"Original Class A-5 Principal Balance" and,
together with the Original Class A-1 Principal
Balance, the Original Class A-2 Principal Balance,
the Original Class A-3 Principal Balance and the
Original Class A-4 Principal Balance, the "Original
Certificate Principal Balance") as of the date of
issuance and will accrue interest at a rate equal
to 7.85% per annum (the "Class A-5 Pass-Through
Rate"; each of the Class A-1 Pass-Through Rate,
Class A-2 Pass-Through Rate, Class A-3 Pass-Through
Rate, Class A-4 Pass-Through Rate, and Class A-5
Pass-Through Rate, a "Pass-Through Rate"). Each
Class of Class A Certificates will have the Final
Scheduled Payment Date set forth below. See
"Description of the Certificates -- General"
herein.
Final Scheduled Payment
Dates..................... The Final Scheduled Payment Dates for each Class of
Class A Certificates are set forth below, although
it is anticipated that the actual final Payment
Date for such Class may occur earlier than its
Final Scheduled Payment Date. See "Description of
the Certificates -- General" for a description of
the methodology of calculating the Final Scheduled
Payment Dates. See also "Certain Yield and
Prepayment Considerations" herein.
<TABLE>
<CAPTION>
FINAL SCHEDULED
PAYMENT DATE
-------------------
<S> <C>
Class A-1 Certificates: June 15, 2003
Class A-2 Certificates: September 15, 2008
Class A-3 Certificates: December 15, 2010
Class A-4 Certificates: June 15, 2021
Class A-5 Certificates: June 15, 2027
</TABLE>
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<PAGE> 10
Distributions on the
Class A Certificates
A. General................ As more fully described herein, distributions will
be made on each Class of Class A Certificates on
each Payment Date to the extent available from the
Mortgage Loans and the Spread Account, if and to
the extent such Certificates are then entitled to
such distributions, first, to pay interest on the
Class A Certificates and then to reduce the
principal amount of Class A Certificates. As
described herein, after payment of such amounts to
the Class A Certificateholders, certain amounts may
be distributed on the Class R Certificates. Any
distributions on the Class A Certificates will be
made on each Payment Date to Certificateholders of
record on the related Record Date in an amount
equal to the product of such Certificateholder's
Percentage Interest and the amount available for
distribution on such Payment Date to the
Certificateholders of the related Class in
accordance with the priorities described in
"Description of the Certificates -- Distributions"
herein.
On any Payment Date, the amount available for
distribution to the Class A Certificateholders
generally will equal (a) the sum of (i) the
Available Payment Amount (as defined below), (ii)
any amount (the "Spread Account Draw") available
from the Spread Account and (iii) any Insured
Payments (as defined below), less (b) the sum of
(i) the amount of the Monthly Premium payable to
the Insurer during the related Due Period to the
extent provided in the Pooling and Servicing
Agreement and (ii) the amount of the fees payable
to the provider of any Letter of Credit (as defined
below) during the related Due Period. The term
"Available Payment Amount" generally means, with
respect to any Payment Date (a) collections on or
with respect to the Mortgage Loans received by the
Servicer during the related Due Period, net of the
related Servicing Fee paid to the Servicer and
reimbursements for incurred unpaid Servicing Fees
and certain expenses paid by the Servicer, plus (b)
the amount of any Advances, less (c) the Excess
Spread.
B. Interest.............. Interest on the Class A Certificates will accrue
from the fifteenth calendar day of each month,
commencing May 15, 1996 (whether or not such day is
a Business Day) to, but excluding, the fifteenth
calendar day of the next succeeding month (whether
or not such day is a Business Day) (each, an
"Accrual Period"). Interest shall accrue on each
Class of Class A Certificates at the related
Pass-Through Rate and shall be distributed to each
Class of Class A Certificates, to the extent
available, on each Payment Date. Interest with
respect to the Class A Certificates will accrue on
the basis of a 360-day year consisting of twelve
30-day months. With respect to each Payment Date
and each Class of Class A Certificates, interest
accrued during the related Accrual Period at the
related Pass-Through Rate on the related Principal
Balance outstanding on the immediately preceding
Payment Date (after giving effect to all payments
of principal made on such Payment Date) (or the
related Original Principal Balances in the case of
the Initial Accrual Period) is referred to herein
as the "Class A Interest Remittance Amount" for
such Class of Class A
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<PAGE> 11
Certificates. See "Description of the Certificates
-- Distributions" herein and in the Prospectus.
C. Principal............. Holders of the Class A Certificates will be
entitled to receive on each Payment Date, in the
order and priority set forth herein, to the extent
of the portion of the amount available for
distribution attributable to the principal of the
Mortgage Loans (but not more than the Principal
Balance of the related Class then outstanding), a
distribution allocable to principal which will
generally equal the sum of (a)(i) the principal
portion of all scheduled payments ("Monthly
Payments") received on the Mortgage Loans during
the calendar month preceding the calendar month in
which such Payment Date occurs (the "Due Period"),
(ii) any principal prepayments in full of any such
Mortgage Loans ("Principal Prepayments") received
during the related Due Period and partial
prepayments of principal on any such Mortgage Loans
that were received during the related Due Period
that are not Principal Prepayments (each, a
"Curtailment"), (iii) the principal portion of (A)
the proceeds of any insurance policy relating to a
Mortgage Loan, a Mortgaged Property (as defined
below) or a REO Property (as defined below), net of
proceeds to be applied to the repair of the
Mortgaged Property or released to the Mortgagor (as
defined herein) and net of expenses reimbursable
therefrom ("Insurance Proceeds"), (B) proceeds
received during the related Due Period in
connection with the liquidation of any defaulted
Mortgage Loans, whether by trustee's sale,
foreclosure sale or otherwise ("Liquidation
Proceeds"), net of fees and advances reimbursable
therefrom ("Net Liquidation Proceeds") and (C)
proceeds received during the related Due Period in
connection with a taking of a related Mortgaged
Property with respect to a Mortgage Loan by
condemnation or the exercise of eminent domain or
in connection with a release of part of any such
Mortgaged Property from the related lien ("Released
Mortgaged Property Proceeds"), (iv) the principal
portion of all amounts paid by the Depositors
(which are limited to amounts paid by the
Representative or an Originator pursuant to the
obligation to purchase or substitute Mortgage Loans
contained in the Transfer Agreement) in connection
with the purchase of, or the substitution of a
substantially similar mortgage loan for, a Mortgage
Loan as to which there is defective documentation
or a breach of a representation or warranty
contained in the Pooling and Servicing Agreement
and (v) the principal balance of each defaulted
Mortgage Loan or REO Property (as defined below) as
to which the Servicer has determined that all
amounts expected to be recovered have been
recovered (each, a "Liquidated Mortgage Loan") to
the extent not included in the amounts described in
clauses (i) through (iv) above (the sum of (i)
through (v) above, the "Basic Principal Amount")
and (b) the sum of (i) the amount, if any, by which
(A) the amount required to be distributed to Class
A Certificateholders as of the preceding Payment
Date exceeded (B) the amount of the actual
distribution to the Class A Certificateholders on
such preceding Payment Date, exclusive of any
portion of any Insured Payment made to such
Certificateholders, and (ii) if any portion of the
amount in the preceding clause (i) represents
Insured Payments made by the Insurer, interest on
such portion at the applicable Pass-Through Rate
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<PAGE> 12
from such immediately preceding Payment Date (the
"Carry-Forward Amount," together with the Basic
Principal Amount, the "Class A Principal Remittance
Amount").
On each Payment Date, the lesser of (i) the Class A
Certificate Principal Balance then outstanding and
(ii) the Class A Principal Remittance Amount
(together with the Class A Interest Remittance
Amount, the "Class A Remittance Amount") is payable
to the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificates, in that order, until
the Principal Balance of each such Class is reduced
to zero.
As of any Payment Date, the "Class A Principal
Balance" will equal the sum of the Original Class
A-1 Principal Balance, the Original Class A-2
Principal Balance, the Original Class A-3 Principal
Balance, the Original Class A-4 Principal Balance
and the Original Class A-5 Principal Balance, less
all amounts previously distributed on account of
principal to holders of the Class A Certificates.
As of any Payment Date, the Principal Balance for
each Class of Class A Certificates will equal the
Original Principal Balance for such Class, less all
amounts previously distributed on account of
principal to holders of such Class.
D. Mandatory Prepayment.... On the first Payment Date immediately following the
Funding Period, any Pre-Funded Amount remaining on
deposit in the Pre-Funding Account at the end of
the Funding Period (net of reinvestment income
payable to the Class R Certificateholders) will be
distributed pro rata to the holders of the Class A
Certificates in reduction of the Principal Balance
of their Certificates, resulting in a partial
principal prepayment of such Certificates.
E. Spread Account.......... Pursuant to the Pooling and Servicing Agreement,
there shall be established with the Trustee a
separate trust account (the "Spread Account"), for
the benefit of the holders of the Certificates,
into which the Trustee will deposit upon receipt
from the Servicer on each Payment Date, prior to
making any payments to the Certificateholders, the
excess, if any, of the aggregate interest accrued
during the related Due Period on all of the
Mortgage Notes at their respective Mortgage
Interest Rates over the sum of (i) the Class A
Interest Remittance Amount for the Class A
Certificates, (ii) the Monthly Premium (as defined
below) due to the Insurer, (iii) the Letter of
Credit Fee Amount (as defined below) due to the
issuers of any Letters of Credit and (iv) the
Servicing Fee (such excess with respect to each
Payment Date, the "Excess Spread"). Unless
otherwise specified by the Insurer, the Trustee is
required to retain 100% of the Excess Spread (the
"Periodic Excess Spread Amount") in the Spread
Account until the amount on deposit therein is
equal to an amount specified by the Insurer in the
Pooling and Servicing Agreement (the "Base Spread
Account Requirement"). After the amount on deposit
in the Spread Account is equal to the Base Spread
Account Requirement, the amount required to be on
deposit in the Spread Account at any time (the
"Specified Spread Account Requirement") may be
reduced over time as specified by the Insurer. The
percentage used in determining the Periodic Excess
Spread Amount may be reduced at the sole discretion
of the Insurer with the
S-12
<PAGE> 13
consent of each person obligated to reimburse
issuers of any Letters of Credit on deposit in the
Spread Account for outstanding drawings thereunder
(each such person, an "Account Party"), and the
Base Spread Account Requirement may be reduced at
the sole discretion of the Insurer, in each case
without the consent of any Certificateholder.
The Pooling and Servicing Agreement permits the
Spread Account to be funded in part by one or more
letters of credit (each, a "Letter of Credit")
issued by banks, trust companies or other
institutions having on the date of delivery of such
Letter of Credit debt ratings acceptable to Moody's
Investors Service, Inc. ("Moody's") and Standard &
Poor's Ratings Services ("S&P"), and having certain
other qualifications set forth in the Pooling and
Servicing Agreement. Amounts available to be drawn
under any Letter of Credit will be deemed to be on
deposit in the Spread Account.
On each Payment Date amounts, if any, on deposit in
the Spread Account will be available to fund any
shortfall between the available funds for payments
to Class A Certificateholders and the Class A
Remittance Amount; provided that, on and after the
date (the "Cross-Over Date") on which the aggregate
withdrawals from the Spread Account to cover
shortfalls in amounts payable on the Class A
Certificates attributable to Mortgage Loan Losses
(such withdrawals, "Cumulative Spread Account
Receipts") equal an amount specified by the Insurer
in the Pooling and Servicing Agreement (the
"Subordinated Amount"), no further withdrawals with
respect to shortfalls in the amounts required to be
paid to the Class A Certificateholders may be made
from the Spread Account, and the Specified Spread
Account Requirement will thereafter be zero. In
addition, the Pooling and Servicing Agreement
provides that the Specified Spread Account
Requirement for any date shall in no event be
greater than the Subordinated Amount as of such
date.
On each Payment Date, any amounts constituting (i)
Excess Spread in excess of the Periodic Excess
Spread Amount (the "Remainder Excess Spread
Amount"), (ii) amounts in the Spread Account in
excess of the Specified Spread Account Requirement
as of such Payment Date (any such amount, a "Spread
Account Excess") and (iii) after the Cross-Over
Date, the entire Excess Spread, will be distributed
to the Class R Certificateholders after repayment
of outstanding draws under any Letters of Credit
and of unreimbursed Servicing Advances to the
Servicer.
Neither the Class R Certificateholders nor the
Servicer will be required to refund any amounts
properly distributed to them, regardless of whether
there are sufficient funds on a subsequent Payment
Date to make a full payment to Class A
Certificateholders of the amount required to be
paid to such holders.
The funding and maintenance of the Spread Account
is intended to enhance the likelihood of timely
payment to Class A Certificateholders of the Class
A Remittance Amount; however, in certain
circumstances, the Spread Account could be depleted
or reduced by the Insurer and shortfalls could
result.
S-13
<PAGE> 14
Notwithstanding the depletion or reduction of the
Spread Account, the Insurer will be obligated to
make Insured Payments on each Payment Date to fund
the full amount of the Class A Remittance Amount on
such Payment Date.
F. The Securities Insurance
Policy................ On or before the Closing Date, the Servicer will
obtain the Securities Insurance Policy, which is
noncancelable, in favor of the Trustee on behalf of
the Class A Certificateholders. The Securities
Insurance Policy will provide for 100% coverage of
the Class A Remittance Amount due on the Class A
Certificates on each Payment Date. On each Payment
Date, the Insurer will make available to the
Trustee the amount of any insufficiency in the
amount available as of such Payment Date which is
necessary to distribute to the Class A
Certificateholders the Class A Remittance Amounts
on such Payment Date (each, an "Insured Payment").
The Securities Insurance Policy does not guarantee
to the Class A Certificateholders any specified
rate of prepayments. See "Description of the
Certificates -- Securities Insurance Policy" and
"The Securities Insurance Policy and the Insurer"
herein.
Payment of Certain
Expenses................... In order to provide for the payment of the fees of
the Insurer, the Trustee is required to establish
and maintain one or more trust accounts (the
"Insurance Account") into which the Trustee is
required to deposit on each Payment Date, from
amounts on deposit in the Collection Account and
before making any required deposits into the Spread
Account and, except under certain limited
circumstances as provided in the Pooling and
Servicing Agreement, before making any required
distributions to the Class A Certificateholders, an
amount that is sufficient to pay the monthly fee of
the Insurer (the "Monthly Premium"). The Servicer
is required to pay to the Trustee from time to time
the fees of the Trustee and the reasonable
expenses, disbursements and advances incurred or
made by the Trustee in accordance with the Pooling
and Servicing Agreement. The Trustee is permitted
on each Payment Date to pay to itself, from amounts
on deposit in the Collection Account after making
any required distributions to Class A
Certificateholders and any required deposits into
the Insurance Account, any amounts then due and
owing representing fees of the Trustee that have
not been paid by the Servicer after written demand
therefor.
Advances from the Principal
and Interest Account..... The Servicer is required to withdraw from the
Principal and Interest Account amounts on deposit
therein and held for future distribution to make
advances (each, an "Advance") on the third business
day preceding each Payment Date in respect of
interest on the Mortgage Loans accrued but
uncollected as of the end of the related Due Period
(net of the applicable Servicing Fee). The Servicer
generally shall not be required to make such
Advance from its own funds or be liable for the
recovery thereof from collections on the related
Mortgage Loans or otherwise. See "Description of
the Certificates -- Advances from the Principal and
Interest Account" herein and "Description of the
Offered Securities -- Advances from the Principal
and Interest Account; Servicing Advances" in the
Prospectus.
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<PAGE> 15
Transfer and Servicing..... Under the Transfer Agreement, each Depositor will
acquire the Mortgage Loans from certain of the
Originators and, under the Pooling and Servicing
Agreement, each Depositor will transfer the
Mortgage Loans to the Trust. In addition, the
Servicer will agree to service the Mortgage Loans.
Servicing Fee.............. The Servicer will be entitled to a fee (the
"Servicing Fee") of 0.60% per annum (the "Servicing
Fee Rate") of the outstanding principal balance of
each Mortgage Loan, subject to certain limitations
set forth in the Pooling and Servicing Agreement,
payable monthly from the interest portion of
monthly payments on such Mortgage Loan, Liquidation
Proceeds, Released Mortgaged Property Proceeds and
certain other sources as provided in the Pooling
and Servicing Agreement.
Representative's Yield..... The Representative will be entitled to receive an
amount (the "Representative's Yield") equal to the
sum of (A) all prepayment penalties and premiums
collected by the Servicer with respect to any
Mortgage Loan and (B) any sum or other finance
charge payable by the Mortgagor on a prepaid Rule
of 78s Mortgage Loan (as defined in the Prospectus)
that is in excess of (i) the Curtailment or
Principal Prepayment (as the case may be) on the
related Mortgage Loan, together with accrued and
unpaid interest thereon at the Mortgage Interest
Rate, plus (ii) servicing compensation exclusive of
Servicing Fees. The Representative's Yield is
retained and freely transferable by the
Representative and does not constitute a portion of
the Trust Fund.
Ratings.................... It is a condition to the issuance of the Class A
Certificates that each Class of Class A
Certificates be rated Aaa by Moody's and "AAA" by
S&P (each of Moody's and S&P, a "Rating Agency").
The ratings assigned to the Class A Certificates
will be based primarily on the claims-paying
ability of the Insurer. 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 any rating
on any Class A Certificate, and, accordingly, there
can be no assurance that the ratings assigned to
the Class A Certificates upon initial issuance
thereof will not be lowered or withdrawn by a
Rating Agency at any time thereafter. In the event
any rating is revised or withdrawn, the liquidity
of the Class A Certificates may be adversely
affected. In general, the ratings address credit
risk and do not represent any assessment of the
likelihood or rate of principal prepayments. See
"Risk Factors" and "Ratings" herein.
Optional Termination by the
Servicer................. The Servicer may, at its option, terminate the
Pooling and Servicing Agreement on any date
following the first Payment Date on which the Pool
Principal Balance as of the last day of the related
Due Period is less than 10% of the sum of (i) the
Original Pool Principal Balance and (ii) the
original Pre-Funded Amount by purchasing from the
Trust, on the next succeeding Payment Date, all of
the Mortgage Loans and all Mortgaged Properties
acquired by foreclosure or deed in lieu of
foreclosure ("REO Properties") then remaining in
the Trust at a price (the "Termination Price")
equal to (i) the sum of (x) 100% of the aggregate
outstanding principal balances of the Mortgage
Loans and REO Properties and (y) accrued and unpaid
interest on such amount computed at a rate equal to
the weighted average Mortgage Interest Rate, minus
(ii) any amounts representing
S-15
<PAGE> 16
collections on the Mortgage Loans and REO
Properties not yet applied to reduce the principal
balance thereof or interest related thereto. The
proceeds of such sale will be deposited into the
Collection Amount for distribution to the
Certificateholders on the next succeeding Payment
Date. In connection with such disposition, the
Servicer is required to pay any unpaid fees and
expenses of the Trustee and the Insurer. See
"Description of the Certificates -- Termination;
Purchase of Mortgage Loans" herein and in the
Prospectus.
Certain Legal Aspects of
the Mortgage Loans......... Approximately 16.02% of the Initial Mortgage Loans,
by aggregate principal balance as of the Statistic
Calculation Date, are secured by second Mortgages
which are subordinate to a mortgage lien on the
related Mortgaged Property prior to the lien of
such Mortgage Loan (such senior lien, a "First
Lien"). A primary risk with respect to second
Mortgages is that foreclosure funds received in
connection therewith will not be sufficient to
satisfy fully both the First Lien and the second
Mortgage. See "Risk Factors" and "Certain Legal
Aspects of the Mortgage Loans" herein.
REMIC Election and
Tax Status............... An election will be made to treat certain assets in
the Trust Fund as a "real estate mortgage
investment conduit" (a "REMIC") for federal income
tax purposes (the "REMIC").
The Class A Certificates will be regular interests
in the REMIC. As regular interests in a REMIC, the
Class A Certificates generally will be treated as
debt instruments issued by the REMIC. Certain
Classes of the Class A Certificates may be issued
with original issue discount. As a result, holders
of such Class A Certificates may be required to
include amounts in income with respect to such
Certificates in advance of the receipt of cash
attributable to that income. With respect to any
Class of Certificates, the prepayment assumption
that will be used in computing the amount of
original issue discount includible periodically
will be 115% of the applicable Prepayment
Assumption (as defined herein). See "Certain Yield
and Prepayment Considerations" herein and in the
Prospectus. No representation is made that either
prepayments on the Mortgage Loans or payments on
the Class A Certificates will occur at these rates
or any other rate. In addition, other Classes of
Class A Certificates may be issued at a premium.
Based on the Treasury regulations relating to the
treatment of original issue discount, the Internal
Revenue Service could assert that all of the
interest payments on the Certificates should be
treated as original issue discount regardless of
their issue price. If such an assertion were
successful, all income derived from the Class A
Certificates, including any otherwise de minimis
discount, would be treated as original issue
discount. See "Certain Federal Income Tax
Consequences for REMIC Certificates -- Original
Issue Discount" in the Prospectus.
ERISA Considerations....... A fiduciary or other person contemplating
purchasing the Class A Certificates on behalf of or
with "plan assets" of any employee benefit or other
plan or other retirement arrangement subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986 (the "Code") should carefully
review with its legal advisors whether the purchase
or holding of Class A Certificates could give rise
to a non-exempt prohibited transaction under ERISA
or Section 4975 of
S-16
<PAGE> 17
the Code and the application of the fiduciary
responsibility provisions of ERISA. The U.S.
Department of Labor has issued individual
prohibited transaction exemptions to the
Underwriters (the "Underwriters' PTEs"). Generally,
the Underwriters' PTEs provide exemptive relief
from the application of certain of the prohibited
transaction provisions of ERISA and Section 4975 of
the Code 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 upon their initial issuance the Class A
Certificates will be rated Aaa by Moody's and "AAA"
by S&P, the Class A Certificates will not
constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because the Mortgage Pool includes
Mortgage Loans that are secured by second
Mortgages. Investors should consult their own legal
advisers in determining whether and to what extent
the Class A Certificates constitute legal
investments for such investors. See "Legal
Investment" herein.
Use of Proceeds............ Substantially all of the net proceeds to be
received from the sale of the Class A Certificates
will be received by the Depositors, which will
apply such proceeds to pay to the Originators a
portion of the purchase price for the Mortgage
Loans.
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<PAGE> 18
RISK FACTORS
Investors should consider, among other things, the matters discussed under
"Risk Factors" in the Prospectus and the following factors in connection with
the purchase of the Class A Certificates:
RISKS OF THE MORTGAGE LOANS
Geographic Concentration. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of 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. In
particular, approximately 13.79%, 7.31%, 6.68%, 5.74%, 5.57% and 5.54%, of the
Initial Mortgage Loans, by aggregate principal balance as of the Statistic
Calculation Date, are secured by Mortgaged Properties located in Florida,
California, Ohio, Illinois, North Carolina and Michigan, respectively. There has
been a contraction of economic activity and a deterioration of the real estate
market in many states and uncertainty exists with respect to the economy and the
real estate market in Florida, California and other regions of the United
States. See "Description of the Mortgage Pool" herein for further information
regarding the geographic concentration of the Mortgage Loans in the Mortgage
Pool.
Nature of Security. Approximately 16.02% of the Initial Mortgage Loans in
the Mortgage Pool, by aggregate principal balance as of the Statistic
Calculation Date, are secured by second Mortgages, and the related First Liens
are not included in the Mortgage Pool. Although little data is available, the
rate of default of second mortgage loans may be greater than that of mortgage
loans secured by First Liens on comparable properties. See "Risk
Factors -- Risks of the Mortgage Loans -- Nature of Security" in the Prospectus.
Risk of Early Defaults. Approximately 42.44% of the Initial Mortgage Loans
by aggregate principal balance as of the Statistic Calculation Date, were
originated within 2 months prior to the Statistic Calculation Date, including
approximately 4.64% of the Initial Mortgage Loans which were originated on or
after April 1, 1996. The weighted average remaining term to maturity of the
Initial Mortgage Loans as of the Cut-off Date is approximately 173 months as of
the Statistic Calculation Date. Although little data is available, defaults on
mortgage loans are generally expected to occur with greater frequency in their
early years.
Balloon Mortgage Loans. Approximately 37.40% of the Initial Mortgage Loans
by aggregate principal balance as of the Statistic Calculation Date, provide for
the payment of the unamortized principal balance of the Mortgage Loan in a
single payment at the maturity of the Mortgage Loan that is greater than the
preceding monthly payment ("Balloon Loans"). See "Description of the Mortgage
Pool" and "Risk Factors -- Risks of the Mortgage Loans -- Balloon Loans" in the
Prospectus.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Class A Certificates will depend on the rate
and timing of payment of principal on the Mortgage Loans in the Mortgage Pool,
including prepayments, liquidations due to defaults and repurchases due to
defective documentation or breaches of representations and warranties. Such
yield may be adversely affected by a higher or lower than anticipated rate of
prepayments on the Mortgage Loans. Prepayments are influenced by a number of
factors, including prevailing mortgage market interest rates, local and regional
economic conditions and homeowner mobility. See "Certain Yield and Prepayment
Considerations" herein and in the Prospectus.
BOOK-ENTRY CERTIFICATES
Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
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<PAGE> 19
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein), which
will thereafter credit them to the accounts of Certificate Owners either
directly or indirectly through indirect participants. See "Description Of The
Certificates -- Book-Entry Certificates" herein.
SUBSEQUENT MORTGAGE LOANS AND PRE-FUNDING ACCOUNT
Each transfer of Subsequent Mortgage Loans into the Trust is subject to the
following conditions, among others: (i) each Subsequent Mortgage Loan must
satisfy the representations and warranties specified in the Pooling and
Servicing Agreement; (ii) the Depositors may not select such Subsequent Mortgage
Loans in a manner that they believe is adverse to the interests of the Class A
Certificateholders; (iii) only Subsequent Mortgage Loans identified on or before
the Closing Date for deposit in the Trust may be transferred to the Trust; and
(iv) as of the related Subsequent Cut-off Date (as defined below), the Mortgage
Loans in the Mortgage Pool at that time, including the Subsequent Mortgage Loans
to be conveyed by the Depositors as of such date, will satisfy the criteria set
forth in the Pooling and Servicing Agreement, as described herein.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may be of a different credit quality than Initial Mortgage Loans.
Following the transfer of Subsequent Mortgage Loans to the Mortgage Pool, the
aggregate characteristics of the Mortgage Loans then held in the Mortgage Pool
may vary from those of the Initial Mortgage Loans included in the Mortgage Pool.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the acquisition of Subsequent Mortgage Loans by the end of
the Funding Period, on the first Payment Date immediately following the Funding
Period, the owners of Class A Certificates of all Classes will collectively
receive a prepayment of principal in an amount equal to the Pre-Funded Amount
(as defined herein) (net of reinvestment income payable to the Class R
Certificateholders) remaining on deposit in the Pre-Funding Account. Although no
assurances can be given, the Depositors expect that all of the funds on deposit
in the Pre-Funding Account will be utilized to acquire Subsequent Mortgage Loans
on the Closing Date. Accordingly, it is expected that there will be no material
principal prepayment to the Owners of the Class A Certificates; however, it is
unlikely that the Depositors will be able to deliver Subsequent Mortgage Loans
with an aggregate principal balance which exactly matches the original
Pre-Funded Amount.
The addition of Subsequent Mortgage Loans to the Trust on any date (each, a
"Subsequent Transfer Date"), other than a transfer occurring on the Closing
Date, is subject to the receipt of confirmation from the Rating Agencies that
the addition of such Subsequent Mortgage Loans will not result in a reduction or
withdrawal of the initial rating of any of the Class A Certificates. If, as a
result of the failure to receive such confirmation, the Depositors are unable to
transfer Subsequent Mortgage Loans into the Trust, principal prepayments to
holders of the Class A Certificates will occur on the first Payment Date
immediately following the Funding Period.
S-19
<PAGE> 20
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
Unless otherwise noted, the statistical information presented herein
concerning the Mortgage Pool is based on such pool as of April 10, 1996 (the
"Statistic Calculation Date"). In addition, certain loans included in such pool
as of the Statistic Calculation Date may prepay in full, or may be determined
not to meet the eligibility requirements for the final pool, and thus may not be
included in the final pool. While the statistical distribution of the
characteristics as of the Cut-off Date for the final Initial Mortgage Pool will
vary somewhat from the statistical distribution of such characteristics as of
the Statistic Calculation Date as presented herein, such variance is not
expected to be material. The statistical characteristics of the Mortgage Pool
will vary upon the acquisition by the Trust of Subsequent Mortgage Loans. A
Current Report on Form 8-K containing a description of the Mortgage Loans
included in the final Mortgage Pool will be filed with the Securities and
Exchange Commission within 15 days after the end of the Funding Period.
The Mortgage Pool consists of Initial Mortgage Loans with an aggregate
principal balance outstanding as of the Statistic Calculation Date, after giving
effect to payments received prior to such date, of $296,534,398.21 (such
aggregate principal balance as of the Cut-off Date, after giving effect to
payments received prior to the Cut-off Date, the "Original Pool Principal
Balance"), together with any Subsequent Mortgage Loans as described herein. This
subsection describes generally certain characteristics of the Initial Mortgage
Loans. Unless otherwise specified herein, references herein to percentages of
Initial Mortgage Loans refer in each case to the approximate percentage of the
aggregate principal balance of the Initial Mortgage Loans as of the Statistic
Calculation Date, based on the outstanding principal balances of the Initial
Mortgage Loans as of the Statistic Calculation Date, and giving effect to all
payments received prior to the Statistic Calculation Date. The Initial Mortgage
Pool consists of fixed-rate Mortgage Loans with remaining terms to maturity of
not more than 360 months (including both fully amortizing Mortgage Loans and
Balloon Loans). All of the Initial Mortgage Loans were originated and
underwritten or purchased and re-underwriten by the Representative or by a
wholly-owned subsidiary of the Representative. The Initial Mortgage Loans have
the characteristics set forth below as of the Statistic Calculation Date.
Percentages expressed herein based on principal balances and number of Initial
Mortgage Loans have been rounded, and in the tables set forth herein the sum of
the percentages may not equal the respective totals due to such rounding.
All of the Initial Mortgage Loans were originated between March 1989 and
April 1996 and have a scheduled maturity date no later than May 2026. No Initial
Mortgage Loan has a remaining term to maturity as of the Statistic Calculation
Date of less than 34 months. The weighted average original term to maturity of
the Initial Mortgage Loans as of the Statistic Calculation Date is approximately
174 months. The weighted average remaining term to maturity of the Initial
Mortgage Loans as of the Statistic Calculation Date is approximately 173 months.
The weighted average Mortgage Interest Rate of the Initial Mortgage Loans
as of the Statistic Calculation Date is approximately 10.59% per annum. All of
the Initial Mortgage Loans have Mortgage Interest Rates as of the Statistic
Calculation Date of at least 7.75% per annum but not more than 17.64% per annum.
The average principal balance outstanding of the Initial Mortgage Loans as of
the Statistic Calculation Date was approximately $47,166.28, and the principal
balances of the Initial Mortgage Loans as of the Statistic Calculation Date
ranged from approximately $5,500.00 to $246,500.00. The original principal
balances of the Initial Mortgage Loans as of Statistic Calculation Date ranged
from approximately $5,500.00 to $246,500.00
Approximately 16.02% of the Initial Mortgage Loans are secured by a second
or more junior Mortgage on the related Mortgaged Property that is junior to a
First Lien, and approximately 83.98% of the Initial Mortgage Loans are secured
by a first Mortgage on the related Mortgage Property. Approximately 1.06% of the
Initial Mortgage Loans are secured by more than one property. The First Liens
related to the Initial Mortgage Loans secured by second or more junior Mortgages
are not included in the Mortgage Pool.
S-20
<PAGE> 21
None of the Initial Mortgage Loans had a Combined Loan-to-Value Ratio
(defined in the Prospectus) at origination in excess of 100.00%. The weighted
average Combined Loan-to-Value Ratio at origination of the Initial Mortgage
Loans as of the Statistic Calculation Date is approximately 74.70%. None of the
Initial Mortgage Loans had a Home Equity Loan Ratio (defined in the Prospectus)
at origination in excess of 100.00%. The weighted average Home Equity Loan Ratio
at origination of the Initial Mortgage Loans as of the Statistic Calculation
Date is approximately 66.56%.
At least 92.12% of the Initial Mortgage Loans are secured by fee simple
interests in detached single-family dwelling units, including units in de
minimis planned unit developments, with the remaining Initial Mortgage Loans
secured by fee simple interests in attached or detached two- to four-family
dwelling units, manufactured housing and condominiums on more than one parcel of
real property; provided, however, that approximately 0.05% of the Initial
Mortgage Loans are secured by a leasehold interest in a one- to four-family
residential dwelling situated on property located in the State of Maryland or
Illinois. With respect to at least 95.55% of the Initial Mortgage Loans, the
Mortgagor represented at the time of the origination of the Mortgage Loan that
the related Mortgaged Property would be occupied by the Mortgagor as a primary
or secondary residence (an "Owner Occupied Mortgaged Property").
No more than approximately 0.12% of the Initial Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area in the State of
California, and no more than approximately 0.49% of the Initial Mortgage Loans
are secured by Mortgaged Properties located in any one zip code area outside the
State of California. Approximately 13.79%, 7.31%, 6.68%, 5.74%, 5.57% and 5.54%
of the Initial Mortgage Loans are secured by Mortgaged Properties located in
Florida, California, Ohio, Illinois, North Carolina and Michigan, respectively.
Except as indicated in the preceding sentence, no more than approximately 4.57%
of the Initial Mortgage Loans are secured by Mortgaged Properties located in any
one state.
Approximately 37.40% of the Initial Mortgage Loans are Balloon Loans.
Approximately 0.12%, 23.17%, 8.22% and 5.43% of the Initial Mortgage Loans are
Balloon Loans based on approximately a 30 year amortization schedule and a
single payment of the remaining loan balance approximately 5, 7, 10 and 15 years
after origination, respectively.
Approximately 0.06% of the Initial Mortgage Loans are Bankruptcy Mortgage
Loans. Of the Initial Mortgage Loans, approximately 0.01% in principal amount
are Bankruptcy Mortgage Loans which are 30 days or more contractually
delinquent. Approximately 0.54% in principal amount of the Initial Mortgage
Loans other than Bankruptcy Mortgage Loans are contractually delinquent 30 days
or more.
Approximately 0.54% of the Initial Mortgage Loans were originated in
connection with the sale of properties acquired by the Originators through
foreclosure and were not originated in accordance with all of the Underwriting
Criteria.
S-21
<PAGE> 22
INITIAL MORTGAGE POOL STATISTICS
The following table sets forth the number and outstanding principal balance
as of the Statistic Calculation Date and the percentage of the Initial Mortgage
Pool represented by Initial Mortgage Loans having outstanding principal balances
as of the Statistic Calculation Date in the ranges described therein:
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY NUMBER OF NUMBER OF
RANGE OF PRINCIPAL BALANCES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99...... $ 591,568.28 0.20% 68 1.08%
10,000.00 to 14,999.99...... 5,352,730.83 1.81 421 6.70
15,000.00 to 19,999.99...... 9,587,398.33 3.23 548 8.72
20,000.00 to 24,999.99...... 12,628,594.10 4.26 557 8.86
25,000.00 to 29,999.99...... 16,226,886.28 5.47 592 9.42
30,000.00 to 34,999.99...... 16,581,782.30 5.59 511 8.13
35,000.00 to 39,999.99...... 18,909,720.51 6.38 504 8.02
40,000.00 to 44,999.99...... 18,472,960.41 6.23 436 6.93
45,000.00 to 49,999.99...... 18,729,595.01 6.32 396 6.30
50,000.00 to 54,999.99...... 18,151,518.35 6.12 347 5.52
55,000.00 to 59,999.99...... 16,983,908.48 5.73 296 4.71
60,000.00 to 64,999.99...... 16,210,753.94 5.47 260 4.14
65,000.00 to 69,999.99...... 13,357,084.79 4.50 198 3.15
70,000.00 to 74,999.99...... 13,477,667.33 4.55 186 2.96
75,000.00 to 79,999.99...... 12,158,077.17 4.10 157 2.50
80,000.00 to 84,999.99...... 9,971,569.67 3.36 121 1.92
85,000.00 to 89,999.99...... 9,900,055.90 3.34 113 1.80
90,000.00 to 94,999.99...... 7,088,732.48 2.39 77 1.22
95,000.00 to 99,999.99...... 9,105,657.00 3.07 93 1.48
100,000.00 to 109,999.99...... 11,591,117.23 3.91 111 1.77
110,000.00 to 119,999.99...... 9,750,931.81 3.29 85 1.35
120,000.00 to 129,999.99...... 7,582,490.93 2.56 61 0.97
130,000.00 to 139,999.99...... 5,620,107.82 1.90 42 0.67
140,000.00 to 149,999.99...... 3,177,509.86 1.07 22 0.35
150,000.00 to 159,999.99...... 3,680,224.26 1.24 24 0.38
160,000.00 to 169,999.99...... 2,465,145.61 0.83 15 0.24
170,000.00 to 179,999.99...... 2,109,380.26 0.71 12 0.19
180,000.00 to 189,999.99...... 1,299,018.16 0.44 7 0.11
190,000.00 to 199,999.99...... 1,952,716.39 0.66 10 0.16
200,000.00 to 209,999.99...... 1,027,448.68 0.35 5 0.08
210,000.00 to 219,999.99...... 219,500.00 0.07 1 0.02
220,000.00 to 229,999.99...... 901,192.72 0.30 4 0.06
230,000.00 to 239,999.99...... 936,973.35 0.32 4 0.06
240,000.00 to 249,999.99...... 734,379.97 0.25 3 0.05
----------------- -------- ------- --------------
Total................ $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
S-22
<PAGE> 23
The following table sets forth the geographic distribution of the Mortgaged
Properties in the Initial Mortgage Pool by state or territory as of the
Statistic Calculation Date:
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY NUMBER OF NUMBER OF
STATE OR TERRITORY PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Alabama.................. $ 8,871,390.17 2.99% 207 3.29%
Arizona.................. 4,856,237.69 1.64 107 1.70
Arkansas................. 1,391,572.92 0.47 36 0.57
California............... 21,676,159.89 7.31 355 5.65
Colorado................. 6,617,815.43 2.23 153 2.43
Connecticut.............. 4,813,754.11 1.62 69 1.10
Delaware................. 2,332,142.17 0.79 49 0.78
District of Columbia..... 381,361.58 0.13 5 0.08
Florida.................. 40,893,621.74 13.79 996 15.84
Georgia.................. 6,660,047.63 2.25 177 2.82
Idaho.................... 1,128,934.46 0.38 37 0.59
Illinois................. 17,014,124.11 5.74 332 5.28
Indiana.................. 12,670,117.80 4.27 315 5.01
Iowa..................... 555,864.67 0.19 16 0.25
Kansas................... 275,722.77 0.09 6 0.10
Kentucky................. 7,636,915.97 2.58 181 2.88
Louisiana................ 2,108,990.24 0.71 53 0.84
Maryland................. 10,409,626.55 3.51 198 3.15
Massachusetts............ 2,283,376.46 0.77 32 0.51
Michigan................. 16,426,797.51 5.54 322 5.12
Minnesota................ 10,655,979.79 3.59 152 2.42
Mississippi.............. 2,487,248.40 0.84 70 1.11
Missouri................. 5,512,727.94 1.86 125 1.99
Nebraska................. 1,376,781.61 0.46 24 0.38
Nevada................... 349,603.24 0.12 17 0.27
New Jersey............... 1,906,086.49 0.64 29 0.46
New Mexico............... 440,158.98 0.15 8 0.13
New York................. 8,584,956.84 2.90 146 2.32
North Carolina........... 16,524,969.11 5.57 371 5.90
Ohio..................... 19,803,806.87 6.68 389 6.19
Oklahoma................. 1,346,181.41 0.45 42 0.67
Oregon................... 1,919,371.59 0.65 43 0.68
Pennsylvania............. 13,560,756.27 4.57 283 4.50
Rhode Island............. 376,452.15 0.13 7 0.11
South Carolina........... 6,397,787.59 2.16 147 2.34
Tennessee................ 13,153,061.25 4.44 296 4.71
Utah..................... 3,450,444.02 1.16 105 1.67
Virginia................. 8,054,868.78 2.72 172 2.74
Washington............... 9,192,183.21 3.10 177 2.82
Wisconsin................ 2,436,398.80 0.82 38 0.60
----------------- -------- ------- --------------
Total.......... $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
S-23
<PAGE> 24
The following table sets forth the Combined Loan-to-Value Ratios of the
Initial Mortgage Loans as of the Statistic Calculation Date:
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF COMBINED PERCENT BY NUMBER OF NUMBER OF
LOAN-TO-VALUE RATIOS PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
5.01% to 10.00%........ $ 11,973.49 0.00% 1 0.02%
10.01% to 15.00%........ 132,940.96 0.04 9 0.14
15.01% to 20.00%........ 541,698.18 0.18 28 0.45
20.01% to 25.00%........ 855,694.73 0.29 38 0.60
25.01% to 30.00%........ 1,841,442.34 0.62 69 1.10
30.01% to 35.00%........ 1,918,655.61 0.65 73 1.16
35.01% to 40.00%........ 2,814,831.92 0.95 91 1.45
40.01% to 45.00%........ 3,774,495.07 1.27 112 1.78
45.01% to 50.00%........ 6,085,828.91 2.05 172 2.74
50.01% to 55.00%........ 7,762,644.60 2.62 197 3.13
55.01% to 60.00%........ 12,284,431.75 4.14 292 4.64
60.01% to 65.00%........ 17,969,891.17 6.06 359 5.71
65.01% to 70.00%........ 30,490,103.30 10.28 653 10.39
70.01% to 75.00%........ 42,217,710.52 14.24 804 12.79
75.01% to 80.00%........ 82,908,739.85 27.96 1,465 23.30
80.01% to 85.00%........ 62,960,549.43 21.23 1,196 19.02
85.01% to 90.00%........ 12,600,977.28 4.25 275 4.37
90.01% to 95.00%........ 2,283,046.37 0.77 77 1.22
95.01% to 100.00%........ 7,078,742.73 2.39 376 5.98
----------------- -------- ------- --------------
Total.......... $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
The following table sets forth the Home Equity Loan Ratios of Initial
Mortgage Loans as of the Statistic Calculation Date:
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF HOME EQUITY PERCENT BY NUMBER OF NUMBER OF
LOAN RATIOS PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
0.01% to 5.00%........ $ 73,609.74 0.02% 7 0.11%
5.01% to 10.00%........ 1,452,287.57 0.49 109 1.73
10.01% to 15.00%........ 6,065,320.10 2.05 348 5.54
15.01% to 20.00%........ 10,544,140.82 3.56 532 8.46
20.01% to 25.00%........ 8,982,304.69 3.03 360 5.73
25.01% to 30.00%........ 7,239,371.14 2.44 264 4.20
30.01% to 35.00%........ 5,984,810.94 2.02 204 3.24
35.01% to 40.00%........ 4,863,172.42 1.64 149 2.37
40.01% to 45.00%........ 5,843,065.34 1.97 155 2.47
45.01% to 50.00%........ 7,338,283.60 2.47 194 3.09
50.01% to 55.00%........ 7,952,264.96 2.68 185 2.94
55.01% to 60.00%........ 11,846,571.83 4.00 261 4.15
60.01% to 65.00%........ 16,540,531.63 5.58 307 4.88
65.01% to 70.00%........ 27,374,417.22 9.23 521 8.29
70.01% to 75.00%........ 38,204,473.58 12.88 651 10.35
75.01% to 80.00%........ 73,341,698.41 24.73 1,124 17.88
80.01% to 85.00%........ 52,339,487.10 17.65 765 12.17
85.01% to 90.00%........ 9,581,700.29 3.23 134 2.13
90.01% to 95.00%........ 780,397.35 0.26 14 0.22
95.01% to 100.00%........ 186,489.48 0.06 3 0.05
----------------- -------- ------- --------------
Total.......... $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
S-24
<PAGE> 25
The following table sets forth the Mortgage Interest Rates borne by the
Mortgage Notes relating to the Initial Mortgage Loans as of the Statistic
Calculation Date:
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MORTGAGE PERCENT BY NUMBER OF NUMBER OF
INTEREST RATES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------ ----------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
7.00% to 7.99%........ $ 697,135.10 0.24% 9 0.14%
8.00% to 8.99%........ 18,409,182.67 6.21 287 4.56
9.00% to 9.99%........ 106,850,210.17 36.03 1,969 31.32
10.00% to 10.99%........ 90,739,924.73 30.60 1,818 28.92
11.00% to 11.99%........ 36,570,061.52 12.33 800 12.72
12.00% to 12.99%........ 18,312,125.14 6.18 516 8.21
13.00% to 13.99%........ 15,758,302.51 5.31 626 9.96
14.00% to 14.99%........ 5,338,076.24 1.80 156 2.48
15.00% to 15.99%........ 2,686,862.86 0.91 71 1.13
16.00% to 16.99%........ 1,050,976.57 0.35 31 0.49
17.00% to 17.99%........ 121,540.70 0.04 4 0.06
----------------- -------- ------- --------
Total......... $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
The following table sets forth the number of remaining months to stated
maturity of the Initial Mortgage Loans as of the Statistic Calculation Date:
<TABLE>
<CAPTION>
RANGE OF REMAINING PERCENT BY
MONTHS PERCENT BY NUMBER OF NUMBER OF
TO STATED MATURITY PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------ ----------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
0 to 83.............. $ 41,222,992.79 13.90% 652 10.37%
84 to 95.............. 29,853,604.41 10.07 446 7.09
96 to 107.............. 187,859.96 0.06 6 0.10
108 to 119.............. 17,748,492.53 5.99 412 6.55
120 to 131.............. 16,195,691.57 5.46 350 5.57
132 to 143.............. 108,880.33 0.04 4 0.06
144 to 155.............. 399,768.05 0.13 10 0.16
156 to 167.............. 284,981.09 0.10 6 0.10
168 to 179.............. 78,484,751.12 26.47 2,051 32.62
180 to 191.............. 60,147,173.02 20.28 1,531 24.35
228 to 239.............. 10,003,258.21 3.37 183 2.91
240 to 251.............. 7,449,363.92 2.51 132 2.10
348 to 359.............. 20,306,254.22 6.85 295 4.69
360 .............. 14,141,326.99 4.77 209 3.32
----------------- -------- ------- --------
Total............ $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
S-25
<PAGE> 26
The following table sets forth the number of months since origination of
the Initial Mortgage Loans as of the Statistic Calculation Date:
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MONTHS PERCENT BY NUMBER OF NUMBER OF
SINCE ORIGINATION PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
0 to 12................. $ 295,857,354.39 99.77% 6,270 99.73%
13 to 24................. 590,560.91 0.20 13 0.21
49 to 60................. 48,806.13 0.02 2 0.03
73 to 84................. 24,425.45 0.01 1 0.02
85 to 96................. 13,251.33 0.00 1 0.02
----------------- -------- ------- --------------
Total.......... $ 296,534,398.21 100.00% 6,287 100.00%
=============== ============== ============= =============
</TABLE>
TRANSFER OF SUBSEQUENT MORTGAGE LOANS
In addition to satisfaction of the conditions set forth in "Risk
Factors -- Subsequent Mortgage Loans and Pre-Funded Account" herein, the
transfer of Subsequent Mortgage Loans on a Subsequent Transfer Date is subject
to the following requirements: (i) such Subsequent Mortgage Loan may not be 30
or more days contractually delinquent as of the related Subsequent Cut-off Date;
(ii) the original term to stated maturity of such Subsequent Mortgage Loan may
not exceed 360 months; (iii) such Subsequent Mortgage Loan will have a Mortgage
Interest Rate of not less than 8.35% per annum; (iv) such Subsequent Mortgage
Loan will be underwritten in accordance with the Underwriting Criteria; and (v)
following the transfer of such Subsequent Mortgage Loans into the Trust, the
Mortgage Loans (including the Subsequent Mortgage Loans) (a) will have a
weighted average interest rate of at least 10.50% per annum; (b) will have a
weighted average original term to stated maturity of not more than 180 months;
and (c) will have a maximum principal balance not in excess of $250,000.00. The
Depositors will designate as a cut-off date (each a "Subsequent Cut-off Date")
the first day of the month in which the related Subsequent Transfer Date occurs.
