<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-20675
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 16, 1998)
$738,874,072 (APPROXIMATE)
EQCC HOME EQUITY LOAN TRUST 1998-1
EQCC HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1998-1
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
DEPOSITORS
EQUICREDIT CORPORATION OF AMERICA,
AS SERVICER
A SUBSIDIARY OF
NATIONSBANK CORPORATION
The EQCC Home Equity Loan Asset Backed Certificates, Series 1998-1 (the
"Certificates"), will consist of thirteen classes of Certificates designated as
(i) the Class A-1F Certificates, Class A-2F Certificates, Class A-3F
Certificates, Class A-4F Certificates, Class A-5F Certificates, Class A-6F
Certificates, Class A-7F Certificates and Class A-IO Certificates (collectively,
the "Fixed Rate Certificates"), (ii) the Class A-1A Certificates (the
"Adjustable Rate Certificates" and, together with the Fixed Rate Certificates,
the "Class A Certificates"), (iii) the Class X Certificates and (iv) the Class
R, Class MR and Class LR Certificates (collectively, the "Residual
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 1998-1 (the "Trust" or the "Trust
Fund"), initially consisting primarily of (i) a pool (the "Mortgage Pool") of
fixed- and adjustable-rate mortgage loans (each, a "Mortgage Loan") secured by
mortgages, deeds of trust or other
(continues on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" HEREIN AT PAGE S-20 AND IN THE PROSPECTUS AT PAGE 17 THEREOF.
------------------------
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.
<TABLE>
<CAPTION>
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CLASS ORIGINAL PASS-THROUGH CLASS ORIGINAL
DESIGNATION PRINCIPAL BALANCE(1) RATE DESIGNATION PRINCIPAL BALANCE(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A-1F........... $251,364,000 6.210% Class A-6F......... $52,737,000
- --------------------------------------------------------------------------------------------------------------------
Class A-2F........... $ 49,113,000 6.136% Class A-7F......... $47,463,000
- --------------------------------------------------------------------------------------------------------------------
Class A-3F........... $145,552,000 6.225% Class A-IO......... (2)
- --------------------------------------------------------------------------------------------------------------------
Class A-4F........... $ 64,596,500 6.459% Class A-1A......... $70,551,229
- --------------------------------------------------------------------------------------------------------------------
Class A-5F........... $ 57,497,343 6.847%
====================================================================================================================
<CAPTION>
===================== =================
CLASS PASS-THROUGH
DESIGNATION RATE
- --------------------- -----------------
<S> <C>
Class A-1F........... 6.252%
- ----------------------------------------------------------
Class A-2F........... 6.415%
- ----------------------------------------------------------------------------
Class A-3F........... 2.500%
- ----------------------------------------------------------------------------------------------
Class A-4F........... (3)
- ----------------------------------------------------------------------------------------------------------------
Class A-5F...........
====================================================================================================================
</TABLE>
(1) Approximate. The Original Principal Balances are subject to adjustment as
described herein.
(2) The Class A-IO Certificates are interest-only certificates, have no
Principal Balance and will bear interest on the Class A-IO Notional Amount
(initially, approximately $100,200,000) as described herein under
"Description of the Certificates -- Interest."
(3) The Pass-Through Rate for the Class A-1A Certificates is adjustable based on
LIBOR, as described herein.
The Class A Certificates (other than the Class A-IO Certificates) will be
purchased from the Depositors by the Underwriters, and the Class A-IO
Certificates will be purchased from the Depositors by NationsBanc Montgomery
Securities LLC and, will be offered by each applicable Underwriter from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The proceeds to the Depositors from the sale
of the Class A Certificates, before deducting expenses payable by the Depositors
(estimated to be $800,000), will be equal to approximately $742,337,000 plus
accrued interest (except in the case of the Class A-1A Certificates) from April
1, 1998 to (but not including) April 23, 1998.
The Class A Certificates (other than the Class A-IO Certificates) are
offered by the Underwriters, and the Class A-IO Certificates are offered by
NationsBank Montgomery Securities LLC, 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 April 23, 1998 (the "Closing Date") against payment in immediately
available funds.
------------------------
NATIONSBANC MONTGOMERY SECURITIES LLC
LEHMAN BROTHERS
MERRILL LYNCH & CO.
The date of this Prospectus Supplement is April 16, 1998.
<PAGE> 2
(continuation of cover page)
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 and
(iv) certain other property. The Mortgage Pool will be divided into two groups
(each, a "Mortgage Loan Group"). The Fixed Rate Certificates will represent an
undivided ownership interest in a group of fixed-rate Mortgage Loans (the "Fixed
Rate Group"). The Adjustable Rate Certificates will represent an undivided
ownership interest in a group of adjustable-rate Mortgage Loans (the "Adjustable
Rate Group"). 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 U.S. Bank National
Association, as trustee (the "Trustee").