In addition, the transfer of Subsequent Mortgage Loans into the Trust on a
Subsequent Transfer Date (other than the Closing Date) is subject to the receipt
of confirmation from the Rating Agencies that the deposit of such Subsequent
Mortgage Loans will not result in a reduction or withdrawal of the initial
rating of the Class A Certificates.
S-26
<PAGE> 27
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on the Class A Certificates and the yield to
maturity of such Certificates are related to the rate and timing of payments of
principal on the Mortgage Loans, which may be in the form of scheduled and
unscheduled payments. In general, when the level of prevailing interest rates
for similar loans significantly declines, the rate of prepayment is likely to
increase, although the prepayment rate is influenced by a number of other
factors, including general economic conditions and homeowner mobility. Defaults
on mortgage loans are expected to occur with greater frequency in their early
years, although little data is available with respect to the rate of default on
second mortgage loans. The rate of default on second mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties. Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions to the Class A Certificateholders of amounts of
principal which would otherwise be distributed over the remaining terms of the
Mortgage Loans.
In addition, the Servicer may, at its option, purchase from the Trust all
of the outstanding Mortgage Loans and REO Properties, and thus effect the early
retirement of the Class A Certificates, on any Payment Date following the first
Payment Date for which the Pool Principal Balance (as defined herein) as of the
last day of the related Due Period is less than 10% of the sum of (i) Original
Pool Principal Balance and (ii) the original Pre-Funded Amount. See "Description
of the Certificates -- Termination; Purchase of Mortgage Loans" herein.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the 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. However, no assurance can be given as to the
level of prepayments that the Mortgage Loans will experience.
No representation is made as to the particular factors that will affect the
prepayment of the Mortgage Loans, as to the relative importance of such factors,
as to the percentage of the principal balance of the Mortgage Loans that will be
paid as of any date or as to the overall rate of prepayment on the Mortgage
Loans. See "Certain Yield and Prepayment Considerations" in the Prospectus.
On the Payment Date immediately following the Funding Period, any
Pre-Funded Amount remaining on deposit in the Pre-Funding Account (net of
reinvestment income payable to the Class R Certificateholders) will be
distributed pro rata to the holders of the Class A Certificates of all Classes
in reduction of the Certificate Balances of their Certificates, thus resulting
in a partial principal prepayment of such Certificates. Although no assurance
can be given, the Depositors expect that the principal amount of Subsequent
Mortgage Loans transferred to the Trust will require the application of
substantially all of the amount on deposit in the Pre-Funding Account. As a
result, there should be no material principal prepaid to the holders of the
Class A Certificates; however, it is unlikely that the Depositors will be able
to deliver Subsequent Mortgage Loans with an aggregate principal balance which
exactly matches the original Pre-Funded Amount. The addition of Subsequent
Mortgage Loans to the Trust on a Subsequent Transfer Date (other than the
Closing Date) is subject to the receipt of confirmation from the Rating Agencies
that the addition of such Subsequent Mortgage Loans will not result in a
reduction or withdrawal of the initial rating of the Class A Certificates. If,
as a result of the failure to receive such confirmation, the Depositors are
unable to transfer Subsequent Mortgage Loans to the Trust, principal prepayments
to holders of the Class A Certificates will occur on the first Payment Date
immediately following the Funding Period.
Interest shortfalls may exist during the Funding Period because, while the
holders of the Class A Certificates are entitled to receive interest accruing on
the respective Principal Balances of their Certificates, the combined aggregate
Principal Balances of the Class A Certificates will be greater than the Original
Pool Principal Balance. It is intended that the resulting interest shortfalls,
if any, together with
S-27
<PAGE> 28
any shortfalls in accrued fees, will be covered by application of amounts on
deposit in the Capitalized Interest Account.
Greater than anticipated prepayments of principal will increase the yield
on Class A Certificates purchased at a price less than par. Greater than
anticipated prepayments of principal will decrease the yield on Class A
Certificates purchased at a price greater than par. The effect on an investor's
yield due to principal prepayments on the Mortgage Loans occurring at a rate
that is faster (or slower) than the rate anticipated by the investor in the
period immediately following the issuance of the 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 "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
any Class of the Class A Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans,
including final payments made upon the maturity of Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. A
100% Prepayment Assumption assumes a conditional prepayment rate ("CPR") of 5%
per annum of the outstanding principal balance of the Mortgage Loans in the
first month of the life of such Mortgage Loans and an additional 1.364% per
annum (precisely 15/11% per annum) in each month thereafter until the twelfth
month; beginning in the twelfth month and in each month thereafter during the
life of such Mortgage Loans, a conditional prepayment rate of 20% per annum each
month is assumed. As used in the table below, 0% Prepayment Assumption assumes a
conditional prepayment rate equal to 0% of the Prepayment Assumption, i.e., no
prepayments. Correspondingly, 80% Prepayment Assumption assumes prepayment rates
equal to 80% of the Prepayment Assumption, and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. The Depositors believe that no
existing statistics of which they are aware provide a reliable basis for holders
of Class A Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the assumptions in the
foregoing and the following paragraphs, there are discrepancies between
characteristics of the actual Mortgage Loans and the characteristics of the
Mortgage Loans assumed in preparing the tables. Any such discrepancy may have an
effect upon the percentages of the Principal Balances outstanding and weighted
average lives of the Certificates set forth in the tables. In addition, since
the actual Mortgage Loans in the Trust have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the Certificates may be made earlier or later than as indicated in
the tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of loans with the weighted average characteristics and
amortization methodologies set forth below, (ii) the Closing Date for the Class
A Certificates is May 15, 1996, (iii) all Subsequent Mortgage Loans will be
delivered on the Closing Date, (iv) distributions on the Class A Certificates
are made on the 15th day of each month regardless of the day on which the
Payment Date actually occurs, commencing in June 1996 in accordance with the
priorities described herein, (v) the scheduled monthly payments of principal and
interest on the Mortgage Loans will be timely delivered to the Servicer each
month (with no defaults), commencing May 1996, (vi) all prepayments are
prepayments in full received on the last day of each month (commencing May 1996)
and include 30 days' interest thereon, (vii) no optional termination or
mandatory termination is exercised, and (viii) the Class A Certificates of each
Class have the respective Pass-Through Rates and Original Principal Balances as
set forth herein.
S-28
<PAGE> 29
<TABLE>
<CAPTION>
ASSUMED
ORIGINAL ORIGINAL REMAINING MONTH OF
MORTGAGE AMORTIZATION TERM TO TERM TO INITIAL
AMORTIZATION PRINCIPAL INTEREST TERM MATURITY MATURITY SCHEDULED
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS) PAYMENT
- - ------------------------------ -------------- -------- ------------ -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Level Pay..................... $11,244,874.43 10.652% 111 111 110 May 1996
Level Pay..................... 118,679,226.76 10.708 180 180 178 May 1996
Level Pay..................... 17,045,722.13 10.430 240 240 239 May 1996
Level Pay..................... 33,787,881.21 10.648 360 360 359 May 1996
Level Pay..................... 331,550.00 10.480 114 114 114 June 1996
Level Pay..................... 3,471,742.00 10.827 180 180 180 June 1996
Level Pay..................... 406,900.00 10.530 240 240 240 June 1996
Level Pay..................... 659,700.00 10.443 360 360 360 June 1996
Level Pay..................... 1,575,829.38 10.480 114 114 114 June 1996
Level Pay..................... 16,500,898.98 10.827 180 180 180 June 1996
Level Pay..................... 1,933,961.62 10.530 240 240 240 June 1996
Level Pay..................... 3,135,498.85 10.443 360 360 360 June 1996
Balloon....................... 67,525,112.63 10.449 360 84 82 May 1996
Balloon....................... 24,181,813.44 10.376 360 120 119 May 1996
Balloon....................... 17,028,700.61 10.732 360 180 178 May 1996
Balloon....................... 1,560,375.00 9.966 360 84 84 June 1996
Balloon....................... 325,550.00 11.073 360 120 120 June 1996
Balloon....................... 285,250.00 9.778 360 180 180 June 1996
Balloon....................... 7,416,331.70 9.966 360 84 84 June 1996
Balloon....................... 1,547,311.89 11.073 360 120 120 June 1996
Balloon....................... 1,355,769.36 9.778 360 180 180 June 1996
</TABLE>
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each Class of Class A Certificates, and
sets forth the percentages of the Original Principal Balance of each such Class
of Class A Certificates that would be outstanding after each of the dates shown
at various percentages of the Prepayment Assumption.
S-29
<PAGE> 30
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
------------------------------------------------------ ------------------------------------------------
PAYMENT DATE 0% 75% 100% 115% 150% 200% 0% 75% 100% 115% 150%
- - ---------------------- -------- -------- ------- ------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 15, 1997.......... 95 67 58 52 39 20 100 100 100 100 100
May 15, 1998.......... 90 28 9 0 0 0 100 100 100 98 69
May 15, 1999.......... 84 0 0 0 0 0 100 94 65 49 16
May 15, 2000.......... 77 0 0 0 0 0 100 60 28 12 0
May 15, 2001.......... 70 0 0 0 0 0 100 32 0 0 0
May 15, 2002.......... 61 0 0 0 0 0 100 8 0 0 0
May 15, 2003.......... 0 0 0 0 0 0 100 0 0 0 0
May 15, 2004.......... 0 0 0 0 0 0 81 0 0 0 0
May 15, 2005.......... 0 0 0 0 0 0 68 0 0 0 0
May 15, 2006.......... 0 0 0 0 0 0 34 0 0 0 0
May 15, 2007.......... 0 0 0 0 0 0 19 0 0 0 0
May 15, 2008.......... 0 0 0 0 0 0 5 0 0 0 0
May 15, 2009.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2010.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2011.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2012.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2013.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2014.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2015.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2016.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2017.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2018.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2019.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2020.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2021.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2022.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2023.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2024.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2025.......... 0 0 0 0 0 0 0 0 0 0 0
May 15, 2026.......... 0 0 0 0 0 0 0 0 0 0 0
June 15, 2027......... 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)*......... 5.5 1.5 1.2 1.1 0.9 0.7 9.6 4.5 3.5 3.1 2.4
<CAPTION>
CLASS A-2 CLASS A-3
--------- -----------------------------------------------------
PAYMENT DATE 200% 0% 75% 100% 115% 150% 200%
- - ---------------------- ------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100% 100% 100% 100% 100% 100% 100%
May 15, 1997.......... 100 100 100 100 100 100 100
May 15, 1998.......... 31 100 100 100 100 100 100
May 15, 1999.......... 0 100 100 100 100 100 42
May 15, 2000.......... 0 100 100 100 100 46 0
May 15, 2001.......... 0 100 100 99 58 0 0
May 15, 2002.......... 0 100 100 41 3 0 0
May 15, 2003.......... 0 100 18 0 0 0 0
May 15, 2004.......... 0 100 0 0 0 0 0
May 15, 2005.......... 0 100 0 0 0 0 0
May 15, 2006.......... 0 100 0 0 0 0 0
May 15, 2007.......... 0 100 0 0 0 0 0
May 15, 2008.......... 0 100 0 0 0 0 0
May 15, 2009.......... 0 72 0 0 0 0 0
May 15, 2010.......... 0 27 0 0 0 0 0
May 15, 2011.......... 0 0 0 0 0 0 0
May 15, 2012.......... 0 0 0 0 0 0 0
May 15, 2013.......... 0 0 0 0 0 0 0
May 15, 2014.......... 0 0 0 0 0 0 0
May 15, 2015.......... 0 0 0 0 0 0 0
May 15, 2016.......... 0 0 0 0 0 0 0
May 15, 2017.......... 0 0 0 0 0 0 0
May 15, 2018.......... 0 0 0 0 0 0 0
May 15, 2019.......... 0 0 0 0 0 0 0
May 15, 2020.......... 0 0 0 0 0 0 0
May 15, 2021.......... 0 0 0 0 0 0 0
May 15, 2022.......... 0 0 0 0 0 0 0
May 15, 2023.......... 0 0 0 0 0 0 0
May 15, 2024.......... 0 0 0 0 0 0 0
May 15, 2025.......... 0 0 0 0 0 0 0
May 15, 2026.......... 0 0 0 0 0 0 0
June 15, 2027......... 0 0 0 0 0 0 0
Weighted Average
Life (Years)*......... 1.8 13.5 6.9 5.9 5.2 4.0 3.0
</TABLE>
- - ---------------
* The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each distribution in reduction of the related
Principal Balance by the number of years from the date of issuance of the
Certificate to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the highest related Principal Balance of the Certificate.
This table has been prepared based on the assumptions described in the second
and fourth paragraphs preceding this table (including the assumptions regarding
the characteristics and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof) and should be read in
conjunction therewith.
S-30
<PAGE> 31
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-4 CLASS A-5
-------------------------------------------------- --------------------------------------------------
PAYMENT DATE 0% 75% 100% 115% 150% 200% 0% 75% 100% 115% 150% 200%
- - ---------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 15, 1997.......... 100 100 100 100 100 100 100 100 100 100 100 100
May 15, 1998.......... 100 100 100 100 100 100 100 100 100 100 100 100
May 15, 1999.......... 100 100 100 100 100 100 100 100 100 100 100 100
May 15, 2000.......... 100 100 100 100 100 66 100 100 100 100 100 100
May 15, 2001.......... 100 100 100 100 84 24 100 100 100 100 100 100
May 15, 2002.......... 100 100 100 100 46 0 100 100 100 100 100 98
May 15, 2003.......... 100 100 66 43 7 0 100 100 100 100 100 43
May 15, 2004.......... 100 81 38 20 0 0 100 100 100 100 76 23
May 15, 2005.......... 100 56 19 4 0 0 100 100 100 100 49 13
May 15, 2006.......... 100 27 0 0 0 0 100 100 100 69 28 6
May 15, 2007.......... 100 12 0 0 0 0 100 100 71 47 17 3
May 15, 2008.......... 100 1 0 0 0 0 100 100 50 32 11 2
May 15, 2009.......... 100 0 0 0 0 0 100 73 34 21 6 1
May 15, 2010.......... 100 0 0 0 0 0 100 50 22 13 4 0
May 15, 2011.......... 55 0 0 0 0 0 100 24 10 6 1 0
May 15, 2012.......... 47 0 0 0 0 0 100 19 7 4 1 0
May 15, 2013.......... 41 0 0 0 0 0 100 15 5 3 1 0
May 15, 2014.......... 35 0 0 0 0 0 100 11 4 2 0 0
May 15, 2015.......... 28 0 0 0 0 0 100 9 3 1 0 0
May 15, 2016.......... 21 0 0 0 0 0 100 7 2 1 0 0
May 15, 2017.......... 17 0 0 0 0 0 100 5 1 1 0 0
May 15, 2018.......... 14 0 0 0 0 0 100 4 1 0 0 0
May 15, 2019.......... 10 9 0 0 0 0 100 3 1 0 0 0
May 15, 2020.......... 5 0 0 0 0 0 100 2 1 0 0 0
May 15, 2021.......... 0 0 0 0 0 0 100 2 0 0 0 0
May 15, 2022.......... 0 0 0 0 0 0 84 1 0 0 0 0
May 15, 2023.......... 0 0 0 0 0 0 66 1 0 0 0 0
May 15, 2024.......... 0 0 0 0 0 0 46 1 0 0 0 0
May 15, 2025.......... 0 0 0 0 0 0 23 0 0 0 0 0
May 15, 2026.......... 0 0 0 0 0 0 0 0 0 0 0 0
June 15, 2027......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)*......... 17.4 9.4 7.9 7.2 6.0 4.5 27.7 14.8 12.7 11.6 9.5 7.5
</TABLE>
- - ---------------
* The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each distribution in reduction of the related
Principal Balance by the number of years from the date of issuance of the
Certificate to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the highest related Principal Balance of the Certificate.
This table has been prepared based on the assumptions described in the second
and fourth paragraphs preceding this table (including the assumptions regarding
the characteristics and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof) and should be read in
conjunction therewith.
S-31
<PAGE> 32
THE ORIGINATORS AND THE SERVICER -- ORIGINATION,
FORECLOSURE AND LOSS EXPERIENCE
GENERAL
For a general discussion of the Depositors, the Servicers and the
Originators, see "The Depositors, the Servicer, the Representative and the
Originators" in the Prospectus. In the discussion that follows, references to
the "Company" include EquiCredit Corporation, EquiCredit Corporation of America
("EquiCredit") and its subsidiaries (including the other Originators) and
EquiCredit's predecessor in interest, OSCC-Florida.
As of March 31, 1996, the Company had a total of 859 employees; 270
employees at its Jacksonville, Florida headquarters and an additional 589
employees in 117 branch offices located nationwide. As of December 31, 1995, the
total stockholder's equity of the Company was $361,200,473. Copies of the
audited financial statements of the Company for the fiscal years ended December
31, 1995, 1994 and 1993, prepared on the basis of generally accepted accounting
principles, may be obtained upon request from John P. Silsby, II, Senior Vice
President and Chief Accounting Officer, EquiCredit Corporation of America, 10401
Deerwood Park Boulevard, Jacksonville, Florida 32256 or by telephoning (904)
987-5106.
LOAN ORIGINATION HISTORY
At December 31, 1995, the Company conducted loan origination and/or
wholesale operations in a number of states, including but not limited to
Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa,
Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New
York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and
Wisconsin.
The dollar amounts of first and second lien mortgage loans originated or
purchased and re-underwritten by the Company during the years ended December 31,
1995, 1994 and 1993 were $1,117,014,000, $653,975,000 and $601,573,000,
respectively. The dollar amount of the first and second lien mortgage loans
originated or purchased and re-underwriten by the Company during the three
months ended March 31, 1996 was $358,192,090.
UNDERWRITING PROGRAMS
The following table sets forth the distribution of the Mortgage Loans among
the Underwriting Programs as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF MORTGAGE PERCENT OF MORTGAGE
UNDERWRITING POOL BY NUMBER OF POOL BY NUMBER OF
PROGRAM PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS
- - ------------------------- ----------------- -------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Class A.................. $ 148,740,591.46 50.16% 3,111 49.48%
Class B.................. 98,992,101.43 33.38 1,954 31.08
Class C.................. 33,237,893.97 11.21 796 12.66
Class C-2................ 10,104,053.99 3.41 290 4.61
Class D.................. 5,459,757.36 1.84 136 2.16
----------------- -------- ------- --------
Total.......... $ 296,534,398.21 100.00% 6,287 100.00%
=============== ================ ============= ================
</TABLE>
See "The Depositors, the Servicer, the Representative and the
Originators -- Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus for a discussion of each of the Underwriting Programs.
S-32
<PAGE> 33
SERVICING PORTFOLIO
At December 31, 1995 and March 31, 1996, the Company serviced a total
portfolio of 60,000 and 64,169 mortgage loans, respectively, having aggregate
unpaid principal balances of $2,352,506,412 and $2,532,297,070, respectively,
for itself and investors consisting primarily of major commercial banks, savings
and loan associations, brokerage houses and the Federal National Mortgage
Association ("FNMA"). The foregoing figures include loans that were not
originated or acquired and re-underwritten by the Company but are serviced
(principally for FNMA) on a contractual basis.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth the Company's delinquency and charge-off
experience at the dates indicated on mortgage loans included in its servicing
portfolio, including loans in foreclosure proceedings, but excluding loans
serviced by the Company that were not originated or acquired and re-underwritten
by the Company (such portfolio, excluding such loans, the "Primary Servicing
Portfolio").
<TABLE>
<CAPTION>
AT OR FOR
THE
THREE
MONTHS
AT OR FOR THE YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------- MARCH 31,
1992 1993 1994 1995(4) 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Portfolio Unpaid
Principal
Balance(1)......... $1,257,049 $1,443,696 $1,710,980 $2,348,583 $2,528,600
Average Portfolio
Unpaid
Principal
Balance............ $1,197,341 $1,350,373 $1,577,333 $2,029,782 $2,438,951
Period of
Delinquency(2):
30-59 Days......... 0.73% 0.75% 0.72% 1.38% 1.34%
60-89 Days......... 0.55% 0.50% 0.47% 0.68% 0.66%
90 Days or More.... 3.01% 2.65% 2.22% 2.38% 2.59%
Total
Delinquencies...... 4.29% 3.90% 3.40% 4.45% 4.59%
Total Credit
Losses(3).......... $ 5,647 $ 8,733 $ 8,749 $ 10,738 $ 2,031
Total Credit Losses
as a Percent of
Average Portfolio
Unpaid Principal
Balance............ 0.47% 0.65% 0.55% 0.53% 0.33%(5)
</TABLE>
- - ---------------
(1) Portfolio Unpaid Principal Balance is the net amount of principal to be paid
on each mortgage loan, excluding unearned finance charges and other charges,
and excludes the principal balance of each mortgage loan as to which the
related mortgaged property has been previously acquired through foreclosure.
(2) Delinquency percentages are calculated as the dollar amount of mortgage loan
principal delinquent as a percent of the Portfolio Unpaid Principal Balance.
Delinquency percentages include the principal balance of all mortgage loans
in foreclosure proceedings. Generally, all Mortgage Loans in foreclosure
proceedings are 90 days or more delinquent. Delinquency percentages do not
include the principal balance of mortgage loans which are real estate owned.
(3) Total Credit Losses includes (a) charge-offs of principal, net of subsequent
recoveries, relating to mortgage loans written off as uncollectible or
charge-offs relating to properties securing any mortgage loans which have
been foreclosed upon and for which, in the opinion of management,
liquidation proceeds would not exceed estimated expenses of liquidation plus
the unpaid principal balance, (b) expenses associated with maintaining,
repairing, and selling foreclosed properties and real estate owned, and (c)
losses (gains) on the disposition of foreclosed properties and real estate
owned.
(4) Commencing August 1995 the Company moved the end of its mortgage loan
collection period from the first business day of a subsequent calendar month
to the next to last business day of the calendar month being reported. As a
consequence of this accounting change, commencing August 1995, mortgage
loans were reported delinquent which would not have been so reported in
prior periods. In the opinion of the Company, a portion of the increase in
delinquency percentages from 1994 to 1995 was due to this accounting change.
(5) Annualized.
S-33
<PAGE> 34
The delinquency percentages set forth in the preceding table are calculated
on the basis of the unpaid principal balances of mortgage loans included in the
Primary Servicing Portfolio as of the end of the periods indicated. The
charge-off experience percentages set forth above are calculated on the basis of
the average outstanding unpaid principal balance of mortgage loans included in
the Primary Servicing Portfolio during the periods indicated. However, because
the amount of loans included in the Primary Servicing Portfolio has increased
over these periods as a result of new originations, the Primary Servicing
Portfolio as of the end of any indicated period includes many loans that will
not have been outstanding long enough to give rise to some or all of the
indicated periods of delinquency or to have resulted in losses. In the absence
of such substantial and continual additions of newly originated loans to the
Primary Servicing Portfolio, the delinquency and charge-offs percentages
indicated above would be higher and could be substantially higher. The actual
delinquency percentages and loss experience with respect to the Mortgage Loans
may be expected to be substantially higher than the delinquency percentages
indicated above because the composition of the Mortgage Pool will not change.
In addition, over the last several years, there has been a general
deterioration of the real estate market and weakening of the economy in many
regions of the country. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, the Company may experience an increase in delinquencies on
the loans it services and higher credit losses on liquidated loans.
OUTSTANDING REAL ESTATE OWNED
At each of December 31, 1995 and March 31, 1996, approximately 265 and 278
properties, respectively, acquired through foreclosure were owned by the Company
for its own account or on behalf of owners of other mortgage loans included in
the Company's Primary Servicing Portfolio. Such properties, at December 31, 1995
and March 31, 1996, had recorded book values of $15,786,383 and $16,495,911,
respectively.
CERTAIN LITIGATION
On February 19, 1996, a class action complaint was filed in the U.S.
District Court for the Northern District of Georgia by Elizabeth D. Washington
on behalf of herself and others similarly situated, against EquiCredit
Corporation of Ga., an affiliate of the Servicer. The plaintiff purports to
represent a class consisting of all persons who obtained "federally regulated
mortgage loans" from February 16, 1995 to February 16, 1996 on which a fee or
yield spread premium ("YSP") was paid to a mortgage broker. The action is
brought pursuant to the Real Estate Settlement Procedures Act ("RESPA") alleging
that EquiCredit Corporation of Ga. violated RESPA by paying a YSP to Funding
Center of Georgia, Inc. ("FCG") failing to disclose such YSP on the Good Faith
Estimate of settlement costs, and failing to provide a Good Faith Estimate and
HUD "Special Information Booklet" within three days of receipt of the loan
application. The plaintiff seeks judgment equal to three times the amount of all
YSP paid by EquiCredit Corporation of Ga. to FCG and other brokers, as well as
court costs and litigation expenses, attorney fees and such other relief which
may be granted by the court. Management of EquiCredit Corporation of Ga. has
informed the Depositors that it denies that the company has violated any law,
rule, or regulation as asserted in the plaintiff's complaint and intends to
vigorously contest this action.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The EQCC Home Equity Loan Asset Backed Certificates, Series 1996-2 (the
"Certificates"), will consist of six classes of Certificates, designated as (i)
the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates and Class A-5 (collectively, the "Class A Certificates")
and (ii) the Class R Certificates. Only the Class A Certificates are offered
hereby.
S-34
<PAGE> 35
The following summary describes certain terms of the Certificates and the
Pooling and Servicing Agreement. Reference is made to the accompanying
Prospectus for important additional information regarding the terms of the
Certificates and the underlying documents. A form of the Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
the Prospectus forms a part. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the provisions of
the Certificates and the Pooling and Servicing Agreement. Where particular
provisions or terms used in any of such documents are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries.
The Certificates represent interests in the Trust created and held pursuant
to the Pooling and Servicing Agreement. The Trust Fund will consist primarily of
(i) the Mortgage Loans and all proceeds thereof, (ii) REO Property, (iii)
amounts on deposit in the Collection Account (as defined herein), Principal and
Interest Account (as defined herein), Insurance Account, Spread Account,
Pre-Funding Account, Capitalized Interest Account, and Letter of Credit Fee
Account, including amounts on deposit in such accounts and all investments of
amounts therein, (iv) certain rights of the Depositors under the Transfer
Agreement, (v) the Securities Insurance Policy, and (vi) certain other property;
provided, however, that the Trust Fund does not include the Representative's
Yield or amounts received on or after the Cut-off Date in respect of interest
accrued on the Mortgage Loans prior to the Cut-off Date.
Each Class A Certificate will be issued in minimum denominations of $1,000
and integral multiples thereof. Each Class A Certificate will represent a
percentage interest (a "Percentage Interest") in the Class A Certificates of the
applicable Class determined by dividing the original dollar amount represented
by such Class A Certificate by the original aggregate principal amount of all
Class A Certificates of such Class.
The Final Scheduled Payment Date for each Class of the Class A Certificates
are as follows:
<TABLE>
<CAPTION>
FINAL SCHEDULED PAYMENT DATE
----------------------------
<S> <C>
Class A-1 Certificates: June 15, 2003
Class A-2 Certificates: September 15, 2008
Class A-3 Certificates: December 15, 2010
Class A-4 Certificates: June 15, 2021
Class A-5 Certificates: June 15, 2027
</TABLE>
The Final Scheduled Payment Date for each Class of Class A Certificates
(other than the Class A-5 Certificates) is the date on which the Original
Principal Balance set forth on the cover page hereof for such Class would be
reduced to zero assuming that (x) no Prepayments or Curtailments are received on
any of the Mortgage Loans, (y) each Monthly Payment of principal of and interest
on each Mortgage Loan is timely received and (z) the Mortgage Loans have the
applicable characteristics set forth in the tables immediately following the
tenth paragraph under "Certain Yield and Prepayment Considerations" herein. The
Final Scheduled Payment Date for the Class A-5 Certificates is the Payment Date
following the calendar month in which the stated maturity of the Mortgage Loan
having the latest stated maturity occurs, plus one year.
The date on which the final payment on any Class A Certificate is
distributed could occur significantly earlier than its Final Scheduled Payment
Date, because, among other things, (i) prepayments on Mortgage Loans are likely
to occur, (ii) defective Mortgage Loans may be purchased from the Trust under
certain circumstances described herein, (iii) the Servicer may purchase all of
the Mortgage Loans when the aggregate outstanding principal amount of the
Mortgage Loans is less than 10% of the sum of the Original Pool Principal
Balance and the original Pre-Funded Amount and (iv) shortfalls in principal due
to losses on the Mortgage Loans could result in Insured Payments in respect of
principal on the Class A Certificates.
The Servicer will service the Mortgage Loans either directly or through
subservicers in accordance with the Pooling and Servicing Agreement and
generally in accordance with the first and second mortgage loan servicing
standards and procedures accepted by prudent mortgage lending institutions.
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See "Description of the Offered Securities -- Servicing Standards" and "Use of
Subservicers" in the Prospectus for a further description of the provisions of
the Pooling and Servicing Agreement relating to servicing standards and the use
of subservicers.
BOOK-ENTRY REGISTRATION
Certificateholders 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 that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Certificates. CEDEL and
Euroclear will hold omnibus positions on behalf of the CEDEL Participants and
the Euroclear Participants, respectively, through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
(collectively the "Depositaries"), which in turn will hold such positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
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 UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. 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").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable 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 in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a DTC 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 additional information regarding clearance and settlement procedures
for the Certificates, see Annex I hereto, and for information with respect to
tax documentation procedures relating to the Certificates, see Annex I hereto
and "Certain Federal Tax Considerations -- Federal Income Tax Consequences For
REMIC Certificates -- Other Matters Relating to REMIC Certificates -- Taxation
of Certain Foreign Investors -- Regular Certificates" in the Prospectus.
The Certificateholders that are not Participants or Indirect Participants
but who desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Certificates may do so only through Participants and Indirect
Participants. In addition, Certificateholders will receive all distributions of
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principal and interest from the Trustee through the Participants who in turn
will receive them from DTC. Under a book-entry format, Certificateholders may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Trustee to Cede, as nominee for DTC. DTC will forward such
payments to its Participants, which thereafter will forward them to Indirect
Participants or Certificateholders. It is anticipated that the only
"Certificateholder" will be Cede, as nominee of DTC. Certificateholders will not
be recognized by the Trustee as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, and Certificateholders will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and its
Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Certificates among Participants on whose behalf it acts with respect to the
Certificates and to receive and transmit distributions of principal of, and
interest on, the Certificates. Participants and Indirect Participants with which
the Certificateholders 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 Certificateholders. Accordingly, although the
Certificateholders will not possess Certificates, the Rules provide a mechanism
by which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Certificateholder under the Pooling and Servicing Agreement only
at the direction of one or more Participants to whose accounts with DTC the
Certificates are credited. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
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 and may include the Underwriters. 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 the
Euroclear System ("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 the risk from transfers of securities and cash that are not
simultaneous.
The Euroclear System has subsequently been extended to clear and settle
transactions between Euroclear Participants and counterparties both in CEDEL and
in many domestic securities markets. Transactions may be settled in any of 32
settlement currencies. In addition to safekeeping (custody) and securities
clearance and settlement, the Euroclear System includes securities lending and
borrowing and money transfer services. The Euroclear System is operated by the
Brussels, Belgium, office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance System S.C., a
Belgian cooperative corporation that establishes policy on behalf of Euroclear
Participants. The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a
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<PAGE> 38
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.
All operations are conducted by the Euroclear Operator and all Euroclear
securities clearance accounts and cash accounts are accounts with the Euroclear
Operator. They 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 all transfers of securities and cash, both within the System
and receipts and withdrawals of securities and cash. All securities in the
Euroclear System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries and may
include any of the Underwriters. Indirect access to the Euroclear System 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 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.
Except as required by law, the Trustee will have no liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the Certificates held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
REPRESENTATIONS AND WARRANTIES OF THE DEPOSITORS AND THE ORIGINATORS
Each Originator will make the representations, among others, as to each
Mortgage Loan conveyed by any Originator to the Depositors as of the Closing
Date described under "Description of the Offered Securities -- Representations
and Warranties of the Originators and the Depositors" in the Prospectus and will
also represent that:
1. No more than approximately 0.81% of the Initial Mortgage Loans are
secured by Mortgaged Properties improved by permanently affixed
manufactured housing units;
2. Approximately 37.40% of the Initial Mortgage Loans are Balloon
Loans. All of the Balloon Loans provide for monthly payments based on an
amortization schedule specified in the related Mortgage Note and have a
final balloon payment no earlier than 60 months following the date of
origination and no later than at the end of the 191st month following the
date of origination;
3. No more than approximately 0.56% of the Initial Mortgage Loans were
30 or more days contractually delinquent, and no more than approximately
0.01% of the Initial Mortgage Loans were 60 or more days contractually
delinquent;
4. No more than approximately 0.49% of the Initial Mortgage Loans are
secured by Mortgaged Properties located within any single zip code area;
and
5. Initial Mortgage Loans representing at least approximately 95.55%
of the Original Pool Principal Balance are secured by an Owner Occupied
Mortgaged Property.
The percentages set forth in the representations above have been calculated
as of the Statistic Calculation Date. The representations made by each
Originator in the Transfer Agreement and by the Depositors in the Pooling and
Servicing Agreement will be calculated as of the Cut-off Date, and such
representations may also apply to Subsequent Mortgage Loans acquired on the
Closing Date concurrently with the Initial Mortgage Loans. Any differences
between the percentages set forth above and the percentages actually used in the
representations made by each Originator as of the Cut-off Date are not expected
to be material.
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<PAGE> 39
DISTRIBUTIONS
General. The Trustee is required to establish a trust account (the
"Collection Account") for the remittance of payments on the Mortgage Loans to
the Certificateholders. The Collection Account is required to be maintained as
an Eligible Account.
On each Payment Date, commencing on June 17, 1996, the Trustee will
distribute to each person in whose name a Certificate is registered (which, as
to each Class of Class A Certificates, initially will be only Cede, the nominee
of DTC) on the related Record Date, the portion of the aggregate distribution to
which such Certificateholder is entitled, if any, based on the Percentage
Interest of the Certificates held by such holder. Distributions will be made by
wire transfer of immediately available funds to the account of such
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder owns of record Certificates aggregating in
excess of $1,000,000, and shall have provided complete wiring instructions to
the Trustee at least five business days prior to the related Record Date, and
otherwise by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register. See "Registration of the Offered
Securities -- Registration and Transfer of the Offered Securities" in the
Prospectus.
On each Payment Date, the Trustee shall withdraw from the Collection
Account and distribute, based on the information provided in the most recent
Trustee's Remittance Report, the following amounts to the extent available, in
the priority indicated:
(i) first, except as otherwise specified in the Pooling and Servicing
Agreement, for deposit into the Insurance Account for the benefit of the
Insurer, the Monthly Premium payable to the Insurer;
(ii) second, for deposit into the Spread Account, the Excess Spread;
(iii) third, for deposit into the Letter of Credit Fee Account, the
Letter of Credit Fee Amount, representing the fees due to the issuers of
any Letters of Credit;
(iv) fourth, to each Class of Class A Certificates, the related Class
A Interest Remittance Amount;
(v) fifth, to the extent not payable pursuant to clause (i) above, as
specified in the Pooling and Servicing Agreement, for deposit into the
Insurance Account for the benefit of the Insurer, the Monthly Premium
payable to the Insurer;
(vi) sixth, to the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates and Class A-5 Certificates,
in that order, to be applied to reduce the Principal Balance of each such
Class to zero, the Class A Principal Remittance Amount;
(vii) seventh, to the Trustee, any amounts then due and owing
representing fees of the Trustee, provided that the Trustee certifies in
writing that such amount is due and owing and has not been paid by the
Servicer within 30 days after written demand therefor;
(viii) eighth, to the Servicer and/or the Representative, an amount
equal to the amounts expended by the Servicer or the Representative and
reimbursable thereto under the Pooling and Servicing Agreement but not
previously reimbursed;
(ix) ninth, to the Servicer an amount equal to Nonrecoverable Advances
previously made by the Servicer and not previously reimbursed; and
(x) tenth, to the Class R Certificateholders, the balance, if any.
The amount available to make the payments described above will generally
equal the sum of (i) the Available Payment Amount for the related Due Period,
(ii) the Spread Account Draw deposited into the Collection Account from the
Spread Account and (iii) any Insured Payments deposited into the Collection
Account with respect to the related Due Period.
The Pooling and Servicing Agreement provides that, to the extent the
Insurer makes Insured Payments, the Insurer will be subrogated to the rights of
the Class A Certificateholders with respect to
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<PAGE> 40
such Insured Payments and shall be deemed, to the extent of the payments so
made, to be a registered holder of Class A Certificates, and shall be entitled
to reimbursement for such Insured Payments, with interest thereon at the
applicable Pass-Through Rate on each Payment Date following the making of an
Insured Payment, only after the Class A Certificateholders have received the
Class A Remittance Amount for such Payment Date.
Interest. Interest on each Class of Class A Certificates will accrue from
the fifteenth calendar day of each month, commencing May 15, 1996 (whether or
not such day is a Business Day) to, but excluding, the fifteenth calendar day of
the next succeeding month (whether or not such day is a Business Day) (each, an
"Accrual Period"). Interest shall accrue on each Class of Class A Certificates
at the related Pass-Through Rate shown on the cover page hereof. Interest shall
be distributed to each Class of Class A Certificates on each Payment Date to the
extent of available funds (including any withdrawals from the Spread Account and
any Insured Payments). Interest with respect to each Class of the Class A
Certificates will accrue on the basis of a 360 day year consisting of twelve 30
day months. With respect to each Payment Date and each Class of Class A
Certificates, interest accrued during the related Accrual Period at the related
Pass-Through Rate on the related Principal Balance (as defined below)
outstanding on the immediately preceding Payment Date (after giving effect to
all payments of principal made on such Payment Date) is referred to herein as
the "Class A Interest Remittance Amount" for such Class of Class A Certificates.
See "Description of the Certificates -- Distributions" in the Prospectus.
Principal. Holders of the Class A Certificates will be entitled to receive
on each Payment Date, in the order and priority set forth herein, to the extent
of the portion of the amount available for distribution attributable to the
principal of the Mortgage Loans (but not more than the Principal Balance of the
related Class then outstanding), a distribution allocable to principal which
will generally equal the sum of (a)(i) the principal portion of all scheduled
payments ("Monthly Payments") received on the Mortgage Loans during the calendar
month preceding the calendar month in which such Payment Date occurs (the "Due
Period"), (ii) any principal prepayments in full of any such Mortgage Loans
("Principal Prepayments") and partial prepayments on any such Mortgage Loan
received during the related Due Period that are not Principal Prepayments (each,
a "Curtailment"), (iii) the principal portion of (A) the proceeds of any
insurance policy relating to a Mortgage Loan, a Mortgaged Property (as defined
below) or a REO Property (as defined below), net of proceeds to be applied to
the repair of the Mortgaged Property or released to the Mortgagor (as defined
herein) and net of expenses reimbursable therefrom ("Insurance Proceeds"), (B)
proceeds received during the related Due Period in connection with the
liquidation of any defaulted Mortgage Loans, whether by trustee's sale,
foreclosure sale or otherwise ("Liquidation Proceeds"), net of fees and advances
reimbursable therefrom ("Net Liquidation Proceeds") and (C) proceeds received
during the related Due Period in connection with a taking of a related Mortgaged
Property by condemnation or the exercise of eminent domain or in connection with
a release of part of any such Mortgaged Property with respect to a Mortgage Loan
from the related lien ("Released Mortgaged Property Proceeds"), (iv) the
principal portion of all amounts paid by the Depositors (which are limited to
amounts paid by the Representatives or an Originator pursuant to the obligation
to purchase or substitute Mortgage Loans contained in the Transfer Agreement) in
connection with the purchase of, or the substitution of a substantially similar
mortgage loan for, a Mortgage Loan as to which there is defective documentation
or a breach of a representation or warranty contained in the Pooling and
Servicing Agreement and (v) the principal balance of each defaulted Mortgage
Loan or REO Property as to which the Servicer has determined that all amounts
expected to be recovered have been recovered (each, a "Liquidated Mortgage
Loan") to the extent not included in the amounts described in clauses (i)
through (iv) above (the sum of (i) through (v) above, the "Basic Principal
Amount") and (b) the sum of (i) the amount, if any, by which (A) the amount
required to be distributed to Class A Certificateholders as of the preceding
Payment Date exceeded (B) the amount of the actual distribution to such Class A
Certificateholders on such preceding Payment Date, exclusive of any portion of
any Insured Payment made to such Certificateholders, and (ii) if any portion of
the amount in the preceding clause (i) represents Insured Payments made by the
Insurer, interest on such portion at the applicable Pass-Through Rate from such
immediately preceding Payment Date (the "Carry-Forward Amount" and, together
with the Basic Principal Amount, the "Class A Principal Remittance Amount").
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On each Payment Date, the lesser of (i) the Principal Balance of the Class
A Certificates then outstanding and (ii) the Class A Principal Remittance Amount
(together with the Class A Interest Remittance Amount, the "Class A Remittance
Amount") is payable to the Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-5 Certificates, in that order, until the Principal Balance of each such Class
is reduced to zero.
As of any Payment Date, the "Class A Principal Balance" will equal the sum
of the Original Class A-1 Principal Balance, the Original Class A-2 Principal
Balance, the Original Class A-3 Principal Balance, the Original Class A-4
Principal Balance and the Original Class A-5 Principal Balance, less all amounts
previously distributed on account of principal to holders of the Class A
Certificates. As of any Payment Date, the Principal Balance for each Class of
Class A Certificates will equal the Original Principal Balance for such Class,
less all amounts previously distributed on account of principal to holders of
such Class.
Spread Account. The Trustee will establish a trust account (the "Spread
Account") for the benefit of the Certificateholders and the Insurer into which
it will deposit upon receipt from the Servicer on each Payment Date the excess,
if any, of the aggregate interest accrued during the related Due Period on the
Mortgage Loans at their respective annual rates of interest (each such annual
rate of interest referred to as the "Mortgage Interest Rate" for the applicable
Mortgage Loan) over the sum of (i) the Class A Interest Remittance Amount for
the Class A Certificates, (ii) the monthly fee due to the Insurer (the "Monthly
Premium"), (iii) the Letter of Credit Fee Amount due to the issuer of any Letter
of Credit and (iv) the Servicing Fee for such Mortgage Loans (such aggregate
amount, the "Excess Spread"). The Trustee is required to retain 100% of the
Excess Spread (the "Periodic Excess Spread Amount") in the Spread Account until
the amount on deposit therein is equal to an amount specified by the Insurer in
the Pooling and Servicing Agreement (the "Base Spread Account Requirement").
After the amount on deposit in the Spread Account is equal to the Base Spread
Account Requirement, the amount required to be on deposit in the Spread Account
at any time as specified by the Insurer in the Pooling and Servicing Agreement
(the "Specified Spread Account Requirement") may be reduced over time as
specified by the Insurer, provided that such reduction shall not result in the
reduction of the rating of the Class A Certificates. The percentage used in
determining the Periodic Excess Spread Amount may be reduced at the sole
discretion of the Insurer with the consent of each Account Party, and the Base
Spread Account Requirement may be reduced at the sole discretion of the Insurer,
in each case without the consent of any Certificateholder. The Pooling and
Servicing Agreement permits the Spread Account to be funded in part by one or
more Letters of Credit issued by banks, trust companies or other institutions
having debt obligations on the date of delivery of such Letter of Credit with
ratings that are acceptable to Moody's and S&P, and having certain other
qualifications set forth in the Pooling and Servicing Agreement. Amounts
available for drawing under any Letter of Credit will be deemed to be on deposit
in the Spread Account.
On each Payment Date, amounts, if any, on deposit in the Spread Account
will be available to fund any shortfall between the available funds for
distributions to Class A Certificateholders and the Class A Remittance Amount;
provided, however, that, on and after such date (the "Cross-Over Date") on which
the aggregate withdrawals from the Spread Account to cover shortfalls in amounts
payable on the Class A Certificates attributable to Mortgage Loan Losses
("Cumulative Spread Account Receipts") equal an amount specified by the Insurer
(the "Subordinated Amount") in the Pooling and Servicing Agreement, no further
withdrawals with respect to shortfalls in the amounts required to be paid on the
Class A Certificates may be made from the Spread Account, and the Specified
Spread Account Requirement will thereafter be zero. The Pooling and Servicing
Agreement provides that the Specified Spread Account Requirement for any date
shall in no event be greater than the Subordinated Amount as of such date.
If the Trustee determines prior to any Payment Date that the amount
available in cash and from the liquidation of Permitted Instruments in which all
or a portion of the Spread Account has been invested is insufficient to fund any
withdrawals required to be made from the Spread Account on such Payment Date,
the Trustee is required to cause to be presented to the issuers of any Letters
of Credit on deposit in the Spread Account one or more drawing certificates in
proper form for the payment under such Letters of
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Credit of the amount of such insufficiency. The proceeds of any such drawings
are required to be deposited into the Spread Account for withdrawal on such
Payment Date.
On each Payment Date any amounts constituting (i) Excess Spread in excess
of the Periodic Excess Spread Amount (the "Remainder Excess Spread Amount"),
(ii) amounts in the Spread Account in excess of the Specified Spread Account
Requirement (any such amount, a "Spread Account Excess") and (iii) after the
Cross-Over Date, the entire Excess Spread will be distributed to the holders of
the Class R Certificates, after payment of outstanding LC Obligations to Account
Parties and of unreimbursed Servicing Advances to the Servicer.
Neither the holders of the Class R Certificates nor the Servicer will be
required to refund any amounts previously distributed to them properly,
regardless of whether there are sufficient funds on a subsequent Payment Date to
make full distributions to the Class A Certificateholders of the amounts
required to be distributed to the Class A Certificateholders.
The funding and maintenance of the Spread Account is intended to enhance
the likelihood of timely payment to the Class A Certificateholders of the Class
A Remittance Amount and to afford limited protection against losses in respect
of the Mortgage Loans; however, in certain circumstances, the Spread Account
could be depleted and shortfalls could result.
Notwithstanding the depletion of the Spread Account, the Insurer will be
obligated to make Insured Payments on each Payment Date to fund the full amount
of the Class A Remittance Amount on any Payment Date.
Certain Definitions. For purposes of the provisions described above, the
following terms have the respective meanings ascribed to them below, each
determined as of any Payment Date.
"Available Payment Amount" generally equals (a) collections on or with
respect to the Mortgage Loans received by the Servicer during the related Due
Period, net of the Servicing Fee paid to the Servicer during the related Due
Period and reimbursements for accrued unpaid Servicing Fees and for certain
expenses paid by the Servicer, plus (b) the amount of any Advances made by the
Servicer, less (c) Excess Spread.
"Basic Principal Amount" means the sum of (i) the principal portion of each
Monthly Payment received by the Servicer or any Subservicer during the related
Due Period, (ii) all Curtailments and all Principal Prepayments received during
such related Due Period, (iii) the principal portion of all Insurance Proceeds,
Released Mortgaged Property Proceeds and Net Liquidation Proceeds received
during the related Due Period, (iv)(a) that portion of the purchase price of any
purchased Mortgage Loans which represents principal and (b) any Substitution
Adjustments deposited into the Collection Account as of the related
Determination Date and (v) the Principal Balance of each Mortgage Loan as of the
beginning of the related Due Period which became a Liquidated Loan during the
related Due Period.
"Class A Carry-Forward Amount" means the sum of (i) the amount, if any, by
which (x) the Class A Remittance Amount as of the immediately preceding Payment
Date exceeded (y) the amount of the actual distribution to the Class A
Certificateholders, exclusive of any portion of such amount attributable to any
Insured Payment, on such preceding Payment Date, and (ii) if any portion of the
amount in the preceding clause (i) represents Insured Payments made by the
Insurer, interest on such portion at the applicable Pass-Through Rate.
"Class A Remittance Amount" means the sum of the Class A Principal
Remittance Amount and the Class A Interest Remittance Amount.
"Excess Spread" means the excess, if any, of the aggregate interest accrued
during the related Due Period on all of the Mortgage Notes at their respective
Mortgage Interest Rates over the sum of the Class A Interest Remittance Amount
for the Class A Certificates, the Monthly Premium due to the Insurer and the
Servicing Fee (such excess, the "Excess Spread").
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<PAGE> 43
"Insured Payment" means the amount, if any, by which (A) the Class A
Remittance Amount exceeds (B) the sum of (i) the Available Payment Amount plus
any amounts transferred from the Spread Account to the Collection Account and
(ii) the aggregate amount of any previous Insured Payments for which the Insurer
has not been reimbursed.
"Mortgage Loan Losses" means the aggregate sum of the amount, if any, by
which the sum of (i) the outstanding principal balance of each Mortgage Loan
that became a Liquidated Mortgage Loan during the related Due Period (such
principal balance determined immediately before such Mortgage Loan became a
Liquidated Mortgage Loan) and accrued and unpaid interest thereon at the
Mortgage Interest Rate to the date on which such Mortgage Loan became a
Liquidated Mortgage Loan exceeds (ii) the Net Liquidation Proceeds received
during such Due Period in connection with the liquidation of such Mortgage Loan
which have not theretofore been used to reduce the Principal Balance of such
Mortgage Loan.
"Spread Account Draw" means an amount deposited into the Collection Account
from the Spread Account equal to the excess of (i) the Class A Remittance
Amount, over (ii) the Available Payment Amount less the fee of the Insurer and
any provider of a Letter of Credit (as reduced by any portion of the Available
Payment Amount that has been deposited in the Collection Account but may not be
withdrawn therefrom pursuant to an order of a United States bankruptcy court of
competent jurisdiction imposing a stay pursuant to Section 362 of the United
States Bankruptcy Code).
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the Class A
Certificates based upon the assumption that the Certificates will be issued in
May 1996.
May 1...................... Cut-off Date. The Original Pool Principal Balance
will be the aggregate principal balance of the
Mortgage Loans on the Cut-off Date (or, in the case
of Mortgage Loans originated after May 1, 1996, the
date of origination) after application of all
payments received prior to the Cut-off Date.
May 1 -- May 31............ Due Period. The Servicer and any subservicers
remit for deposit into the Principal and Interest
Account all amounts received on account of the
Mortgage Loans (other than interest accrued prior
to the Cut-off Date).
June 11.................... Determination Date. The Trustee determines, based
on information provided by the Servicer, the amount
of principal and interest that will be distributed
to Certificateholders on June 17, 1996.
June 12.................... The Servicer transfers funds, including any
Advances, in the Principal and Interest Account to
the Collection Account.
Not later than 10:00 a.m.
on June 14................. The Trustee will notify the Servicer and the
Insurer of the amount of the Insured Payment, if
any, required to be distributed to the Class A
Certificateholders on June 17, 1996.
June 14.................... First Record Date. Distributions on June 17, 1996
will be made to Certificateholders of record at the
close of business on June 14, 1996.
June 17.................... Payment Date. The Trustee or its designee will
transfer funds from the Collection Account and
Capitalized Interest Account into the Insurance
Account, Spread Account and the Letter of Credit
Fee Account, as required, and to Certificateholders
the amounts required to be distributed pursuant to
the Pooling and Servicing Agreement and distributes
the Remainder Excess Spread Amount, the Spread
Account Excess and, after the Cross-Over Date, the
entire Excess Spread, to the Class R
Certificateholders.
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<PAGE> 44
PRE-FUNDING ACCOUNT
On the Closing Date approximately $33,465,601.79 (the "Pre-Funded Amount")
will be deposited in a Pre-Funding Account, which account shall be an Eligible
Account and part of the Trust. The maximum aggregate principal amount of
Subsequent Mortgage Loans which may be deposited in the Trust is equal to the
sum of the Pre-Funded Amount, the principal payments received on the Initial
Mortgage Loans between the Statistic Calculation Date and the Cut-off Date and
the aggregate principal amount of Initial Mortgage Loans which are determined
not to meet the related eligibility requirements. The Pre-Funding Account will
initially be maintained at First Bank National Association. During the period
(the "Funding Period") from and including the Closing Date until the earlier of
(i) the date on which the amount on deposit in the Pre-Funding Account is less
than or equal to $100,000, or (ii) August 15, 1996, the Pre-Funded Amount will
be maintained in the Pre-Funding Account. The Pre-Funding Account will be
reduced during the Funding Period by the amount of Subsequent Mortgage Loans
deposited in the Trust in accordance with the Pooling and Servicing Agreement.
On the first Payment Date immediately following the Funding Period, any
Pre-Funded Amount (net of reinvestment income payable to the Class R
Certificateholders) remaining at the end of the Funding Period will be
distributed pro rata to the holders of each Class of the Class A Certificates in
reduction of the Principal Balances of their Certificates, resulting in a
partial principal prepayment of such Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in Permitted
Instruments as defined in the Pooling and Servicing Agreement. All such
Permitted Instruments are required to mature no later than the following
Business Day. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be distributed to the Class R
Certificateholders on the first Payment Date immediately following the Funding
Period.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date an amount will be deposited in the Capitalized Interest
Account, which account shall be an Eligible Account and part of the Trust. The
Capitalized Interest Account will be initially maintained at Bank of America
Illinois. The Capitalized Interest Account will be applied by the Trustee to
cover shortfalls in interest and certain fees accrued during the Funding Period
on the Class A Certificates attributable to the pre-funding feature. Any amounts
remaining in the Capitalized Interest Account on the Payment Date immediately
following the Funding Period and not used for such purpose are required to be
paid directly to the Class R Certificateholders on such Payment Date.
Amounts on deposit in the Capitalized Interest Account will be invested in
Permitted Instruments as defined in the Pooling and Servicing Agreement. All
such Permitted Instruments are required to mature no later than the Business Day
preceding the following Payment Date. All interest and any other investment
earnings on amounts on deposit in the Capitalized Interest Account will be
distributed to the Class R Certificateholders on the first Payment Date
immediately following the Funding Period.
SECURITIES INSURANCE POLICY
The Servicer will obtain the Securities Insurance Policy in favor of the
Trustee for the benefit of the Class A Certificateholders. In the event that, on
any Payment Date, the amount available for distribution (net of any Insured
Payments) is less than the Class A Remittance Amount, the Trustee will make a
draw on the Securities Insurance Policy for an Insured Payment, in an amount
equal to any such deficiency. The Securities Insurance Policy provides for 100%
coverage of the Class A Remittance Amount due on the Class A Certificates on
each Payment Date. The Securities Insurance Policy provides protection for
credit risk and does not guarantee to the Class A Certificateholders any
specified rate of principal payments or prepayments.
ADVANCES FROM THE PRINCIPAL AND INTEREST ACCOUNT
Not later than the close of business on the third business day prior to
each Payment Date, the Servicer shall withdraw from amounts on deposit in the
Principal and Interest Account and held for future
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<PAGE> 45
distribution and remit to the Trustee for deposit in the Collection Account an
amount (the "Advance"), to be distributed on the related Payment Date, equal to
the sum of the interest portions of the aggregate amount of Monthly Payments
(net of the related Servicing Fee and, after the later to occur of (x) the
Cross-Over Date and (y) the date on which there are no outstanding obligations
to repay any draw on any Letter of Credit (each, an "LC Obligation"), the Excess
Spread) accrued during the related Due Period, but uncollected as of the close
of business on the last day of the related Due Period. The Servicer generally
shall not be required to make such Advance from its own funds or be liable for
the recovery thereof from collections on the Mortgage Loans or otherwise.
SERVICING COMPENSATION
As compensation for servicing and administering the Mortgage Loans, the
Servicer is entitled to a fee (the "Servicing Fee") equal to 0.60% per annum
(the "Servicing Fee Rate") of the outstanding principal balance of each Mortgage
Loan, subject to certain limitations set forth in the Pooling and Servicing
Agreement, payable monthly from the interest portion of monthly payments on the
Mortgage Loans, Liquidation Proceeds, Released Mortgaged Property Proceeds,
Insurance Proceeds and certain other late collections on the Mortgage Loans. In
addition to the Servicing Fee, the Servicer is entitled under the Pooling and
Servicing Agreement to retain as additional servicing compensation any
assumption and other administrative fees (including bad check charges, late
payment fees and similar fees), the excess of any Net Liquidation Proceeds over
the outstanding principal balance of a Liquidated Mortgage Loan, to the extent
not otherwise required to be remitted to the Trustee for deposit into the
Collection Account and not constituting any part of the Representative's Yield,
and interest paid on funds on deposit in the Principal and Interest Account,
earnings paid on Permitted Instruments, certain amounts representing excess
funds released from the Insurance Account and similar items.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Advances of such payment or collection by the Servicer), or the disposition of
all funds with respect to the last Mortgage Loan and the remittance of all funds
due under the Pooling and Servicing Agreement and the payment of all amounts due
and payable to the Insurer and the Trustee or (b) mutual consent of the
Servicer, the Insurer 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 date of the Pooling and Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Servicer may, at its option,
terminate the Pooling and Servicing Agreement on any date following the first
Payment Date on which the Pool Principal Balance as of the last day of the
related Due Period is less than 10% of the sum of (i) Original Pool Principal
Balance and (ii) the original Pre-Funded Amount by purchasing, on the next
succeeding Payment Date, all of the outstanding Mortgage Loans and REO
Properties then remaining in the Trust at a price equal to (i) the sum of (x)
100% of the aggregate outstanding principal balances of the Mortgage Loans and
REO Properties and (y) accrued and unpaid interest thereon at a rate equal to
the weighted average Mortgage Interest Rate minus (ii) any amounts representing
collections on the Mortgage Loans and REO Properties not yet applied to reduce
the principal balance thereof or interest related thereto (the "Termination
Price"). In connection with such purchase, the Servicer is required to pay any
unpaid fees and expenses of the Trustee and the Insurer.
In connection with a purchase by the Servicer as described above, the
Servicer is required to remit to the Trustee all amounts then on deposit in the
Principal and Interest Account that would have constituted part of the Available
Payment Amount for subsequent Payment Dates absent such purchase. Any such
purchase is required to be accomplished by deposit of the Termination Price into
the Collection Account.
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<PAGE> 46
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Servicer and the Trustee by written agreement, upon the prior written consent of
the Insurer, without notice to, or consent of, the Certificateholders, to cure
any ambiguity, to correct or supplement any provisions therein, 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 shall not
be inconsistent with the provisions of the Pooling and Servicing Agreement, or
any Custodial Agreement, provided that such action does not, as evidenced by an
opinion of counsel delivered to the Trustee, adversely affect in any material
respect the interests of any Certificateholder; and provided, further, that no
such amendment is permitted to 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 to the
Pooling and Servicing Agreement without the consent of such party.
The Pooling and Servicing Agreement also may be amended from time to time
by the Representative, the Depositors, the Servicer and the Trustee, with the
consent of the Insurer, the Majority in Aggregate Voting Interest and the
holders of the majority of the Percentage Interest in the Class R Certificates
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement or of
modifying in any manner the rights of the Certificateholders; provided, however,
that no such amendment is permitted unless the Trustee receives an opinion of
counsel, at the expense of the party requesting the change, that such change
will not adversely affect the status of the Trust Fund as a REMIC or cause any
tax to be imposed on the REMIC, and provided further, that no such amendment is
permitted to 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 each such Certificate or reduce
the percentage for each Class the holders of which are required to consent to
any such amendment without the consent of the holders of 100% of each Class of
Certificates affected thereby.
Notwithstanding any contrary provision of the Pooling and Servicing
Agreement, the Trustee is not permitted to consent to any amendment to the
Pooling and Servicing Agreement unless it has first received an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the Servicer, the Representative, any Depositor, the Insurer or the Trustee
in accordance with such amendment will not result in the imposition of tax on
the Trust or cause the Trust Fund to fail to qualify as a REMIC at any time that
any Certificate is outstanding.
THE TRUSTEE
First Bank National Association, a national banking association organized
under the laws of the United States of America with its principal place of
business in the State of Minnesota, will be named Trustee pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement provides
that any corporation into which the Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Trustee shall be a party, or any corporation to which the Trustee
may sell or transfer all or substantially all of its corporate trust business,
shall be the successor Trustee provided that such corporation meets the
requirements described below.
Pursuant to the Pooling and Servicing Agreement, the Trustee is required at
all times to be a banking association organized and doing business under the
laws of the United States of America or of any State authorized under such laws
to exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, whose long-term deposits, if any, are rated at least "BBB" by
S&P and Baa2 by Moody's, or such lower rating as may be approved in writing by
the Insurer, Moody's and S&P, subject to supervision or examination by federal
or state authority and reasonably acceptable to the Insurer. If at any time the
Trustee shall cease to be eligible in accordance with the provisions described
in this paragraph, the Trustee shall give notice of such ineligibility to the
Insurer and shall resign, upon the request of the Insurer or the Majority in
Aggregate Voting Interest, in the manner and with the effect specified in the
Pooling and Servicing Agreement.
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<PAGE> 47
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by such
successor trustee.
The Trustee, or any successor trustee or trustees, may resign at any time
by giving written notice to the Servicer, the Insurer and to all
Certificateholders in the manner set forth in the Pooling and Servicing
Agreement. Upon receiving notice of resignation, the Servicer, with the consent
of the Insurer, is required to promptly appoint a successor trustee or trustees
meeting the eligibility requirements set forth above in the manner set forth in
the Pooling and Servicing Agreement. The Servicer will deliver a copy of the
instrument used to appoint a successor trustee to the Certificateholders. If no
successor trustee shall have been appointed and have accepted appointment within
60 days after the giving of such notice of resignation, the resigning trustee
may petition any court of competent jurisdiction for the appointment of a
successor trustee. Such court may thereupon, after such notice, if any, as it
may deem proper and prescribe, appoint a successor trustee.
The Majority in Aggregate Voting Interest or, if the Trustee fails to
perform in accordance with the terms of the Pooling and Servicing Agreement, the
Insurer, may remove the Trustee under the conditions set forth in the Pooling
and Servicing Agreement and appoint a successor trustee in the manner set forth
therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such person or persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Servicer and the Trustee may consider
necessary or desirable.
THE SECURITIES INSURANCE POLICY
AND THE INSURER
The information set forth in this section and in the financial statements
of the Insurer set forth in Appendix A hereto has been provided by Financial
Guaranty Insurance Company. No representation is made by the Representative, the
Depositors, any Originator or any of their affiliates as to the accuracy or
completeness of any such information.
Financial Guaranty Insurance Company (the "Insurer") will issue its
Securities Guaranty Surety Bond for the Class A Certificates (the "Securities
Insurance Policy"). The Securities Insurance Policy unconditionally guarantees
the payment of principal and scheduled interest on the Class A Certificates. The
Insurer will make each required Insured Payment to the Trustee on the later of
(i) the Payment Date on which such Insured Payment is distributable to the Class
A Certificateholders pursuant to the Pooling and Servicing Agreement and (ii)
the business day next following the day on which the Insurer shall have received
telephonic or telegraphic notice, subsequently confirmed in writing, or written
notice by registered or certified mail, from the Trustee, specifying that an
Insured Payment is due in accordance with the terms of the Securities Insurance
Policy.
The Insurer's obligation under the Securities 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 Securities Insurance Policy, "Class A
Certificateholder" as to a particular Certificate, does not and may not include
the Trust, the Servicer, any Subservicer, the Representative, any Depositor or
any Originator.
The Securities Insurance Policy does not guarantee to the Class A
Certificateholders any specified rate of prepayments of principal of the
Mortgage Loans or any specified return.
The Securities Insurance Policy is non-cancelable.
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<PAGE> 48
THE SECURITIES INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Insurer is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General Electric Capital Corporation ("GE Capital"). Neither the Corporation nor
GE Capital is obligated to pay the debts of or the claims of the Insurer.
The Insurer, a New York stock insurance company, 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
Insurer also insures a variety of non-municipal structured debt obligations. The
Insurer is authorized to write insurance in 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 Insurer
is subject to regulation by the State of New York Insurance Department.
The Insurer and its holding company, FGIC Corporation, are subject to
regulation by each jurisdiction in which the Insurer is licensed to write
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies and their insurance subsidiaries
to register and file certain reports, including information concerning their
capital structure, ownership and financial condition and require prior approval
by the insurance department of their states of domicile, of changes in control,
of certain dividends and other intercorporate transfer of assets and of
transactions between insurance companies, their parents and other affiliates.
The 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 Insurer is
subject to triennial audits by the State of New York Insurance Department.
The Insurer considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Insurer only insures securities
that the Insurer considers to be of investment grade quality. With respect to
each category of obligations considered for insurance, the Insurer has
established and maintains its own underwriting standards that are based on those
aspects of credit quality that the 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 Insurer also reviews the security features and reserves created by the
financing documentation, as well as the financial and other covenants imposed
upon the credit backing the issue. In connection with the underwriting of new
issues, the 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 Insurer.
Insurance written by the Insurer insures the full and timely payment of
principal and interest on insured debt securities and scheduled payments due in
respect of pass-through securities such as the Class A Certificates. If the
issuer of a security insured by the Insurer defaults on its obligations to pay
the insured amounts, or, in the case of a pass-through security, available funds
are insufficient to pay the insured amounts, the 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 Insurer is rated Aaa by
Moody's and "AAA" by S&P and Fitch.
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<PAGE> 49
In consideration for issuing its insurance, the 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 Insurer according to its
internal credit rating system and the type of issue.
As of December 31, 1995 and December 31, 1994, the Insurer had written
directly, or assumed through reinsurance, guaranties of approximately $180.0
billion and $160.2 billion par value of securities, respectively (of which
approximately 88 percent constituted guaranties of municipal bonds), for which
it had collected gross premiums of approximately $1.95 billion and $1.78
billion, respectively. As of December 31, 1995, the Insurer had reinsured
approximately 18 percent of the risks it had written, 41 percent through quota
share reinsurance and 59 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Insurer as of
December 31, 1994 and December 31, 1995, respectively, on the basis of generally
accepted accounting principles. No material adverse change in the capitalization
of the Insurer has occurred since December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
1995
DECEMBER 31, ------------
1994 (IN
------------ MILLIONS)
(IN
MILLIONS)
<S> <C> <C>
Unearned Premiums................................................ $ 757 $ 728
Other Liabilities................................................ 261 304
Stockholder's Equity
Common Stock................................................... 15 15
Additional Paid-in Capital..................................... 334 334
Net Unrealized Gains/(Losses).................................. (42) 64
Foreign Currency Translation Adjustment........................ (1) (2)
Retained Earnings.............................................. 974 1,137
------------ ------------
Total Stockholder's Equity....................................... 1,280 1,548
------------ ------------
Total Liabilities and Stockholder's Equity....................... $2,298 $2,580
=========== ===========
</TABLE>
For further financial information concerning the Insurer, see the audited
financial statements of the Insurer included as Appendix A of this Prospectus
Supplement.
Copies of the Insurer's quarterly and annual statutory statements filed by
the 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 Insurer's telephone number
is (212) 312-3000.
The 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 Insurer
and the Securities Insurance Policy set forth under the heading "The Securities
Insurance Policy and The Insurer" and set forth in Appendix A of this Prospectus
Supplement.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to ERISA
("Plans") and on those persons who are fiduciaries with respect to "plan assets"
of such Plans. In accordance with the general fiduciary standards of ERISA, a
Plan fiduciary or any other individual contemplating purchasing the Class A
Certificates with "plan assets" of any Plan should consider whether an
investment in the Class A Certificates is permitted by the documents and
instruments governing the Plan, consistent with the Plan's overall investment
policy, and appropriate in view of the composition of its investment portfolio.
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<PAGE> 50
Employee benefit plans that are governmental plans and certain church plans
(if no election has been made under Section 410(d) of the Code) are not subject
to ERISA requirements. Accordingly, assets of such plans may be invested in the
Class A Certificates subject to the provisions of applicable federal and state
law and, in the case of any such plan which is qualified under Section 401(a) of
the Code and exempt from taxation under Section 501(a) of the Code, the
restrictions imposed under Section 503(b) of the Code.
In addition to imposing general fiduciary standards, ERISA and Section 4975
of the Code prohibit a broad range of transactions involving "plan assets" of a
Plan or of a plan that is subject to Section 4975 of the Code (also a "Plan")
and certain persons who are "parties in interest" under ERISA or "disqualified
persons" under Section 4975 of the Code with respect to such Plans. If the
assets of the Trust were treated as "plan assets" of a Plan whose "plan assets"
are used to purchase or hold Class A Certificates, such an investment in Class A
Certificates might constitute or result in a non-exempt prohibited transaction
under ERISA or Section 4975 of the Code, unless a statutory or administrative
exemption applies. Violation of the prohibited transaction rules could result in
the imposition of excise taxes and/or other penalties and liabilities under
ERISA and/or Section 4975 of the Code.
FINAL PLAN ASSETS REGULATION
The U.S. Department of Labor has issued a final regulation (the "Final
Regulation") under which the purchase with "plan assets" of equity interests in
an entity could, in certain circumstances, cause the entity's assets to be
treated as "plan assets" of the investing Plan. Unless the Final Regulation
provides an exemption from this "plan asset" treatment, and if such an exemption
is not otherwise available under ERISA and Section 4975 of the Code, an
undivided portion of the assets of the Trust will be treated, for purposes of
applying the fiduciary standards and prohibited transaction rules of ERISA and
Section 4975 of the Code, as "plan assets" of each Plan whose "plan assets" are
used to purchase or hold Class A Certificates.
UNDERWRITERS' PTES
Salomon Brothers Inc ("Salomon"), the First Boston Corporation, a
predecessor of CS First Boston Corporation ("First Boston"), and Shearson Lehman
Hutton, Inc., a predecessor of an affiliate of Lehman Brothers Inc. ("Lehman"),
are the recipients of final prohibited transaction exemptions 54 Fed. Reg. 42589
(1989), 54 Fed. Reg. 42597 (1989) and 56 Fed. Reg. 7413 (1991), respectively
(collectively, the "Underwriters' PTEs"), which may accord protection from
violations under Sections 406 and 407 of ERISA and Section 4975 of the Code for
Plans whose "plan assets" are used to acquire Class A Certificates. The
Underwriters' PTEs apply to a certificate (a) which represents a beneficial
ownership interest in the assets of a trust and entitle the holder to
pass-through payments of principal, interest and/or other payments made with
respect to the assets of the trust, and (b) with respect to which Salomon, First
Boston, Lehman or any of their affiliates is either the sole underwriter, the
manager or co-manager of the underwriting syndicate or a selling or placement
agent. The corpus of a trust to which the Underwriters' PTEs apply may consist
of (1) obligations which bear interest or are purchased at a discount, and which
are identified on or before the Closing Date for deposit in the Trust which are
secured by (A) single-family residential, multifamily residential or commercial
real property (including obligations secured by leasehold interests on
commercial real property), or (B) shares issued by a cooperative housing
association; and (2) "guaranteed governmental mortgage pool certificates" (as
defined in the Final Regulation).
Plans whose "plan assets" are used to acquire Class A Certificates may be
eligible for protection under the Underwriters' PTEs if:
(a) assets of the type included as Trust Assets have been included in
other investment pools ("Other Pools");
(b) Certificates evidencing interests in Other Pools have been both
(1) rated in one of the three highest generic rating categories by Standard
& Poor's Rating Services, Moody's Investors
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<PAGE> 51
Service, Inc., Duff & Phelps, Inc. or Fitch Investors Services, Inc.; and
(2) purchased by investors other than Plans, for at least one year prior
to a Plan's acquisition of Certificates in reliance upon an Underwriters'
PTE;
(c) the Class of Certificates acquired by the Plan are not
subordinated to other Classes of Certificates of that series with respect
to the right to receive payment in the event of defaults or delinquencies
on the underlying trust assets;
(d) the Plan is an "accredited investor" (as defined in Rule 501(a)(1)
of Regulation D under the Securities Act);
(e) the acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(f) the Trustee is not an affiliate of any member of the Restricted
Group or any of their affiliates; and
(g) the sum of all payments made to and retained by the Underwriter in
connection with the distribution or placement of the Certificates
represents not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by any Depositor
pursuant to the sale of the trust assets to the Trust represents not more
than the fair market value of such trust assets; and the sum of all
payments made to and retained by the Servicer represents not more than
reasonable compensation for such Servicers' services under the Pooling and
Servicing Agreement and reimbursement of such Servicers' reasonable
expenses in connection herewith.
In addition, the Underwriters' PTEs will not provide exemptive relief for
certain transactions prohibited by Section 406(b) of ERISA or Section
4975(c)(1)(E) or (F) of the Code which may result from a Plan's investment in
Certificates if:
(1) the Plan's investment in any Class of Certificates exceeds 25% of
the outstanding Certificates of that Class at the time of acquisition;
(2) 25% or more of the "plan assets" with respect to which the
investing fiduciary has discretionary authority or renders investment
advice are invested in certificates evidencing interest in trusts sponsored
or containing assets sold or serviced by the same entity;
(3) the Plan is sponsored by any Depositor, any Underwriter, the
Trustee, any Servicer, any Pool, Special Hazard or Primary Mortgage Insurer
or the obligor under any other credit support mechanism (the "Restricted
Group"), an obligor with respect to obligations constituting more than 5%
of the aggregate unamortized principal balance of the trust assets on the
date of the initial issuance of Certificates (a "Major Obligor"), or their
affiliates; or
(4) the Plan fiduciary responsible for the decision to invest or any
of its affiliates is a Major Obligor.
Class A Certificates generally are expected to satisfy conditions (a), (b),
(c) and (f) above. Whether the other conditions of the Underwriters' PTEs will
be satisfied as to the Class A Certificates will depend upon the relevant facts
and circumstances existing at the time "plan assets" of a Plan are used to
acquire Class A Certificates. Any fiduciary or other Plan investor who proposes
to cause "plan assets" of any Plan to acquire Class A Certificates in reliance
upon the Underwriters' PTEs should determine whether all of the applicable
conditions are satisfied and consult with its counsel regarding other factors
that may affect the applicability of Underwriters' PTEs.
GENERAL CONSIDERATIONS
Any member of the Restricted Group, a Major Obligor or any of their
affiliates might be considered or might become a "party in interest" or
"disqualified person" with respect to a Plan. In that event, the acquisition or
holding of Class A Certificates by, on behalf of or with "plan assets" of any
such Plan might
S-51
<PAGE> 52
be viewed as giving rise to a prohibited transaction under ERISA and Section
4975 of the Code, unless exemption is available. Accordingly, before a fiduciary
or other Plan investor makes the investment decision to purchase, to commit to
purchase or to hold Class A Certificates, the fiduciary or other Plan investor
should determine (a) whether the Underwriters' PTEs are available, (b) whether
any other prohibited transaction exemption (if required) is available under
ERISA and Section 4975 of the Code, or (c) whether an exemption from "plan
asset" treatment is available to the Trust. The fiduciary or other Plan investor
should also consult the ERISA discussion in the Prospectus for further
information regarding the application of ERISA to the Class A Certificates.
Any fiduciary or other Plan investor who proposes to invest "plan assets"
of any Plan in the Class A Certificates should consult with its counsel with
respect to the potential consequences under ERISA and Section 4975 of the Code
of the acquisition and ownership of such Certificates.
LEGAL INVESTMENT
Although upon their initial issuance the Class A Certificates will be rated
Aaa by Moody's and "AAA" by S&P, the Class A Certificates will not constitute
"mortgage related securities" under the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") because the Mortgage Pool includes Mortgage Loans that are
secured by second Mortgages. Investors should consult their own legal advisers
in determining whether and to what extent the Class A Certificates constitute
legal investments for such investors.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Class A Certificates will be received by the Depositors, which will apply such
proceeds to pay to the Originators a portion of the purchase price for the
Mortgage Loans.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Depositors and the Underwriters named
below (the "Underwriters"), the Depositors have agreed to sell to the
Underwriters, and the Underwriters have agreed to purchase from the Trust and
the Depositors, the respective principal amounts of the Class A Certificates
(based on the original Principal Balances of Class A Certificates set forth
herein) set forth opposite their names below.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- - ----------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Salomon Brothers Inc .............. $ 41,186,000 $ 34,414,000 $ 13,568,000 $ 15,522,000 $ 5,312,000
CS First Boston Corporation........ $ 41,185,000 $ 34,414,000 $ 13,567,000 $ 15,521,000 $ 5,312,000
Lehman Brothers Inc. .............. $ 41,185,000 $ 34,413,000 $ 13,568,000 $ 15,521,000 $ 5,312,000
------------ ----------- ----------- ----------- ----------
Total..................... $123,556,000 $103,241,000 $ 40,703,000 $ 46,564,000 $ 15,936,000
============ =========== =========== =========== ==========
</TABLE>
Under the terms of the Underwriting Agreement, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
of the Class A Certificates offered hereby if any of the Class A Certificates
are purchased.
The Underwriters have advised the Depositors and the Trust that they
propose to offer the Class A Certificates to the public at the prices set forth
on the cover page hereof, and to certain dealers at such prices less a
concession not in excess of 0.125% of the denomination of the Class A-1
Certificates, 0.150% of the denomination of the Class A-2 Certificates, 0.225%
of the denomination of the Class A-3 Certificates, 0.300% of the denomination of
the Class A-4 Certificates and 0.375% of the denomination of the Class A-5
Certificates. The Underwriters may allow and such dealers may reallow a
concession to certain other dealers not in excess of 0.100% of the denomination
of the Class A-1 Certificates, 0.100%
S-52
<PAGE> 53
of the denomination of the Class A-2 Certificates, 0.150% of the denomination of
the Class A-3 Certificates, 0.150% of the denomination of the Class A-4
Certificates and 0.250% of the denomination of the Class A-5 Certificates. After
the initial public offering, the public offering prices and such concessions may
be changed.
The Underwriting Agreement, together with a Representations Letter from the
Originators and the Depositors to the Underwriters, provide that the Originators
and the Depositors will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
EXPERTS
The financial statements of Financial Guaranty Insurance Company, included
in this Prospectus Supplement in Appendix A, as of December 31, 1995 and 1994
and for each of the years in the three year period ended December 31, 1995, have
been included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing in Appendix A, and upon the authority of
such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
RATINGS
The Class A Certificates will be rated at their initial issuance Aaa by
Moody's and "AAA" by S&P. Such ratings are the highest long-term ratings that
such Rating Agencies assign to securities. The ratings assigned to the Class A
Certificates will be based primarily on the claims-paying ability of the
Insurer.
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
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to the
Certificates upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. The ratings do not represent any assessment of
the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the Offered Securities will be passed
upon for the Originators, Depositors and EquiCredit by Hutchins, Wheeler &
Dittmar, A Professional Corporation, Boston, Massachusetts and for the
Underwriters by Orrick, Herrington & Sutcliffe, New York, New York. Orrick,
Herrington & Sutcliffe will also pass upon certain legal and ERISA matters for
the Depositors. Certain federal income tax matters will also be passed upon for
the Depositors by Orrick, Herrington & Sutcliffe (in such capacity, "Tax
Counsel").
S-53
<PAGE> 54
APPENDIX A
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE> 55
FINANCIAL GUARANTY INSURANCE COMPANY
- - --------------------------------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 56
[KPMG Peat Marwick LLP Letterhead]
Report of Independent Auditors
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the 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, 1995 and 1994 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.
As described in notes 6 and 2, respectively, in 1993, the Company changed its
methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
KPMG Peat Marwick LLP
January 19, 1996
<PAGE> 57
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
- - --------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1995 1994
----------- ------------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $2,141,584 $1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
---------- ----------
Total assets $2,580,302 $2,298,210
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
---------- ----------
Total liabilities 1,032,421 1,018,487
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available-
for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
---------- ----------
Total stockholder's equity 1,547,881 1,279,723
---------- ----------
Total liabilities and stockholder's equity $2,580,302 $2,298,210
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE> 58
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Gross premiums written $ 97,288 $161,940 $291,052
Ceded premiums (19,319) (46,477) (49,914)
-------- -------- --------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
-------- -------- --------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
-------- -------- --------
Total revenues 256,438 284,553 301,595
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
-------- -------- --------
Total expenses 19,806 43,597 87,022
-------- -------- --------
Income before provision for Federal income taxes 236,632 240,956 214,573
-------- -------- --------
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
-------- -------- --------
Total Federal income tax expense 48,754 51,225 52,221
-------- -------- --------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
-------- -------- --------
Net cumulative effect of change in
accounting principle - - 3,008
-------- -------- --------
Net income $187,878 $189,731 $165,360
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 59
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
- - --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES) ON
ADDITIONAL FIXED MATURITY FOREIGN
COMMON PAID-IN SECURITIES AVAILABLE- CURRENCY RETAINED
STOCK CAPITAL FOR-SALE, NET OF TAX ADJUSTMENT EARNINGS
----- ------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $324,639 $ 7,267 $(1,597) $ 618,615
Net income - - - - 165,360
Capital contribution - 21,872 - - -
Adjustment to common stock par value 12,500 (12,500) - - -
Unrealized gains on fixed maturity securities
previously held at market, net of tax of ($713) - - (1,325) - -
Implementation of change in accounting for
adoption of SFAS 115, net of tax of $45,643 - - 84,766 - -
Foreign currency translation adjustment - - - (668) -
------- -------- --------- ------- ----------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income - - - - 189,731
Unrealized losses on fixed maturity securities
available-for-sale, net of tax of ($71,336) - - (132,481) - -
Foreign currency translation adjustment - - - 1,044 -
------- -------- --------- ------- ----------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income - - - - 187,878
Dividend paid - - - - (25,000)
Unrealized gains on 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) $1,136,584
======= ======== ========= ======= ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 60
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 187,878 $ 189,731 $ 165,360
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax - - (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
--------- --------- -----------
Net cash provided by operating activities 94,546 184,489 277,448
--------- --------- -----------
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
--------- --------- -----------
Net cash used in investing activities (71,113) (184,150) (298,335)
--------- --------- -----------
FINANCING ACTIVITIES:
Dividends paid (25,000) - -
Capital contribution - - 21,872
--------- --------- -----------
Net cash provided by financing activities (25,000) - 21,872
--------- --------- -----------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
--------- --------- -----------
Cash at end of year $ 199 $ 1,766 $ 1,427
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 61
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides
financial guaranty insurance on newly issued municipal bonds and
municipal bonds trading in the secondary market, the latter including
bonds held by unit investment trusts and mutual funds. The Company also
insures structured debt issues outside the municipal market.
Approximately 88% 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 1995 presentation.
Significant accounting policies are as follows:
INVESTMENTS
As of December 31, 1993, the Company adopted 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> 62
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
PREMIUM REVENUE RECOGNITION
Premiums are earned over the period at risk in proportion to the amount
of coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related
unearned premiums, net of premium credits allowed against the premiums
charged for insurance of refunding issues and applicable acquisition
costs, are earned immediately. Unearned premiums represent the portion
of premiums written related to coverage yet to be provided on policies
in force.
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 $77.8 million and $98.7 million at December 31,
1995 and 1994, respectively. As of December 31, 1995 and 1994, such
reserves included $28.8 million and $71.0 million, respectively,
established based on an evaluation of the insured portfolio in light of
current economic conditions and other relevant factors. Loss and loss
adjustment expenses include amounts discounted at an interest rate of
5.5% in 1995 and 7.8% in 1994. 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> 63
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, 1995 and 1994 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation loss at December 31, 1995 and 1994 was $1.5
million and $1.2 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 in proportion to the reduction of the
related risk rather than in proportion to the coverage
provided;
(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> 64
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
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 $187,878 $1,547,881 $189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve - (386,564) - (328,073) - (252,542)
Non-admitted assets - (5,731) - (7,566) - (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax - (63,785) - 41,773 - (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance - - - (266) - -
Contingency reserve tax deduction (see Note 2) - 78,196 - 55,496 - 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 - 9,716
-------- ---------- -------- ---------- -------- ----------
Statutory-basis amount $166,906 $1,001,521 $179,348 $ 893,734 $185,145 $ 777,097
======== ========== ======== ========== ======== ==========
</TABLE>
-9-
<PAGE> 65
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994,
respectively, were on deposit with various regulatory authorities as
required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as
available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1995 COST GAINS LOSSES VALUE
---- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 71,182 $ 1,696 - $ 72,878
Obligations of states and political
subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments 30,270 152 550 29,872
---------- -------- ------ ----------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
---------- -------- ------ ----------
Total $2,134,485 $100,306 $2,175 $2,232,616
========== ======== ====== ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1995, 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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
1995 COST VALUE
---- ---- -----
<S> <C> <C>
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
---------- ----------
Total $2,134,485 $2,232,616
========== ==========
</TABLE>
-10-
<PAGE> 66
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1994 COST GAINS LOSSES VALUE
---- ---------- ------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political
subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments 103,666 400 (4,765) 99,301
----------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
---------- ------- -------- ----------
Total $2,029,851 $26,217 $(90,484) $1,965,584
========== ======= ======== ==========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were
$836.1 million, $550.5 million, and $789.0 million, respectively. For
1995, 1994 and 1993 gross gains of $36.3 million, $18.2 million and
$36.1 million respectively, and gross losses of $5.5 million, $12.3
million and $1.0 million respectively, were realized on such sales.
Net investment income of the Company is derived from the following
sources (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income from fixed maturity securities $112,684 $108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
-------- -------- --------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
-------- -------- --------
Net investment income $120,398 $109,828 $ 99,920
======== ======== ========
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE> 67
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the
Company and the Parent based upon their respective contributions to
consolidated net income. The Company's effective federal corporate tax
rate (20.6 percent in 1995, 21.3 percent in 1994 and 24.3 percent in
1993) is less than the corporate tax rate on ordinary income of 35
percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the
Company for 1995, 1994 and 1993 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current tax expense $28,913 $43,484 $ 59,505
Deferred tax expense 19,841 7,741 (7,284)
------- ------- --------
Federal income tax expense $48,754 $51,225 $ 52,221
======= ======= ========
</TABLE>
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $ 82,821 $ 84,334 $ 75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
-------- -------- --------
Provision for income taxes $ 48,754 $ 51,225 $ 52,221
======== ======== ========
</TABLE>
-12-
<PAGE> 68
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995 and 1994
are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available-for-sale - $22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
-------- -------
Total gross deferred tax assets 18,434 52,439
-------- -------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
-------- -------
Total gross deferred tax liabilities 117,605 75,079
-------- -------
Net deferred tax liability $ 99,171 $22,640
======== =======
</TABLE>
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, 1995 and 1994. The
company anticipates that the related deferred tax asset will be
realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 million, respectively.
-13-
<PAGE> 69
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 $33.7 million that can be drawn on in the event of default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent
a payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial
statements, an initial adjustment of $4.6 million, before applicable
income taxes, has been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December
31, 1995, 1994 and 1993, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $1.1 million,
$0.3 million and $9.1 million for the years ended December 31, 1995,
1994 and 1993, respectively.
-14-
<PAGE> 70
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Balance at January 1, $ 98,746 $ 96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
-------- -------- -------
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
-------- -------- -------
Total Incurred (8,426) 3,646 42,894
-------- -------- -------
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
-------- -------- -------
Total Paid (5,712) (1,302) (670)
-------- -------- -------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
-------- -------- -------
Balance at December 31, $ 77,808 $ 98,746 $96,098
======== ======== =======
</TABLE>
The changes in incurred portfolio reserves principally relate 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> 71
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 $3.2 million, $3.2
million and $1.0 million in expenses were incurred in 1995, 1994 and
1993, 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 $1.3 million in 1995, $2.5 million
in 1994, and $3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross
premiums written in 1995 and 1994 and 2 percent in 1993).
(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 $7.5 million, $12.2 million and $16.7
million in 1995, 1994 and 1993, 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 $2.1 million in 1995 and 1994, 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, 1995 and 1994, the amount
of the Company's surplus available for dividends was approximately
$100.2 million and $89.3 million, respectively.
During 1995, the company paid dividends of $25 million. No dividends
were paid during 1994 or 1993.
-16-
<PAGE> 72
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
(11) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market
price is not available, fair values is estimated using quoted market
prices for similar securities. Fair value disclosure for fixed maturity
securities is included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts $ 199 $ 199 $ 1,766 $ 1,766
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of
deferred acquisition costs, and loss and loss adjustment expense
reserves. Estimated fair values of these guaranties are based on
amounts currently charged to enter into similar agreements (net of
applicable ceding commissions), discounted cash flows considering
contractual revenues to be received adjusted for expected prepayments,
the present value of future obligations and estimated losses, and
current interest rates. The estimated fair values of such financial
guaranties range between $412.8 million and $456.2 million compared to
a carrying value of $540.6 million as of December 31, 1995 and between
$518.1 million and $565.9 million compared to a carrying value of
$585.1 million as of December 31, 1994.
-17-
<PAGE> 73
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, 1995, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $98.7
billion, net of reinsurance of $20.7 billion. The Company's insured
portfolio as of December 31, 1995 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, 1995, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
---------
Total $98,660.3
=========
</TABLE>
-18-
<PAGE> 74
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, 1995 by state, net of reinsurance, was as
follows (in millions):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
California $10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
---------
Sub-total 59,518.2
Other states and International 39,142.1
---------
Total $98,660.3
=========
</TABLE>
(12) COMMITMENTS
Total rent expense was $2.2 million, $2.6 million and $2.4 million in
1995, 1994 and 1993, respectively. For each of the next five years and
in the aggregate as of December 31, 1995, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-------
Total minimum future rental payments $16,844
=======
</TABLE>
-19-
<PAGE> 75
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered EQCC Home
Equity Loan Trust 1996-2 Class A-1 Certificates, Class A-2 Certificates, Class
A-3 Certificates, Class A-4 Certificates and Class A-5 Certificates
(collectively, 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"), CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between 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.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
I-1
<PAGE> 76
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, calculated on the basis of a year of 360 days, in
each case for the actual number of days occurring in the period for which such
interest is payable. Payment will then be made by the respective Depositary to
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
debit 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 debit 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 pre-position 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 can elect not to pre-position funds and allow that
credit line to be drawn upon to finance settlement. Under this procedure, CEDEL
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they 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 settlement. In these cases, CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account 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, calculated on the basis of a year of 360
days, in each case for the actual number of days occurring in the period for
which such interest is payable. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over the one-day period. If settlement is not completed on the
intended value date (i.e., the
I-2
<PAGE> 77
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 was 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 Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade 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 Certificateholders 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 Certificateholder or
his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The holder 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.
I-3
<PAGE> 78
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. 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> 79
PROSPECTUS
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
DEPOSITORS
EQUICREDIT CORPORATION OF AMERICA
SERVICER
EQCC HOME EQUITY LOAN ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
------------------
The Home Equity Loan Asset Backed Securities (the "Securities") offered
hereby may be sold from time to time in series (each, a "Series") as described
in the related Prospectus Supplement. Each Series of Securities will be issued
by a separate trust (each, a "Trust").
The assets of each Trust will consist primarily of (i) a pool (a "Mortgage
Pool") of mortgage loans (each, a "Mortgage Loan") secured by mortgages, deeds
of trust or other instruments (each, a "Mortgage") creating a first or junior
lien on one- to four-family dwellings, units in planned unit developments, units
in condominium developments, units in cooperatives or manufactured housing units
(each, a "Mortgaged Property") to be transferred to such Trust by the Depositors
and originated or purchased by EquiCredit Corporation of America (formerly known
as Old Stone Credit Corporation) ("EquiCredit", or the "Representative") or by
EquiCredit Corporation/Ala. & Miss., California/EquiCredit Corporation,
EquiCredit Corporation of In., EquiCredit Corporation of Pa. or EquiCredit
Corporation of SC (each, an "Originator"), (ii) all monies received on the
Mortgage Loans on and after the related Cut-off Date (as defined herein) (unless
otherwise specified in the related Prospectus Supplement, other than the
Representative's Yield, as described herein, and amounts received on and after
the related Cut-off Date (defined herein) in respect of interest accrued on the
Mortgage Loans prior to the Cut-off Date), and (iii) certain other property. The
Mortgage Loans will be serviced by EquiCredit (in its capacity as servicer, the
"Servicer"). The Mortgage Loans and other assets of each Trust as described
herein and in the related Prospectus Supplement will be held for the benefit of
the holders of the related Series of Securities.
(continues on following page)
NONE OF THE SECURITIES OF ANY SERIES WILL REPRESENT AN INTEREST IN OR
OBLIGATION OF THE REPRESENTATIVE, THE DEPOSITORS, ANY ORIGINATOR OR ANY OF THEIR
AFFILIATES. NONE OF THE SECURITIES OF ANY SERIES OR THE UNDERLYING MORTGAGE
LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE REPRESENTATIVE, EITHER DEPOSITOR OR ANY OF THEIR
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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
Prospective investors should consider the factors set forth under "Risk
Factors" herein.
Prospective investors should refer to the "Index of Principal Definitions"
herein for the location of the definitions of capitalized terms that appear in
this Prospectus.
The date of this Prospectus is April 25, 1996.
<PAGE> 80
(continuation of cover page)
Each Series of Securities may be issuable in one or more classes (each, a
"Class"). The Securities of any Class may represent beneficial ownership
interests in the Mortgage Loans held by the related Trust or may represent debt
secured by such Mortgage Loans, as described herein and in the related
Prospectus Supplement. A Series may include one or more Classes of Securities
entitled to principal distributions and disproportionate, nominal or no interest
distributions, or to interest distributions and disproportionate, nominal or no
principal distributions. The rights of one or more Classes of Securities of a
Series may be senior or subordinate to the rights of one or more of the other
Classes of Securities. A Series may include two or more Classes of Securities
which differ as to the timing, sequential order, priority of payment, interest
rate or amount of distributions of principal or interest or both.
If specified in the related Prospectus Supplement, one or more Classes of
Securities of a Series may have the benefit of one or more of a letter of
credit, financial guaranty insurance policy, reserve fund, spread account, cash
collateral account, overcollateralization or other form of credit enhancement.
If specified in the related Prospectus Supplement, the Mortgage Loans underlying
a Series of Securities may be insured under one or more of a mortgage pool
insurance policy, bankruptcy bond, special hazard insurance policy or similar
credit enhancement. In addition to or in lieu of any or all of the foregoing,
credit enhancement with respect to one or more Classes of Securities of a Series
may be provided through subordination. See "Description of Credit Enhancement".
The yield on each Class of Securities 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 and the timing of receipt of such
payments. See "Certain Yield and Prepayment Considerations" herein and in the
related Prospectus Supplement. A Trust may be subject to early termination under
the circumstances described herein and in the related Prospectus Supplement.
Offers of the Securities of a Series may be made through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" herein and "Underwriting" in the related Prospectus
Supplement. There will have been no secondary market for the Securities of any
Series prior to the offering thereof. There can be no assurance that a secondary
market for any Class of Securities of any Series will develop or, if one does
develop, that it will continue. None of the Securities will be listed on any
securities exchange.
If so specified in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust or a designated portion of the assets of
the related Trust as a "real estate mortgage investment conduit" for federal
income tax purposes. For a description of certain tax consequences of owning the
Securities, including, without limitation, original issue discount, see "Certain
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
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<PAGE> 81
AVAILABLE INFORMATION
The Depositors have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 3rd
Floor, New York, New York 10007. Copies of such material may 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 HOLDERS
Periodic reports concerning the assets of each Trust are required to be
forwarded to holders of the Securities of the related Series. See "Description
of the Securities -- Reports to Holders" herein. Any reports forwarded to
holders will not contain financial information that has been examined and
reported upon by, with an opinion expressed by, an independent public or
certified public accountant.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Depositors pursuant to Section
13(a), Section 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of the Securities
offered hereby shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Depositors will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any of or all the documents incorporated herein by reference (other
than exhibits to such documents). Requests for such copies should be directed to
John P. Silsby, II, Senior Vice President and Chief Accounting Officer, EQCC
Receivables Corporation and EQCC Asset Backed Corporation, 1801 Art Museum
Drive, Jacksonville, Florida 32207, (904) 398-7581.
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<PAGE> 82
SUMMARY OF PROSPECTUS
The following Summary of Prospectus is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus and
by reference to the information with respect to each Series of Securities
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Summary of Prospectus shall have the meanings ascribed to such
terms elsewhere in this Prospectus. The Index of Principal Definitions included
in this Prospectus sets forth the pages on which the definitions of certain
principal terms appear.
DEPOSITORS................. EQCC Receivables Corporation, a corporation
organized under the laws of the State of Delaware,
and EQCC Asset Backed Corporation, a corporation
organized under the laws of the State of Delaware
(together, the "Depositors"). All of the
outstanding common stock of each of the Depositors
is owned by one or more of the Originators (defined
below). See "The Depositors, the Servicer, the
Representative and the Originators" herein.
ISSUER..................... With respect to each Series of Securities, a trust
entitled "EQCC Home Equity Loan Trust" (the "Trust"
or the "Issuer"), with an additional designation to
indicate the Series of Securities to which it
relates. Each Trust will be either a trust formed
pursuant to a Pooling and Servicing Agreement among
the Depositors, the Servicer (defined herein) and
the trustee named therein (the "Trustee") or a
business trust formed pursuant to a Trust Agreement
between the Depositors and a Trustee (the "Owner
Trustee"), as set forth in the related Prospectus
Supplement.
REPRESENTATIVE AND
ORIGINATORS.............. EquiCredit Corporation of America (formerly known
as Old Stone Credit Corporation), a corporation
organized under the laws of the State of Delaware
("EquiCredit", the "Representative" and an
"Originator"), and EquiCredit Corporation of
Ala./Miss., a corporation organized under the laws
of the State of Florida, California/EquiCredit
Corporation, a corporation organized under the laws
of the State of California, EquiCredit Corporation
of In., a corporation organized under the laws of
the State of Indiana, EquiCredit Corporation of
Pa., a corporation organized under the laws of the
Commonwealth of Pennsylvania, and EquiCredit
Corporation of SC, a corporation organized under
the laws of the State of South Carolina, each of
which is a wholly-owned subsidiary of the
Representative (each, an "Originator"). See "The
Depositors, the Servicer, the Representative and
the Originators" herein.
SERVICER................... EquiCredit (in its capacity as servicer, the
"Servicer"). See "The Depositors, the Servicer, the
Representative and the Originators" herein.
TRUSTEE.................... The entity or entities named as trustee in the
related Prospectus Supplement. If so specified in
the related Prospectus Supplement, a Series of
Securities including one or more Classes of Notes
and one or more Classes of Certificates may include
a trustee for the Notes (the "Indenture Trustee")
and a trustee for the certificates (the "Owner
Trustee"). Unless otherwise indicated references
herein to "Trustee" shall include any Indenture
Trustee.
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<PAGE> 83
CUT-OFF DATE............... The date specified in the related Prospectus
Supplement on and after which payments due or
received on the related Mortgage Loans, as
specified in the related Prospectus Supplement, are
transferred to the related Trust and available for
payment to the holders of the related Securities
(each, a "Cut-off Date").
CLOSING DATE............... The date on which the Securities of any Series are
initially issued (each, a "Closing Date") as
specified in the related Prospectus Supplement.
DESCRIPTION OF
SECURITIES................. The Securities of each Series may be issued in one
or more classes (each, a "Class") and will
represent either beneficial interests in or debt
secured by a segregated pool (each, a "Mortgage
Pool") of mortgage loans (the "Mortgage Loans")
originated or purchased by the Originators and
transferred by the Originators to the Depositors
pursuant to a Transfer Agreement (each, a "Transfer
Agreement"), and by the Depositors to the related
Trust, and certain other property. See "The Trust
Assets".
A Series of Securities may include one or more
Classes entitled to distributions of principal and
disproportionate, nominal or no interest
distributions or distributions of interest and
disproportionate, nominal or no principal
distributions. The principal amount of any Security
may be zero or may be a notional amount as
specified in the related Prospectus Supplement. A
Class of Securities of a Series entitled to
payments of interest may receive interest at a
specified rate (a "Securities Interest Rate") which
may be fixed, variable or adjustable and may differ
from other Classes of the same Series, may receive
interest based on the weighted average interest
rate on the underlying Mortgage Loans or may
receive interest as otherwise determined, all as
described in the related Prospectus Supplement. One
or more Classes of a Series may be Securities upon
which interest will accrue but not be currently
paid until certain other Classes have received
principal payments due to them in full or until the
happening of certain events, as set forth in the
related Prospectus Supplement. One or more Classes
of Certificates of a Series may be entitled to
receive principal payments pursuant to a planned
amortization schedule or may be entitled to receive
interest payments based on a notional principal
amount which reduces in accordance with a planned
amortization schedule. A Series may also include
one or more Classes of Certificates entitled to
payments derived from a specified group or groups
of Mortgage Loans held by the related Trust. The
rights of one or more Classes of Securities may be
senior or subordinate to the rights of one or more
of the other Classes of Securities. A Series may
include two or more Classes of Securities which
differ as to the timing, sequential order, priority
of payment or amount of distributions of principal
or interest or both.
PAYMENT DATE............... The monthly, quarterly or other periodic date
specified in the related Prospectus Supplement on
which payments will be made to holders of
Securities. (each, a "Payment Date").
MONTHLY DEPOSIT DATE....... If so specified in the related Prospectus
Supplement with respect to a Series of Securities
having Payment Dates occurring less frequently than
monthly, the day of each month other than a month
in which a
5
<PAGE> 84
Payment Date occurs (each, a "Monthly Deposit
Date") specified in the related Prospectus
Supplement on which certain deposits and transfers
will be made.
DETERMINATION DATE......... The day of the month in which the related Monthly
Deposit Date or Payment Date occurs (each, a
"Determination Date") specified in the related
Prospectus Supplement.
RECORD DATE................ The calendar day (each, a "Record Date") specified
in the related Prospectus Supplement.
INTEREST................... Unless otherwise specified in the related
Prospectus Supplement, interest on each Class of
Securities of a Series (other than a Class of
Securities entitled to receive only principal) will
accrue during each period specified in the related
Prospectus Supplement (each, an "Accrual Period")
at the Securities Interest Rate for such Class
specified in the related Prospectus Supplement.
Interest accrued on each Class of Securities at the
applicable Securities Interest Rate during each
Accrual Period will be paid, to the extent monies
are available therefor, on each Payment Date,
commencing on the day specified in the related
Prospectus Supplement and will be distributed in
the manner specified in such Prospectus Supplement,
except for any Class of Securities ("Accrual
Securities") on which interest is to accrue and not
be paid until the principal of certain other
Classes has been paid in full or until the
occurrence of certain events as specified in such
Prospectus Supplement. If so described in the
related Prospectus Supplement, interest that has
accrued but is not yet payable on any Accrual
Securities will be added to the principal balance
thereof on each Payment Date and will thereafter
bear interest at the applicable Securities Interest
Rate. Payments of interest with respect to any
Class of Securities entitled to receive interest
only or a disproportionate amount of interest and
principal will be paid in the manner set forth in
the related Prospectus Supplement. Payments of
interest (or accruals of interest, in the case of
Accrual Securities) with respect to any Series of
Securities or one or more Classes of Securities of
such Series, may be reduced to the extent of
interest shortfalls not covered by Advances
(defined herein) or by any applicable credit
enhancement.
PRINCIPAL.................. On each Payment Date, commencing with the Payment
Date specified in the related Prospectus
Supplement, principal with respect to the related
Mortgage Loans during the period specified in the
related Prospectus Supplement (each such period, a
"Due Period") will be paid to holders of the
Securities of the related Series (other than a
Class of Securities of such Series entitled to
receive interest only) in the priority, manner and
amount specified in such Prospectus Supplement, to
the extent funds are available therefor. Unless
otherwise specified in the related Prospectus
Supplement, such principal payments will generally
include (i) the principal portion of all scheduled
payments ("Monthly Payments") received on the
related Mortgage Loans during the related Due
Period, (ii) any principal prepayments of any such
Mortgage Loans in full ("Principal Prepayments")
and in part ("Curtailments") received during the
related Due Period or such other period (each, a
"Prepayment Period") specified in the related
Prospectus Supplement, (iii) the principal portion
of (A) the pro-
6
<PAGE> 85
ceeds of any insurance policy relating to a Mortgage Loan, a Mortgaged Property
(defined herein) or a REO Property (defined herein), net of any amounts applied
to the repair of the Mortgaged Property or released to the Mortgagor (defined
herein) and net of reimbursable expenses (such net proceeds, "Insurance
Proceeds"), (B) proceeds received in connection with the liquidation of any
defaulted Mortgage Loans ("Liquidation Proceeds"), net of fees and advances
reimbursable therefrom ("Net Liquidation Proceeds") and (C) proceeds received in
connection with a taking of a related Mortgaged Property by condemnation or the
exercise of eminent domain or in connection with any partial release of any such
Mortgaged Property from the related lien ("Released Mortgaged Property
Proceeds"), (iv) the principal portion of all amounts paid by the Depositors
(which are limited to amounts paid by the Representative or an Originator
pursuant to the related Transfer Agreement, unless otherwise specified in the
related Prospectus Supplement) in connection with the purchase of or
substitution for a Mortgage Loan as to which there is defective documentation or
a breach of a representation or warranty contained in such Transfer Agreement
and assigned to the related Trust under the related Pooling and Servicing
Agreement and (v) the principal balance of each defaulted Mortgage Loan or REO
Property as to which the Servicer has determined that all amounts expected to be
recovered have been recovered (each, a "Liquidated Mortgage Loan"), to the
extent not included in the amounts described in clauses (i) through (iv) above
(the aggregate of the amounts described in clauses (i) through (v), less the
amount of Special Payments (defined herein), if any, paid to the holders of the
Securities on any Special Payment Date (defined herein) occurring in the related
Accrual Period, the "Basic Principal Amount"). Payments of principal with
respect to a Series of Securities or one or more Classes of such Series may be
reduced to the extent of delinquencies or losses not covered by advances or any
applicable credit enhancement.
DENOMINATIONS.............. Each Class of Securities of a Series will be issued
in the minimum denominations set forth in the
related Prospectus Supplement. Each Security will
represent a percentage interest (a "Percentage
Interest") in the Securities of the related Class
determined by dividing the original dollar amount
(or Notional Principal Amount, in the case of
Securities entitled to interest only and assigned a
Notional Principal Amount) represented by such
Security by the original aggregate principal
balance (or original aggregate Notional Principal
Amount, if applicable).
REGISTRATION OF THE
SECURITIES............... Each or any Class of Securities of a Series may be
issued in definitive form or may initially be
represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), the nominee of
The Depository Trust Company ("DTC"), and available
only in the form of book-entries on the records of
DTC, participating members thereof ("Participants")
and other entities, such as banks, brokers, dealers
and trust companies, that clear through or maintain
custodial relationships with a Participant, either
directly or indirectly ("Indirect Participants")
("Book-Entry Securities"). Certificates
representing Book-
7
<PAGE> 86
Entry Securities will be issued in definitive form
only under the limited circumstances described
herein and in the related Prospectus Supplement.
With respect to the Book-Entry Securities, all
references herein to "holders" shall reflect the
rights of owners of the Book-Entry Securities as
they may indirectly exercise such rights through
DTC and Participants, except as otherwise specified
herein. See "Risk Factors" and "Description of the
Securities -- Registration of the Securities"
herein.
THE TRUST PROPERTY......... Each Class of Securities of a Series will represent
an interest in or debt secured by primarily (i) a
segregated pool (the "Mortgage Pool") of fixed- or
adjustable-rate mortgage loans originated by the
Originators and evidenced by promissory notes or
other evidence of indebtedness (the "Mortgage
Loans") secured by mortgages, deeds of trust or
other instruments (each, a "Mortgage") creating a
first lien or a junior lien on one- to four-family
dwellings, units in condominium developments, units
in planned unit developments, units in cooperatives
and manufactured housing units (each, a "Mortgaged
Property"), with the aggregate principal balance of
the Cut-off Date specified in the related
Prospectus Supplement, after giving effect to
payments received prior to the Cut-off Date (the
"Original Pool Principal Balance"), (ii) all monies
received with respect to the Mortgage Loans on and
after the Cut-off Date (other than the
Representative's Yield, as defined below, and
amounts received on and after the Cut-off Date in
respect of interest accrued on the Mortgage Loans
prior to the Cut-off Date), (iii) certain rights of
the Depositors under the related Transfer
Agreement, and (iv) certain other property. One or
more Classes of Securities of any Series may, if so
specified in the related Prospectus Supplement,
have the benefit of one or more of a spread
account, reserve fund, financial guaranty insurance
policy, letter of credit, cash collateral account,
overcollateralization, subordination or other
credit enhancement as described herein under
"Description of Credit Enhancement".
The Prospectus Supplement for each Series of
Securities will specify certain information with
respect to the related Mortgage Pool including,
without limitation, the number of Mortgage Loans in
the Mortgage Pool, the Original Pool Principal
Balance, the respective percentages of the Mortgage
Loans which are secured by first Mortgages, second
Mortgages and more junior Mortgages, the minimum
and maximum outstanding principal balances of the
Mortgage Loans, the weighted average of the annual
rates of interest of the Mortgage Loans (each such
annual rate of interest hereinafter referred to as
the "Mortgage Interest Rate") and, if the Mortgage
Loans bear interest at adjustable interest rates,
the applicable Index (defined herein), the maximum
and minimum Gross Margins (defined herein) and the
weighted average Gross Margin, the minimum and
maximum Mortgage Interest Rates, the weighted
average original term to maturity, the weighted
average remaining term to maturity, the minimum and
maximum remaining terms to maturity and the range
of origination dates. If so specified in the
related Prospectus Supplement, such information may
be approximate, based on the expected Mortgage
Pool, in which case the final information, to the
extent of any variances, will be
8
<PAGE> 87
contained in the Current Report on Form 8-K
referred to below. See "Description of the Mortgage
Pools -- General" herein and "Description of the
Mortgage Pool" in the related Prospectus
Supplement.
A Current Report on Form 8-K will be available to
purchasers or underwriters of the related Series of
Securities and will generally be filed, together
with the related primary documents, with the
Securities and Exchange Commission within fifteen
days after the related Closing Date.
OPTIONAL TERMINATION....... The Servicer, the Depositors or the holders of the
Class of Securities specified in the related
Prospectus Supplement may cause the Issuer to sell
all of the Mortgage Loans and all Mortgaged
Properties acquired by foreclosure or deed in lieu
of foreclosure ("REO Properties") when the Pool
Principal Balance declines to the percentage of the
Original Pool Principal Balance specified in the
related Prospectus Supplement, the proceeds of
which will be applied to retire the related
Securities. See "Description of the
Securities -- Optional Disposition of Mortgage
Loans" herein.
MANDATORY TERMINATION...... If so specified in the related Prospectus
Supplement, the Trustee, the Servicer or such other
entities as may be specified in such Prospectus
Supplement, may be required to effect early
retirement of a Series of Securities by soliciting
competitive bids for the purchase of the assets of
the related Trust or otherwise, under the
circumstances and in the manner specified under
"Description of the Securities -- Mandatory
Disposition of Mortgage Loans" herein and in the
related Prospectus Supplement.
SPECIAL PAYMENTS........... One or more Classes of a Series of Securities may
be subject to special redemption or distributions
in part on the dates and under the circumstances
described herein and in the related Prospectus
Supplement.
YIELD AND PREPAYMENT
CONSIDERATIONS........... The yield on each Class of Securities 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 and the
timing of receipt of such payments. See "Certain
Yield and Prepayment Considerations" herein and in
the related Prospectus Supplement. The Prospectus
Supplement for a Series may specify certain yield
calculations, based upon an assumed rate or range
of prepayment assumptions on the related Mortgage
Loans, for Classes receiving disproportionate
allocations of principal and interest. A higher
level of principal prepayments on the related
Mortgage Loans than anticipated is likely to have
an adverse effect on the yield on any Class of
Securities that is purchased at a premium and a
lower level of principal prepayments on the related
Mortgage Loans is likely to have an adverse effect
on the yield on any Class of Securities that is
purchased at a discount from its principal amount.
It is possible under certain circumstances that
holders of Securities purchased at a premium
(including Securities entitled to receive interest
only) could suffer a lower than anticipated yield
or could fail to recoup fully their initial
investment. See "Certain Yield and Prepayment
Considerations" herein and in the related
Prospectus Supplement.
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TRANSFER AND SERVICING..... Under the Transfer Agreement with respect to a
Series of Securities, each Depositor will acquire
the related Mortgage Loans from certain of the
Originators and, under the related Pooling and
Servicing Agreement, each Depositor will transfer
the Mortgage Loans to the related Trust. In
addition, the Servicer will agree to service the
Mortgage Loans.
FORWARD COMMITMENTS;
PREFUNDING............... If so specified in the related Prospectus
Supplement, a portion of the proceeds of the sale
of one or more Classes of Securities of a Series
may be deposited in a segregated account (a
"Prefunding Account") or all or a portion of the
payments on the Mortgage Loans may be set aside, to
be applied to acquire additional Mortgage Loans
from the Depositors at the times and meeting the
requirements set forth in the related Pooling and
Servicing Agreement or other agreement with the
Depositors. Unless otherwise specified in the
related Prospectus Supplement, monies on deposit in
the Prefunding Account or otherwise set aside to
fund such transfer and not applied to acquire such
additional Mortgage Loans within the time set forth
in the related Pooling and Servicing Agreement or
other applicable agreement will be treated as a
principal prepayment and applied in the manner
described in the related Prospectus Supplement.
CREDIT ENHANCEMENT......... If so specified in the related Prospectus
Supplement, credit enhancement may be provided by
any one or a combination of a letter of credit,
financial guaranty insurance policy, mortgage pool
insurance policy, special hazard insurance policy,
reserve fund, spread account, cash collateral
account, overcollateralization or other type of
credit enhancement to provide full or partial
coverage for certain defaults and losses relating
to the underlying Mortgage Loans. Credit support
may also be provided by subordination. The amount
of any credit enhancement may be limited or have
exclusions from coverage and may decline over time
or under certain circumstances, all as specified in
the related Prospectus Supplement. See "Description
of Credit Enhancement" herein.
ADVANCES FROM THE PRINCIPAL
AND INTEREST ACCOUNT..... If so specified in the related Prospectus
Supplement, the Servicer will be required to
withdraw from the Principal and Interest Account
amounts on deposit therein and held for future
distribution to make advances (each, an "Advance")
in respect of interest on the Mortgage Loans
accrued but uncollected as of the end of the
related Monthly Period (net of the Servicing Fee).
The Servicer generally shall not be required to
make such Advance from its own funds or be liable
for the recovery thereof from collections on the
related Mortgage Loans or otherwise. See
"Description of the Securities -- Advances from the
Principal and Interest Account; Servicing Advances"
herein.
SERVICING FEE.............. The Servicer will be entitled to receive a fee for
its servicing duties in the amount specified in the
related Prospectus Supplement (the "Servicing
Fee"), payable monthly from the interest portion of
monthly payments on the related Mortgage Loans,
Liquidation Proceeds, Released Mortgaged Property
Proceeds and certain other sources as provided in
the related Pooling and Servicing Agreement.
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REPRESENTATIVE'S YIELD..... Unless otherwise specified in the related
Prospectus Supplement, the Representative will be
entitled to receive an amount (the
"Representative's Yield") equal to the sum of (A)
all prepayment penalties and premiums collected by
the Servicer with respect to any Mortgage Loan and
(B) any sum or other finance charge payable by the
Mortgagor on a prepaid Rule of 78s Mortgage Loan
(as defined herein) that is in excess of (i) the
Curtailment or Principal Prepayment (as the case
may be) on the related Mortgage Loan, together with
accrued and unpaid interest thereon at the Mortgage
Interest Rate, plus (ii) servicing compensation
exclusive of Servicing Fees. The Representative's
Yield will be retained and will be freely
transferable by the Representative and will not
constitute a portion of the assets of the related
Trust.
RATINGS.................... It is a condition to the issuance of each Series of
Securities that each Class of the Securities of
such Series be rated by one or more of Moody's
Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Services ("S&P") and Fitch Investors
Service, Inc. ("Fitch" and each of Fitch, Moody's
and S&P, a "Rating Agency") in one of their four
highest rating categories. 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 any rating
on any Security, and, accordingly, there can be no
assurance that the ratings assigned to any Class of
Securities upon initial issuance thereof will not
be lowered or withdrawn by a Rating Agency at any
time thereafter. If a rating of any Class of
Securities of a Series is revised or withdrawn, the
liquidity of such Class of Securities may be
adversely affected. In general, the ratings address
credit risk and do not represent any assessment of
the likelihood or rate of principal prepayments.
See "Risk Factors -- Liquidity" and "Ratings"
herein.
CERTAIN LEGAL ASPECTS OF
THE MORTGAGE LOANS......... The Mortgage Loans relating to a Series of
Securities may be secured by second or more junior
Mortgages which are subordinate to one or more
mortgage liens on the related Mortgaged Property
prior to the lien of such Mortgage Loan (such
senior lien, if any, a "Senior Lien"). A primary
risk with respect to a junior Mortgage is that
funds received in connection with the foreclosure
thereof will not be sufficient to satisfy fully
both the Senior Lien and the junior Mortgage. See
"Risk Factors" and "Certain Legal Aspects of the
Mortgage Loans" herein.
TAX STATUS OF THE
SECURITIES................. If an election is made to treat the Trust or one or
more segregated pools of assets comprising the
Trust relating to a Series of Securities as a "real
estate mortgage investment conduit (a "REMIC"), the
Securities will constitute "regular interests" in a
REMIC or "residual interests" in a REMIC, as
specified in the related Prospectus Supplement. See
"Certain Federal Income Tax Consequences."
If an election is not made to treat the Trust as a
REMIC, (i) the Trust will not be treated as an
association or publicly traded partnership taxable
as a corporation and (ii) the Securities to be
treated as debt (if any) will be treated as debt.
The Depositors, the Representative, their
affiliates and the Servicer will have agreed, and
by the purchase of Securities, the holders of the
Securities will agree, to treat the Trust
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as a partnership (the "Partnership") for purposes
of federal and state income taxes, with the
partners of the Partnership being the holders of
the designated Classes of Securities and the
Securities to be treated as debt being debt of the
Partnership. See "Certain Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
Any such Securities representing debt of the
Partnership will not be treated as qualifying real
property loans within the meaning of section
593(d)(1) of the Internal Revenue Code of 1986 (the
"Code") or assets described in section
7701(a)(19)(C) of the Code, and probably will not
be treated as "real estate assets" within the
meaning of section 856(c)(6)(B) of the Code. Income
derived from such Securities treated as debt
probably will not be treated as "interest on
obligations secured by mortgages on real property
or on interests in real property" within the
meaning of section 856(c)(3)(B) of the Code. For
any holder of a Security representing a partnership
interest in the "Partnership", which holder is a
"real estate investment trust" within the meaning
of section 856 of the Code, such Securities will be
treated as "real estate assets" within the meaning
of section 856(c)(6)(B) of the Code. However, no
comparable authority exists that would allow a
thrift institution that is such a holder to treat
such Securities as qualifying real property loans
within the meaning of section 593(d)(1) of the Code
or assets described in section 7701(a)(19)(C) of
the Code. If any Class of such Securities were
treated as indebtedness rather than an interest in
a partnership, such Securities would not be treated
as qualifying real property loans within the
meaning of section 593(d)(1) of the Code and assets
described in section 7701(a)(19)(C) of the Code and
probably would not be treated as "real estate
assets" within the meaning of section 856(c)(6)(B)
of the Code. In addition, in that case, income
derived from such Securities probably would not be
treated as "interest on obligations secured by
mortgages on real property or on interests in real
property" within the meaning of section
856(c)(3)(B) of the Code. See "Certain Federal
Income Tax Consequences" herein and in the related
Prospectus Supplement.
ERISA CONSIDERATIONS....... A fiduciary or other person investing "plan assets"
of any employee benefit or other plan 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 any
Class of Securities could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or Section 4975 of the Code. Certain
Classes of Securities may not be permitted to be
acquired by any employee benefit or other plan
subject to ERISA or Section 4975 of the Code, as
specified in the related Prospectus Supplement. See
"ERISA Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT........... Unless otherwise specified in the related
Prospectus Supplement, no Class of Securities will
constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984
because the related Mortgage Pool will include
Mortgage Loans that are
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<PAGE> 91
secured by second or more junior mortgages.
Investors should consult their own legal advisers
in determining whether and to what extent the
Securities constitute legal investments for such
investors. See "Legal Investment" herein and in the
related Prospectus Supplement.
USE OF PROCEEDS............ Substantially all of the net proceeds to be
received from each sale of Securities will be
received, directly or indirectly, by the
Depositors. The Originators will, in the aggregate,
contribute or otherwise transfer the related
Mortgage Loans to the Depositors in return for
cash, stock or other property, as specified in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Securities:
SECURITIES
Limited Liquidity. There is no assurance that a secondary market for any
of the Securities will develop or, if one does develop, that it will provide the
holders with liquidity of investment or that it will continue for the life of
such Securities. None of the Securities will be listed on any securities
exchange.
It is a condition to the issuance of the Securities that each Class of
Securities be rated in one of the four highest rating categories by one or more
of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Services ("S&P") or Fitch Investors Service, Inc. ("Fitch"; and each of Moody's,
S&P and Fitch, a "Rating Agency"). See "Ratings" herein. 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 Security and, accordingly, there can be no assurance that the
ratings assigned to any Class of Securities on the date on which such Securities
are initially issued will not be lowered or withdrawn by a Rating Agency at any
time thereafter. In the event any rating is revised or withdrawn, the liquidity
of the related Securities may be adversely affected.
Issuance of any of the Securities in book-entry form may reduce the
liquidity of such Securities in the secondary trading market because investors
may be unwilling to purchase Securities for which they cannot obtain physical
certificates. See "Description of the Securities -- Registration of the
Securities" herein.
Difficulty in Pledging. Because transactions in Securities of a Series in
book-entry form may be effected only through DTC, Participants and Indirect
Participants, the ability of an Owner to pledge such a Security to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Securities, may be limited due to the lack of a physical
certificate representing such Security. See "Description of the
Securities -- Registration of the Securities" herein.
Potential Delays in Receipt of Payments. Owners of Securities issued in
book-entry form may experience some delay in their receipt of payments of
interest and principal on the Securities because such payments will be forwarded
to DTC and DTC will credit such payments to the accounts of its Participants
which will thereafter credit them to the accounts of Owners either directly or
indirectly through Indirect Participants. See "Description of the
Securities -- Registration and Transfer of the Securities" herein.
Limited Obligations. No Class of Securities of any Series will represent
an interest in or obligation of the Depositors, the Representative, any
Originator, the Servicer or any of their affiliates. The only obligations of the
foregoing entities with respect to any of the Securities or the related Mortgage
Loans will be the Servicer's servicing obligations under the Pooling and
Servicing Agreement and the obligations of the Depositors to purchase, or
substitute substantially similar mortgage loans for, or cause the Originators to
purchase or substitute, any Mortgage Loans as to which there is defective
documentation or a breach of certain representations and warranties in the
Pooling and Servicing Agreement and Transfer Agreement, respectively. Neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositors, the
Representative, any Originator, the Servicer or any of their affiliates.
ERISA Considerations. An investment in a Class of Securities of any Series
by Plans may give rise to a prohibited transaction under ERISA section 406 and
be subject to tax under Code section 4975 unless a statutory or administrative
exemption is available. Accordingly, fiduciaries of any employee benefit plan or
other retirement arrangement should consult their counsel before purchasing any
Class of Securities. Certain Classes of Securities will not be eligible for
purchase by Plans. See "ERISA Considerations" herein and in the related
Prospectus Supplement.
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Limitations, Reduction and Substitution of Credit Enhancement. Credit
enhancement may be provided with respect to one or more Classes of Securities of
a Series to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement may be provided by one or more forms, including but not
limited to subordination of one or more Classes of Securities of such Series,
letter of credit, financial guaranty insurance policy, mortgage pool insurance
policy, special hazard insurance policy, reserve fund, spread account, cash
collateral account, overcollateralization or other type of credit enhancement.
The coverage of any credit enhancement may be limited or have exclusions from
coverage and may decline over time or under certain circumstances, all as
specified in the related Prospectus Supplement. See "Description of Credit
Enhancement" herein.
Yield and Prepayment Considerations. The yield on certain Classes of
Securities of a Series may be particularly sensitive to the rate of prepayments,
including voluntary prepayments and prepayments due to foreclosures, repurchases
and losses. Accordingly, to the extent the risks described herein and in the
related Prospectus Supplement with respect to the characteristics of the
Mortgage Loans and of mortgage loans in general result in prepayments being
received at rates greater or less than those assumed by investors, the yield to
the holders of such Class of Securities will be adversely affected. See "Certain
Yield and Prepayment Considerations" herein and in the related Prospectus
Supplement.
RISKS OF THE MORTGAGE LOANS
General Economic Conditions. General economic conditions have an impact on
the ability of borrowers to repay mortgage loans. Loss of earnings, illness and
other similar factors may lead to an increase in delinquencies and bankruptcy
filings by borrowers. In the event of personal bankruptcy of a borrower under a
Mortgage Loan (a "Mortgagor"), it is possible that the holders of the related
Securities could experience a loss with respect to such Mortgagor's Mortgage
Loan. In conjunction with a Mortgagor's bankruptcy, a bankruptcy court may
suspend or reduce the payments of principal and interest to be paid with respect
to such Mortgage Loan, thus delaying the amount received by the holders of the
related Securities with respect to such Mortgage Loan. Moreover, if a bankruptcy
court prevents the transfer of the related Mortgaged Property to the related
Trust, any remaining balance on such Mortgage Loan may not be recoverable. In
recent years, EquiCredit Corporation of America (together with its wholly-owned
subsidiaries, including the other Originators, the "Company") has experienced
increased delinquencies and higher net losses on the mortgage loans included in
its servicing portfolio. This trend may have resulted in part from the effect of
general economic conditions on the ability of borrowers to repay such mortgage
loans, although no statistics are available with respect to the extent of such
effect. See "The Depositors, the Servicer, the Representative and the
Originators -- Delinquency and Loss Experience" herein and "The Originators and
the Servicer -- Origination, Foreclosure and Delinquency Experience" in the
related Prospectus Supplement for further information regarding the rates of
delinquency and net losses experienced on the mortgage loans included in the
Company's servicing portfolio.
Real Estate Market Conditions. An investment in securities such as the
Offered Securities which are secured by or represent interests in mortgage loans
may be affected by, among other things, a decline in real estate values. No
assurance can be given that values of the Mortgaged Properties will remain at
the levels existing on the dates of origination of the related Mortgage Loans.
If the residential real estate market should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans,
together with loans secured by Senior Liens (defined below), if any, 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
recent years, the Company has experienced higher net losses on the mortgage
loans included in the Company's servicing portfolio. This trend may have
resulted in part from the effect of real estate market conditions on the value
of the mortgaged properties securing such mortgage loans, although no statistics
are available with respect to the extent of such effect. See "The Depositors,
the Servicer, the Representative and the Originators -- Delinquency and Loss
Experience" herein and "The Originators and the Servicer -- Origination,
Foreclosure and Delinquency
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<PAGE> 94
Experience" in the related Prospectus Supplement for further information
regarding the rates of delinquency and net losses experienced on the mortgage
loans included in the Company's servicing portfolio.
Geographic Concentration. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of the Mortgage Loans
relating to any Series of Securities in such a region may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. See "Description of the
Mortgage Pool" in the related Prospectus Supplement for further information
regarding the geographic concentration of the Mortgage Loans underlying the
Securities of any Series.
Nature of Security. Certain of the Mortgage Loans underlying the
Securities of a Series may be secured by Mortgages junior or subordinate to one
or more other mortgages ("Senior Liens"), and the related Senior Liens will not
be included in the Mortgage Pool. Although little data is available, the rate of
default of second or more junior mortgage loans may be greater than that of
mortgage loans secured by senior liens on comparable properties. A primary risk
to holders of Mortgage Loans secured by junior Mortgages is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related Senior Lien to satisfy fully both the Senior Lien and the Mortgage Loan.
If a holder of the Senior 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 Senior
Liens. The claims of the holder of the Senior Lien will be satisfied in full out
of proceeds of the liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the related Trust as holder of the junior Mortgage receives
any payments in respect of the Mortgage Loan. If the Servicer were to foreclose
on any junior Mortgage Loan, it would do so subject to any related Senior Lien.
The debt related to the Mortgage Loan would not be paid in full at such sale
unless a bidder at the foreclosure sale of such Mortgage Loan bids an amount
sufficient to pay off all sums due under the Mortgage Loan and the Senior Lien
or purchases the Mortgaged Property subject to the Senior Lien. If such proceeds
from a foreclosure or similar sale of the related Mortgaged Property are
insufficient to satisfy such loans in the aggregate, the related Trust, as the
holder of the junior Mortgage, and, accordingly, holders of the Offered
Securities would 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 junior mortgagee may not
foreclose on the property securing a junior Mortgage unless it forecloses
subject to the Senior Lien. In servicing second Mortgages, it is generally the
Servicer's practice to advance funds to keep the Senior Lien current in the
event the mortgagor is in default thereunder until such time as the Servicer
satisfies the Senior Lien by sale of the mortgaged property. The Servicer
intends to advance such amounts in accordance with its normal servicing
procedures, but only to the extent that it determines such advances will be
recoverable from future payments and collections on that Mortgage Loan or
otherwise. Such practice may not be followed in servicing loans more junior than
second mortgages or may be modified at any time. The related Trust will have no
source of funds to satisfy any Senior Lien or make payments due to any senior
mortgagee. The junior Mortgages securing the Mortgage Loans are subject and
subordinate to any Senior Liens affecting the related Mortgaged Property,
including limitations and prohibitions which may be contained in such Senior
Liens upon subordinate financing.
Certain Mortgage Loans. Certain Mortgage Loans that may be included in the
assets of a Trust may involve additional uncertainties not present in other
types of loans. Certain of the Mortgage Loans may provide for escalating or
variable payments that may be larger than the initial payment amount; however,
the borrowers under such Mortgage Loans are generally qualified on the basis of
the initial payment amount. In some instances, such a borrower's income may not
be sufficient to enable them to pay the increased payment amounts and the
likelihood of default may increase.
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Certain of the Mortgage Loans underlying a Series of Securities may be
delinquent in respect of the payment of principal and interest. In addition,
certain of the Mortgagors under the Mortgage Loans underlying a Series of
Securities may be subject to personal bankruptcy proceedings. Such Mortgage
Loans may be subject to a greater risk of default. See "Description of the
Mortgage Pools" herein and "Description of the Mortgage Pool" in the related
Prospectus Supplement.
Delays in Liquidating Defaulted Mortgage Loans. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans underlying
a Series of Securities, substantial delays could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by the related Trust 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 Net Liquidation Proceeds sufficient to repay all
amounts due on the related Mortgage Loan. In addition, the Servicer will be
entitled to deduct from collections received during the preceding Due Period all
expenses reasonably incurred in attempting to recover amounts due and not yet
repaid on Liquidated Mortgage Loans, including payments to senior lienholders,
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses, thereby reducing collections available to the related
Trust. See "Certain Legal Aspects of the Mortgage Loans -- Foreclosure in
General," and "-- Rights of Redemption" herein.
Likelihood of Disproportionate Liquidation Expenses. Liquidation expenses
with respect to defaulted mortgage loans do not vary directly with the
outstanding principal balance of the loan at the time of default. Therefore,
assuming that the Servicer took the same steps in realizing upon a defaulted
mortgage loan having a small remaining principal balance as it would in the case
of a defaulted 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 small mortgage loan than would be
the case with the defaulted mortgage loan having a large remaining principal
balance. Because the average outstanding principal balance of the Mortgage Loans
is small relative to the size of the average outstanding principal balance of
the loans in a typical pool consisting only of conventional purchase-money
mortgage loans, Net Liquidation Proceeds on Liquidated Mortgage Loans may also
be smaller as a percentage of the principal balance of a Mortgage Loan than
would be the case in a typical pool consisting only of conventional
purchase-money mortgage loans.
Risk of Early Defaults. Certain of the Mortgage Loans underlying a Series
of Securities may be recently originated as of the date of inclusion in the
related Mortgage Pool. Although little data is available, defaults on mortgage
loans are generally expected to occur with greater frequency in their early
years.
Balloon Mortgage Loans. Certain of the Mortgage Loans underlying a Series
of Securities may provide for the payment of the unamortized principal balance
of the Mortgage Loan in a single payment at the maturity of the Mortgage Loan
that is greater than the preceding monthly payment ("Balloon Loans"). See
"Description of the Mortgage Pools" herein and "Description of the Mortgage
Pool" in the related Prospectus Supplement. Because borrowers under 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. The ability of a Mortgagor
on a Balloon Loan to repay the Mortgage Loan upon maturity frequently depends
upon, among other things, the borrower's ability to refinance the Mortgage Loan,
which will be affected by a number of factors, including, without limitation,
the level of mortgage rates available in the primary mortgage market at the
time, the Mortgagor's equity in the related Mortgaged Property, the financial
condition of the Mortgagor, the condition of the Mortgaged Property, tax law,
general economic conditions and the general willingness of financial
institutions and primary mortgage bankers to extend credit.
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<PAGE> 96
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by holders of the Offered
Securities of the proceeds in such an environment may produce a lower return
than that previously received in respect of the related Mortgage Loan.
Conversely, a high interest rate environment may make it more difficult for the
Mortgagor to accomplish a refinancing and may result in delinquencies or
defaults.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures and require licensing of
the Representative, the Originators and the Servicer. In addition, most states
have other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and 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"
herein.
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 Mortgagors 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 Mortgagor's credit
experience; and (iv) certain other laws and regulations.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Equity Protection Act") which amended the Truth in
Lending Act as it applies to mortgages subject to the Equity Protection Act. The
Equity Protection Act requires certain additional disclosures, specifies the
timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to its provisions. The Equity Protection Act
also provides that any purchaser or assignee of a mortgage covered by the Equity
Protection Act is subject to all of the claims and defenses which the borrower
could assert against the original lender. The maximum damages that may be
recovered under the Equity Protection Act from an assignee is the remaining
amount of indebtedness plus the total amount paid by the borrower in connection
with the Mortgage Loan. If the assets of the related Trust include Mortgage
Loans subject to the Equity Protection Act, the Trust may be subject to all of
the claims and defenses which the borrower could assert against the original
lender. The Depositors are required to provide the Trustee, as assignee of such
Mortgage Loans, with notice that such Mortgage Loans are subject to special
rules under the Federal Truth in Lending Act and that the assignee could be
liable for violations of such rules.
Under environmental legislation and case law applicable in certain states,
including the State of California, it is possible that liability for
environmental hazards in respect of real property may be imposed on a holder of
a mortgage note (such as the Trust) secured by real property. See "Certain Legal
Aspects of the Mortgage Loans -- Environmental Legislation" herein.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF BANKRUPTCY OF AN ORIGINATOR
The transactions contemplated hereby and by the related Prospectus
Supplement will be structured such that the voluntary or involuntary application
for relief under the United States Bankruptcy Code or similar applicable state
laws ("Insolvency Laws") by the Depositors is unlikely and such filings by the
Originators should not result in consolidation of the assets and liabilities of
the Depositors with those of the Originators. These steps include the creation
of the Depositors as separate, limited purpose subsidiaries, the certificates of
incorporation of which contain limitations on the nature of the Depositors'
business and restrictions on the ability of a Depositor to commence voluntary or
involuntary cases or proceedings under the Insolvency Laws without the prior
unanimous affirmative vote of all its directors.
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However, there can be no assurance that the activities of the Depositors would
not result in a court concluding that the assets and liabilities of the
Depositors should be consolidated with those of the Originators.
Each Originator will transfer its related Mortgage Loans to either
Depositor, and the Depositors will transfer the Mortgage Loans to the related
Trust. The Originators will warrant in the related Transfer Agreement, and the
Depositors will warrant in the related Pooling and Servicing Agreement, that the
Originators or the Depositors, as the case may be, have taken and will take all
actions that are required to perfect the Depositors' and the Trust's, as the
case may be, ownership interests in the Mortgage Loans. If an Originator were to
become a debtor in a bankruptcy case, a creditor or trustee (or the debtor
itself) may take the position that the contribution or transfer of the Mortgage
Loans by the Originator to its related Depositor should be characterized as a
pledge of such Mortgage Loans to secure a borrowing of such debtor, with the
result that such Depositor is deemed to be a creditor of such Originator,
secured by a pledge of the applicable Mortgage Loans. If such an attempt were
successful, delays in payments of collections on the Mortgage Loans could occur
or reductions in the amount of such payments could result, or such a trustee in
bankruptcy could elect to accelerate payment of the obligation to the Depositors
and liquidate the Mortgage Loans. With respect to a Trust as to which no REMIC
election is made and as to which a Class of Securities will be treated as debt
of the Trust, if a Depositor were to become a debtor in a bankruptcy case,
unless otherwise described in the related Prospectus Supplement, the Indenture
Trustee will be directed to sell the assets of the Trust (other than the
Accounts) in a commercially reasonable manner and on commercially reasonable
terms. The proceeds of such sale will be treated as collections on the Mortgage
Loans.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of each Class of Securities of a Series will depend
on the rate and timing of payment of principal on the related Mortgage Loans,
including prepayments, liquidations due to defaults and repurchases due to
defective documentation or breaches of representations and warranties. Such
yield may be adversely affected by a higher or lower than anticipated rate of
prepayments on the Mortgage Loans. Prepayments are influenced by a number of
factors, including prevailing mortgage market interest rates, local and regional
economic conditions and homeowner mobility. The yield to maturity of certain
Classes of Securities identified in the related Prospectus Supplement may be
particularly sensitive to the rate and timing of principal payments (including
prepayments, liquidations and repurchases) of the related Mortgage Loans, which
may fluctuate significantly from time to time. Investors in a Class of
Securities offered at a discount from the principal amount thereof or with no
stated principal amount should fully consider the associated risks, including
the risk that an extremely rapid rate of principal payments could result in the
failure of such investors to recoup their initial investments. See "Certain
Yield and Prepayment Considerations" herein and in the related Prospectus
Supplement.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a Mortgagor who enters military service
after the origination of such Mortgagor's Mortgage Loan (including a Mortgagor
who is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest (including fees and charges) above an annual rate of 6% during
the period of such Mortgagor's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action could
have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans
underlying a Series of Securities. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the Mortgagor's period of active duty status.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the related
Mortgaged Property in a timely fashion.
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ORIGINAL ISSUE DISCOUNT
Certain Classes of Securities of a Series may be treated as having been
issued with original issue discount for federal income tax purposes. As a
result, holders of such Securities will be required to include amounts in income
without the receipt of cash corresponding to that income. See "Federal Income
Tax Consequences -- Original Issue Discount" herein and, if applicable, in the
related Prospectus Supplement.
DESCRIPTION OF THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist of Mortgage Loans having the aggregate
principal balance outstanding as of the related Cut-off Date, after giving
effect to payments due or received prior to such date, specified in the related
Prospectus Supplement (the "Original Pool Principal Balance"). Unless otherwise
specified in the related Prospectus Supplement, each Mortgage Pool will consist
of fixed- or adjustable-rate Mortgage Loans (including both fully amortizing
Mortgage Loans and Balloon Loans) originated and underwritten by the
Representative or by a wholly-owned subsidiary of the Representative or
purchased and re-underwritten by the Representative or by a wholly-owned
subsidiary of the Representative. This subsection describes generally certain
characteristics of the Mortgage Loans.
The related Prospectus Supplement will describe certain characteristics of
the related Mortgage Loans, including without limitation (i) the range of dates
of origination and the latest scheduled maturity date, (ii) the minimum
remaining term to maturity, the weighted average original term to maturity and
the weighted average remaining term to maturity, (iii) the range of Mortgage
Interest Rates and the weighted average Mortgage Interest Rate, (iv) in the case
of Mortgage Loans with adjustable interest rates ("ARMs" or "Adjustable Rate
Mortgages"), the weighted average outstanding current Mortgage Interest Rates,
Gross Margins, Maximum Mortgage Rates and Minimum Mortgage Rates and Periodic
Caps and Payment Caps, if any (as such terms are defined below under
"-- Payments on the Mortgage Loans"), (v) the range of principal balances
outstanding, the range of original principal balances and the weighted average
outstanding principal balance, (vi) the percentages of Mortgage Loans secured by
first Mortgages, second Mortgages and more junior Mortgages, respectively, (vii)
the maximum Combined Loan-to-Value Ratio at origination (defined below), the
weighted average Combined Loan-to-Value Ratio, the maximum Home Equity Loan
Ratio (defined below) at origination and the weighted average Home Equity Loan
Ratio, (viii) the percentage of Mortgage Loans secured by fee simple interests
in single-family dwelling units, attached or detached two- to four-family
dwelling units, units in planned unit developments and condominiums,
respectively, the percentage of Mortgage Loans secured by leasehold interests,
the percentage of Mortgage Loans secured by manufactured housing units and the
percentage of Mortgage Loans secured by units in cooperatives, (ix) the
percentage of Mortgage Loans as to which the related Mortgagor represented at
the time of origination that the related Mortgaged Property would be occupied by
such Mortgagor as a primary or secondary residence, (x) certain summary
information relating to the geographic concentration of the Mortgaged Properties
securing the Mortgage Loans, (xi) the percentage of Mortgage Loans which are
Balloon Loans and the dates after origination the balloon payment is due, and
(xii) the percentage of Mortgage Loans which are Bankruptcy Mortgage Loans
(defined below), the percentage of Bankruptcy Loans which are 30 days or more
contractually delinquent and the percentages of Mortgage Loans other than
Bankruptcy Mortgage Loans which are 30 days and 60 days or more contractually
delinquent, respectively. If so specified in the related Prospectus Supplement,
such information may be approximate based on the expected characteristics of the
Mortgage Liens to be included in the related Mortgage Pool and any significant
variations therefrom provided on the related Current Report on Form 8-K, as
described below.
For purposes of the foregoing, the "Combined Loan-to-Value Ratio" of any
Mortgage Loan is the ratio (expressed as a percentage) of (i) the sum of (a) the
original principal balance of such Mortgage Loan at the date of origination plus
(b) the outstanding balance of the Senior Lien, if any, divided by
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(ii) the lesser of (a) the value of the related Mortgaged Property, based upon
the appraisal made at the time of origination of the Mortgage Loan and (b) the
purchase price of the Mortgaged Property if the Mortgage Loan proceeds were used
to purchase the Mortgaged Property. The Combined Loan-to-Value Ratios of the
Mortgage Loans also reflect certain judgments of the Company's underwriters made
at the time the Mortgage Loans were originated or acquired and certain other
policies of the Company. See "The Depositors, the Servicer, the Representative
and the Depositors -- Specific Underwriting Criteria -- Balloon Mortgage Loans"
and "-- Certain Calculations Relating to Combined Loan-to-Value Ratios" herein.
The "Home Equity Loan Ratio" of any Mortgage Loan is the ratio (expressed as a
percentage) of (i) the original principal balance of such Mortgage Loan divided
by (ii) the lesser of (a) the value of the related Mortgaged Property, based
upon the appraisal made at the time of origination of the Mortgage Loan and (b)
the purchase price of the Mortgaged Property if the Mortgage Loan proceeds were
used to purchase the Mortgaged Property. For Mortgage Loans secured by a first
Mortgage, the Combined Loan-to-Value Ratio and the Home Equity Loan Ratio will
be the same.
A Bankruptcy Mortgage Loan is a Mortgage Loan on which the related
Mortgagor is making payments pursuant to a personal bankruptcy plan or
proceeding (each, a "Bankruptcy Plan"). The entire principal balance and the
right to receive interest accrued after the Cut-off Date with respect to each
Bankruptcy Mortgage Loan will generally be included in the assets of the related
Trust, while the right to interest accrued but unpaid prior to the related
Cut-off Date under each Bankruptcy Mortgage Loan will generally be retained by
the Originators. The Originators' right to collect interest accrued on a
Bankruptcy Mortgage Loan prior to the date of the related Bankruptcy Plan filing
will generally be subordinate to the related Trust's right to receive timely
payments of principal and interest with respect to such Bankruptcy Mortgage
Loan.
In addition, the related Prospectus Supplement or, if so specified therein,
the Current Report on Form 8-K to be filed within fifteen days after the
delivery of a Series of Securities, will set forth in tabular form certain more
detailed information relating to the characteristics of the related Mortgage
Loans by number and outstanding principal balance and by percentage of the
Mortgage Pool including, without limitation, the outstanding principal balances
of the Mortgage Loans, the geographic distribution of the related Mortgaged
Properties (by state), the Combined Loan-to-Value Ratios, the Home Equity Loan
Ratios, the Mortgage Interest Rates, the remaining months to stated maturity and
the number of months since origination, in each case (except for geographic
distribution) within the ranges specified therein.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, a
substantial portion of the Mortgage Loans underlying a Series of Securities will
provide for level monthly installments (except, in the case of Balloon Mortgage
Loans, the final payment) consisting of interest equal to one-twelfth of the
applicable Mortgage Interest Rate times the unpaid principal balance, with the
remainder of such payment applied to principal (an "Actuarial Mortgage Loan").
No adjustment is made if a payment is made earlier or later than the due date,
although the Mortgagor may be subject to a late payment penalty. If such
Mortgage Loan is prepaid, the borrower is required to pay interest only to the
date of prepayment. The remainder of the Mortgage Loans will provide for
payments that are allocated to principal and interest according to the daily
simple interest method (a "Simple Interest Mortgage Loan") or the "sum of the
digits" method, otherwise known as the "Rule of 78s" method (a "Rule of 78s
Mortgage Loan"). Unless otherwise specified in the related Prospectus
Supplement, no Mortgage Loan will provide for deferred interest or negative
amortization.
The Mortgage Loans may have Mortgage Interest Rates which are fixed or may
be ARMs on which the Mortgage Interest Rates are adjusted periodically based on
an index (an "Index") or otherwise, as specified in the related Prospectus
Supplement. ARMs generally provide for a fixed initial Mortgage Interest Rate
until the first date on which such Mortgage Interest Rate is to be adjusted.
Thereafter, the Mortgage Interest Rate is subject to periodic adjustment
generally equal to the Index plus a fixed percentage spread over the Index
established contractually for each ARM at the time of its origination (the
"Gross Margin"). The initial Mortgage Interest Rate for an ARM may be lower than
the sum of the
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then-applicable Index and the Gross Margin for such ARM. An ARM may be
convertible into a fixed-rate Mortgage Loan. To the extent specified in the
related Prospectus Supplement, any ARM so converted may be subject to repurchase
upon conversion by the party specified in such Prospectus Supplement.
An ARM may provide that its Mortgage Interest Rate may not exceed a rate
above a maximum rate (the "Maximum Mortgage Rate") or be less than a minimum
rate (the "Minimum Mortgage Rate") established at the time of origination. In
addition, if so specified in the related Prospectus Supplement, an ARM may
provide for limitations on the maximum amount by which the Mortgage Interest
Rate may adjust for any single adjustment period (a "Periodic Cap") or, in the
case of an ARM providing for negative amortization, may provide for limitations
on the amounts by which scheduled payments may be increased due to rising
interest rates (a "Payment Cap").
A Simple Interest Mortgage Loan provides for the amortization of the amount
financed under the Mortgage Loan over a series of equal monthly payments
(except, in the case of a Balloon Loan, the final payment). Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the stated
Mortgage Interest Rate and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such Mortgage Loan. As payments are
received under a Simple Interest Mortgage Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a Simple Interest Mortgage Loan before its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if such payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a Simple Interest Mortgage
Loan is made on or prior to its scheduled due date, the principal balance of the
Mortgage Loan will amortize in the manner described in the preceding paragraph.
However, if the borrower consistently makes scheduled payments after the
scheduled due date the Mortgage Loan will amortize more slowly than scheduled.
If a Simple Interest Mortgage Loan is prepaid, the borrower is required to pay
interest only to the date of prepayment.
A Rule of 78s Mortgage Loan provides for the payment by the borrower of a
specified total amount of payments, payable in equal monthly installments on
each due date, which total represents the amount financed and add-on interest in
an amount calculated on the basis of the stated note rate for the term of the
Mortgage Loan. The rate at which such amount of add-on interest is earned and,
correspondingly, the portion of each fixed monthly payment allocated to
reduction of the outstanding principal balance are calculated in accordance with
the "sum of the digits" or "Rule of 78s". Under a Rule of 78s Mortgage Loan, the
portion of a payment allocable to interest is determined by multiplying the
total amount of add-on interest payable over the term of the Mortgage Loan by a
fraction derived as described herein. The fraction used in the calculation of
add-on interest earned each month under a Rule of 78s Mortgage Loan has as its
denominator a number equal to the sum of a series of numbers beginning with one
and ending with the number of monthly payments due under the Mortgage Loan. For
example, for a Mortgage Loan providing for twelve scheduled payments, the
denominator of each month's fraction would be 78, the sum of the series of
numbers from one to twelve. The numerator of the fraction for a given month
would be the number of payments remaining before giving effect to the payment to
which the fraction is being applied. Accordingly, in the case of such Mortgage
Loan, the fraction for the first payment would be 12/78, for the second payment,
11/78, for the third payment, 10/78, and so on through the final payment, for
which the fraction would be 1/78. The applicable fraction is then multiplied by
the total add-
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on interest payable over the term of the Mortgage Loan to determine the amount
of interest "earned" that month. The difference between the amount of the
monthly payment made by the borrower and the amount of earned add-on interest
calculated for the month is applied to principal reduction. As a result, the
rate at which interest is earned in the initial months of a Rule of 78s Mortgage
Loan is somewhat higher than the interest computed for a Mortgage Loan computed
on an actuarial basis, and the rate at which interest is earned at the end of
the Mortgage Loan is somewhat less than that computed under an actuarial basis.
Payments to holders of the related Securities and the Servicing Fee with
respect to Rule of 78s Mortgage Loans will be computed as if such Mortgage Loans
were Simple Interest Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, amounts received upon prepayment in full of a Rule of 78s
Mortgage Loan in excess of (i) the then outstanding principal balance of such
Mortgage Loan (computed on a daily simple interest amortization basis) and (ii)
accrued interest computed on a daily simple interest basis at the Mortgage
Interest Rate, plus servicing compensation exclusive of Servicing Fees, will
constitute part of the Representative's Yield and will not be part of the assets
of the related Trust available to make required payments of principal and
interest to holders of the related Securities and will not be treated as
collected principal for purposes of computing the amount to be distributed.
In the event of the prepayment in full (voluntarily or by acceleration) of
a Rule of 78s Mortgage Loan, under the terms of the Mortgage Loan the entire
remaining amount of payments is due but a "refund" or "rebate" will be made to
the borrower of the portion of the total amount of the scheduled payments
remaining under the Mortgage Loan immediately prior to such prepayment which is
allocable to "unearned" add-on interest. Such rebate will be calculated in
accordance with the Rule of 78s method.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on each Class of Securities of a Series
entitled to principal, the aggregate amount of each interest payment on each
Class of Securities of a Series entitled to interest and the yield to maturity
of each Class of Securities of a Series will be related to the rate and timing
of payments of principal on the related Mortgage Loans, which may be in the form
of scheduled and unscheduled payments. 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. In general, when the level of prevailing
interest rates for similar loans significantly declines, the rate of prepayment
is likely to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions and homeowner mobility.
Defaults on mortgage loans are expected to occur with greater frequency in their
early years, although little data is available with respect to the rate of
default on second mortgage loans. The rate of default on second or more junior
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 the holders of amounts of
principal which would otherwise be distributed over the remaining terms of the
Mortgage Loans.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer, the Depositors or the holders of the Class of
Securities of any Series specified in the related Prospectus Supplement may, at
their option, cause the related Trust to sell all of the outstanding Mortgage
Loans and REO Properties underlying the related Series of Securities, and thus
effect the early retirement of the related Securities, after the date on which
the Pool Principal Balance (as defined herein) is less than the percentage of
the Original Pool Principal Balance specified in the related Prospectus
Supplement. See "Description of the Securities -- Optional Disposition of
Mortgage Loans" herein. Further, if so specified in the related Prospectus
Supplement, the Servicer or such other entities as may be specified in such
Prospectus Supplement may be required to effect early retirement of a Series of
Securities by soliciting competitive bids for the purchase of the assets of the
related Trust or otherwise. See "Description of the Securities -- Mandatory
Disposition of Mortgage Loans" herein.
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If any Class of Securities of Series are subject to special redemption or
special remittances ("Special Payments") on a date other than a Payment Date
(each such date, a "Special Payment Date"), the holders will receive principal
earlier than would have been the case had no special redemption or special
remittance, as the case may be, occurred and such principal payments were made
on the next succeeding Payment Date. In such event, holders may not be able to
reinvest such payments at rates equal to the rates on such Class of Securities.
If the Pooling and Servicing Agreement for a Series of Securities provides
for a Prefunding Account or other means of funding the transfer of additional
Mortgage Loans to the related Trust, as described under "Description of the
Securities -- Forward Commitments; Prefunding" herein, and the Trust is unable
to acquire such additional Mortgage Loans within any applicable time limit, the
amounts set aside for such purpose may be required to effect the retirement of
all or a portion of one or more Classes of Securities of such Series.
As described above, the rate of prepayment on a pool of mortgage loans is
affected by prevailing market rates for comparable mortgage loans. 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. No representation is made as to the particular
factors that will affect the prepayment of the Mortgage Loans underlying any
Series of Securities, as to the relative importance of such factors, as to the
percentage of the principal balance of the Mortgage Loans that will be paid as
of any date or as to the overall rate of prepayment on the related Mortgage
Loans.
The yield to maturity of certain Classes of Securities of a Series may be
particularly sensitive to the rate and timing of principal payments (including
prepayments) of the Mortgage Loans, which may fluctuate significantly from time
to time. The Prospectus Supplement relating to such Securities will provide
certain additional information with respect to the effect of such payments on
the yield to maturity of such Securities under varying rates of prepayment,
including the rate of prepayment, if any, which would reduce the holder's yield
to zero.
Greater than anticipated prepayments of principal will increase the yield
on Securities purchased at a price less than par. Conversely, greater than
anticipated prepayments of principal will decrease the yield on Securities
purchased at a price greater than par. The effect on an investor's yield due to
principal prepayments on the Mortgage Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the Securities will not be entirely offset by a
subsequent like reduction (or increase) in the rate of principal payments. The
weighted average life of each Class of Securities of a Series will also be
affected by the amount and timing of delinquencies and defaults on the related
Mortgage Loans and the recoveries, if any, on defaulted Mortgage Loans and
foreclosed properties in the related Mortgage Pool.
The "weighted average life" of a Security refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Security is repaid. The weighted average life of
each Class of Securities of a Series will be influenced by, among other factors,
the rate at which principal payments are made on the Mortgage Loans, including
final payments made upon the maturity of Balloon Loans.
THE TRUSTS
Each Trust will be formed under a Pooling and Servicing Agreement (a
"Pooling and Servicing Agreement") among the Depositors, the Servicer and the
Trustee named therein (a "Trustee") or a Trust Agreement (each, a "Trust
Agreement") between the Depositors and the trustee of the Trust (the "Owner
Trustee"). If a Trust is formed under a Trust Agreement, the related Pooling and
Servicing Agreement will be entered into between the Trust, the Depositors and
the Servicer. No Trust will engage
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in any activity other than (i) acquiring, holding and managing the Mortgage
Loans and the other assets of the Trust and the proceeds therefrom, (ii) issuing
the related securities, (iii) making payments on the related Securities and (iv)
engaging in other activities incidental to the foregoing.
The property of each Trust will include: (i) the related Mortgage Loans as
from time to time are subject to the related Pooling and Servicing Agreement and
all proceeds thereof, (ii) such assets as from time to time are identified as
REO Property or are deposited in the Collection Account (defined herein),
Principal and Interest Account (defined herein), or other accounts established
under any of the documents governing the Trust or the related Securities,
including amounts on deposit in such accounts and invested in Permitted
Instruments, (iii) the Trustee's rights under all insurance policies with
respect to the Mortgage Loans required to be maintained pursuant to the Pooling
and Servicing Agreement and any Insurance Proceeds, (iv) Liquidation Proceeds,
(v) Released Mortgaged Property Proceeds; and (vi) certain other property;
provided, however, that unless otherwise specified in the related Prospectus
Supplement, the assets of a Trust will not include the Representative's Yield or
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 Servicer will service the Mortgage Loans either directly or through
subservicers in accordance with the Pooling and Servicing Agreement and
generally in accordance with the first and second mortgage loan servicing
standards and procedures accepted by prudent mortgage lending institutions. See
"Description of the Securities -- Servicing Standards" and "-- Use of
Subservicers" below for a further description of the provisions of the Pooling
and Servicing Agreement relating to servicing standards and the use of
subservicers.
THE DEPOSITORS, THE SERVICER, THE REPRESENTATIVE AND THE ORIGINATORS
GENERAL
EquiCredit Corporation of America (formerly known as Old Stone Credit
Corporation), the Servicer, the Representative and an Originator ("EquiCredit"),
was incorporated under the laws of the State of Delaware on September 4, 1991,
for the purpose of acquiring substantially all of the assets of Old Stone Credit
Corporation ("OSCC-Florida"), a corporation organized under the laws of the
State of Florida and a wholly-owned subsidiary of Old Stone Corporation, a
corporation organized under the laws of the State of Rhode Island. EquiCredit is
a wholly-owned subsidiary of EquiCredit Corporation ("EquiCredit Corporation"),
a Delaware corporation organized on August 29, 1991. On November 7, 1991,
EquiCredit acquired substantially all of the assets and succeeded in the
business of OSCC-Florida, including the common stock of the wholly-owned
subsidiaries of OSCC-Florida, consisting of, among other companies, EquiCredit
Corporation/Ala. & Miss., California/EquiCredit Corporation, EquiCredit
Corporation of In., EquiCredit Corporation of Pa. and EquiCredit Corporation of
SC. In the discussion that follows, references to the "Company" include
EquiCredit Corporation, EquiCredit and its subsidiaries (including the other
Originators) and EquiCredit's predecessor in interest, OSCC-Florida.
On January 27, 1995, Barnett Merger Sub Inc., a wholly-owned subsidiary of
Barnett Banks, Inc. ("Barnett Banks"), was merged with and into EquiCredit
Corporation, and EquiCredit Corporation became a wholly-owned indirect
subsidiary of Barnett Banks.
The Depositors were incorporated in the State of Delaware on February 26,
1993 for the limited purposes of receiving the mortgage loans from one or more
Originators, transferring such mortgage loans to third parties, forming trusts
and engaging in related activities. All of the outstanding common stock of each
Depositor is owned by one or more of the Originators.
The transactions contemplated hereby have been structured to make the
voluntary or involuntary application for relief by a Depositor under any
Insolvency Law unlikely and that such application by an Originator would not
result in consolidation of the assets and liabilities of the Depositors with
those of such Originator. If, notwithstanding the measures so taken, a court
concluded that the assets and liabilities of the Depositors should be so
consolidated with those of an Originator, delays in distributions
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on the Notes and the Certificates and possible reductions in the amount of such
distributions could occur. See "Risk Factors -- The Status of the Mortgage Loans
in the Event of Bankruptcy of an Originator".
LOAN ORIGINATION HISTORY
The Company originates mortgage loans on residential dwellings nationwide;
purchases mortgage loans from lenders, mortgage bankers, and brokers on a
wholesale basis; assembles and sells pools of mortgages to major commercial
banks and other financial institutions; and services mortgage portfolios placed
with such investors. The Company lends primarily on suburban and urban
single-family homes in major metropolitan areas. See "The Originators and the
Servicer -- Origination, Foreclosure and Loss Experience -- Loan Origination
History" in the related Prospectus Supplement for a current listing of the
states in which the Company conducts loan origination and/or wholesale
operations.
The related Prospectus Supplement will set forth the dollar amounts of
first and junior lien mortgage loans originated and purchased by the Company
during the three years immediately preceding the date of the Prospectus
Supplement and, if available, the dollar amounts of mortgage loans originated
and purchased by the Company during the most recent complete calendar quarters
in the current year.
GENERAL LOAN UNDERWRITING
The Company originates and acquires first and junior lien mortgage loans
using standard underwriting procedures based upon an applicant's general
creditworthiness and the extent of real estate equity used as collateral
security. The following is a general discussion of the underwriting standards
and procedures utilized by the Company, subject to such variations as are
specified in the related Prospectus Supplement.
All mortgage loan applications are underwritten, and collateral properties
appraised, prior to the closing or acquisition of a mortgage loan by the
Company. Loan underwriting and approval is centralized at the Company's
headquarters in Jacksonville, Florida. Loans are reviewed and approved by one of
the Company's loan officers, each of whom is granted specific credit approval
limits based on experience and seniority. Approval of a majority of the
Company's Board of Directors is required for all loan applications over a dollar
limit established from time to time, currently $300,000.
The Company does not currently originate or acquire mortgage loans that
result in a lien position more subordinate than a second lien on real estate
and, unless otherwise specified in the related Prospectus Supplement, no loan
secured by a more subordinate mortgage will be included in a Mortgage Pool. The
Company will consider making a second mortgage loan in a subordinate position to
a first mortgage loan held by a party other than a bank, savings association or
a supervised lender, if a copy of the recorded security instrument and note are
reviewed prior to credit approval. Second mortgage loans may also be made behind
adjustable or variable rate first mortgage loans if the maximum payment (on a
fully indexed basis) is used when calculating the debt ratio, and the note and
mortgage relating to such first mortgage loan accompany the loan application
file for consideration during the credit review process. Any first lien
adjustable or variable rate loan is required to have been in existence for at
least one year and to have experienced at least one rate adjustment.
INCOME VERIFICATION
Loan applications are considered through a combination of reviews of credit
bureau reports and/or individual certifications. Income is verified through
various means, including applicant interviews, written verification, review of
paycheck stubs, tax returns, and so forth, and the potential borrower's
demonstration of sufficient levels of disposable income to satisfy debt
repayment requirements. The following are certain of the key factors considered
by the Company.
Employment. A loan applicant's employer is always contacted to verify
employment and employee compensation in addition to receipt of the potential
borrower's W-2s, last two to four paycheck stubs and similar items of
verification.
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<PAGE> 105
Self-Employed Applicants -- Commissions/Bonuses/Tax-Returns. Federal tax
returns for the most recent two years (with schedules) signed by the potential
borrower are required from self-employed applicants and applicants who derive
100% of their income from commissions or 25% or more of their total income from
commissions and/or bonuses. Consistency in commission and/or bonus income must
be established. Self-employed applicants must also submit financial statements
including an income statement and a balance sheet reflecting the applicant's or
the applicant's business's financial condition no more than six months prior to
the date of the loan application. The Company's underwriters may, in the
exercise of their judgment, either accept personal and business related
financial statements prepared by the borrower or require financial statements
prepared by a certified public accountant. Checking account statements are used
solely as additional verification of income.
Rental Income. Rental income must be documented by leases, rental
agreements, tenant letters, or tax returns for the two most recent years. The
Company calculates 75% of total rents received and subtracts from that figure
from total mortgage payments on rental property to derive a cash flow, if any,
which amount is then treated as additional income in the credit review process.
If the subtraction of the mortgage payment from the rental income results in a
negative cash flow, such amount is subtracted from the applicant's monthly
income.
Social Security and Veterans Compensation. Compensation from the Social
Security Administration or the Department of Veterans Affairs must be supported
by an awards letter from the appropriate agency. If such a letter is
unavailable, copies of checks received from the appropriate agency or eight to
twelve months of checking account statements indicating equal deposit amounts
are required.
Retirement Income. Retirement income must be supported by an annuity
letter or similar awards document describing all details of income. If such a
letter or document is unavailable, copies of checks received from the source of
income or eight to twelve months of checking account statements indicating equal
deposit amounts are required.
Child and/or Spousal Support. A loan applicant must submit to the Company
a copy of the final decree of divorce specifically setting forth the amount and
term, if any, of support. If such award is a substantial portion of the
applicant's total monthly income, either copies of cancelled checks from the
former spouse, collection receipts paid through a court ordered public service
office or checking account statements indicating equal monthly or otherwise
periodic deposit amounts are required.
APPRAISALS; TITLE COMPANIES AND CLOSING AGENTS
All properties are required to be appraised by independent fee appraisers
approved by the Company in advance of funding. Appraisers are approved by the
Company based upon a review of sample appraisals, professional experience,
education, membership in related professional organizations, clients and typical
or specific properties appraised. All appraisers must be approved by the
Company's Vice President or Assistant Vice President of Loan Administration and
must be independent from borrowers, referral brokers used by the Company and any
other mortgage loan originator from which the Company acquires mortgage loans.
Management reviews references, credentials and examples of prior appraisals
before approving an appraiser. If an appraisal with respect to a mortgaged
property appears to be inconsistent with appraisals previously conducted on
comparable properties by the same or other appraisers, the Company requires the
appraiser to explain the discrepancies. If the problems continue or are not
resolved to the Company's satisfaction, the appraisal firm is removed from the
Company's approved appraiser list. See "-- Quality Control Audit Procedures
Highlights" below.
Appraisals are completed on standard FNMA/FHLMC forms and conform to
current FNMA/FHLMC secondary market requirements for one- to four family
residential appraisals. Each such appraisal includes, among other things, an
inspection of the exterior of the subject property, obtaining front, side and
street view photographs and obtaining data from three recent sales of similar
properties within the same general location as such subject property; provided,
that for certain high loan-to-value loans, interior inspections may not be
included. The appraisals may take into account any increased value in the
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<PAGE> 106
residence due to improvements proposed to be made with the proceeds of the
Mortgage Loan. In such cases, the Company will escrow a portion of the loan
proceeds until such improvements are made.
Loans are closed by personnel at the respective branches of the Company,
approved attorneys, title insurers or agents of title insurers, and title
insurance is issued by one of several nationally recognized title companies.
SPECIFIC UNDERWRITING CRITERIA; UNDERWRITING PROGRAMS
The Company originates and purchases loans under six underwriting programs
(each, an "Underwriting Program") summarized below, which may change from time
to time, as described in the related Prospectus Supplement. Management permits
deviations from the specific criteria of an Underwriting Program to reflect
local economic trends and real estate valuations, as well as other credit
factors specific to each loan application. From time to time, the Company grants
loans to applicants whose creditworthiness may not coincide with program
criteria. In such circumstances, the Company strives to maintain the overall
integrity of these programs and simultaneously provide its lending officers with
the flexibility to consider the specific circumstances of the loan application.
The related Prospectus Supplement will set forth the distribution of the
Mortgage Loans among the Underwriting Programs as of the related Cut-off Date.
SUMMARIES OF THE UNDERWRITING PROGRAMS
CLASS A PLUS
1. The Company requires both direct creditor verification and a credit
report on the borrower by two independent credit reporting agencies reflecting
the borrower's complete credit history. An excellent credit history of at least
one year is required, and prior credit history may be rated on a case-by-case
basis. The credit history should reflect that existing and previous debts were
paid in a timely manner. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy that
has been discharged for a minimum of more than five years or 24 months,
respectively, is acceptable if the borrower has since established a payment
history, notwithstanding such bankruptcy, consistent with this Underwriting
Program. No unpaid collections, liens or judgments are allowed under this
Underwriting Program. Unless otherwise specified below, mortgage payment history
may not reflect any 30-day delinquency during the most recent 12-month period.
In addition, no more than one revolving credit account, and no installment
credit account, may reflect a 30-day delinquency in the most recent 12-month
period.
2. Generally, the borrower must have been employed for not less than two
years with the same employer or have established comparable stability in a
particular field of work.
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<PAGE> 107
3. Combined Loan-to-Value Ratios(1) and Debt-to-Income Ratios(2) must
conform to the following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -----------------------------------------
<S> <C> <C> <C>
Owner Occupied Single
Family............... 100% 42% Only non-purchase money mortgage loans
may be originated or acquired pursuant to
these criteria. Mortgage payment history
must be historically current with no late
payments of 30 days or more in the last
12 months. Mortgage loans originated or
acquired under these criteria must not
exceed $30,000, must have fixed rates,
and may not have terms exceeding 15
years. Mortgage loans secured by
properties located in the State of New
York may not be originated or acquired
pursuant to these criteria.
Owner Occupied Single
Family............... 90% 42% Mortgage payment history must be
historically current with no late
payments of 30 days or more in the last
12 months. First mortgage loans and
second mortgage refinance loans
originated under these criteria must not
exceed $180,000 and $60,000, respectively
and must have fixed rates. The maximum
term of any first mortgage loan
originated or acquired under these
criteria is 30 years, provided that
balloon mortgage loans with 30-year
amortization schedules and single
payments of the remaining loan balances
up to 15 years after origination may also
be originated or acquired. The maximum
term of any second mortgage refinance
loan originated or acquired under these
criteria is 15 years.
Owner Occupied One-to
Four-Family.......... 85% 42% A Debt-to-Income Ratio of up to 45% is
permitted if income is not less than
$5,000 per month. Mortgage payment
history must be historically current with
no late payments of 30 days or more in
the last 12 months.
</TABLE>
- - ---------------
(1) See "Description of the Mortgage Pool -- General" for the definition of
"Combined Loan-to-Value Ratio."
(2) "Debt-to-Income Ratio" under all of the Underwriting Programs is generally
calculated as that ratio, stated as a percentage, which results from
dividing a mortgagor's fixed monthly debt by his or her gross monthly
income. "Fixed monthly debt" includes: (i) in the case of second mortgages,
the monthly payment under the first lien (which generally includes an
escrow of real estate taxes), (ii) the related mortgage loan monthly
payment (which in the case of an Adjustable Rate Mortgage, is calculated
based on a rate per annum equal to 2% plus the initial rate), (iii) other
installment debt service payment, including, in respect of revolving credit
debt, the required monthly payment thereon, or, if no such payment is
specified, the greater of the amount equal to 5% of the balance, or $10.00.
"Fixed monthly debt" does not include any of the debt (other than revolving
credit debt)
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<PAGE> 108
described above that matures within less than three months from the date of the
calculation, or in the case of revolving debt, the minimum $10.00 monthly
payment on accounts showing a zero balance.
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio
may apply depending on the amount of gross monthly income. See
"-- Monthly Income" below.
4. The mortgaged property is required to be an owner occupied one- to
four-family or single family dwelling, as specified above, which may include
condominiums or townhouses, in at least average repair, comparable to
neighboring properties and in compliance with zoning regulations. If the
mortgaged property is non-owner occupied, the Company reduces the Maximum
Combined Loan-to-Value Ratio by 10%.
5. Generally, the borrower must have resided on the property that will
secure the loan for at least two years.
CLASS A
1. The Company requires both direct creditor verification and a credit
report on the borrower by two independent credit reporting agencies reflecting
the borrower's complete credit history. An excellent credit history of at least
one year is required, and prior credit history may be rated on a case-by-case
basis. The credit history should reflect that existing and previous debts were
paid in a timely manner. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy that
has been discharged for a minimum of more than five years or 24 months,
respectively, is acceptable if the borrower has since established a payment
history, notwithstanding such bankruptcy, consistent with this Underwriting
Program. No unpaid collections, liens or judgments are allowed under this
Underwriting Program. Unless otherwise specified below, mortgage payment history
may reflect not more than one 30-day delinquency during the most recent 12-month
period. In addition, no more than two revolving credit accounts, and no more
than two installment credit accounts, may reflect 30-day delinquencies in the
most recent 12-month period.
2. Generally, the borrower must have been employed for not less than two
years with the same employer or have established comparable stability in a
particular field of work.
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<PAGE> 109
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -----------------------------------------
<S> <C> <C> <C>
Owner Occupied One-to
Four-Family.......... 80% 45% A Debt-to-Income Ratio not in excess of
50% may be permitted on a case-by-case
basis.
Self-Employed Owner
Occupied One- to
Four-Family.......... 75% 45% Exceptions to the Maximum Combined Loan-
to-Value Ratio may be considered if the
borrower's spouse has held a salaried job
for at least two years and contributes at
least 50% of the total joint income.
</TABLE>
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio
may apply depending on the amount of gross monthly income. See
"-- Monthly Income" below.
4. The mortgaged property is required to be an owner occupied one- to
four-family or single family dwelling, as specified above, which may include
condominiums or townhouses, in at least average repair, comparable to
neighboring properties and in compliance with zoning regulations. If the
mortgaged property is non-owner occupied, the Company reduces the Maximum
Combined Loan-to-Value Ratio by 10%.
5. Generally, the borrower must have resided on the property that will
secure the loan for at least two years.
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<PAGE> 110
CLASS B
1. The Company requires both direct creditor verification and a credit
report on the borrower by two independent credit reporting agencies reflecting
the borrower's complete credit history. A credit history of at least one year is
required and prior credit history may be rated on a case-by-case basis. The
credit history should reflect that existing and previous debts were paid in a
predominantly timely manner. No more than an aggregate of five revolving credit
accounts or five installment credit accounts with 30-day or 60-day delinquencies
are considered. Collections up to $300 are acceptable as well as greater amounts
if a satisfactory explanation is provided. The mortgage payment history is
required to reflect no more than two 30-day delinquencies during the most recent
12-month period and prior mortgage payment history may be rated on a
case-by-case basis; provided that consecutive or "rolling" delinquencies are
counted as one occurrence. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy
that has been discharged for a minimum of more than three years or 18 months,
respectively, is acceptable if the borrower has since established a payment
history, notwithstanding such bankruptcy, consistent with the Class A
Underwriting Program.
2. Generally, the borrower must have been employed with the same employer
for at least one year or held two jobs in the same field of work in the most
recent five year period.
3. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -------------------------------------
<S> <C> <C> <C>
Owner Occupied One-to
Four-Family.......... 80% 45% A Debt-to-Income Ratio not in excess
of 50% may be considered on a
case-by-case basis.
Self-Employed Owner
Occupied One- to
Four-Family.......... 70% 45% A Debt-to-Income Ratio not in excess
of 50% may be considered on a
case-by-case basis and exceptions to
the Maximum Combined Loan-to-Value
Ratio may be considered if the
borrower's spouse has held a salaried
job for at least two years and
contributes at least 50% of total
joint income.
</TABLE>
- - ---------------
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may
apply depending on gross monthly income. See "-- Monthly Income" below.
4. The mortgaged property is required to be an owner-occupied, one- to
four-family dwelling, which may include condominiums or townhouses, in at least
average repair, comparable to neighboring properties and in compliance with
zoning regulations. If the mortgaged property is non-owner occupied, the Company
reduces the Maximum Combined Loan-to-Value Ratio by 10%.
CLASS C
1. The Company requires both direct creditor verification and a credit
report on the borrower by two independent credit reporting agencies reflecting
the borrower's complete credit history. Generally, a
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<PAGE> 111
credit history of at least two years is required and should reflect that
existing and previous debts were paid in a generally satisfactory manner. No
more than an aggregate of eight revolving credit accounts or installment credit
accounts with 30- or 60- or 90-day delinquencies in the most recent 24-month
period are considered. Collections of up to $300 are acceptable as well as
greater amounts if a satisfactory explanation is provided. Mortgage payment
history should reflect not more than three 30-day delinquencies and one 60-day
delinquency during the most recent 12-month period; provided that consecutive or
"rolling" delinquencies are counted as one occurrence. A bankruptcy that has
been discharged for a minimum of two years is acceptable if the borrower has
since established a payment history, notwithstanding such bankruptcy, consistent
with the Class B Underwriting Program.
2. Generally, the borrower must have been employed with the same employer
for at least one year or held two jobs in the same field of work in the most
recent five year period.
3. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -------------------------------------
<S> <C> <C> <C>
Owner Occupied One-to
Four-Family.......... 75% 45% Exceptions to the Maximum Debt-to-
Income Ratio may be considered on a
case-by-cash basis.
Self-Employed Owner
Occupied One- to
Four-Family.......... 70% 45% Exceptions to the Maximum Debt-to-
Income Ratio may be considered on a
case-by-case basis. Borrower's
mortgage payment history must reflect
no 30-day delinquency during the most
recent 12-month period.
</TABLE>
- - ---------------
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may
apply depending on gross monthly income. See "-- Monthly Income" below.
4. The mortgaged property is required to be an owner occupied one- to
four-family dwelling, which may include condominiums or townhouses, in at least
average repair, comparable to neighboring properties and in compliance with
zoning regulations. If the mortgaged property is non-owner occupied, the Company
reduces the Maximum Combined Loan-to-Value Ratio by 10%.
CLASS C-2
1. The Company requires a credit report on the borrower by two independent
credit reporting agencies reflecting the complete credit history of the
borrower, but ratings are not a material factor in determining whether the loan
is approved. Mortgage payment history must reflect no more than two 60-day
delinquencies and one 90-day delinquency within the most recent 12 months, and
the mortgage must be current or brought current with the proceeds of the loan;
provided that consecutive or "rolling" delinquencies are counted as one
occurrence. No Notice of Default may have been filed within the last 24-month
period.
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<PAGE> 112
2. Employment and income verification is required by direct employer
contact and written documentation, such as pay stubs, W-2s and tax returns.
3. With respect to mortgage loans secured by properties located in states
other than California, Connecticut or New York, the Combined Loan-to-Value
Ratios and Debt-to-Income Ratios were or are required to conform to the
following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -----------------------------------------
<S> <C> <C> <C>
Owner Occupied One-to
Four-Family.......... 70% 50% Only first mortgage loans may be
originated or acquired pursuant to these
criteria.
Owner Occupied One-to
Four-Family.......... 65% 50% Second mortgage loans may be originated
or acquired pursuant to these criteria.
Self-Employed Owner
Occupied One- to
Four-Family.......... 60% 50% Only first mortgage loans may be
originated or acquired pursuant to these
criteria.
</TABLE>
- - ---------------
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may
apply depending on gross monthly income. See "-- Monthly Income" below.
4. With respect to mortgage loans secured by properties located in the
State of California, the Combined Loan-to-Value Ratio and Debt-to-Income Ratio
are required to conform to the following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -----------------------------------------
<S> <C> <C> <C>
Owner Occupied One-to
Four-Family.......... 70% 50% First and second mortgage loans may be
originated or acquired pursuant to these
criteria. Second mortgage loans
originated or acquired under these
criteria must not exceed $100,000 and
must be secured by property with a value
not in excess of $300,000.
Owner Occupied One-to
Four-Family.......... 65% 50% Second mortgage loans not meeting the
preceding criteria may be originated or
acquired pursuant to these criteria.
Self-Employed Owner
Occupied One- to
Four-Family.......... 65% 50% Only first mortgage loans may be
originated or acquired pursuant to these
criteria.
</TABLE>
- - ---------------
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may
apply depending on gross monthly income. See "-- Monthly Income" below.
5. The mortgaged property is required to be owner occupied, in good repair
and well maintained such that pride of ownership is evidenced. No rural property
is considered as security for a loan originated or acquired for this
Underwriting Program. In the case of mortgaged property located in the states of
Connecticut or New York, a minimum of three years residence is required.
CLASS D
1. The Company requires a credit report on the borrower by two independent
credit reporting agencies reflecting the complete credit history of the
borrower, but ratings are not a material factor in
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<PAGE> 113
determining whether the loan is approved. Mortgage payment history will be
considered on a case-by-case basis.
2. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria:
<TABLE>
<CAPTION>
MAXIMUM
COMBINED MAXIMUM
LOAN-TO-VALUE DEBT-TO-INCOME
PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A)
- - ----------------------- ------------- -------------- -----------------------------------------
<S> <C> <C> <C>
Owner Occupied and
Non-Owner Occupied
One- to
Four-Family.......... 70% 50% First and second mortgage loans may be
originated or acquired pursuant to these
criteria. A $300 per person disposable
income is also required.
</TABLE>
- - ---------------
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may
apply depending on gross monthly income. See "-- Monthly Income" below.
3. The mortgaged property may be an owner occupied or non-owner occupied
one- to four-family dwelling or mobile home. Only double-wide mobile homes on
paved roads are acceptable. All mortgaged property must be in good repair and
well maintained such that pride of ownership is evidenced. Rural property will
be considered on a case-by-case basis.
4. The maximum term of any loan originated or acquired for this
Underwriting Program is fifteen years; provided that balloon mortgage loans with
30-year amortization schedules and single payments of the remaining loan
balances at approximately 7, 10 or 15 years after origination may also be
originated or acquired.
MONTHLY INCOME
Under any Underwriting Program, Debt-to-Income Ratios must also conform to
the following criteria, to the extent not otherwise satisfied pursuant to the
criteria of such Underwriting Program:
<TABLE>
<CAPTION>
MAXIMUM
DEBT-TO-INCOME
GROSS MONTHLY INCOME RATIO
-------------------------------------------------------------- --------------
<S> <C>
1,667 or less................................................. 40%
1,668-$4,150.................................................. 45%
4,151 or more................................................. 50%
</TABLE>
Exceptions to the Maximum Debt-to-Income Ratio may be considered under any
Underwriting Program on a case-by-case basis, provided that any exception is
reasonable in light of the entire circumstances and approved by senior
underwriters located at the Company's headquarters.
BALLOON MORTGAGE LOANS
The Underwriting Guidelines provide that, notwithstanding the criteria
described above in connection with any Underwriting Program, no balloon mortgage
loan may be originated or acquired if (i) the amount of the loan is in excess of
the dollar limit established from time to time, subject to exceptions on a case-
by-case basis; (ii) the Combined Loan-to-Value Ratio of the loan is in excess of
90%; (iii) the amount of the loan is less than the dollar limit established from
time to time.
CERTAIN CALCULATIONS RELATING TO COMBINED LOAN-TO-VALUE RATIOS
Under all of the Underwriting Programs, the balance of the related Senior
Lien, if any, used to determine the Combined Loan-to-Value Ratio for the
mortgage loan is based on the judgment of the Company's underwriters. In
determining the Combined Loan-to-Value Ratio in cases where the related
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<PAGE> 114
Senior Lien, if any, secures an adjustable rate mortgage loan, the Company's
underwriters also consider the historical performance of the index from which
the mortgage interest rate is derived under the first mortgage and other credit
factors. In addition, the maximum amount of any revolving credit line prior and
superior to any mortgage loan is included in any calculation to determine the
Combined Loan-to-Value Ratio.
QUALITY CONTROL AUDIT PROCEDURES
The Company's quality control audit procedures consist of post-funding
examinations in the areas of legal documentation, credit documentation and
underwriting. Following the origination or purchase of each loan, the Company's
loan verification department conducts a review and verification of the loan with
specific attention to the following areas:
Legal Documentation: The mortgage note, mortgage, deed of trust,
Truth-in-Lending disclosure, Real Estate Settlement Procedures Act and Equal
Credit Opportunity Act documents, title abstract, affidavits, riders, and all
other documents required pursuant to statutory law are reviewed for existence,
accuracy, and proper signatures.
Credit Documentation: All credit verifications (such as verification of
mortgage, verification of employment and verification of deposits), credit
applications and credit reports are reviewed for existence, accuracy and proper
signatures.
Underwriting: The Company verifies that all loan conditions required by its
loan administration department have been satisfied. Some loans are reviewed for
compliance with the Company's underwriting standards for the Class of
Underwriting Program (i.e., Class A Plus to Class D) under which the loan was
originated or acquired.
Quality control audits ("Quality Control Audits") are conducted on
approximately fifty percent of the mortgage loans funded each month, measured by
aggregate outstanding principal balance, beginning in the first week of the
following month and completed in most cases no later than the end of such
following month. Reports, with any major exceptions noted, are forwarded to the
President of the Company for review and distribution to appropriate senior
management. Audit and quality control functions are performed separately from
the activities of the loan verification department by credit reviewers on each
loan to assure the accuracy of disclosure in dollar amounts, interest rates and
appraisals.
Quality Control Appraisals: If a Quality Control Audit determines
circumstances that warrant a reappraisal, a drive-by appraisal is conducted by
an independent fee appraisal firm.
The Company's quality control department uses the following guidelines when
reviewing each appraisal:
1. A 3% to 5% margin between the values reflected by each appraisal is
acceptable.
2. In the case of a margin of 6% to 10% between values, an addendum is
prepared by the review appraiser and a quality control addendum is written
reflecting the discrepancies between market values reflected by each
appraisal.
3. In the case of a margin of greater than 10% between values, further
review and analysis is obtained from each of the appraisers involved. This
is accomplished by submitting each appraisal to the opposite appraiser for
review and written analysis. (All references to appraisal firms are omitted
from the documents.)
The foregoing information, along with a review by the Company's quality
control department, is submitted in a monthly report to the President for
review. Customer files, including both the original appraisal and the quality
control appraisals, if any, are reviewed on all questionable appraisals. In the
majority of cases, a review of the files and a quality control analysis is
sufficient. A third appraisal can be ordered in any case where discrepancies are
still unexplained to the Company's satisfaction.
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<PAGE> 115
If an appraiser's market value or other appraisal data are deemed to be
consistently inaccurate, a meeting is arranged to address these problems. If the
problems continue or are not resolved to the Company's satisfaction, the
appraisal firm is removed from the Company's list of approved appraisers.
COLLECTION PROCEDURES
The related Prospectus Supplement will set forth the number and aggregate
principal amount of mortgage loans serviced by the Company as of the end of the
prior year and any completed calendar quarters in the current year, for itself
and for investors (primarily major commercial banks, savings and loan
associations, brokerage houses and the Federal National Mortgage Association
("FNMA")). Such statistics may include loans that were not originated or
acquired and re-underwritten by the Company but are serviced (principally for
FNMA) on a contractual basis.
The following describes collection procedures generally employed by the
Company. Any significant deviations therefrom with respect to a pool of Mortgage
Loans will be described in the related Prospectus Supplement. Collections are
conducted by the Company's Service Center at its corporate headquarters located
in Jacksonville, Florida, and the Company utilizes additional collection
assistance from its branch office network when an account becomes seriously past
due. Delinquent accounts are divided into groups of accounts of 0-29, 30-59 and
60 or more days past due. All collection activity on 0-29 day accounts is
handled by Service Center collectors who collect in teams headed by a senior
collector. When an account becomes 7 days past due, the mortgagor is generally
called by phone with simultaneous notices being sent if contact by phone is not
made. When an account becomes 30-59 days delinquent, it is assigned to a higher
level Home Office collector experienced in default accounts. The Company also
utilizes area collection managers in the metropolitan areas of Miami, Chicago
and Atlanta who assume collection responsibility for accounts in those areas. On
the 20th of the month, a list of 30-59 day accounts that remain delinquent is
faxed to the originating branch office and the regional vice president
responsible for the branch collection assistance. Personnel at the branches then
engage in collection efforts and field work while personnel in the Service
Center continue telephone collections. Thereafter, all accounts delinquent for
60 to 90 days are assigned to the respective branch for collection. Any such
delinquent account will remain under branch supervision until it is either
reduced to at most a 30-day delinquency status or is recommended for
foreclosure. Prior to submitting an account for foreclosure, a 30 day breach
notice is sent certified mail to the customer. If the breach is not cured, the
account is referred to the default management area located in Jacksonville, and
collection management attempts personal contact with the borrower to determine
that all avenues of resolution have been considered. Accounts delinquent for 90
or more days are actively supervised by the regional vice president responsible
for the respective branch. Branch offices are not responsible for the management
of accounts in foreclosure, bankruptcy, litigation or otherwise designated for
special consideration, all of which are the responsibility of either the
Company's loan asset control department or its legal department.
If foreclosure is necessary, the Company's loan asset control department
supervises and monitors all related procedures (including bankruptcy
proceedings) conducted by the foreclosure attorneys. If title to the mortgaged
property is taken in the name of the mortgagee, the Company's real estate owned
division attempts to insure that the property is preserved and protected. After
review and analysis, a disposition strategy is developed and the property is
marketed for sale.
DELINQUENCY AND LOSS EXPERIENCE
The related Prospectus Supplement will set forth the Company's delinquency
and charge-off experience at the dates indicated on mortgage loans included in
its servicing portfolio, including loans in foreclosure proceedings, but
excluding loans serviced by the Company that were not originated or acquired and
re-underwritten by the Company (such portfolio, excluding such loans, the
"Primary Servicing Portfolio").
OUTSTANDING REAL ESTATE OWNED
Each Prospectus Supplement will set forth the number and value of
properties acquired by the Company through foreclosure which were owned by the
Company for its own account or on behalf of
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owners of mortgage loans included in the Company's Primary Servicing Portfolio
as at the end of the immediately preceding calendar year and as at the end of
the most recent complete calendar quarter.
DESCRIPTION OF THE SECURITIES
GENERAL
The following summary describes certain terms of the Securities, common to
each Pooling and Servicing Agreement and any Indenture and Trust Agreement.
Forms of the Indenture, the Trust Agreement, the Pooling and Servicing
Agreements and the Transfer Agreement providing for the transfer of Mortgage
Loans from the Originators to the Depositors have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. The summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the provisions of the Securities, the Pooling and Servicing
Agreement and the Transfer Agreement for each Trust, any Indenture and Trust
Agreement and the related Prospectus Supplement. Where particular provisions or
terms used in any of such documents are referred to, the actual provisions
(including definitions of terms) are incorporated by reference as part of such
summaries.
The Securities will represent beneficial interests in (sometimes referred
to herein as "Certificates") or debt secured by (sometimes referred to herein as
"Notes") the assets of the related Trust, including (i) the Mortgage Loans and
all proceeds thereof, (ii) REO Property, (iii) amounts on deposit in the funds
and accounts established with respect to the related Trust, including all
investments of amounts on deposit therein, (iv) certain rights of the Depositors
under the Transfer Agreement and (v) certain other property, as described in the
related Prospectus Supplement. If specified in the related Prospectus
Supplement, one or more Classes of Securities of a Series may have the benefit
of one or more of a letter of credit, financial guaranty insurance policy,
reserve fund, spread account, cash collateral account, overcollateralization or
other form of credit enhancement. If so specified in the related Prospectus
Supplement, a Series of Securities may have the benefit of one or more of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy
of similar credit enhancement. Any such credit enhancement may be included in
the assets of the related Trust. See "Description of Credit Enhancement" herein.
A Series of Securities may include one or more Classes entitled to
distributions of principal and disproportionate, nominal or no interest
distributions or distributions of interest and disproportionate, nominal or no
principal distributions. The principal amount of any Security may be zero or may
be a notional amount as specified in the related Prospectus Supplement. A Class
of Securities of a Series entitled to payments of interest may receive interest
at a specified rate (a "Securities Interest Rate") which may be fixed, variable
or adjustable and may differ from other Classes of the same Series, may receive
interest based on the weighted average Mortgage Interest Rate on the related
Mortgage Loans, or may receive interest as otherwise determined, all as
described in the related Prospectus Supplement. One or more Classes of a Series
may be Securities upon which interest will accrue but not be currently paid
until certain other Classes have received principal payments due to them in full
or until the occurrence of certain events, as set forth in the related
Prospectus Supplement. One or more Classes of Certificates of a Series may be
entitled to receive principal payments pursuant to a planned amortization
schedule or may be entitled to receive interest payments based on a notional
principal amount which reduces in accordance with a planned amortization
schedule. A Series may also include one or more Classes of Certificates entitled
to payments derived from a specified group or groups of Mortgage Loans held by
the related Trust. The rights of one or more Classes of Securities may be senior
or subordinate to the rights of one or more of the other Classes of Securities.
A Series may include two or more Classes of Securities which differ as to the
timing, sequential order, priority of payment or amount of distributions of
principal or interest or both.
Each Class of Securities of a Series will be issued in the denominations
specified in the related Prospectus Supplement. Each Security will represent a
percentage interest (a "Percentage Interest") in
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the Securities of the respective Class, determined by dividing the original
dollar amount (or Notional Principal Amount, in the case of certain Securities
entitled to receive interest only) represented by such Security by the Original
Principal Balance of such Class.
One or more Classes of Securities of a Series may be issuable in the form
of fully registered definitive certificates or, if so specified in the related
Prospectus Supplement, one or more Classes of Securities of a Series (the
"Book-Entry Securities") may initially be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), the nominee of The
Depository Trust Company ("DTC"), and available only in the form of book-entries
on the records of DTC, participating members thereof ("Participants") and other
entities, such as banks, brokers, dealers and trust companies, that clear
through or maintain custodial relationships with a Participant, either directly
or indirectly ("Indirect Participants"). Certificates representing the
Book-Entry Securities will be issued in definitive form only under the limited
circumstances described herein and in the related Prospectus Supplement. With
respect to Book-Entry Certificates, all references herein to "holders" of
Securities shall reflect the rights of owners of the Book-Entry Securities, as
they may indirectly exercise such rights through DTC and Participants, except as
otherwise specified herein. See "-- Registration of Securities" herein.
Unless otherwise specified in the related Prospectus Supplement, on each
Payment Date and Special Payment Date, there shall be paid to each person in
whose name a Security is registered on the related Record Date or Special Record
Date (defined herein) as applicable (which in case of the Book-Entry Securities
initially will be only Cede, as nominee of DTC), the portion of the aggregate
payment to be made to holders of such Class to which such holder is entitled, if
any, based on the Percentage Interest, held by such holder of such Class.
INTEREST
Unless otherwise specified in the related Prospectus Supplement, interest
will accrue on each Class of Securities of a Series (other than a Class of
Securities entitled to receive only principal) during each period specified in
the related Prospectus Supplement (each, an "Accrual Period") at the Securities
Interest Rate for such Class specified in the related Prospectus Supplement.
Interest accrued on each Class of Securities at the applicable Securities
Interest Rate during each Accrual Period will be paid, to the extent monies are
available therefor, on each Payment Date, commencing on the day specified in the
related Prospectus Supplement and will be distributed in the manner specified in
such Prospectus Supplement, except for any Class of Securities ("Accrual
Securities") on which interest is to accrue and not be paid until the principal
of certain other Classes has been paid in full or the occurrence of certain
events as specified in such Prospectus Supplement. If so described in the
related Prospectus Supplement, interest that has accrued but is not yet payable
on any Accrual Securities will be added to the principal balance thereof on each
Payment Date and will thereafter bear interest at the applicable Securities
Interest Rate. Payments of interest with respect to any Class of Securities
entitled to receive interest only or a disproportionate amount of interest and
principal will be paid in the manner set forth in the related Prospectus
Supplement. Payments of interest (or accruals of interest, in the case of
Accrual Securities) with respect to any Series of Securities or one or more
Classes of Securities of such Series, may be reduced to the extent of interest
shortfalls not covered by Advances or by any applicable credit enhancement.
PRINCIPAL
On each Payment Date, commencing with the Payment Date specified in the
related Prospectus Supplement, principal with respect to the related Mortgage
Loans during the period specified in the related Prospectus Supplement (each
such period, a "Due Period") will be paid to holders of the Securities of the
related Series (other than a Class of Securities of such Series entitled to
receive interest only) in the priority, manner and amount specified in such
Prospectus Supplement, to the extent funds are available therefor. Unless
otherwise specified in the related Prospectus Supplement, such principal
payments will generally include (i) the principal portion of all scheduled
payments ("Monthly Payments") received on the related Mortgage Loans during the
related Due Period, (ii) any principal
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prepayments of any such Mortgage Loans in full ("Principal Prepayments") and in
part ("Curtailments") received during the related Due Period or such other
period (each, a "Prepayment Period") specified in the related Prospectus
Supplement, (iii) the principal portion of (A) the proceeds of any insurance
policy relating to a Mortgage Loan, a Mortgaged Property (defined herein) or a
REO Property (defined herein), net of any amounts applied to the repair of the
Mortgaged Property or released to the Mortgagor (defined herein) and net of
reimbursable expenses ("Insurance Proceeds"), (B) proceeds received in
connection with the liquidation of any defaulted Mortgage Loans ("Liquidation
Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation
Proceeds") and (C) proceeds received in connection with a taking of a related
Mortgaged Property by condemnation or the exercise of eminent domain or in
connection with any partial release of any such Mortgaged Property from the
related lien ("Released Mortgaged Property Proceeds"), (iv) the principal
portion of all amounts paid by the Depositors (which are limited to amounts paid
by the Representative or an Originator pursuant to the related Transfer
Agreement, unless otherwise specified in the related Prospectus Supplement) in
connection with the purchase of or substitution for a Mortgage Loan as to which
there is defective documentation or a breach of a representation or warranty
contained in the Transfer Agreement and assigned to the related Trust under the
related Pooling and Servicing Agreement and (v) the principal balance of each
defaulted Mortgage Loan or REO Property as to which the Servicer has determined
that all amounts expected to be recovered have been recovered (each, a
"Liquidated Mortgage Loan"), to the extent not included in the amounts described
in clauses (i) through (iv) above (the aggregate of the amounts described in
clauses (i) through (v), the "Basic Principal Amount"). Payments of principal
with respect to a Series of Securities or one or more Classes of such Series may
be reduced to the extent of delinquencies or losses not covered by advances or
any applicable credit enhancement.
ASSIGNMENT OF THE MORTGAGE LOANS
At the time of issuance of a Series of Securities, the Originators,
pursuant to a Transfer Agreement (the "Transfer Agreement") among the
Originators and the Depositors, will assign the Mortgage Loans to the Depositors
together with all principal and interest received on or with respect to the
Mortgage Loans, other than (i) principal and interest received before the
related Cut-off Date (and interest received on or after the Cut-off Date but
accrued prior to the Cut-off Date) and (ii) unless otherwise specified in the
related Prospectus Supplement, the Representative's Yield. On such date, the
Depositors will assign the Mortgage Loans to the Trust pursuant to a Pooling and
Servicing Agreement.
Each Mortgage Loan will be identified in a schedule included as an exhibit
to the related Transfer Agreement and the related Pooling and Servicing
Agreement (the "Mortgage Loan Schedule"). The Mortgage Loan Schedule will set
forth certain information with respect to each Mortgage Loan, including, among
other things, the principal balance as of the Cut-off Date, the Mortgage
Interest Rate, the scheduled monthly payment of principal and interest, the
maturity of the Mortgage Note, the Combined Loan-to-Value Ratio at origination
and, as applicable, the Home Equity Loan Ratio at origination.
In addition, the Originators will, with respect to each Mortgage Loan,
deliver to the applicable Depositor the Mortgage Note endorsed to the order of
the Depositor or a Custodian or in blank, the mortgage with evidence of
recording thereon, an assignment of the mortgage to the Depositor or a Custodian
or in blank, evidence of title insurance, intervening assignments of the
mortgage, assumption and modification agreements and, in the case of Mortgage
Loans secured by Mortgaged Property improved by a manufactured housing unit, the
certificate of title, if any (collectively, the "Mortgage File"). The Depositor
shall simultaneously deliver such Mortgage Note, Mortgage and assignment of
Mortgage to the Trust, endorsed as set forth in the related Pooling and
Servicing Agreement. It is expected that each such transfer will be effected by
endorsement and delivery to a Custodian, which Custodian shall hold such
instruments and documents for the Depositor, the Trust and the Indenture
Trustee, if any, as their interests may appear. The assignment of Mortgage shall
be recorded in the name of the Trustee. With respect to a loan on a unit in a
cooperative, the related Mortgage Note, the original security agreement, the
proprietary lease or occupancy agreement, the related stock certificate
evidencing the ownership interest in the cooperative association and blank stock
powers and a copy of the
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original filed financing statement and assignments thereof in form sufficient
for filing shall be so delivered and, where required, filed. With respect to any
Mortgage Loan secured by a Mortgaged Property located in the State of Illinois
held in a trust formed under a trust agreement between a trustee and one or more
beneficiaries named therein pursuant to which such trustee holds legal and
equitable title to the Mortgaged Property and such beneficiaries are the owners
of the beneficial interest in such trust (an "Illinois Land Trust"), the
Originators will not be required to deliver an assignment of the mortgage to the
Depositors, but will be required to deliver or cause to be delivered to the
Depositors the original assignment of beneficial interest executed by the
beneficiaries of the Illinois Land Trust assigning to the Originator all of such
beneficiaries' rights in the Illinois Land Trust (or a copy thereof certified by
the related trustee, under certain circumstances), an original reassignment of
the assignment of beneficial interest to the Depositors, all originals of
intervening reassignments of beneficial interest, together with a certified copy
of the instrument creating the Illinois Land Trust, a copy of the financing
statement evidencing the assignment of the Mortgagor's beneficial interest in
the Illinois Land Trust (with evidence of filing thereon) and the original
personal guaranty of the Mortgage Note executed by each beneficiary of the
Illinois Land Trust, all of which shall also constitute part of the Mortgage
File with respect to Mortgage Loans secured by Mortgaged Property held in an
Illinois Land Trust. The Depositors will assign each of such documents to the
Trust, which shall in turn assign such documents to the Indenture Trustee, if
any related Securities represent debt secured by the Mortgage Loans.
If, with respect to any Mortgage Loan, the Originators are unable to
deliver to the Depositors on the Closing Date the mortgage or any assignment
with evidence of recording thereon because they have not yet been returned from
the public recording office, the Originators are required to deliver or cause to
be delivered on the Closing Date a certified true copy of such mortgage or
assignment, which certification may be that of an officer of the respective
Originator. If, with respect to any Mortgage Loan, the Depositors are unable to
deliver an original policy of title insurance because such policy has not yet
been delivered by the insurer, the Depositors are required to deliver or cause
to be delivered the commitment or binder to issue the title insurance. The
Depositors are required to deliver or cause to be delivered the mortgage or
assignment with evidence of recording thereon and an original title insurance
policy within five Business Days after receipt thereof and in any event within
one year after the Closing Date, provided, however, that if a mortgage or
assignment has not been returned from the appropriate public recording office,
the respective Originator is required to deliver a certified copy of the
mortgage and a receipted copy of the assignment from the appropriate public
recording office prior to the expiration of such one year period. The Servicer
is required to cause the assignments of mortgage to be recorded in the
appropriate public recording offices. With respect to loans on units in
cooperatives, the Trustee or the Servicer, as specified in the related
Prospectus Supplement, will also be required to use its best efforts to file
continuation statements.
Pursuant to the Pooling and Servicing Agreement, the Trustee will agree,
for the benefit of the holders of the related Securities to review (or cause to
be reviewed) each Mortgage File within 45 days (or such other time period as may
be specified in the related Prospectus Supplement) after the Closing Date to
ascertain that all required documents have been executed and received.
If the Trustee (or if specified in the related Prospectus Supplement, any
Credit Provider (defined herein)) during such 45-day period finds any document
constituting a part of a Mortgage File which is not executed, has not been
received or is unrelated to the Mortgage Loans, or that any Mortgage Loan does
not conform to the delivery requirements described above or to the description
thereof as set forth in the Mortgage Loan Schedule (other than certain
descriptive items set forth in the Mortgage Loan Schedule), the Trustee (or the
Credit Provider) is required to promptly so notify the Depositors, the Servicer,
the Representative, the Originators, the Credit Provider, if any, and the
Trustee. The Servicer is required to use reasonable efforts to cause to be
remedied a material defect in a document constituting part of a Mortgage File of
which it is so notified. If the Servicer has not caused the defect to be
remedied within 60 days (or such other time period as may be specified in the
related Prospectus Supplement) after notice thereof and the defect materially
and adversely affects the interests of the holders of the Securities in the
related Mortgage Loan or the interests of the Credit Provider, the Servicer is
required, on
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the immediately following Determination Date (defined herein), to either (i)
cause the respective Originator to substitute in lieu of such Mortgage Loan a
mortgage loan that meets certain criteria set forth in the Pooling and Servicing
Agreement (a "Qualified Substitute Mortgage Loan") and, if the then outstanding
principal balance of such Qualified Substitute Mortgage Loan plus accrued and
unpaid interest thereon is less than the outstanding principal balance of the
substituted Mortgage Loan as of the date of such substitution plus accrued and
unpaid interest thereon and the amount of any unreimbursed Servicing Advances,
cause the respective Originator to deliver to the Servicer, to become part of
the amount remitted by the Servicer on the related Payment Date, the amount of
any such shortfall (a "Substitution Adjustment") or (ii) cause the respective
Originator to purchase such Mortgage Loan at a price equal to the outstanding
principal balance of such Mortgage Loan as of the date of purchase plus all
accrued and unpaid interest thereon computed at the Mortgage Interest Rate, net
of the Servicing Fee if the Representative is the Servicer, plus the amount of
any unreimbursed Servicing Advances made by the Servicer, which purchase price
is required to be deposited in the Principal and Interest Account on the next
succeeding Determination Date (after deducting therefrom any amounts received in
respect of such repurchased Mortgage Loan or Loans and being held in the
Principal and Interest Account for future distribution).
REPRESENTATIONS AND WARRANTIES OF THE ORIGINATORS AND THE DEPOSITORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will represent, among other things, that as to each Mortgage Loan
conveyed by any Originator to the Depositors as of the related Closing Date:
1. The information with respect to each Mortgage Loan set forth in the
Mortgage Loan Schedule is true and correct;
2. All of the original or certified documentation constituting the
Mortgage Files (including all material documents related thereto) has been
or will be delivered to the Depositors or to the custodian appointed to
hold the Mortgage Files (the "Custodian"), if any, on the Closing Date or
as otherwise provided in the Agreement;
3. Each Mortgage Loan is principally secured by the related Mortgaged
Property. Each Mortgaged Property is improved by a one- to four-family
residential dwelling, including, if and to the extent specified in the
related Prospectus Supplement, cooperatives or mobile homes;
4. All of the Balloon Loans, if any, provide for monthly payments
based on an amortization schedule specified in the related Mortgage Note
and have a final balloon payment no earlier than the number of months
following the date of origination set forth in the related Prospectus
Supplement and no later than at the end of the year following the date of
origination set forth in the related Prospectus Supplement. Each other
fixed-rate Mortgage Note will provide for a schedule of substantially equal
monthly payments which are, if timely paid, sufficient to fully amortize
the principal balance of such Mortgage Note on or before its maturity date;
5. Each Mortgage is a valid and subsisting first, second or, if so
specified in the related Prospectus Supplement, more junior lien of record
on the Mortgaged Property subject, in the case of any second or more junior
Mortgage Loan, only to the Senior Lien or Liens on such Mortgaged Property
and subject in all cases to the exceptions to title set forth in the title
insurance policy, or the other evidence of title delivered pursuant to the
Transfer Agreement, with respect to the related Mortgage Loan, which
exceptions are generally acceptable to second mortgage lending companies,
and such other exceptions to which similar properties are commonly subject
and which do not individually, or in the aggregate, materially and
adversely affect the benefits of the security intended to be provided by
such Mortgage. If the Mortgaged Property is held in an Illinois Land Trust,
(i) a natural person is the beneficiary of such Illinois Land Trust, and
either is a party to the Mortgage Note or is a guarantor thereof, in either
case, in an individual capacity and not in the capacity of trustee or
otherwise, and, if a party to the Mortgage Note, is jointly and severally
liable under the Mortgage
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Note and (ii) the Mortgagor is the trustee of such Illinois Land Trust,
is a party to the Mortgage Note and is the Mortgagor under the Mortgage
in its capacity as such trustee and not otherwise;
6. Except with respect to liens released immediately prior to the
transfer contemplated in the Transfer Agreement, immediately prior to the
transfer and assignment contemplated in the Transfer Agreement, the
Originator held good and indefeasible title to, and was the sole owner of,
each Mortgage Loan conveyed by the Originator subject to no liens, charges,
mortgages, encumbrances or rights of others; and immediately upon the
transfer and assignment herein contemplated, the Depositors will hold good
and indefeasible title to, and be the sole owner of, each Mortgage Loan
(other than the Representative's Yield and amounts received on or after the
Cut-off Date in respect of interest accrued prior to the Cut-off Date)
subject to no liens, charges, mortgages, encumbrances or rights of others;
7. With respect to each Mortgage Loan secured by a second or more
junior Mortgage, the related Senior Lien requires equal monthly payments,
or if it bears an adjustable interest rate, the monthly payments for the
related Senior Lien may adjust, but not more frequently than every six
months;
8. The percentage of the Mortgage Loans which are secured by an Owner
Occupied Mortgaged Property; and
9. Each Mortgage Loan conforms, and all Mortgage Loans in the
aggregate conform, to the description thereof set forth in this Prospectus
and the related Prospectus Supplement.
Such Originator will also make representations as to the percentage of
Mortgage Loans which are Balloon Loans, the percentage of Mortgage Loans secured
by Mortgaged Properties located within any single zip code area and the
percentage of the Mortgage Loans which were 30 or more days contractually
delinquent and 60 or more days contractually delinquent. For purposes of this
representation, "30 or more days contractually delinquent" means that a monthly
payment due on a due date was unpaid as of the end of the month in which
occurred the next succeeding due date and "60 or more days contractually
delinquent" means that a monthly payment due on a due date was unpaid as of the
end of the month in which occurred the second due date following the due date on
which such monthly payment was due.
In addition, each Originator will, with respect to each Bankruptcy Mortgage
Loan, make certain representations regarding (i) the number of payments made
under the related Bankruptcy Plan and (ii) the ratio of (a) the outstanding
principal balance of the Bankruptcy Mortgage Loan (plus the outstanding
principal balance of any Senior Lien) divided by (b) the current appraised value
of the related Mortgaged Property, as determined within 30 days after the
Closing Date. If there is a breach of these representations as to any Bankruptcy
Mortgage Loan which is not waived by the Trustee or any Credit Provider, the
Originators may, as described below, be required to repurchase such Bankruptcy
Mortgage Loan. Such repurchases would have the effect of increasing the rate of
prepayment of the Mortgage Loans.
Pursuant to the related Pooling and Servicing Agreement, the Depositors
will make substantially identical representations and warranties with respect to
the Mortgage Loans conveyed by the Depositors thereunder. Upon the discovery by
any of the Depositors, the Representative, any Originator, the Servicer, any
Subservicer, the Custodian, the Credit Provider, if any, the Trustee or any
other party specified in such Pooling and Servicing Agreement that any of the
representations and warranties described above have been breached in any
material respect as of the Closing Date, with the result that the interests of
the holders of the related Securities in the related Mortgage Loan or the
interests of the Credit Provider or any party specified in such Pooling and
Servicing Agreement are materially and adversely affected, the party discovering
such breach is required to give prompt written notice to the other parties.
Within 60 days (or such other period as may be specified in the related
Prospectus Supplement) of the earlier to occur of its discovery or its receipt
of notice of any such breach, the Servicer is required to (i) cure or cause the
respective Originator to cure such breach in all material respects, (ii) remove
each Mortgage Loan which has given rise to the requirement for action, or cause
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the respective Originator to substitute one or more Qualified Substitute
Mortgage Loans and, if the outstanding principal balance of such Qualified
Substitute Mortgage Loans plus accrued and unpaid interest thereon as of the
date of such substitution is less than the outstanding principal balance, plus
accrued and unpaid interest thereon and any unreimbursed Servicing Advances, of
the replaced Mortgage Loans as of the date of substitution, deliver or cause the
respective Originator to deliver a Substitution Adjustment to the Servicer, to
become part of the amount remitted by the Servicer to the Trustee on the related
Payment Date, or (iii) purchase or cause the respective Originator to purchase
such Mortgage Loan at a price equal to the outstanding principal balance of such
Mortgage Loan as of the date of purchase plus all accrued and unpaid interest on
such outstanding principal balance computed at the Mortgage Interest Rate, net
of the Servicing Fee if the Representative is the Servicer, plus the amount of
any unreimbursed Servicing Advances made by the Servicer, and deposit such
purchase price into the Principal and Interest Account on the next succeeding
Determination Date or other date specified in the related Pooling and Servicing
Agreement; provided, however, that if a REMIC election has been made with
respect to the related Series of Securities, no such purchase or substitution
may be made if such Mortgage Loan is not in default or no default as to such
Mortgage Loan is imminent unless there shall have been delivered to the Trustee
an opinion of counsel knowledgeable in federal income tax matters which states
that such a purchase or substitution would not constitute a prohibited
transaction under the REMIC Provisions (defined herein) or cause the REMIC to
fail to qualify as such at any time the related Securities are outstanding. The
obligation of the Depositors and the Originators to cure, substitute or purchase
any Mortgage Loan as described above will constitute the sole remedy respecting
a material breach of any such representation or warranty to the holders of the
related Securities or the Trustee. The obligation of the Depositors to so cure,
substitute or purchase shall be limited to the obligation of the Servicer to
cause the Originators to do so. The Depositors will have no substantial assets
other than certain Securities retained by them issued by trusts formed by the
Depositors.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will require the Servicer to cause to be
established and maintained an account (the "Principal and Interest Account") at
an institution meeting certain ratings and other criteria set forth in the
Pooling and Servicing Agreement (an "Eligible Account"), into which it is
required to deposit certain payments received in respect of the Mortgage Loans,
as more fully described below. Unless otherwise specified in the related
Prospectus Supplement, all funds in the Principal and Interest Account are
required to be held (i) uninvested, either in trust or insured by the Federal
Deposit Insurance Corporation up to the limits provided by law, (ii) invested in
certain permitted investments, which are generally limited to United States
government securities and other high-quality investments and repurchase
agreements or similar arrangements with respect to such investments, (iii)
invested in certain asset management accounts maintained by the Trustee or (iv)
invested in such other investments which the Insurer and the Rating Agencies may
approve ("Permitted Instruments"). Unless otherwise specified in the related
Prospectus Supplement, any investment earnings on funds held in the Principal
and Interest Account will be for the account of the Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to use its reasonable efforts to deposit into the Principal
and Interest Account within one business day and in any event to deposit within
two business days of receipt all Monthly Payments received on or after the
related Cut-off Date (other than amounts received on or after the Cut-off Date
in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date)
and all Principal Prepayments and Curtailments collected on or after the Cut-off
Date (net of the Representative's Yield and the Servicing Fee with respect to
each Mortgage Loan and other servicing compensation payable to the Servicer as
permitted by the Pooling and Servicing Agreement), all Net Liquidation Proceeds,
Insurance Proceeds, Released Mortgaged Property Proceeds, any amounts paid in
connection with the repurchase of any Mortgage Loan, the amount of any
Substitution Adjustments, the amount of any losses incurred in connection with
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investments in Permitted Instruments and certain amounts relating to
insufficient insurance policies and REO Property.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may make withdrawals from the Principal and Interest Account only for
the following purposes:
(i) for deposit to the Collection Account no later than the third
business day preceding each Monthly Deposit Date (defined below), if any,
and each Payment Date, the Excess Spread (defined below), if any, and the
Available Payment Amount for the related Monthly Period (defined below).
"Excess Spread" means generally the aggregate excess, if any, of interest
accrued on the related Mortgage Loans during the Due Period over interest
accrued on the related Securities at the applicable Securities Interest
Rates on the related Payment Date. The "Monthly Deposit Date" is the day of
each month other than a month in which a Payment Date occurs specified in
the related Prospectus Supplement with respect to a Series of Securities
providing for Payments to be made less frequently than monthly. A "Monthly
Period" is the calendar month preceding the month in which the related
Monthly Deposit Date or Payment Date occurs and, if Payment Dates for a
Series of Securities occur monthly, may be identical to the Due Period;
(ii) to reimburse itself for any accrued unpaid Servicing Fees and
unreimbursed Servicing Advances. Unless otherwise specified in the related
Prospectus Supplement, the Servicer's right to reimburse itself for unpaid
Servicing Fees and unreimbursed Servicing Advances will be limited to late
collections on the related Mortgage Loan, including Liquidation Proceeds,
Released Mortgaged Property Proceeds, Insurance Proceeds and such other
amounts as may be collected by the Servicer from the related Mortgagor or
otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed;
The Servicer's rights to such reimbursement will be prior to the
rights of holders of the related Securities unless the Representative is
the Servicer and the Representative or any Originator is required to
purchase or substitute a Mortgage Loan pursuant to the Pooling and
Servicing Agreement and the Transfer Agreement, in which case the
Servicer's right to such reimbursement shall be junior to the payment to
such holders of the purchase price or Substitution Adjustment;
(iii) to withdraw any amount received from a Mortgagor that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final, nonappealable order of a court having competent
jurisdiction;
(iv) to make investments in Permitted Instruments and, after effecting
the remittance described in clause (i) above, to pay itself interest earned
in respect of Permitted Instruments or on funds deposited in the Principal
and Interest Account;
(v) to withdraw any funds deposited in the Principal and Interest
Account that were not required to be deposited therein (such as servicing
compensation) or were deposited therein in error;
(vi) to pay itself the Servicing Fee and any other permitted servicing
compensation to the extent not previously retained or paid;
(vii) to withdraw funds necessary for the conservation and disposition
of REO Property;
(viii) to make Servicing Advances, as more fully described below; and
(ix) with respect to a Bankruptcy Loan, to remit to the applicable
Depositor certain payments, as provided in the Pooling and Servicing
Agreement; and
(x) to clear and terminate the Principal and Interest Account upon the
termination of the Pooling and Servicing Agreement.
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Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to wire transfer to the Collection Account the amount
described in clause (i) above no later than the third business day preceding
each Monthly Deposit Date, if any, and each Payment Date.
ADVANCES FROM THE PRINCIPAL AND INTEREST ACCOUNT; SERVICING ADVANCES
Unless otherwise specified in the related Prospectus Supplement, not later
than the close of business on the third business day prior to each Monthly
Deposit Date, if any, and each Payment Date, the Servicer is required to
withdraw from amounts on deposit in the Principal and Interest Account and held
for future distribution and remit for deposit in the Collection Account an
amount (each, an "Advance"), to be distributed on the related Payment Date,
equal to the sum of the interest portions of the aggregate amount of Monthly
Payments (net of the Servicing Fee and if so specified in the related Pooling
and Servicing Agreement, the Excess Spread) accrued during the related Monthly
Period, but uncollected as of the close of business on the last day of the
related Monthly Period. The Servicer generally shall not be required to make
such Advance from its own funds or be liable for the recovery thereof from
collections on the related Mortgage Loans or otherwise.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations ("Servicing Advances"), including,
but not limited to, the cost of (i) maintaining REO Properties; (ii) any
enforcement or judicial proceedings, including foreclosures; and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage. Unless otherwise provided in the related Pooling and Servicing
Agreement, the Servicer may pay all or a portion of any Servicing Advance out of
excess amounts on deposit in the Principal and Interest Account and held for
future distribution on the date on which such Servicing Advance is made. Any
such excess amounts so used will be required to be replaced by the Servicer by
deposit to the Principal and Interest Account no later than the date specified
in the related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may recover Servicing Advances to the extent permitted by the Mortgage
Loans or, 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 certain Servicing
Advances, as described in the Pooling and Servicing Agreement, will not be
ultimately recoverable from late collections, Insurance Proceeds, Liquidation
Proceeds on the related Mortgage Loans or otherwise ("Nonrecoverable Advances"),
the Servicer may reimburse itself from the amounts available after distributions
to the holders of Securities and payment of certain other fees and expenses.
The Servicer is not required to make any Servicing Advance which it
determines would be a Nonrecoverable Advance.
DISTRIBUTIONS
The Trustee is required to establish a trust account (referred to herein as
the "Collection Account", but which may have such other designation as is set
forth in the related Prospectus Supplement) into which there shall be deposited
amounts transferred by the Servicer from the Principal and Interest Account. The
Collection Account is required to be maintained as an Eligible Account. Amounts
on deposit in the Collection Account may be invested in Permitted Instruments
and other investments specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, on each
Monthly Deposit Date, if any, and each Payment Date the Trustee is required to
withdraw from the Collection Account and
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distribute the amounts set forth in the related Prospectus Supplement, to the
extent available, in the priority set forth therein, which generally will
include (in no particular order of priority):
(i) deposits into any account established for the purpose of paying
credit enhancement fees and premiums;
(ii) if a Spread Account, Reserve Fund or similar account is
established with respect to a Series of Securities, deposits into such fund
or account of the Excess Spread or other amounts required to be deposited
therein;
(iii) payments to the holders of the Securities on account of interest
and principal, in the order and manner set forth in the related Prospectus
Supplement;
(iv) reimbursement of the Servicer and/or the Representative for
amounts expended by the Servicer or the Representative and reimbursable
thereto under the related Pooling and Servicing Agreement but not
previously reimbursed;
(v) payments to the Servicer of an amount equal to Nonrecoverable
Advances previously made by the Servicer and not previously reimbursed; and
(vi) after the payments and deposits described above and in the
related Prospectus Supplement, the balance, if any, to the persons
specified in the related Prospectus Supplement.
The amount available to make the payments described above will generally
equal (a) the sum of (i) the Available Payment Amount for the related Due Period
and (ii) the amount available under any credit enhancement, including amounts
withdrawn from any Spread Account or Reserve Fund, less (b) the amount of the
premiums or fees payable to the Credit Provider, if any, during the related Due
Period.
Generally, to the extent a Credit Provider makes payments to holder of
Securities, such Credit Provider will be subrogated to the rights of such
holders with respect to such payments and shall be deemed, to the extent of the
payments so made, to be a registered holder of such Securities.
For purposes of the provisions described above, the following terms have
the respective meanings ascribed to them below, each determined as of any
Payment Date.
"Available Payment Amount" generally means the result of (a) collections on
or with respect to the Mortgage Loans received by the Servicer during each month
in the related Due Period, net of the Servicing Fee paid to the Servicer during
each month in the related Due Period and reimbursements for accrued unpaid
Servicing Fees and for certain expenses paid by the Servicer, plus (b) the
amount of any Advances, less, if so specified in the related Prospectus
Supplement, (c) the Excess Spread or other amounts specified in such Prospectus
Supplement.
"Basic Principal Amount" means the sum of (i) the principal portion of each
Monthly Payment received by the Servicer or any Subservicer during the related
Due Period, (ii) all Curtailments and all Principal Prepayments received during
such Due Period (or the applicable period (the "Prepayment Period") specified in
the related Prospectus Supplement), (iii) the principal portion of all Insurance
Proceeds, Released Mortgaged Property Proceeds and Net Liquidation Proceeds
received during the related Due Period, (iv) (a) that portion of the purchase
price of any purchased Mortgage Loans which represents principal and (b) any
Substitution Adjustments deposited into the Collection Account as of the related
Determination Date and (v) the Principal Balance of each Mortgage Loan as of the
beginning of the related Due Period which became a Liquidated Mortgage Loan
during such Due Period (exclusive of any principal payments in respect thereof
described in the preceding clauses (i) through (iv)), less the amount of Special
Payments, if any, paid to the holders of the Securities on any Special Payment
Date occurring in the related Accrual Period.
"Mortgage Loan Losses" means, for Mortgage Loans that become Liquidated
Mortgage Loans during the related Due Period, the amount, if any, by which (i)
the sum of the outstanding principal balance of each such Mortgage Loan
(determined immediately before such Mortgage Loan became a
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Liquidated Mortgage Loan) and accrued and unpaid interest thereon at the
Mortgage Interest Rate to the date on which such Mortgage Loan became a
Liquidated Mortgage Loan exceeds (ii) the Net Liquidation Proceeds received
during such Due Period in connection with the liquidation of such Mortgage Loan
which have not theretofore been used to reduce the Principal Balance of such
Mortgage Loan.
"Payment Date" means the monthly, quarterly or other periodic date
specified in the related Prospectus Supplement on which payments will be made to
holders of the related Securities.
"Special Payment Date" means the day on which a special redemption of or
special remittance to holders of one or more Classes of Securities of a Series
will be made, as specified in the related Prospectus Supplement.
"Special Record Date" means the record date established with respect to a
Special Payment Date as specified in the related Prospectus Supplement.
"Special Payment Amount" means the amount of a special remittance or
special redemption price paid to holders of one or more classes of Securities of
a Series, as specified in the related Prospectus Supplement.
SPECIAL PAYMENTS
If so specified in the related Prospectus Supplement, a Series of
Securities providing for Payment Dates occurring other than monthly may provide
for special payments ("Special Payments") to be made to holders of Securities of
one or more Classes in the amount (the "Special Payment Amount") and on the
dates ("Special Payment Dates") specified in such Prospectus Supplement. The
related Prospectus Supplement will describe the circumstances under which such
Special Payments will be made, which may be as a result of receipt of Principal
Prepayments in excess of a specified amount or otherwise. Unless otherwise
specified in the related Prospectus Supplement, such Special Payments will
result in amounts which would otherwise have been distributed on the next
succeeding Payment Date being paid instead on one or more Special Payment Dates.
OPTIONAL DISPOSITION OF MORTGAGE LOANS
If so specified in the related Prospectus Supplement, the Servicer, the
Depositors or the holders of the Class of Securities or such other person
specified in such Prospectus Supplement may cause the Trust to sell all of the
Mortgage Loans and all REO Properties when the Pool Principal Balance declines
to the percentage of the Original Pool Principal Balance specified in the
related Prospectus Supplement, when the outstanding principal balance of a Class
of Securities specified in the related Prospectus Supplement declines to the
percentage of the original principal balance of such Class specified in the
related Prospectus Supplement or at such other time as is specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the related Pooling and Servicing Agreement will
establish a minimum price at which such Mortgage Loans and REO Properties may be
sold generally equal to the principal amount thereof plus accrued interest
thereon. Such minimum price may include certain expenses and other amounts or
such party as is specified in the related Prospectus Supplement may be required
to pay all or a portion of such expenses or other amounts at the time of sale.
Unless otherwise specified in the related Prospectus Supplement, the proceeds of
any such sale will be distributed to holders of the Securities on the Payment
Date next following the date of disposition.
MANDATORY DISPOSITION OF MORTGAGE LOANS
If so specified in the related Prospectus Supplement, the Servicer, the
Depositors or such other entities as may be specified in such Prospectus
Supplement may be required to effect early retirement of a Series of Securities
by soliciting competitive bids for the purchase of the assets of the related
Trust or otherwise, under the circumstances set forth in such Prospectus
Supplement. The procedures for the solicitation of such bids will be described
in the related Prospectus Supplement. Unless otherwise
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specified in the related Prospectus Supplement, the Representative, the
Servicer, the Originators and any Underwriter (defined herein) will be permitted
to submit bids. If so specified in the related Prospectus Supplement, a minimum
bid or reserve price may be established. If so specified in the related
Prospectus Supplement, the Underwriter or such other entity specified in such
Prospectus Supplement will be required to confirm that the accepted bid will
result in the sale of the assets of the Trust at their fair market value.
FORWARD COMMITMENTS; PREFUNDING
If so specified in the related Prospectus Supplement, a Pooling and
Servicing Agreement or other agreement may provide for the transfer by the
Depositors of additional Mortgage Loans to the related Trust after the Closing
Date for the related Securities. In such case, it is expected that the related
Transfer Agreement will provide for a concurrent transfer of such additional
Mortgage Loans from one or more Originators to the Depositors. Such additional
Mortgage Loans will be required to conform to the requirements set forth in the
related Pooling and Servicing Agreement or other agreement providing for such
transfer. As specified in the related Prospectus Supplement, such transfer may
be funded by the application for a specified period of all or a portion of
payments on the Mortgage Loans originally included in the related Mortgage Pool
or by the establishment of a Prefunding Account (a "Prefunding Account"). If a
Prefunding Account is established, all or a portion of the proceeds of the sale
of one or more Classes of Securities of the related Series will be deposited in
such account to be released as additional Mortgage Loans are transferred. Unless
otherwise specified in the related Prospectus Supplement, a Prefunding Account
will be required to be maintained as an Eligible Account. The related Pooling
and Servicing Agreement or other agreement providing for the transfer of
additional Mortgage Loans will generally establish a specified period of time
within which such transfers must be made. Unless otherwise specified in the
related Prospectus Supplement, amounts set aside to fund such transfers (whether
in a Prefunding Account or otherwise) and not so applied within the required
period of time will be deemed to be principal prepayments and applied in the
manner set forth in such Prospectus Supplement.
REPORTS TO HOLDERS
On each Payment Date, there will be forwarded to each holder a statement
setting forth, among other things, the information as to such Payment Date
required by the related Pooling and Servicing Agreement, which generally will
include, except as otherwise provided therein, if applicable:
(i) the Available Payment Amount (and any portion of the Available
Payment Amount that has been deposited in the Collection Account but may
not be withdrawn therefrom pursuant to an order of a United States
bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code);
(ii) the principal balance of each class of Securities as reported in
the report for the immediately preceding Payment Date, or, with respect to
the first Payment Date for a Series of Securities, the Original Principal
Balance of such Class;
(iii) the number and Principal Balances of all Mortgage Loans which
were the subject of Principal Prepayments during the related Due Period and
the amount of any Special Payments made during the related Accrual Period;
(iv) the amount of all Curtailments which were received during the
related Due Period;
(v) the principal portion of all Monthly Payments received during the
related Due Period;
(vi) the amount of interest received on the Mortgage Loans during the
related Due Period;
(vii) the aggregate amount of the Advances to be made with respect to
the Payment Date;
(viii) certain delinquency and foreclosure information as described
more fully in the related Pooling and Servicing Agreement, and the amount
of Mortgage Loan Losses during the related Due Period;
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(ix) the amount of interest and principal due to the holders of each
Class of Securities of such Series on such Payment Date;
(x) the amount then available in any Spread Account or Reserve
Account;
(xi) the amount of the payments, if any, to be made from any credit
enhancement on the Payment Date;
(xii) the amount to be distributed to the holders of any subordinated
or residual securities on the Payment Date;
(xiii) the principal balance of each Class of Securities of such
Series after giving effect to the payments to be made on the Payment Date;
(xiv) with respect to the Mortgage Pool, the weighted average maturity
and the weighted average Mortgage Interest Rate of the Mortgage Loans as of
the last day of the related Due Period;
(xv) the amount of all payments or reimbursements to the Servicer for
accrued unpaid Servicing Fees, unreimbursed Servicing Advances and interest
in respect of Permitted Instruments or funds on deposit in the Principal
and Interest Account and certain other amounts during the related Due
Period;
(xvi) the Pool Principal Balance as of the immediately preceding
Payment Date, the Pool Principal Balance after giving effect to payments
received and Mortgage Loan Losses incurred during the related Due Period
and the ratio of the Pool Principal Balance to the Original Pool Principal
Balance. As of any Payment Date, the "Pool Principal Balance" equals the
aggregate outstanding principal balance of all Mortgage Loans, as reduced
by the aggregate Mortgage Loan Losses, at the end of the related Due
Period;
(xvii) certain information with respect to the funding, availability
and release of monies from any Spread Account or Reserve Fund;
(xviii) the number of Mortgage Loans outstanding at the beginning and
at the end of the related Due Period;
(xiv) the amounts that are reimbursable to the Servicer, the
Representative or the Depositors, as appropriate; and
(xv) such other information as the holders reasonably require.
The Servicer will also be required to furnish to any holder upon request
(i) annual audited financial statements of the Servicer for one or more of the
most recently completed three fiscal years for which such statements are
available, and (ii) interim unaudited financial statements of the Servicer
relating to periods subsequent to the most recent annual audited period.
DESCRIPTION OF CREDIT ENHANCEMENT
To the extent specified in the related Prospectus Supplement, credit
enhancement for one or more Classes of a Series of Securities may be provided by
one or more of a letter of credit, financial guaranty insurance policy, reserve
fund, spread account, cash collateral account, mortgage pool insurance policy,
special hazard insurance policy or other type of credit enhancement. Credit
enhancement may also be provided by overcollateralization or by subordination of
one or more Classes of Securities of a Series to one or more other Classes of
Securities of such Series. Any credit enhancement will be limited in amount and
scope of coverage. Unless otherwise specified in the related Prospectus
Supplement, credit enhancement for a Series of Securities will not be available
for losses incurred with respect to any other Series of Securities. To the
extent credit enhancement for any Series of Securities is exhausted, or losses
are incurred which are not covered by such credit enhancement, the holders of
the Securities will bear all further risk of loss.
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The amounts and types of credit enhancement, as well as the provider
thereof (the "Credit Provider"), if applicable, with respect to each Series of
Securities will be set forth in the related Prospectus Supplement. To the extent
provided in the applicable Prospectus Supplement and the related Pooling and
Servicing Agreement, any credit enhancement may be periodically modified,
reduced or substituted for as the aggregate principal balance of the related
Mortgage Pool decreases, upon the occurrence of certain events or otherwise.
Unless otherwise specified in the related Prospectus Supplement, to the extent
permitted by the applicable Rating Agencies and provided that the then current
rating of the affected Securities is not reduced or withdrawn as a result
thereof, any credit enhancement may be cancelled or reduced in amount or scope
of coverage or both.
The descriptions of credit enhancement arrangements included in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of governing documents, copies of which will be available upon
request.
Financial Guaranty Insurance Policy. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond (a
"Securities Insurance Policy") may be obtained and maintained for a Class or
Series of Securities. The issuer of the Securities Insurance Policy (the
"Insurer") will be described in the related Prospectus Supplement and a copy of
the form of Securities Insurance Policy will be filed with the related Current
Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Securities Insurance Policy will be unconditional and irrevocable and will
guarantee to holders of the applicable Securities that an amount equal to the
full amount of distributions due to such holders will be received by the Trustee
or its agent on behalf of such holders for distribution on each Payment Date.
The specific terms of any Securities Insurance Policy will be set forth in
the related Prospectus Supplement. A Securities Insurance Policy may have
limitations and generally will not insure the obligation of the Depositors or
any Originator to purchase or substitute for a defective Mortgage Loan and will
not guarantee any specific rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
Insurer will be subrogated to the rights of each holder to the extent the
Insurer makes payments under the Securities Insurance Policy.
Letter of Credit. If so specified in the related Prospectus Supplement,
all or a component of credit enhancement for a Class or a Series of Securities
may be provided by a letter of credit (a "Letter of Credit") issued by a bank or
other financial institution (a "Letter of Credit Issuer") identified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Letter of Credit will be irrevocable. A Letter of
Credit may provide coverage with respect to one or more Classes of Certificates
or the underlying Mortgage Loans or, if specified in the related Prospectus
Supplement, may support a specified obligation or be provided in lieu of the
funding with cash of a Reserve Fund or Spread Account (each as defined below).
The amount available, conditions to drawing, if any, and right to reimbursement
with respect to a Letter of Credit will be specified in the related Prospectus
Supplement. A Letter of Credit will expire on the date specified in the related
Prospectus Supplement, unless earlier terminated or extended in accordance with
its terms.
Mortgage Pool Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Securities may be
provided by a mortgage pool insurance policy (a "Pool Insurance Policy") issued
by the insurer (a "Pool Insurer") specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Pool Insurance Policy will, subject to limitations described in such
Prospectus Supplement, insure against losses due to defaults in the payment of
principal or interest on the underlying Mortgage Loans up to the amount
specified in such Prospectus Supplement (or in a Current Report on Form 8-K).
The Pooling and Servicing Agreement with respect to any Series of Securities for
which a Pool Insurance Policy is provided will require the Servicer or other
party specified therein to use reasonable efforts to maintain the Pool Insurance
Policy and to present claims to the Pool Insurer in the manner required thereby.
No Pool
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Insurance Policy will be a blanket policy against loss and will be subject to
the limitations and conditions precedent described in the related Prospectus
Supplement.
Special Hazard Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Securities may be
provided in part by an insurance policy (a "Special Hazard Policy") covering
losses due to physical damage to a Mortgaged Property other than a loss of the
type covered by a standard hazard insurance policy or flood insurance policy or
losses resulting from the application of co-insurance clauses contained in
standard hazard insurance policies. The Prospectus Supplement relating to a
Series of Securities for which a Special Hazard Policy is provided will identify
the issuer of such policy and any limitations on coverage. No Special Hazard
Policy will cover extraordinary losses such as those due to war, civil
insurrection, governmental action, errors in design or workmanship, chemical
contamination or similar causes. Each Special Hazard Policy will contain an
aggregate limit on claims specified in the related Prospectus Supplement. No
claim will be paid under any Special Hazard Policy unless hazard insurance on
the Mortgaged Property is in force and protection and preservation expenses have
been paid.
Spread Account and Reserve Fund. If so specified in the related Prospectus
Supplement, all or any component of credit enhancement for a Series of
Securities may be provided by a reserve fund (a "Reserve Fund") or a spread
account (a "Spread Account"). A Reserve Fund or Spread Account may be funded by
a combination of cash, one or more letters of credit or one or more Permitted
Instruments provided by the Depositors or other party identified in the related
Prospectus Supplement, amounts otherwise distributable to one or more Classes of
Securities subordinated to one or more other Classes of Securities or all or any
portion of Excess Spread. If so specified in the related Prospectus Supplement,
a Reserve Fund for a Series of Securities may be funded in whole or in part on
the applicable Closing Date. If so specified in the related Prospectus
Supplement, cash deposited in a Reserve Fund or a Spread Account may be
withdrawn and replaced with one or more letters of credit or Permitted
Instruments. A Reserve Fund or Spread Account may be pledged or otherwise made
available to a Credit Provider. If so specified in the related Prospectus
Supplement, a Reserve Fund or Spread Account may not be deemed part of the
assets of the related Trust or may be deemed to be pledged or provided by one or
more of the Depositors, the holders of the Class of Securities otherwise
entitled to the amounts deposited in such account or such other party as is
identified in such Prospectus Supplement.
Cash Collateral Account. If so specified in the related Prospectus
Supplement, all or any portion of credit enhancement for a Series of Securities
may be provided by the establishment of a cash collateral account (a "Cash
Collateral Account"). A Cash Collateral Account will be similar to a Reserve
Fund or Spread Account except that generally a Cash Collateral Account is funded
initially by a loan from a cash collateral lender (the "Cash Collateral
Lender"), the proceeds of which are invested with the Cash Collateral Lender or
other eligible institution. Unless otherwise specified in the related Prospectus
Supplement, the Cash Collateral Account will be required to be maintained as an
Eligible Account. The loan from the Cash Collateral Lender will be repaid from
Excess Spread, if any, or such other amounts as are specified in the related
Prospectus Supplement. Amounts on deposit in the Cash Collateral Account will be
available in generally the same manner described above with respect to a Spread
Account or Reserve Fund. As specified in the related Prospectus Supplement, a
Cash Collateral Account may be deemed to be part of the assets of the related
Trust, may be deemed to be part of the assets of a separate cash collateral
trust or may be deemed to be property of the party specified in the related
Prospectus Supplement and pledged for the benefit of the holders of one or more
Classes of Securities of a Series.
Subordination. If so specified in the related Prospectus Supplement,
distributions of scheduled principal, Principal Prepayments, Curtailments,
interest or any combination thereof otherwise payable to one or more Classes of
Securities of a Series ("Subordinated Securities") may instead be payable to
holders of one or more other Classes of Securities of such Series ("Senior
Securities") under the circumstances and to the extent specified in such
Prospectus Supplement. A Class of Securities may be subordinated to one or more
Classes of Securities and senior to one or more other Classes of Securities of a
Series. If so specified in the related Prospectus Supplement, delays in receipt
of scheduled payments
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on the Mortgage Loans and losses on defaulted Mortgage Loans will be borne first
by the various Classes of Subordinated Securities and thereafter by the various
Classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in such Prospectus Supplement. The aggregate losses
in respect of defaulted Mortgage Loans which must be borne by the Subordinated
Securities by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Securities that will be
distributable to Senior Securities on any Payment Date may be limited as
specified in the related Prospectus Supplement or the availability of
subordination may otherwise be limited as specified in the related Prospectus
Supplement. If losses or delinquencies were to exceed the amounts payable and
available to holders of Subordinated Securities of a Series or if such amounts
were to exceed any limitation on the amount of subordination available, holders
of Senior Securities of such Series could experience losses.
In addition, if so specified in the related Prospectus Supplement, amounts
otherwise payable to holders of Subordinated Securities on any Payment Date may
be deposited in a Reserve Fund or Spread Account, as described above. Such
deposits may be made on each Payment Date, on each Payment Date for a specified
period or to the extent necessary to cause the balance in such account to reach
or maintain a specified amount, as specified in the related Prospectus
Supplement, and thereafter, amounts may be released from such Reserve Fund or
Spread Account in the amounts and under the circumstances specified in such
Prospectus Supplement.
Distributions may be allocated as among Classes of Senior Securities and as
among Classes of Subordinated Securities in order of their final scheduled
payment dates, in accordance with a schedule or formula or otherwise, as
specified in the related Prospectus Supplement. As between Classes of
Subordinated Securities, payments to holders of Senior Securities on account of
delinquencies or losses and deposits to any Reserve Fund or Spread Account will
be allocated as specified in the related Prospectus Supplement. Principal
Prepayments and Curtailments may be paid disproportionately to Classes of Senior
Securities pursuant to a "shifting interest" structure or otherwise, as
specified in the related Prospectus Supplement.
Other Credit Enhancement. Credit enhancement may also be provided for a
Series of Securities in the form of overcollateralization, surety bond,
insurance policy or other type of credit enhancement approved by the applicable
Rating Agencies to cover one or more risks with respect to the Mortgage Loans or
the Securities, as specified in the related Prospectus Supplement.
PAYMENT OF CERTAIN EXPENSES
If so specified in the related Prospectus Supplement, in order to provide
for the payment of the fees of the Credit Provider, if any, the Trustee may be
required to establish a Credit Enhancement Account and to deposit therein on the
dates specified in the related Prospectus Supplement, from amounts on deposit in
the Collection Account, in the priority indicated, an amount that is sufficient
to pay the premiums or fees due to the Credit Provider.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will require the Servicer to pay to the
Trustee(s) from time to time their respective fees and the reasonable expenses,
disbursements and advances incurred or made by them. The Trustee will be
permitted under the Pooling and Servicing Agreement on each Payment Date to pay,
from amounts on deposit in the Collection Account and after making any required
distributions to holders, any amounts then due and owing representing fees of
the Trustee(s) that have not been paid by the Servicer after written demand
therefor.
SERVICING COMPENSATION
As compensation for servicing and administering the Mortgage Loans, the
Servicer is entitled to a fee in the amount specified in the related Prospectus
Supplement (the "Servicing Fee"), payable monthly from the interest portion of
monthly payments on the related Mortgage Loans, Liquidation Proceeds, Released
Mortgaged Property Proceeds, Insurance Proceeds and certain other late
collections on the
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related Mortgage Loans. In addition to the Servicing Fee, the Servicer will
generally be entitled under the related Pooling and Servicing Agreement to
retain as additional servicing compensation any assumption and other
administrative fees (including bad check charges, late payment fees and similar
fees), the excess of any Net Liquidation Proceeds over the outstanding principal
balance of a Liquidated Mortgage Loan, to the extent not otherwise required to
be remitted to the Indenture Trustee for deposit into the Collection Account and
not constituting any part of the Representative's Yield, and interest paid on
funds on deposit in the Principal and Interest Account.
SERVICING STANDARDS
General Servicing Standards. The Servicer will agree to service the
Mortgage Loans in accordance with the Pooling and Servicing Agreement and, in
servicing and administering the Mortgage Loans, to employ or cause to be
employed procedures, including collection, foreclosure and REO Property
management procedures, and exercise the same care it customarily employs and
exercises in servicing and administering mortgage loans for its own account, in
accordance with accepted first and second mortgage servicing practices of
prudent lending institutions and giving due consideration to the holders', and
any Credit Provider's reliance on the Servicer. The interests of the holders of
each Class of Securities of any Series and the Credit Provider, if any, may
differ with respect to servicing decisions which may affect the rate at which
prepayments are received. For example, holders of certain Classes of Securities
may prefer that "due-on-sale" clauses be waived in the event of a sale of the
underlying Mortgaged Property, that delinquent Mortgagors be granted extensions
or other accommodations and that liquidations of Mortgage Loans be deferred, if
an increase in the rate of principal prepayments would have an adverse effect on
the yield to investors in such Securities. Depending on the timing of such
prepayments, holders of other classes of Securities may prefer that
"due-on-sale" clauses be enforced or that other actions be taken which would
increase prepayments. No holder of a Security will have the right to make any
decisions with respect to the underlying Mortgage Loans. The Servicer will have
the right and obligation to make such decisions in accordance with its normal
servicing procedures and the standards set forth in the related Pooling and
Servicing Agreement. In certain cases, the consent or approval of the Credit
Provider, if any, may be permitted or required. The interests of the Credit
Provider, if any, with respect to, among other things, matters which affect the
timing of payments and prepayments may not be the same as those of the holders
of each Class of Securities of such Series.
Hazard Insurance. The Servicer will cause to be maintained fire and hazard
insurance with extended coverage (sometimes referred to as "standard hazard
insurance") 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 Mortgage Loan, (ii) the full insurable value of the
premises securing the Mortgage Loan and (iii) the minimum amount required to
compensate for damage or loss on a replacement cost basis. Generally, if (i) the
Mortgaged Property is in an area identified in the Federal Register by the Flood
Emergency Management Agency as Flood Zone "A", (ii) flood insurance has been
made available and (iii) the Servicer determines that such insurance is
necessary in accordance with accepted first and second mortgage servicing
practices of prudent lending institutions, the Servicer will be required to
cause to be purchased a flood insurance policy with a generally acceptable
insurance carrier, in an amount representing coverage not less than the least of
(a) the outstanding principal balance of the Mortgage Loan, (b) the full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, 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 1968, as amended, and the Servicer
determines that such insurance is necessary in accordance with accepted first
and second 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 first and second mortgage servicing
procedures) will be deposited in the Principal and
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Interest Account, subject to retention by the Servicer to the extent such
amounts constitute servicing compensation or to withdrawal pursuant to the
related Pooling and Servicing Agreement.
If 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 outstanding principal balance on the Mortgage
Loans without co-insurance, the Servicer will be deemed conclusively to have
satisfied its obligations with respect to fire and hazard insurance coverage.
Enforcement of Due on Sale Clauses. When a Mortgaged Property has been or
is about to be conveyed by the Mortgagor, the Servicer, on behalf of the
Trustee, is required, 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 permitted 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 Note or Mortgage, the Mortgagor remains liable
thereon. The Servicer will also be authorized (with the prior approval of any
Credit Provider, if required) 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.
Realization Upon Defaulted Mortgage Loans. The Servicer is required to
foreclose upon or otherwise comparably effect the ownership in the name of the
Trustee on behalf of the holders of the related Securities 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 if it determines
that foreclosure would not be in the best interests of the holders or any Credit
Provider. In connection with such foreclosure or other conversion, the Servicer
is required to 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.
Collection of Mortgage Loan Payments. Each Pooling and Servicing Agreement
will require the Servicer 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, 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 matter grant indulgence to any Mortgagor, subject
to the limitations set forth in the related Pooling and Servicing Agreement.
USE OF SUBSERVICERS
The Servicer will be permitted under each Pooling and Servicing Agreement
to enter into Subservicing Agreements for any servicing and administration of
Mortgage Loans with any institution which is in compliance with the laws of each
state necessary to enable it to perform its obligations under such Subservicing
Agreement and is either (i) designated by FNMA or the Federal Home Loan Mortgage
Corporation ("FHLMC") as an approved Depositor-Servicer for first and second
mortgage loans or (ii) is an affiliate or a wholly owned subsidiary of the
Servicer.
Notwithstanding any Subservicing Agreement, unless otherwise specified in
the related Prospectus Supplement, the Servicer will not be relieved of its
obligations under a Pooling and Servicing Agreement, and the Servicer shall be
obligated to the same extent and under the same terms and conditions as if it
alone were servicing and administering the Mortgage Loans. The Servicer will be
entitled to enter into any
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agreement with a subservicer for indemnification of the Servicer by such
subservicer and nothing contained in any Pooling and Servicing Agreement shall
be deemed to limit or modify such indemnification.
SERVICING CERTIFICATES AND AUDITS
The Servicer is required to deliver, not later than the last day of the
fourth month following the end of the Servicer's fiscal year, commencing in the
year specified in the related Pooling and Servicing Agreement, an Officers'
Certificate stating that (i) the Servicer has fully complied with the provisions
of the Pooling and Servicing Agreement which relate to the servicing and
administration of the Mortgage Loans, (ii) a review of the activities of the
Servicer during such preceding year and of performance under the Pooling and
Servicing Agreement has been made under such officers' supervision, and (iii) to
the best of such officers' knowledge, based on such review, the Servicer has
fulfilled all its obligations under the Pooling and Servicing Agreement for such
year, or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such default.
The Servicer is required to cause to be delivered, not later than the last
day of the fourth month following the end of the Servicer's fiscal year,
commencing in the year set forth in the related Pooling and Servicing Agreement,
a letter or letters of a firm of independent certified public accountants
reasonably acceptable to the Trustee and any Owner Trustee stating that such
firm has, with respect to the Servicer's overall servicing operations, examined
such operations in accordance with the requirements of the Uniform Single Audit
Program for Mortgage Bankers, and stating such firm's conclusions relating
thereto.
LIMITATIONS ON LIABILITY OF THE SERVICER AND ITS AGENTS
Each Pooling and Servicing Agreement will provide that the Servicer and any
director, officer, employee or agent of the Servicer may rely on any document of
any kind that is reasonably and in good faith believed to be genuine and adopted
or signed by the proper authorities respecting any matters arising under the
Pooling and Servicing Agreement. In addition, the Servicer will not be required
to appear with respect to, prosecute or defend any legal action that is not
incidental to the Servicer's duty to service the Mortgage Loans in accordance
with the related Pooling and Servicing Agreement, other than certain claims made
by third parties with respect to such Pooling and Servicing Agreement.
REMOVAL AND RESIGNATION OF SERVICER
Unless otherwise specified in the related Prospectus Supplement, any Credit
Provider or the holders of Securities of a Series representing a majority in
principal amount of Securities of such Series, voting as a single class (a
"Majority in Aggregate Voting Interest"), with the consent of any Credit
Provider, may, pursuant to the related Pooling and Servicing Agreement, remove
the Servicer upon the occurrence and continuation beyond the applicable cure
period of any of the following events (each a "Servicer Termination Event"):
(i) (A) an Event of Nonpayment (defined below); (B) the failure by the
Servicer to make any required Servicing Advance, to the extent such failure
materially and adversely affects the interests of any Credit Provider or
the holders of the Securities of such Series; or (C) any other failure by
the Servicer to remit to holders of the Securities of such Series or to the
Trustee or any Owner Trustee for the benefit of the holders of the
Securities of such Series, any payment required to be made under the terms
of the related Pooling and Servicing Agreement 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; or
(ii) failure by the Servicer duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Servicer as set forth in the related Pooling and Servicing Agreement, which
failure continues unremedied for a period of 30 days after the date on
which
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written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer; 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; 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; or
(vi) the Servicer shall fail for 60 days to pay, or bond against, an
unappealable, undischarged, unvacated and unstayed final judgment by a
court of competent jurisdiction in an aggregate amount set forth in the
related Pooling and Servicing Agreement; or
(vii) Under certain circumstances, the aggregate Mortgage Loan Losses
on the related Mortgage Pool shall exceed certain thresholds described in
the related Pooling and Servicing Agreement.
"Event of Nonpayment" means, with respect to any Payment Date, unless
otherwise specified in the related Prospectus Supplement, the failure of the sum
of (i) the amounts withdrawn from the Principal and Interest Account during the
related Accrual Period, (ii) income accrued on the amounts in the Collection
Account during such Accrual Period, (iii) Advances made during such Accrual
Period and (iv) amounts withdrawn from any Reserve Fund or Spread Account on
such Payment Date, when taken together (but not including any amounts subject to
any automatic stay under applicable bankruptcy law), to be sufficient to pay all
amounts due to holders of such Securities on such Payment Date; together with
any fees or premiums due to any Credit Provider; provided, that an Event of
Nonpayment shall not occur if such insufficiency results from a failure by any
Credit Provider to perform in accordance with the terms of the related Pooling
and Servicing Agreement and credit enhancement documents or the failure by the
Trustee to perform in accordance with the related Pooling and Servicing
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Depositors may, with the consent of any Credit Provider and holders representing
a majority in aggregate Percentage Interest of each Class of Securities of a
Series, remove the Servicer upon 90 days' prior written notice. No such removal
shall be effective until the appointment and acceptance of a successor Servicer
other than the Trustee (unless the Trustee agrees to serve) meeting the
requirements described below and otherwise acceptable to any Credit Provider and
majority in Percentage Interest of each Class of Securities of such Series.
Unless otherwise specified in the related Prospectus Supplement, 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 Representative (if the Representative is not the Servicer),
any Credit Provider, the Trustee, any Owner Trustee and the Majority in
Aggregate Voting Interest or upon the determination that the Servicer's duties
thereunder are no longer permissible under applicable law and such incapacity
cannot be cured by the Servicer. No such resignation shall become effective
until a successor has assumed the Servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, upon
removal or resignation of the Servicer other than as described in the second
preceding paragraph, the Trustee will be the successor servicer (the "Successor
Servicer"). The Trustee, as Successor Servicer, is obligated to make Servicing
Advances and certain other advances unless it determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor
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Servicer, or if the Majority in Aggregate Voting Interest or any Credit Provider
so requests in writing, the Trustee may appoint, or petition a court of
competent jurisdiction to appoint, any established mortgage loan servicing
institution acceptable to such Credit Provider having a net worth of not less
than the amount set forth in the related Pooling and Servicing Agreement and
which is approved as a servicer by FNMA and FHLMC as the Successor Servicer in
the assumption of all or any part of the responsibilities, duties or liabilities
of the Servicer.
The Trustee and any other Successor Servicer in such capacity is entitled
to the same reimbursement for advances and other Servicing Compensation as the
Servicer. See "Servicing Compensation" above.
REGISTRATION AND TRANSFER OF THE SECURITIES
If so specified in the related Prospectus Supplement, one or more Classes
of Securities of a Series will be issued in definitive certificated form and
will be transferable and exchangeable at the office of the registrar identified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, no service charge will be made for any such registration
or transfer of such Securities, but the owner may be required to pay a sum
sufficient to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, one or more Classes
of Securities of a Series ("Book-Entry Securities") may be initially represented
by one or more certificates registered in the name of The Depository Trust
Company ("DTC") or other securities depository and be available only in the form
of book-entries. Any Book-Entry Securities will initially be registered in the
name of Cede, the nominee of DTC. 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 Securities Exchange Act of 1934, as amended.
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").
Beneficial owners ("Owners") that are not Participants but desire to
purchase, sell or otherwise transfer ownership of Book-Entry Offered Securities
may do so only through Participants (unless and until Definitive Securities, as
defined below, are issued). In addition, Owners will receive all distributions
of principal of, and interest on, the Book-Entry Securities from the Trustee or
any Trustee, as the case may be, through DTC and Participants. Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Book-Entry Offered Securities, except under the limited
circumstances described below.
Unless and until Definitive Securities (as defined below) are issued, it is
anticipated that the only "holder" of Book-Entry Securities of any Series will
be Cede, as nominee of DTC. Owners will only permitted to exercise the rights of
holders indirectly through Participants and DTC.
While any Book-Entry Securities of a Series are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Securities and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Securities.
Participants with whom Owners have accounts with respect to Book-Entry
Securities are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Owners. Accordingly,
although
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Owners will not possess certificates, the Rules provide a mechanism by which
Owners will receive distributions and will be able to transfer their interests.
Unless and until Definitive Securities are issued, Owners who are not
Participants may transfer ownership of Book-Entry Securities of a Series only
through Participants by instructing such Participants to transfer Book-Entry
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Book-Entry Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Book-Entry Securities will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the respective Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Owners.
Book-Entry Securities of a Series will be issued in registered form to
Owners, or their nominees, rather than to DTC (such Book-Entry Securities being
referred to herein as "Definitive Securities") only under the circumstances
provided in the related Pooling and Servicing Agreement, which generally will
include, except if otherwise provided therein, if (i) DTC or the Servicer
advises the Trustee and any Owner Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Securities of such Series and the
Servicer is unable to locate a qualified successor, (ii) the Servicer, at its
sole option, elects to terminate the book-entry system through DTC or (iii)
after the occurrence of a Servicer Termination Event, a majority of the
aggregate Percentage Interest of any Class of Securities of such Series advises
DTC 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
Owners is no longer in the best interests of Owners of such Class of Securities.
Upon issuance of Definitive Securities of a Series to Owners, such Book-Entry
Securities will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee or any Owner
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised the Servicer and the Depositors that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by a holder only at the direction of one or more Participants to whose DTC
accounts the Securities are credited. DTC has advised the Servicer and the
Depositors that DTC will take such action with respect to any Percentage
Interests of the Book-Entry Securities of a Series only at the direction of and
on behalf of such Participants with respect to such Percentage Interests of the
Book-Entry Securities. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Securities which conflict with
actions taken with respect to other Book-Entry Securities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state laws (which laws may differ substantially
from one another), 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 Mortgage Properties may be situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Mortgage Loan is located. A mortgage conveys legal title
to or creates a lien upon 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
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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.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include loans on units in cooperatives ("Cooperative Loans"). Cooperative Loans
are evidenced by notes secured by security interests in shares issued by
cooperatives, which are corporations entitled to be treated as housing
cooperatives under federal tax law, and in the related proprietary leases or
occupancy agreements granting rights to occupy specific dwelling units within
the cooperative buildings. The security agreement will create a lien upon or
grant a title interest in the property which it covers, the priority of which
lien will depend on the terms of the agreement and the order of recordation in
the appropriate recording office. Ownership of a unit in a cooperative is held
through the ownership of stock in the corporation, together with the related
proprietary lease or occupancy agreement. Such ownership interest is generally
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the proprietary lease or
occupancy agreement and a security interest in the related cooperative shares.
Each cooperative owns in fee or has a leasehold interest in the real
property and improvements, including all separate dwelling units therein. The
cooperative is responsible for property management and generally for the payment
of real estate taxes, insurance and similar charges, the cost of which is shared
by the owners. The cooperative building or underlying land may be subject to one
or more mortgages (generally incurred in connection with the construction or
purchase of the building) for which the cooperative is responsible. The interest
of an occupant under proprietary leases or occupancy agreements is generally
subordinate to that of the holder of such a mortgage or land lease. If the
cooperative is unable to meet the payment obligations under such mortgage or any
land lease, the holder of such mortgage or land lease could foreclose the
mortgage or terminate the land lease, which may have the effect of terminating
all proprietary leases or occupancy agreements. In the event of such foreclosure
or termination, the value of any collateral held by a lender which financed the
purchase by a tenant/shareholder of cooperative shares or, in the case of the
Mortgage Loans, the collateral securing the Cooperative Loans could be
eliminated or significantly reduced.
FORECLOSURE IN GENERAL
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not contested by any of the parties
defendant.
Foreclosure of a deed of trust or a security deed is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of trust
or security deed 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
security deed. In some states, 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, the trustee
must provide notice in some states to any other individual having an interest in
the real property, including any junior lienholders. 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
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entire amount in arrears plus the costs and expenses incurred in enforcing the
obligations. Generally, state laws require that a copy of the notice of sale be
posted on the property and sent to all parties having an interest in the real
property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is often a public
sale. Because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property subject to the lien of the mortgage or the deed of trust may have
deteriorated during the foreclosure proceedings, a third party may be unwilling
to purchase the property at a foreclosure sale. Potential buyers may further
question the prudence of purchasing property at a foreclosure sale as a result
of several court decisions permitting such a sale to be rescinded as a
fraudulent conveyance. However, in light of the recent United States Supreme
Court decision in BFP v. Resolution Trust Corporation, as Receiver of Imperial
Federal Savings Ass'n., the ability to rescind a sale under fraudulent
conveyance theories should be limited to state law. The Supreme Court in BFP
held that a non-collusive, regularly-conducted foreclosure sale under applicable
state law was not a fraudulent transfer under Section 548 of the current United
States Bankruptcy Code and, therefore, could not be rescinded in favor of the
bankrupt's estate, even though the foreclosure sale was held while the debtor
was insolvent and not more than one year prior to the filing of the bankruptcy
petition, because the price paid at such a foreclosure sale is conclusively
presumed to constitute "reasonably equivalent value" under the United States
Bankruptcy Code.
For these reasons, it is common for the lender to purchase the property
from the trustee or referee for an amount equal to the principal amount of the
indebtedness secured by the mortgage or deed of trust, accrued and unpaid
interest and the expenses of foreclosure. The lender thereby assumes 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. In some states there is a statutory minimum purchase
price which the lender may offer for the property. 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.
Under the Pooling and Servicing Agreement (and the REMIC Provisions of the
Code, if applicable), the Servicer may 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.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by second or more junior
mortgages or deeds of trust, which are subordinate to first or more senior
mortgages or deeds of trust held by other lenders. The rights of the holders, 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 the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
mortgagee satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "Foreclosure in General"
herein.
Furthermore, the terms of the second or more junior mortgage or deed of
trust are subordinate to the terms of the first or senior mortgage or deed of
trust. In the event of a conflict between the terms of the senior mortgage or
deed of trust and the junior mortgage or deed of trust, the terms of the senior
mortgage 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
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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 senior mortgagee
expends such sums, such sums will generally have priority over all sums due
under the junior mortgage. See "Special Considerations -- Risks of the
Mortgages -- Nature of Security" for a further discussion of certain risks
associated with junior mortgage loans.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
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.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court provided no sale of the residence
had yet occurred prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
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 allowed modifications that 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. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period. As a result of an amendment to the federal bankruptcy
laws effective for cases filed after October 22, 1995, a Chapter 11 plan
similarly may
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not modify the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage 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.
The Mortgage Loans will generally contain due-on-sale clauses, which permit
the lender to accelerate the maturity of the Mortgage Loan if the borrower
sells, transfers, or conveys the related Mortgaged Property. The enforceability
of these clauses has been the subject of legislation or litigation in many
states. Some jurisdictions automatically enforce such clauses, while others
require a showing of reasonableness and hold, on a case-by-case basis, that a
"due on sale" clause may be invoked only where a sale threatens the legitimate
security interests of the lender.
The Garn-St. Germain Depository Institutions Act of 1982 purports to
preempt state laws which prohibit the enforcement of "due-on-sale" clauses in
certain loans made after October 15, 1982. The Servicer may thus be able to
accelerate the Mortgage Loans that were originated after that date and contain a
"due-on-sale" provision, upon transfer of an interest in the related Mortgaged
Property, regardless of its ability to demonstrate that a sale threatens its
legitimate security interest. Each Pooling and Servicing Agreement will provide
that the Servicer, on behalf of the Trustee, will enforce any right of the
Trustee as the mortgagee of record to accelerate a Mortgage Loan in the event of
a sale or other transfer of the related Mortgaged Property unless, in the
Servicer's reasonable judgment, doing so would materially increase the risk of
default or delinquency on, or materially impair the security for, such Mortgage
Loan.
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
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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 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. The
Depositors will represent and warrant in each Pooling and Servicing Agreement
that each related Mortgage Loan was originated in compliance with applicable
state law in all material respects.
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 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 the related Trust).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain federal income tax
consequences of the purchase, ownership and disposition of the Securities. This
summary does not purport to address all federal income tax matters that may be
relevant to purchasers of Securities, and is directed solely to investors that
hold the Securities as capital assets within the meaning of section 1221 of the
Internal Revenue Code of 1986 (the "Code") and to investors that do not hold the
Securities as part of a larger transaction such as a hedge, straddle or
conversion transaction. It does not address tax consequences that may be
relevant to particular holders subject to special treatment under federal income
tax law (such as, banks and other financial institutions, insurance companies,
regulated investment companies, real estate investment trusts, dealers in
securities, tax-exempt entities, or investors whose "functional currency" is not
the United States dollar). Prospective investors are urged to consult their own
tax advisers in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the
Securities. The following summary is based upon current provisions of the Code,
the Treasury regulations promulgated thereunder and judicial or ruling
authority, all of which are subject to change, which change may be retroactive.
No ruling on any of the issues discussed below will be sought from the Internal
Revenue Service ("IRS").
The tax consequences of the purchase, ownership and disposition of the
Securities will depend in large part on whether or not an election is made to
treat the issuing Trust or any segregated pool of assets therein as one or more
real estate mortgage investment conduits ("REMICs") within the meaning of
section 860D of the Code. A Trust or any segregated pool of assets therein as to
which one or more REMIC elections will be made will be referred to as a "REMIC
Pool" and its related Securities will be referred to as "REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
REMIC ELECTIONS
Upon issuance of each series of REMIC Certificates, special federal tax
counsel to the Trust specified in the related Prospectus Supplement ("Tax
Counsel") will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Agreement, each related REMIC Pool will
qualify as a
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REMIC, and the related REMIC Certificates will be treated either as regular
interests in the REMIC ("Regular Certificates") or as residual interests in the
REMIC ("Residual Certificates"). Regular Certificates generally will be treated
as debt instruments issued by the REMIC. The holder of a Residual Certificate
will be subject to the special rules described below under which the holder
generally will take into account for Federal income tax purposes its pro rata
share of the net income or loss of the REMIC.
If a REMIC Pool fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, the Code
provides that the REMIC Pool will not be treated as a REMIC for such year and
thereafter. In that event, such REMIC Pool may be taxable as a separate
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
REMIC Pool's income for the period in which the requirements for such status are
not satisfied. The Agreement will include provisions designed to maintain the
REMIC Pool's status as a REMIC. It is not anticipated that the status of any
REMIC Pool as a REMIC will be terminated.
STATUS OF REMIC CERTIFICATES
It is unclear whether property acquired by foreclosure held pending sale
and the amount held in a Spread Account or Reserve Fund (or similar accounts)
would be considered to be part of the Mortgage Loans, or whether such assets
otherwise would receive the same treatment as the Mortgage Loans, for purposes
of sections 593(d)(1), 856(c)(6)(B) and 7701(a)(19)(C) of the Code.
REGULAR CERTIFICATES
General. In general, stated interest, original issue discount and market
discount received or accrued on a Regular Certificate will be ordinary income,
and principal payments on a Regular Certificate will be a return of capital to
the extent of the Certificateholder's basis in the Regular Certificate allocable
to those payments. A holder of a Regular Certificate must use the accrual method
of accounting with respect to that Certificate regardless of the method of
accounting otherwise used.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of section 1273(a) of the
Code.
A holder of a Regular Certificate having original issue discount generally
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount regardless of the method of
accounting otherwise used. Section 1272(a)(6) of 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; those regulations
have not been issued. The legislative history of the REMIC provisions 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 used by the Company in reporting original issue discount for each
series of REMIC Regular Certificates (the "Prepayment Assumption") will be
consistent with this standard and will be disclosed in the related Prospectus
Supplement. The Company makes no representation that the Mortgage Loans will in
fact prepay at a rate conforming to the Prepayment Assumption or at any other
rate.
The amount of original issue discount, if any, on a Regular Certificate is
the excess of its "stated redemption price at maturity" over its "issue price."
The issue price of a Regular Certificate in a particular class is the first
price at which a substantial amount of the Regular Certificates of that class is
first sold to the public (excluding bond houses, brokers and underwriters).
Unless specified otherwise in the
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Prospectus Supplement, the Company will determine original issue discount by
including the amount paid by an initial Regular Certificateholder for accrued
interest that relates to a period prior to the issue date of the Regular
Certificate in the issue price of a Regular Certificate and will include in the
stated redemption price at maturity any interest paid on the first Payment Date
to the extent such interest is attributable to a period in excess of the number
of days between the issue date and such first Payment Date. The stated
redemption price of a Regular Certificate is equal to the total of all payments
due on the Regular Certificate other than payments of qualified stated interest.
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, or in the case of a variable rate debt
instrument, 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" that generally 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. Generally, original issue discount will accrue
on the Certificates at the same rate it would accrue if the Certificates were to
bear interest at a fixed rate based on the rate that would be in effect if the
index remained constant after the Closing Date (or, possibly, the pricing date).
Notwithstanding the general definition, under a statutory de minimis rule,
original issue discount on a Regular Certificate will be treated as zero if such
discount is less than 0.25 percent of the stated redemption price at maturity of
such Regular Certificate multiplied by its weighted average life. The weighted
average life of a Regular Certificate is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity of the Regular Certificate, of the amounts determined by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until the date on which each such distribution is scheduled to be
made (presumably taking into account the Prepayment Assumption) by (ii) a
fraction, the numerator of which is the amount of such distribution and the
denominator of which is the Regular Certificate's stated redemption price at
maturity.
The Treasury regulations pertaining to original issue discount (the "OID
Regulations") provide a special application of the de minimis rule for certain
debt instruments where the interest payable for the first period is at a rate
less than that which applies in all other periods. In such cases, the OID
Regulations provide that the Regular Certificate would be treated as having de
minimis original issue discount if the greater of (i) the excess of its stated
principal amount over its issue price or (ii) the amount of the "foregone
interest" does not exceed the amount that would otherwise be treated as de
minimis original issue discount under the rules described above, but treating as
the stated redemption price at maturity for that purpose, the sum of the issue
price and the greater of the amounts in clauses (i) or (ii). Foregone interest
for this purpose is the amount of additional stated interest that would be
required to be payable on the Regular Certificate during the period of the
teaser rate, interest holiday or other shortfall so that all stated interest
would be qualified stated interest. If original issue discount is treated as
zero under these rules, all stated interest payments are treated as qualified
stated interest and the actual amount of original issue discount must be
allocated to the principal distributions on the Regular Certificate and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
One or more classes of Regular Certificates may entitle the holder to
payments of a portion of the interest but not a corresponding portion of the
principal of Mortgage Loans held in the REMIC Pool ("Stripped REMIC
Certificates") or otherwise provide for interest that is disproportionately high
relative to the principal amount. Although the matter is not free from doubt,
the Company intends to treat all of the payments on such Certificates as part of
their stated redemption price at maturity. If such Certificates are not treated
as having original issue discount, it is likely that such Certificates will be
treated as having been issued at a premium. See "Regular
Certificates -- Premium" below. In addition, the holder of such a Certificate
may be entitled to recognize a loss (which may be treated as a capital loss) at
such time
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and in such amount as it is determined that the Certificateholder's adjusted
basis exceeds all future payments to be received on such REMIC Certificates,
assuming no future prepayments occur with respect to the Mortgage Loans.
A Certificateholder generally must include in gross income for any taxable
year the sum of the "daily portions" of the original issue discount that accrue
on the Regular Certificate for each day during the Certificateholder's taxable
year on which the Regular Certificate is held. A calculation will be made of the
portion of the original issue discount that accrues on each Regular Certificate
during each "accrual period," which in general is the period corresponding to
the period between Payment Dates or other interest compounding periods. Under
the OID Regulations, the accrual periods may be of any length and may vary in
length over the term of the debt instrument, provided that each accrual period
is no longer than one year and each scheduled payment of principal or interest
occurs on the final day of an accrual period or on the first day of an accrual
period. The original issue discount accruing during any accrual period is
divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the period.
For a Regular Certificate, original issue discount accruing in an accrual
period is the excess, if any, of (i) the sum of (a) the present value of the
remaining payments to be made on the Regular Certificate as of the end of that
accrual period and (b) the payments made on the Regular Certificate during the
accrual period that are included in the stated redemption price at maturity of
the Regular Certificate, over (ii) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. For this purpose, the
present value of the remaining payments to be made on a Regular Certificate is
calculated based on (i) the Prepayment Assumption, (ii) the yield to maturity of
the Regular Certificate as of the Closing Date (taking into account the
Prepayment Assumption) and (iii) events (including actual prepayments) that have
occurred prior to the end of the accrual period. The adjusted issue price of a
Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate increased by the aggregate amount of original
issue discount that accrued on that Regular Certificate in all such prior
periods and reduced by the amount of payments included in the stated redemption
price at maturity of the Regular Certificate in prior accrual periods. In
general, the daily portions of original issue discount required to be included
in income by the holder of a Regular Certificate (other than a Stripped REMIC
Certificate) will increase if prepayments on the Mortgage Loans exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if those prepayments are slower than the Prepayment Assumption.
A subsequent purchaser of a Regular Certificate at a price greater than the
Regular Certificate's "adjusted issue price" but less than its remaining stated
redemption price also will be required to include in gross income the daily
portions of the original issue discount on the Regular Certificate. With respect
to such a purchaser, the daily portion for any day is reduced by an amount equal
to the product of (i) such daily portion and (ii) a fraction, the numerator of
which is the amount, if any, by which the price paid by such purchaser for the
Regular Certificate exceeds the adjusted issue price and the denominator of
which is the excess of the sum of all amounts payable on the Regular Certificate
after the purchase date, other than payments of qualified stated interest, over
the Regular Certificate's adjusted issue price. The adjusted issue price of a
Regular Certificate on any given day is equal to its issue price, increased by
all original issue discount previously includible with respect to such Regular
Certificate and reduced by the amount of all previous distributions with respect
to such Regular Certificate included in such Regular Certificate's stated
redemption price at maturity.
Market Discount. The holder of a Regular Certificate purchased at a market
discount will be subject to the market discount provisions of the Code. In
general, "market discount" is the amount by which the stated redemption price at
maturity (or, in the case of a Regular Certificate issued with original issue
discount, the revised issue price) of the Regular Certificate exceeds the
purchaser's basis in a Regular Certificate. The holder of a Regular Certificate
that has market discount generally will be required to include accrued market
discount in ordinary income to the extent payments includible in the stated
redemption price at maturity of such Regular Certificate are received. The
purchaser of a Regular Certificate that has market discount also will be
required to treat a portion of any gain on a sale or
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exchange of the Regular Certificate as ordinary income to the extent of the
market discount that accrued to the date of disposition and was not previously
included in ordinary income. Unless otherwise provided in Treasury regulations
that have not yet been issued, it is anticipated that market discount on a
Regular Certificate will accrue at the holder's option (i) on the basis of a
constant interest rate, (ii) ratably based on the ratio of stated interest
payable in the current period to all interest remaining to be paid in the case
of a Regular Certificate issued without original issue discount, or (iii)
ratably based on the ratio of the amount of original issue discount accrued in
the current period to all remaining original issue discount in the case of a
Regular Certificate issued with original issue discount, in each case computed
taking into account the Prepayment Assumption.
A purchaser of a Regular Certificate that has market discount may be
required to defer recognition of a portion of interest expense attributable to
any indebtedness incurred or continued to purchase or carry the Regular
Certificate. The amount of this deferred interest expense in any taxable year
generally would not exceed the accrued market discount for the year, and the
deferred expense generally is allowed as a deduction not later than the year in
which the related market discount income is recognized. Alternatively, a
Certificateholder may elect to include market discount in income currently as it
accrues on all market discount obligations that the Certificateholder acquires
in that taxable year or thereafter, in which case the rules described above
relating to the treatment of market discount, as well as the interest deferral
rule will not apply. Notwithstanding the above rules, market discount on a
Regular Certificate will be considered to be zero under a de minimis rule that
is similar to the de minimis rule applied for purposes of determining whether a
Regular Certificate has original issue discount.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity is considered to be purchased at a
premium. The holder of such a Regular Certificate may elect under section 171 of
the Code to amortize the premium under the constant interest method. That
election will apply to all premium obligations that the holder owns or
subsequently acquires. In addition, it appears that the same rules that apply to
the accrual of market discount on installment obligations are intended to apply
in amortizing premium on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available. The
portion of the premium deductible pursuant to an election under section 171 of
the Code and allocable to a particular period will be treated as a reduction in
interest payments on the Regular Certificate during that period. A
Certificateholder who neither has in place nor makes an election to amortize
bond premium could be required to allocate that premium among the principal
payments to be received on that instrument and recognize the premium as a loss
(which would be a capital loss if the Certificate is held as a capital asset) as
those principal payments are received.
Interest Election. Under the OID Regulations, Regular Certificateholders
generally may elect to include all accrued interest on a Regular Certificate in
gross income using the constant yield to maturity method. For purposes of this
election, interest includes stated interest, original issue discount, de minimis
original issue discount, market discount, de minimis market discount and
unstated interest, as adjusted by any premium. If a Certificateholder makes such
an election and (i) the Regular Certificate has amortizable bond premium, the
Certificateholder is deemed to have made an election to amortize bond premium or
(ii) the Regular Certificate has market discount, the Certificateholder is
deemed to have made an election to include market discount in income currently.
See "Premium" and "Market Discount" above. A Regular Certificateholder should
consult its tax adviser before making this election.
Sale or Exchange of Regular Certificates. If a holder sells or exchanges a
Regular Certificate, the Certificateholder will recognize gain or loss equal to
the difference, if any, between the amount realized and its adjusted basis in
the Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by the payments previously received on the
Regular Certificate, other than payments of qualified stated interest, and by
any amortized premium.
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In general, except as described above with respect to market discount, and
except for certain financial institutions subject to section 582(c) of the Code,
any gain or loss on the sale or exchange of a Regular Certificate recognized by
an investor who holds the Regular Certificate as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Regular Certificate has been
held for more than one year. Gain from the disposition of a Regular Certificate
that otherwise might be capital gain will be treated as ordinary income to the
extent that the gain does not exceed the excess, if any, of (i) the amount that
would have been includible in the gross income of the holder if the yield on the
Regular Certificate were 110% of the applicable federal rate under section
1274(d) of the Code as of the date of purchase, over (ii) the amount of income
actually includible in the gross income of such holder with respect to the
Regular Certificate.
Treatment of Subordinated Certificates. As described above under
"Description of the Securities -- Credit Enhancement -- Subordination," certain
series of REMIC Certificates may contain one or more classes of Regular REMIC
Certificates that are subordinate to one or more other classes of Regular REMIC
Certificates (the "Subordinated Certificates" and "Senior Certificates,"
respectively), Holders of Subordinated Certificates will be required to report
income with respect to such Certificates on the accrual method of accounting
without giving effect to delays or reductions in distributions attributable to
defaults and delinquencies on the Mortgage Loans, except to the extent it can be
established that such amounts are uncollectible. In addition, holders of
Subordinated Certificates will be required to treat amounts transferred to any
Reserve Fund as having been distributed to them. As a result, the amount of
income reported by a holder of a Subordinated Certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder generally will be allowed a loss (or will be allowed to
report less income) where either principal or previously accrued interest are
determined to be uncollectible with respect to the Subordinated Certificate,
although the timing and character of such losses (or reductions in income) are
uncertain.
TAXATION OF RESIDUAL CERTIFICATES
General. Generally, holders of Residual Certificates ("Residual
Certificateholders") will take into account as ordinary income or loss for
federal income tax purposes, the "daily portions" of REMIC taxable income or net
loss. The daily portions of REMIC taxable income or net loss for a Residual
Certificateholder are determined by allocating to each day in any calendar
quarter its ratable portion of the REMIC's taxable income or net loss for such
calendar quarter, and by allocating such daily portion among the Residual
Certificateholders in proportion to their respective holdings of Residual
Certificates of a series on that day. A Residual Certificateholder also must
include in income any distributions from the REMIC in excess of the Residual
Certificateholder's adjusted basis in the Residual Certificate. Certain
adjustments to the income of a subsequent holder of a Residual Certificate may
be required when the Residual Certificate was purchased at a price that is
greater or less than the adjusted basis (determined in the manner discussed
below) that the Residual Certificate would have if held by an initial holder.
Nevertheless, in the absence of Treasury regulations or clarifying legislation,
it is uncertain whether any adjustments would be required.
Method of Computing REMIC Taxable Income. In general, REMIC taxable income
is determined in the same manner as the taxable income of an individual having
the calendar year as the taxable year and using the accrual method of
accounting, with certain exceptions. For these purposes, REMIC taxable income
generally means the excess of (i) the REMIC's gross income (including interest,
original issue discount and market discount, if any) on the Mortgage Loans owned
by the REMIC, plus income on reinvestment of cash flows and investment of assets
in the Reserve Fund and amortization of any premium with respect to the Regular
Certificates, over (ii) deductions, including interest and original issue
discount on the Regular Certificates, servicing fees on the Mortgage Loans,
other administrative expenses, and deduction or amortization of premium, if any,
with respect to the Mortgage Loans or the mortgage loans. Under the Treasury
regulations pertaining to the REMIC provisions of the Code (the "REMIC
Regulations"), section 163(d) of the Code does not apply to limit a REMIC's
deductions for any
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interest expense, and for purposes of determining a REMIC's bad debt deduction,
debt owed to the REMIC is not treated as nonbusiness debt under section 166(d)
of the Code. In addition, under the REMIC Regulations, any gain or loss from the
disposition of any asset, including a qualified mortgage (as defined in section
860G(a)(3) of the Code) or a permitted investment (as defined in section
860G(a)(5) of the Code) is treated as ordinary gain or loss. For purposes of
determining REMIC taxable income or net loss, the REMIC's aggregate basis in the
collateral is the fair market value thereof immediately after transfer to the
REMIC. Under the REMIC Regulations, that basis is equal to the aggregate of the
issue prices of all regular and residual interests in the REMIC.
Generally, the REMIC's deductions for original issue discount will be
determined in the same manner as original issue discount income on Regular
Certificates as described above under "Regular Certificates -- Original Issue
Discount," without regard to the de minimis rule described therein. The REMIC
will have discount income in respect of a Mortgage Loan if, in general, the
basis of the REMIC allocable thereto is exceeded by the unpaid principal balance
thereof. In respect of Mortgage Loans that have discount, REMIC taxable income
will take into account discount that accrues during the taxable year as it
accrues under a constant yield method. Generally, if the REMIC's basis allocable
to a Mortgage Loan exceeds the unpaid principal balance thereof, the REMIC will
be considered to have acquired the Mortgage Loan at a premium equal to the
amount of the excess, which premium may be amortized under a constant interest
method as described above under "Regular Certificates -- Premium."
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount and market
discount income (or amortization of premium) with respect to Mortgage Loans, and
the timing of deductions for interest (including original issue discount) on the
Regular Certificates. Where the Mortgage Loans bear interest at a fixed rate,
mismatching of that timing may result from the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of the
REMIC Regular Certificates, will increase over time as the earlier classes of
REMIC Regular Certificates are paid, whereas interest income with respect to any
given Mortgage Loan generally will remain constant over time as a percentage of
the outstanding principal amount of that loan. When there is more than one class
of Regular Certificates that pay principal sequentially, this mismatching of
income and deductions is likely to occur in the early years following issuance
of the REMIC Certificates when principal payments are being made in respect of
the earlier classes of REMIC Regular Certificates particularly if the Mortgage
Loans were acquired at a discount. In those circumstances, Residual
Certificateholders may require sufficient other sources of cash to pay any
federal, state or local income or franchise taxes due as a result of the
mismatching. The mismatching of income and deductions described in this
paragraph, if present with respect to a series of REMIC Certificates, may have a
significant adverse effect upon a Residual Certificateholder's after-tax rate of
return.
Losses. The amount of any net loss of the REMIC that may be taken into
account by a Residual Certificateholder is limited to the Residual
Certificateholder's adjusted basis of the Residual Certificate as of the close
of the quarter (or time of disposition of the Residual Certificate, if earlier)
determined without taking into account the net loss for the quarter. Any loss so
disallowed may be carried over indefinitely, and may be used only to offset any
income generated by the Residual Certificate. The adjusted basis of a Residual
Certificate is equal to the amount paid therefor, increased by the amount of any
income allocated to the Residual Certificateholder and decreased (but not below
zero) by the amount of cash distributed, the fair market value of property
distributed and any loss allocated to the Residual Certificateholder. The
ability of a Residual Certificateholder that is an individual or a closely held
corporation to take into account losses from the REMIC also may be subject to
other limitations under the Code.
Limitations on Offset or Exemption of REMIC Income. A portion of the REMIC
taxable income includible in determining the Federal income tax liability of a
Residual Certificateholder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess, if any, of the
Residual Certificateholder's allocable share of REMIC taxable income for a
calendar quarter, over the sum of the "daily accruals" with respect to the
Residual Certificate for days during the calendar quarter that
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the Residual Certificateholder held the Residual Certificate. The daily accruals
for each day during a calendar quarter generally are determined by allocating to
each day in the calendar quarter its ratable portion of the product of (i) 120%
of the long-term applicable federal rate that would have applied to the Residual
Certificate (if it were a debt instrument issued on the day the REMIC was
formed) under section 1274(d) of the Code, and (ii) the adjusted issue price of
the Residual Certificate at the beginning of the quarterly period. The adjusted
issue price of the Residual Certificate at the beginning of a quarter is the
issue price of the Residual Certificate (generally determined as if the Residual
Certificate were a debt instrument), increased by the amount of the daily
accruals of REMIC income for all prior quarters and decreased (but not below
zero) by any distributions made with respect to the REMIC Residual Certificate
prior to the beginning of the quarterly period.
To the extent provided in Treasury regulations that have not yet been
issued if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then a Residual Certificateholder's entire share
of REMIC taxable income will be treated as excess inclusions. Unless otherwise
stated in the Prospectus Supplement with respect to any Residual Certificates
offered by such Prospectus Supplement, it is expected that the value of the
Residual Certificates will not be significant.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the "excess inclusion" may not be offset by other deductions,
including net operating losses or net operating loss carryforwards, on the
Residual Certificateholder's federal income tax return. Further, if the Residual
Certificateholder is an organization subject to the tax on unrelated business
income imposed by section 511 of the Code, the Residual Certificateholder's
excess inclusion will be treated as unrelated business taxable income of the
Residual Certificateholder. Pursuant to the REMIC Regulations, if a Residual
Certificateholder is a member of an affiliated group filing a consolidated
income tax return, the taxable income of the affiliated group cannot be less
than the sum of the excess inclusions attributable to all residual interests
held by the members of the affiliated group. In addition, under Treasury
regulations that have not yet been issued, if a real estate investment trust
owns a Residual Certificate, a portion of dividends paid by the real estate
investment trust would be treated as excess inclusions in the hands of its
shareholders with the same consequences as excess inclusions attributed directly
to a Residual Certificateholder. Similar rules will apply to Residual
Certificates that are held by regulated investment companies, common trust funds
or certain cooperative corporations.
Prohibited Transactions and Other Taxes on the REMIC. Income from certain
transactions by the REMIC, called prohibited transactions, will not be part of
the calculation of income or loss includible in the federal income tax returns
of Residual Certificateholders, but rather will be taxed directly to the REMIC
at a 100% rate. In addition, no loss or deduction allocable to a prohibited
transaction is taken into account in determining the taxable income or net loss
of the REMIC. Prohibited transactions generally include (i) subject to certain
limited exceptions (which exceptions include the liquidation of the REMIC, a
"clean-up call" of one class of interests and the repurchase of a defective
mortgage loan), the disposition of any mortgage loan; (ii) the receipt of income
attributable to any asset that is not the type of mortgage loan or other
investment that the REMIC is permitted to hold; (iii) the receipt of
compensation for services; or (iv) the receipt of gain from disposition of
temporary investments between Payment Dates other than pursuant to a qualified
liquidation. In addition, a 100% tax is imposed on the amount of any
contribution of property made to the REMIC after its initial formation
(excluding certain specified contributions such as cash payments in the nature
of guarantees). An additional tax may be imposed on income from property
acquired by the REMIC upon foreclosure of a Mortgage Loan.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Certificateholder will recognize gain or loss
equal to the excess, if any, of the amount realized over the adjusted basis (as
described above under "Losses") of the REMIC Residual Certificate at the time of
the sale or exchange. In addition, a cash distribution to a Residual
Certificateholder from the REMIC is treated as gain from the sale or exchange of
the Residual Certificate to the extent that the amount of the distribution
exceeds such adjusted basis. For corporate taxpayers, there is no preferential
rate afforded to long-term capital gains. For individual taxpayers, all
long-term capital gains are subject to a maximum nominal rate of tax of 28%
(although the effective rate may be somewhat higher in certain
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circumstances). In addition, in certain circumstances, if a Residual Certificate
is transferred to a "Disqualified Organization" (as defined below), a tax will
be imposed on the transferor. See "Residual Certificates Transferred to or Held
by Disqualified Organizations."
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person is disregarded for all federal tax purposes unless no
significant purpose of the transfer was to impede the assessment or collection
of tax. A Residual Certificate is treated as constituting a noneconomic residual
interest for this purpose unless, at the time of the transfer, (i) the present
value of the expected future distributions on the Residual Certificate is no
less than the product of the present value of the "anticipated excess
inclusions" with respect to the Residual Certificate and the highest rate
applicable to domestic corporations for the year in which the transfer occurs
and (ii) the transferor reasonably expects that the transferee will receive
distributions from the REMIC in an amount sufficient to satisfy the income tax
liability on any "excess inclusions" at or after the time the liability accrues.
The anticipated excess inclusions are the excess inclusions that are anticipated
to accrue to each calendar quarter, or portion thereof, following the transfer
of the Residual Certificate, determined as of the date the Residual Certificate
is transferred and based on events that have occurred up to the time of the
transfer and on the Prepayment Assumption and any required or permitted clean up
calls or required liquidation. See "Taxation of REMIC Certificates -- Original
Issue Discount" and "Limitations on Offset or Exemption of REMIC Income."
A significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
(had "improper knowledge") that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. Under the REMIC
Regulations, a transferor is presumed not to have improper knowledge if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and, as a result of the investigation,
the transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee represents to the transferor that it understands that, as the holder
of the noneconomic residual interest, the transferee may incur tax liabilities
in excess of any cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due.
Under the REMIC Regulations, a transfer of a Residual Certificate that has
"tax avoidance potential" to a person who is not a U.S. Person is disregarded
for all federal tax purposes. For this purpose a Residual Certificate has tax
avoidance potential unless at the time of the transfer (i) the transferor
reasonably expects that, for each excess inclusion, the REMIC will distribute to
the transferee Residual Certificateholder, an amount that will equal at least
thirty percent of the excess inclusion, and that each such amount will be
distrusted at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. The REMIC Regulations provide that a transferor has a reasonable
expectation if the thirty percent test would be satisfied were the REMIC's
qualified mortgages to prepay at each rate within a range of rates from fifty
percent to two hundred percent of the rate assumed under section 1272(a)(6) of
the Code with respect to the qualified mortgages (or the rate that would have
been assumed had the mortgages been issued with original issue discount). A
transfer of a Residual Certificate to a person who is not a U.S. Person,
however, is not disregarded if income from the Residual Certificate is subject
to tax under section 871(b) or section 882 of the Code in the hands of the
transferee. Moreover, if a person who is not a U.S. Person transfers a Residual
Certificate to a U.S. Person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Certificate for purposes of sections 871(a), 881, 1441 and 1442 of the
Code. As used herein, a U.S. Person is a citizen or resident of the United
States, a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust the
income of which is includible in gross income for U.S. tax purposes regardless
of its source. See "Limitations on Offset or Exemption of REMIC Income" and
"Other Matters Relating to REMIC Certificates -- Taxation of Certain Foreign
Investors -- Residual Certificates."
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Except as provided in Treasury regulations that have not yet been issued,
the wash sale rules of section 1091 of the Code will apply to the disposition of
a Residual Certificate where, during the period beginning six months before the
sale or disposition of the REMIC Residual Certificate and ending six months
after the sale or disposition, the seller of the Residual Certificate acquires
(or enters into any other transaction that results in the application of section
1091) any residual interest in any REMIC or any interest in a "taxable mortgage
pool" (such as a non-REMIC owner trust) that is comparable to a Residual
Certificate. Application of these wash sale rules would result in the deferral
of recognition of any loss on the sale of the Residual Certificate.
RESIDUAL CERTIFICATES TRANSFERRED TO OR HELD BY DISQUALIFIED ORGANIZATIONS
Regardless of whether any gain or loss is recognized on the transfer of a
Residual Certificate, a tax is imposed on the transferor of a Residual
Certificate where the transfer is to certain specified entities generally
including governmental entities or any other entities that are exempt from U.S.
tax including the tax on unrelated business income (collectively, "Disqualified
Organizations"). If a transfer of a Residual Certificate to a Disqualified
Organization is made through an agent for the Disqualified Organization
(including a nominee, broker or middleman), then the tax is imposed on the
agent. The tax is imposed at the highest rate applicable to domestic
corporations based on the present value of expected excess inclusions (see
"Limitations on Offset or Exemption of REMIC Income" above). The REMIC
Regulations provide that the anticipated excess inclusions must be determined as
of the date the Residual Certificate is transferred and must be based on (i)
events that have occurred up to the time of the transfer, (ii) the Prepayment
Assumption, and (iii) any required or permitted clean up calls, or required
qualified liquidation. In addition, the REMIC Regulations provide that the
present value of the anticipated excess inclusions is determined by discounting
the anticipated excess inclusions from the end of each remaining calendar
quarter in which those excess inclusions are expected to accrue to the date the
disqualified organization acquires the Residual Certificate. The discount rate
to be used for this present value computation is the applicable Federal rate as
specified in section 1274(d)(1) of the Code that would apply to a debt
instrument that was issued on the date the disqualified organization acquired
the residual interest and whose term ended on the close of the last quarter in
which excess inclusions were expected to accrue with respect to the Residual
Certificate. The transferor is relieved of the tax liability if it receives in
good faith from the transferee (i) an affidavit stating that the transferee is
not a Disqualified Organization or (ii) the transferee's social security number
and an affidavit stating that the social security number is that of the
transferee. Because a requirement for qualification as a REMIC is that
reasonable efforts must be made to ensure that Residual Certificates are not
held by Disqualified Organizations, the ability of a Residual Certificate to be
transferred may be conditioned upon the Trustee's receipt of an affidavit
representing that the proposed transferee is not a Disqualified Organization.
If a Residual Certificate is held by a "pass-through entity" (such as a
partnership, trust, real estate investment trust, regulated investment company,
or common trust fund), a tax is imposed at the highest rate applicable to
domestic corporations on the pass-through entity if a record holder of interest
in the entity is a Disqualified Organization. The tax would be imposed on the
portion of the excess inclusion income relating to the Residual Certificate
allocable to the Disqualified Organization interest holder. If a nominee holds
an interest in a pass-through entity for a Disqualified Organization, then the
tax is imposed on the nominee. Any tax imposed on a pass-through entity is
deductible against the gross amount of ordinary income of the pass-through
entity. No tax, however, will be imposed during any period if (i) the record
holder of an interest in the pass-through entity furnishes to the pass-through
entity an affidavit that the record holder is not a Disqualified Organization,
(ii) the record holder's social security number and an affidavit stating that
the social security number is that of the record holder, and (iii) during such
period, the pass-through entity does not have actual knowledge that the
affidavit is false.
OTHER MATTERS RELATING TO REMIC CERTIFICATES
Liquidation of the REMIC. If a REMIC adopts a plan of complete
liquidation, and sells all of its assets (other than cash) within the 90-day
period beginning on the date of the adoption of the plan of
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liquidation, then the REMIC will not be subject to an entity-level tax on the
sale of its assets, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts retained
to meet claims) to holders of all REMIC Certificates within the 90-day period.
It is unclear whether that the termination of the REMIC will be treated as a
sale or exchange of a Residual Certificateholder's Residual Certificate, in
which case, a Residual Certificateholder would be entitled to recognize a gain
(or loss) at that time equal to the amount of the excess (or shortfall) of the
cash or fair market value of other property distributed in liquidation over the
adjusted basis in the Residual Certificate remaining upon termination of the
REMIC. The amount of such gain (or loss) may be treated as a capital loss for
certain taxpayers, although not for financial institutions subject to the
provisions of section 582(c) of the Code.
Reporting and Other Administrative Matters. For federal income tax
purposes, the REMIC must adopt a calendar year as its taxable year and must file
annual federal information and tax returns and other reports with the IRS and
furnish reports to Certificateholders as specified in temporary Treasury
regulations (the "Temporary Regulations") and Treasury regulations. Pursuant to
Treasury regulations, reports will be made annually to the IRS and to holders of
record that are not excepted from the reporting requirements regarding
information with respect to the interest paid or accrued on the Regular
Certificates, original issue discount, if any, accrued on the Regular
Certificates, the portion of the Regular Certificates (and income therefrom)
that is eligible for each special tax status described above, and certain
information necessary to compute the accrual of any market discount or the
amortization of any premium on the Regular Certificates. Quarterly reports will
be made to the holders of Residual Certificates with regard to REMIC taxable
income, excess inclusions and allocable investment expenses of the REMIC
required to be taken into account by the holder of the Residual Certificate.
These quarterly reports will be filed with the IRS on an annual basis. The
Temporary Regulations also provide that quarterly reports must be made of the
REMIC's investment expenses to holders of Regular Certificates where such
allocations are required. The REMIC also is subject to the procedural and
administrative rules of the Code applicable to partnerships including the
determination of any adjustments to, among other things, items of REMIC income
gain, loss, deduction or credit by the IRS in a unified administrative
proceeding. In this connection, a holder of a Residual Certificate may be
required to act as the "tax matters person" of the REMIC.
Certain Noncorporate Investors. Under section 67 of the Code, an
individual, estate or trust may deduct certain itemized deductions only to the
extent that the aggregate of these itemized deductions exceeds two percent of
the taxpayer's adjusted gross income. These itemized deductions include expenses
paid or incurred for the production or collection of income, or the management,
conservation or maintenance of property held for the production of income. In
the case of a REMIC, these deductions may include deductions for servicing
expenses with respect to the Mortgage Loans, compensation paid to the Servicer
of a series of Certificates, or other administrative expenses, if any, of the
REMIC. In the case of a REMIC that is similar to a traditional single-class
mortgage pass-through arrangement (including a pass-through arrangement with
senior and subordinated interests), a pro rata portion of the expenses that are
deductible under section 212 of the Code would be allocated among all of the
holders of interests in the REMIC and would be taken into account by holders who
are individuals, estates or trusts (where interests are held either directly or
indirectly through certain pass-through entities) as a "gross-up" to income,
against which deductions for those expenses would be available subject to the
limitations of section 67 of the Code. Nevertheless, for other REMICs, these
deductions would be allocated only to holders of the Residual Certificates.
Taxation of Certain Foreign Investors -- Regular Certificates. For
purposes of this discussion, a "Foreign Holder" is a Certificateholder who holds
a REMIC Certificate and who is not (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for U.S. tax purposes
regardless of its source. A Foreign Holder that is not subject to Federal income
tax as a result of any direct or indirect connection with the United States in
addition to its ownership of a Regular Certificate will not be subject to
federal income tax on interest (or
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original issue discount, if any) on a Regular Certificate (subject to possible
backup withholding of tax, discussed below), provided the Foreign Holder does
not own actually or constructively a 10% or greater interest in the Residual
Certificates. To qualify for this tax exemption, the Foreign Holder will be
required to provide a statement signed under penalties of perjury certifying
that the Foreign Holder meets the requirements for treatment as a Foreign Holder
and providing the Foreign Holder's name and address. The statement, which may be
made on an IRS Form W-8 or substantially similar substitute form, generally must
be provided in the year a payment occurs or in either of the two preceding
years.
Any gain recognized by a Foreign Holder upon a sale, retirement, or other
taxable disposition of a Regular Certificate generally will not be subject to
U.S. Federal income tax unless either (i) the Foreign Holder is a nonresident
alien individual who holds the Regular Certificate as a capital asset and who is
present in the United States for 183 days or more in the taxable year of the
disposition or (ii) the gain is effectively connected with the conduct by the
Foreign Holder of a trade or business within the United States.
It appears a Regular Certificate will not be includible in the estate of a
Foreign Holder and would not be subject to U.S. estate taxes.
Taxation of Certain Foreign Investors -- Residual Certificates. Amounts
paid to Residual Certificateholders who are Foreign Holders are treated as
interest for purposes of the 30% U.S. withholding tax. The U.S. Department of
the Treasury has promulgated regulations that provide that interest payments to
the holder of a Residual Certificate is treated as having been paid with respect
to the obligations held by the REMIC for purposes of determining whether the
payments are eligible for the portfolio interest exemption. Such regulations do
not allow any payments representing the "excess inclusion" portion of the
REMIC's income to be eligible for the portfolio interest exemption. In addition,
a Residual Certificateholder will not be entitled to any exemption from the 30%
withholding tax or a reduced treaty rate to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "Taxation of REMIC
Certificates -- Taxation of Residual Certificates -- Limitations on Offset or
Exemption of REMIC Income." If the amounts allocable to Residual
Certificateholders who are Foreign Holders are effectively connected with the
conduct of a trade or business within the United States by such Foreign Holders,
30% (or lower treaty rate) withholding will not apply. Instead, the amounts
allocable to such Foreign Holders will be subject to U.S. federal income tax at
regular graduated rates. It is possible that the activities of the REMIC could
by themselves result in the Residual Certificateholder's being considered to be
conducting a trade or business in which case amounts paid to Residual
Certificateholders would be so effectively connected. If 30% (or lower treaty
rate) withholding is applicable, such amounts will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
REMIC Residual Certificate is disposed of) under rules similar to those that
govern withholding upon disposition of debt instruments that have original issue
discount. However, the Code grants the U.S. Department of the Treasury authority
to issue regulations requiring that the amounts includible be taken into account
earlier than otherwise provided where necessary to prevent avoidance of tax.
This latter rule may apply where the Residual Certificates do not have
significant value.
Backup Withholding. Under certain circumstances interest (and original
issue discount, if any), principal or proceeds of the sale of a Regular
Certificate may be subject to "backup withholding" of U.S. Federal income tax at
a 31% rate. Backup withholding does not apply to corporations and certain other
exempt recipients, which may be required to establish their exempt status.
Backup withholding generally applies if, among other circumstances, a non-exempt
Regular Certificateholder who is a U.S. person fails to furnish its taxpayer
identification number or, when applicable, a Form 4224. Backup withholding
generally does not apply to a Foreign Holder if the Foreign Holder provides the
statement necessary to establish the exemption from federal income tax on
interest on the Regular Certificate. Special backup withholding rules may apply
when a payment is made through one or more financial institutions or by a
custodian, nominee, broker or other agent of the beneficial owner of a Regular
Certificate.
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FEDERAL INCOME TAX CONSEQUENCES FOR NOTES AND CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
CERTIFICATES AND NOTES
If a REMIC election will not be made with respect to a Trust which issues
both Notes and Certificates, upon the issuance of such Securities, Tax Counsel
will deliver its opinion generally to the effect that, for federal income tax
purposes, assuming compliance with all provisions of the related Agreement, (i)
the Notes will be treated as indebtedness and (ii) the Trust will not be treated
as an association or publicly traded partnership taxable as a corporation. The
Depositors, the Representative, their affiliates and the Servicer will have
agreed, and the holders of Notes and Certificates will agree by their purchase
of Notes and Certificates, to treat the Trust as a partnership with the assets
of the partnership being the assets held by the Trust, the partners of the
partnership being the Certificateholders and the Notes being debt of the
partnership, in each case for purposes of federal and state income tax,
franchise tax and any other tax measured in whole or in part by income. The
proper characterization, however, of the arrangement involving the Trust, the
Notes and the Certificates is not clear because there is no authority on
transactions closely comparable to that contemplated herein, and it is possible
that the IRS could take the position that the Notes and one or more classes of
Certificates represent interests in the assets of the Trust or that one or more
classes of Certificates represent indebtedness. If one or more classes of
Certificates with maturities different from the Notes are treated as
indebtedness or a substitute for indebtedness, then the Trust may be treated as
a "taxable mortgage pool" taxable as a corporation. If the Trust were taxable as
a corporation for federal income tax purposes, the Trust would be subject to
corporate income tax. Any such corporate income tax could materially reduce or
eliminate cash that would otherwise be distributable with respect to the Notes
and the Certificates (and the Certificateholders and possibly the Noteholders
could be liable for any such tax that is unpaid by the Trust). The following
discussion assumes that the Trust will be treated as a partnership with the
assets of the partnership being the assets held by the Trust, the partners of
the partnership being the Certificateholders and the Notes being debt of the
partnership.
The Notes will not be treated as qualifying real property loans within the
meaning of section 593(d)(1) or assets described in section 7701(a)(19)(C) of
the Code, and probably will not be treated as "real estate assets" within the
meaning of section 856(c)(6)(B) of the Code. Income derived from the Notes
probably will not be treated as "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. For any Certificateholder that is a "real estate
investment trust" within the meaning of section 856 of the Code, the related
Certificates will be treated as "real estate assets" within the meaning of
section 856(c)(6)(B) of the Code. However, no comparable authority exists that
would allow a thrift institution that is a Certificateholder to treat the
related Certificates as qualifying real property loans within the meaning of
section 593(d)(1) of the Code or assets described in section 7701(a)(19)(C) of
the Code. If any class of Certificates were treated as indebtedness, those
Certificates would not be treated as qualifying real property loans within the
meaning of section 593(d)(1) of the Code or assets described in section
7701(a)(19)(C) of the Code, and probably would not be treated as "real estate
assets" within the meaning of section 856(c)(6)(B) of the Code. Income derived
from the Certificates probably would not be treated as "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of section 856(c)(3)(B) of the Code.
TAXATION OF THE NOTES
The Notes and a Noteholder generally will be treated in the manner
described above under "Federal Income Tax Consequences for REMIC
Certificates -- Regular Certificates," except that the accrual method of
accounting for income on the Notes will be required for cash method taxpayers
and the 110% of the applicable federal rate rule described under "Sale or
Exchange of Regular Certificates" will not apply.
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TAXATION OF THE CERTIFICATES
PARTNERSHIP TAXATION
Assuming the Trust is classified as a partnership for Federal income tax
purposes, the Trust will not be subject to federal income tax as an entity.
Instead, each Certificateholder will report on its federal income tax return for
each year during which the Certificateholders are deemed to be partners in the
Trust such Certificateholder's distributive share of the items of income, gain,
loss and deduction of the Trust. The characterization of an item of income,
gain, loss or deduction (e.g., as capital gain or interest income) will usually
be the same for the Certificateholders as it is for the Trust. Generally, a
Certificateholder will include in its taxable year its share of the Trust's tax
items of the Trust taxable year ending within or with such Certificateholder's
taxable year.
Generally, under relevant Treasury regulations, a partnership must adopt
the taxable year of partners owning a majority interest in partnership profits
and capital; if there is no such taxable year, it must adopt the taxable year of
all partners owning five percent or more of the partnership profits or capital;
if there is no such taxable year, it must adopt the taxable year that results in
the least aggregate deferral of income to the partners. Although it is likely
that these rules will result in the Trust's taxable year being the calendar
year, it is impossible to predict the Trust's year with any certainty until the
identity of the Certificateholders is known. Upon request, Certificateholders
will be required to inform the Trust of their taxable year.
FORMATION OF THE TRUST; CODE SECTION 708 TERMINATION; MORTGAGE LOANS PREMIUM
The Depositors will be the initial partners in the Trust. The Depositors'
bases in their respective Trust interests will equal their respective bases in
the Mortgage Loans they transfer to the Trust. The Trust will execute and
deliver the Certificates to the Depositors. The Trust will issue Notes and
distribute the proceeds to the Depositors. The Depositors will then sell one or
more classes of Certificates to the Certificateholders and may later sell a
portion of one or more classes of Certificates to an affiliate. The first sale
will probably cause the Trust to be terminated for tax purposes under section
708(b) of the Code which provides for the termination of a partnership if
partners possessing at least a 50 percent interest in partnership capital and
profits sell their interests within a twelve-month period. If the Trust is not
terminated as a result of the first sale, it would be terminated as a result of
the second sale.
Upon a termination under section 708 of the Code, the Trust will be deemed
to distribute the Mortgage Loans to its partners, the Certificateholders, in
complete liquidation, and the Certificateholders will be deemed to recontribute
the Mortgage Loans to a new tax partnership. Generally, the basis of assets
received by a partner upon complete liquidation of a partnership equals the
partner's basis in its partnership interest, reduced by any cash distributed to
the partner as part of the same transaction. A partnership's basis in assets
contributed to it by a partner equals the partner's basis in that asset. Thus,
if the Trust is deemed terminated as a result of the sale of one or more classes
of Certificates to Certificateholders, the related Certificateholders will be
deemed to receive a distribution of an interest in the Mortgage Loans, to hold
those Mortgage Loans with a basis equal to their fair market value and to
recontribute the Mortgage Loans to the Trust with that basis. It is anticipated
that initially the fair market value of the interest in the Mortgage Loans held
by the Certificateholders exceed the basis of that interest in the hands of the
Trust. The net effect of a section 708 termination thus is likely to increase
the Trust's basis in the Mortgage Loans to reflect that excess. If the Trust is
deemed to terminate after the sale of one or more classes of Certificates to
Depositors' affiliate, the Trust's basis in its Mortgage Loans will be increased
to also reflect the excess of the fair market value of the interest in Mortgage
Loans indirectly sold to Depositors' affiliate over the Trust's initial basis in
that interest.
As discussed above, the net effect of a section 708 termination of the
Trust in connection with the formation of the Trust will be to increase the
Trust's basis in the Mortgage Loans. That increase will result in the basis of
the Mortgage Loans being greater than their stated principal amount, so that the
Mortgage Loans will be deemed held with a premium. That premium will result in
the Trust recognizing a deduction over the life of the Mortgage Loans.
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PARTNERSHIP INCOME AND ALLOCATIONS
The Trust's income will consist primarily of interest and finance charges
earned on the Mortgage Loans (including appropriate adjustments for market
discount, original issue discount, and bond premium) and any gain upon
collection or disposition of the Mortgage Loans. The Trust's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, premium deductions described immediately above and losses or
deductions upon collection or disposition of the Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The allocations will be set forth in the
Agreement and the related Prospectus Supplement.
Additionally, most or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer may generally deduct miscellaneous itemized
deductions (which do not include interest expenses) only to the extent they
exceed two percent of adjusted gross income, and, in addition, certain other
limitations may apply. These limitations probably apply to an individual
Certificateholders' respective share of expenses of the Trust (including fees to
the Servicer) and might result in such holder being taxed on an amount of income
that exceeds the amount of cash actually distributed to such holder over the
life of the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Certificateholders.
PREMIUM/DISCOUNT
The Trust's basis in the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. If any Mortgage Loans are deemed to be acquired by the Trust at a
discount, the Trust will make an election that will result in any market
discount on the Mortgage Loans being included in income currently as such
discount accrues over the life of the Mortgage Loans. Accordingly, all discount,
whether original issue discount or market discount, will be taxed as it accrues.
As indicated above, the Trust will calculate its deductions attributable to the
premium on an aggregate basis, but might be required to recompute it on a
Mortgage Loan by Mortgage Loan basis.
SECTION 708 TERMINATION
As noted above, under section 708 of the Code, the Trust will be deemed to
terminate for federal income tax purposes if 50 percent or more of the capital
and profits interests of the Trust are sold or exchanged within a 12-month
period. Such a termination may occur as a result of trades by the
Certificateholders. The Trust will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES
Generally, capital gain or loss will be recognized on a sale of
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Certificates sold. A holder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of net income of the Trust, and decreased by any distributions received
with respect to such Certificate and by the holder's share of any net losses of
the Trust. In addition, both the tax basis in the Certificate and the
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amount realized on a sale of a Certificate would include the holder's share of
the Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount, if any, on the Mortgage Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust will elect to include
market discount in income as it accrues.
If a holder of a Certificate is required to recognize an aggregate amount
of income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificate that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificate.
ALLOCATIONS BETWEEN TRANSFEREES
In general, the Trust's taxable income and losses will be determined
monthly and the tax items for a particular calendar month will be apportioned
among the Certificateholders in proportion to the principal amount of
Certificates or, in the case of Certificates that provide for the payment of
amounts based on a notional principal amount, the notional principal amount,
owned by them as of the first business day of the subsequent month. As a result,
a holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
Treasury regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Owner
Trustee (technically acting on behalf of the Depositor that serves as the Tax
Matters Partner) is authorized to revise the Trust's method of allocation
between transferors and transferees to conform to a method permitted by the Code
and Treasury regulations.
TRANSFEREES OF CERTIFICATES/SECTION 754 ELECTION
In the event that a Certificateholder sells its Certificates at a profit
(loss), the purchasing Certificateholder will have a higher (lower) basis in the
Certificates than the selling Certificateholder had. The tax basis of the
Trust's assets will not be adjusted to reflect that higher (or lower) basis
unless the Trust were to file an election under section 754 of the Code. In
order to avoid the administrative complexities that would be involved in keeping
accurate accounting records, as well as potentially onerous information
reporting requirements, the Trust will not make such election. As a result,
Certificateholders might be allocated a greater or lesser amount of Trust income
than would be appropriate based on their own purchase price for Certificates.
For example, a Certificateholder who purchases the Certificate from an original
holder for a price that exceeds the principal amount with respect to such
Certificate would be allocated the same amount of Trust income that the original
Certificateholder would have been allotted and will not be entitled to amortize
the excess of its purchase price over the principal amount with respect to such
Certificate. Such holder will have a capital loss upon the final payment and
cancellation of such Certificate.
ADMINISTRATIVE MATTERS
The Owner Trustee is required to keep or have kept complete and accurate
books of the Trust. Such books will be maintained for financial reporting and
tax purposes on an accrual basis and the fiscal year of the Trust will, unless
another year is required under the rules discussed under "Partnership Taxation"
above, be the calendar year. The Owner Trustee, acting on behalf of the
Depositor that serves as the
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Trust's Tax Matters Partner, will file a partnership information return (IRS
Form 1065) with the IRS for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1
information to nominees that fail to provide the Trust with the information
statement described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed by
the Trust or be subject to penalties unless the holder notifies the IRS of all
such inconsistencies.
One of the Depositors, as the Tax Matters Partner, will be responsible for
representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders causing the
Certificateholders to pay additional tax, interest and possibly, penalties.
Under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust.
FOREIGN CERTIFICATEHOLDERS
The ownership by Foreign Holders of Certificates may subject the Trust and
Certificateholders to burdensome U.S. withholding tax and reporting
requirements.
BACKUP WITHHOLDING
Distributions made on the Certificates and proceeds from the sale of the
Certificates will be subject to a backup withholding tax of 31% if, in general,
the Certificateholder fails to comply with certain identification procedures,
unless the holder is an exempt recipient under applicable provisions of the Code
as described above under "Federal Income Tax Consequences for REMIC
Certificates -- Other Matters Relating to REMIC Certificates-Backup
Withholding."
CERTAIN STATE TAX CONSEQUENCES
Each holder of a Security may be liable for state and local income taxes
payable in the state or locality in which it is a resident or conducts or is
deemed to conduct business and where an election is not made to treat the Trust
as a REMIC, a holder of a Security representing an ownership interest in the
related Trust may also be liable for such taxes in any state or locality in
which the Trust conducts or is deemed to conduct business. The income tax laws
of each state and locality may differ from the above discussion of federal
income tax laws so each prospective purchaser of a Security should consult its
own tax counsel with respect to potential state and local income taxes payable
as a result of its purchase of a Security.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on employee benefit
plans and certain other plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
insurance company general or separate accounts in which such plans, accounts or
arrangements are invested, that are subject to ERISA and/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" of such Plans. 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. Generally, any person who
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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 with respect to such Plan assets.
ERISA and Section 4975 of the Code also 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 a penalty imposed
under ERISA and/or 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.
Any Plan fiduciary or other investor considering whether to purchase any
Securities on behalf of or with "plan assets" of any Plan should consult with
its counsel and refer to the applicable Prospectus Supplement for guidance
regarding the ERISA considerations applicable to the Securities offered thereby.
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 the requirements of ERISA or Section 4975 of the Code. Accordingly,
assets of such plans may be invested in the Securities without regard to the
ERISA considerations described herein and in the applicable Prospectus
Supplement, subject to the provisions of other applicable federal and state law.
However, any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, no Class
of Securities of a Series will constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because the
related Mortgage Pool will include Mortgage Loans that are secured by second
Mortgages. Investors should consult their own legal advisers in determining
whether and to what extent any Class of Securities of a Series constitutes legal
investments for such investors.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from each sale of the
Series of Securities will be received, directly or indirectly, by the
Depositors. In the aggregate, the Originators will contribute or otherwise
transfer the related Mortgage Loans to the Depositors in return for cash, stock
or other property as specified in the related Prospectus Supplement.
PLAN OF DISTRIBUTION
The Securities of each Series may be sold to or through underwriters (the
"Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters or such other underwriting arrangement as may be
specified in the related Prospectus Supplement or may be placed either directly
or through agents. The Depositors intend that Securities will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Securities may be made through a combination of such
methods.
The distribution of Securities may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
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In connection with the sale of the Securities, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Securities to certain dealers at prices less a concession.
Underwriters may allow and such dealers may reallow a concession to certain
other dealers. Underwriters, dealers and agents that participate in the
distribution of the Securities of a Series may be deemed to be underwriters and
any discounts or commissions received by them from the Depositors or the related
Trust and any profit on the resale of the Securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933. Any
such Underwriters or agents will be identified, and any such compensation
received from the Depositors or the related Trust will be described, in the
related Prospectus Supplement.
Under agreements which may be entered into by the Depositors and, if so
specified in the related Prospectus Supplement, by the Originators, Underwriters
and agents who participate in the distribution of the Securities may be entitled
to indemnification by the Depositors or the Originators, as the case may be,
against certain liabilities, including liabilities under the Securities Act of
1933.
The Underwriters may, from time to time, buy and sell Securities, but there
can be no assurance that an active secondary market will develop and there is no
assurance that any such market, if established, will continue.
RATINGS
Each Class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
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
Agency. No person is obligated to maintain the rating on any Security, and,
accordingly, there can be no assurance that the ratings assigned to a Security
upon initial issuance will not be lowered or withdrawn by a Rating Agency at any
time thereafter. In general, ratings address credit risk and do not represent
any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Depositors and EquiCredit by Hutchins, Wheeler & Dittmar, A Professional
Corporation, Boston, Massachusetts.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
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<S> <C>
Accrual Period.................................................................... 6,39
Accrual Securities................................................................ 6,39
Actuarial Mortgage Loan........................................................... 21
Adjustable Rate Mortgages......................................................... 20
Advance........................................................................... 10,46
ARMs.............................................................................. 20
Available Payment Amount.......................................................... 47
Bankruptcy Plan................................................................... 21
Balloon Loans..................................................................... 17
Barnett Banks..................................................................... 25
Basic Principal Amount............................................................ 7,40,47
Book-Entry Securities............................................................. 7,39,58
Cash Collateral Account........................................................... 52
Cash Collateral Lender............................................................ 52
Cede.............................................................................. 7,39
Certificates...................................................................... 38
Class............................................................................. 2,5
Closing Date...................................................................... 5
Code.............................................................................. 12,64
Collection Account................................................................ 46
Combined Loan-to-Value Ratio...................................................... 20
Commission........................................................................ 3
Company........................................................................... 15
Cooperative Loans................................................................. 60
Credit Provider................................................................... 51
Curtailments...................................................................... 6,40
Custodian......................................................................... 42
Cut-off Date...................................................................... 5
Debt-to-Income Ratio.............................................................. 29
Definitive Securities............................................................. 58
Depositors........................................................................ 4
Determination Date................................................................ 6
Disqualified Organization......................................................... 73
DTC............................................................................... 7,39,58
Due Period........................................................................ 6,39
Eligible Account.................................................................. 44
ERISA............................................................................. 12,80
EquiCredit........................................................................ 1,4,25
EquiCredit Corporation............................................................ 25
Equity Protection Act............................................................. 18
Event of Nonpayment............................................................... 57
Excess Spread..................................................................... 45
FHLMC............................................................................. 55
Fitch............................................................................. 11,14
Fixed Monthly Debt................................................................ 29
FNMA.............................................................................. 37
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Gross Margin...................................................................... 21
Holders........................................................................... 8
Home Equity Loan Ratio............................................................ 21
Illinois Land Trust............................................................... 41
Indenture Trustee................................................................. 4
Index............................................................................. 21
Indirect Participants............................................................. 7,39,58
Insolvency Laws................................................................... 18
Insurance Proceeds................................................................ 7,40
Insurer........................................................................... 51
IRS............................................................................... 64
Issuer............................................................................ 4
Letter of Credit.................................................................. 51
Letter of Credit Issuer........................................................... 51
Liquidated Mortgage Loan.......................................................... 7,40
Liquidation Proceeds.............................................................. 7,40
Majority in Aggregate Voting Interest............................................. 56
Market Discount................................................................... 67
Maximum Combined Loan-to-Value Ratio.............................................. 29
Maximum Debt-to-Income Ratio...................................................... 29
Maximum Mortgage Rate............................................................. 22
Minimum Mortgage Rate............................................................. 22
Monthly Deposit Date.............................................................. 6,45
Monthly Payments.................................................................. 6,39
Monthly Period.................................................................... 45
Moody's........................................................................... 11,14
Mortgage.......................................................................... 1,8
Mortgage File..................................................................... 40
Mortgage Interest Rate............................................................ 8
Mortgage Loan..................................................................... 1,5,8
Mortgage Loan Losses.............................................................. 47
Mortgage Loan Schedule............................................................ 40
Mortgage Pool..................................................................... 1,5,8
Mortgaged Property................................................................ 1,8
Mortgagor......................................................................... 15
Mortgage related securities....................................................... 12
Net Liquidation Proceeds.......................................................... 7,40
Nonrecoverable Advances........................................................... 46
Notes............................................................................. 38
OID Regulations................................................................... 66
Original issue discount........................................................... 65
Original Pool Principal Balance................................................... 8,20
Originator........................................................................ 1,4
OSCC-Florida...................................................................... 25
Owners............................................................................ 58
Owner Trustee..................................................................... 4,24
Participants...................................................................... 7,39,58
Parties in Interest............................................................... 80
</TABLE>
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<TABLE>
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Partnership....................................................................... 12
Pass-through entity............................................................... 73
Payment Cap....................................................................... 22
Payment Date...................................................................... 5,48
Percentage Interest............................................................... 7,38
Periodic Cap...................................................................... 22
Permitted Instruments............................................................. 44
Plans............................................................................. 80
Pooling and Servicing Agreement................................................... 24
Pool Insurance Policy............................................................. 51
Pool Insurer...................................................................... 51
Pool Principal Balance............................................................ 50
Prefunding Account................................................................ 10,49
Prepayment Assumption............................................................. 65
Prepayment Period................................................................. 40,47
Primary Servicing Portfolio....................................................... 37
Principal and Interest Account.................................................... 44
Principal Prepayments............................................................. 6,40
Qualified Substitute Mortgage Loan................................................ 42
Quality Control Audits............................................................ 36
Rating Agency..................................................................... 11,14
Real estate assets................................................................ 12
Record Date....................................................................... 6
Regular Certificates.............................................................. 65
Released Mortgaged Property Proceeds.............................................. 7,40
Relief Act........................................................................ 19
REMIC............................................................................. 11,64
REMIC Certificates................................................................ 64
REMIC Regulations................................................................. 69
REO Properties.................................................................... 9
Representative.................................................................... 1,4
Representative's Yield............................................................ 11
Reserve Fund...................................................................... 52
Residual Certificateholders....................................................... 69
Residual Certificates............................................................. 65
Rule of 78s Mortgage Loan......................................................... 21
Rules............................................................................. 58
Securities........................................................................ 1
Securities Insurance Policy....................................................... 51
Securities Interest Rate.......................................................... 5,38
Senior Liens...................................................................... 11,16
Senior Certificates............................................................... 69
Senior Securities................................................................. 52
Series............................................................................ 1
Servicer.......................................................................... 1,4
Servicer Termination Event........................................................ 56
Servicing Advances................................................................ 46
Servicing Fee..................................................................... 10,53
</TABLE>
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<TABLE>
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Simple Interest Mortgage Loan..................................................... 21
SMMEA............................................................................. 81
S&P............................................................................... 11,14
Special Hazard Policy............................................................. 52
Special Payment Amount............................................................ 48
Special Payment Date.............................................................. 24,48
Special Payments.................................................................. 24,48
Special Record Date............................................................... 48
Spread Account.................................................................... 52
Standard hazard insurance......................................................... 54
Stripped REMIC Certificates....................................................... 66
Subordinated Certificates......................................................... 69
Subordinated Securities........................................................... 52
Substitution Adjustment........................................................... 42
Successor Servicer................................................................ 57
Tax Counsel....................................................................... 64
Title V........................................................................... 63
Transfer Agreement................................................................ 5,40
Trust............................................................................. 1,4
Trust Agreement................................................................... 24
Trustee........................................................................... 4,24
Underwriters...................................................................... 81
Underwriting Program.............................................................. 28
Weighted average life............................................................. 24
</TABLE>
86
<PAGE> 165
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
REPRESENTATIVE, EITHER DEPOSITOR OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE SECURITIES OFFERED HEREBY BY ANY ONE 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 OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS
SUPPLEMENT.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms........................... S-4
Risk Factors............................... S-18
Description of the Mortgage Pool........... S-20
Mortgage Pool Statistics................... S-22
Certain Yield and Prepayment
Considerations........................... S-27
The Originators and the
Servicer-Origination, Foreclosure and
Loss Experience.......................... S-32
Description of the Certificates............ S-34
The Trustee................................ S-46
The Securities Insurance Policy and the
Insurer.................................. S-47
ERISA Considerations....................... S-49
Legal Investment........................... S-52
Use of Proceeds............................ S-52
Underwriting............................... S-52
Experts.................................... S-53
Ratings.................................... S-53
Legal Matters.............................. S-53
Appendix A................................. A-1
Annex I.................................... I-1
PROSPECTUS
Available Information...................... 3
Reports to Holders......................... 3
Incorporation of Certain Documents by
Reference................................ 3
Summary of Prospectus...................... 4
Risk Factors............................... 14
Description of the Mortgage Pools.......... 20
Certain Yield and Prepayment
Considerations........................... 23
The Trusts................................. 24
The Depositors, the Servicer, the
Representative and the Originators....... 25
Description of the Securities.............. 38
Certain Legal Aspects of the Mortgage
Loans.................................... 59
Certain Federal Income Tax Consequences.... 64
Certain State Tax Consequences............. 80
ERISA Considerations....................... 80
Legal Investment........................... 81
Use of Proceeds............................ 81
Plan of Distribution....................... 81
Ratings.................................... 82
Legal Matters.............................. 82
</TABLE>
UNTIL JULY 24, 1996 (90 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 AND
A PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
DEPOSITORS
EQUICREDIT CORPORATION OF AMERICA
SERVICER
EQCC HOME EQUITY
LOAN TRUST 1996-2
$123,556,000 (APPROXIMATE)
CLASS A-1 CERTIFICATES
6.15% PASS-THROUGH RATE
$103,241,000 (APPROXIMATE)
CLASS A-2 CERTIFICATES
6.70% PASS-THROUGH RATE
$40,703,000 (APPROXIMATE)
CLASS A-3 CERTIFICATES
7.125% PASS-THROUGH RATE
$46,564,000 (APPROXIMATE)
CLASS A-4 CERTIFICATES
7.50% PASS-THROUGH RATE
$15,936,000 (APPROXIMATE)
CLASS A-5 CERTIFICATES
7.85% PASS-THROUGH RATE
SALOMON BROTHERS INC
LEHMAN BROTHERS
CS FIRST BOSTON
PROSPECTUS SUPPLEMENT
DATED APRIL 25, 1996