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 May 15, 1998 (each, a
"Payment Date"). The Fixed Rate Certificates will accrue interest during each
Accrual Period (as defined herein) at the rates shown above. The Adjustable Rate
Certificates will accrue interest during each Accrual Period at a rate equal to
the lesser of (i) the London interbank offered rate for one month U.S. dollar
deposits ("LIBOR") (calculated as described herein) as of the LIBOR
Determination Date (as defined herein) plus (a) 0.16% per annum on each Payment
Date on or prior to the Optional Purchase Date (as defined herein) and (b) 0.32%
per annum on each Payment Date following the Optional Purchase Date (the "Class
A-1A LIBOR Rate") and (ii) the Net Funds Cap Rate (as defined herein) with
respect to such Accrual Period. See "Description of the
Certificates -- Interest" herein.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED MORTGAGE LOAN GROUP. INVESTORS
IN THE CLASS A CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS, INCLUDING, IN
THE CASE OF CLASS A CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER
THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED MORTGAGE LOAN GROUP COULD
RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED. A FASTER THAN
ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON
THE MORTGAGE LOANS IN THE RELATED MORTGAGE LOAN GROUP COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN ANTICIPATED FOR INVESTORS PURCHASING CLASS A
CERTIFICATES AT A PREMIUM OR INVESTORS PURCHASING CLASS A-IO CERTIFICATES, WHICH
HAVE NO PRINCIPAL BALANCE. INVESTORS PURCHASING CLASS A-IO CERTIFICATES SHOULD
ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT OF PRINCIPAL
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED MORTGAGE LOAN GROUP
COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL
INVESTMENTS.
On or before the issuance of the Certificates, the Servicer will obtain from
Ambac Assurance Corporation (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, subject to its terms, provide for 100% coverage of the
Class A Remittance Amount (as defined herein) due on the Class A Certificates on
each Payment Date.
(AMBAC LOGO)
There is currently no secondary market for the Class A Certificates. Each of
NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery"), Lehman
Brothers Inc. ("Lehman Brothers") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch" and, together with NationsBanc Montgomery and
Lehman Brothers, the "Underwriters"), intend to make a secondary market in the
Class A Certificates purchased thereby, 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" (or "AAAr" in the case
of the Class A-IO Certificates) by Standard & Poor's.
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, elections will be made to treat certain assets in the
Trust Fund as three separate "real estate mortgage investment conduits" (each, a
"REMIC" or, alternatively, the "Upper-Tier REMIC", the "Middle-Tier REMIC" and
the "Lower-Tier REMIC", respectively) for federal income tax purposes. The Class
A and Class X Certificates will represent "regular interests" in the Upper-Tier
REMIC and the Class R, Class MR and Class LR Certificates will constitute the
sole classes of "residual interests" in the Upper-Tier REMIC, the Middle-Tier
REMIC and the Lower-Tier REMIC, respectively. See "Summary of Terms -- REMIC
Election and Tax Status" and "Certain Federal Income Tax Consequences" 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.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A CERTIFICATES,
INCLUDING SHORT COVERING TRANSACTIONS IN THE CLASS A CERTIFICATES, AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING" HEREIN AND "PLAN OF DISTRIBUTION"
IN THE PROSPECTUS.
This Prospectus Supplement and Prospectus may be used by NationsBanc
Montgomery, an affiliate of the Depositors, to the extent required, in
connection with market making transactions in the Class A Certificates.
NationsBanc Montgomery may act as principal or agent in such transactions.
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 16, 1998, 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.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY OF TERMS............................................ S-5
RISK FACTORS................................................ S-20
Risks of the Mortgage Loans............................... S-20
Yield and Prepayment Considerations....................... S-21
Risk of Mortgage Loan Yield Reducing the Class A-1A
Pass-Through Rate...................................... S-21
Book-Entry Certificates................................... S-22
Risks Associated with Year 2000 Compliance................ S-22
DESCRIPTION OF THE MORTGAGE POOL............................ S-23
General................................................... S-23
Fixed Rate Group.......................................... S-23
Adjustable Rate Group..................................... S-30
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS................. S-38
Sensitivity of the Class A-IO Certificates................ S-46
THE ORIGINATORS AND THE SERVICER -- ORIGINATION, FORECLOSURE
AND LOSS EXPERIENCE....................................... S-47
General................................................... S-47
Loan Origination History.................................. S-47
Underwriting Programs..................................... S-47
Servicing Portfolio....................................... S-47
Delinquency and Loss Experience........................... S-48
Outstanding Real Estate Owned............................. S-49
DESCRIPTION OF THE CERTIFICATES............................. S-49
General................................................... S-49
Book-Entry Registration................................... S-50
Distributions............................................. S-51
Example of Distributions.................................. S-57
Securities Insurance Policy............................... S-57
Advances from the Principal and Interest Account.......... S-58
Servicing Compensation.................................... S-58
Termination; Purchase of Mortgage Loans................... S-58
Amendment................................................. S-59
THE TRUSTEE................................................. S-59
THE SECURITIES INSURANCE POLICY AND THE INSURER............. S-60
The Insurer............................................... S-60
The Securities Insurance Policy........................... S-61
FEDERAL INCOME TAX CONSEQUENCES............................. S-62
Taxation of Class A Regular Interests..................... S-63
Taxation of Basis Risk Arrangement........................ S-63
Termination Payments...................................... S-64
Application of the Straddle Rules......................... S-64
ERISA CONSIDERATIONS........................................ S-64
LEGAL INVESTMENT............................................ S-65
USE OF PROCEEDS............................................. S-65
UNDERWRITING................................................ S-66
SECONDARY MARKET............................................ S-66
EXPERTS..................................................... S-67
RATINGS..................................................... S-67
LEGAL MATTERS............................................... S-67
INDEX OF PRINCIPAL DEFINITIONS.............................. S-68
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES................................................ Annex I
</TABLE>
S-4
<PAGE> 5
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. See the "Index of
Principal Definitions" herein and in the Prospectus.
Issuer..................... EQCC Home Equity Loan Trust 1998-1.
Securities Offered......... EQCC Home Equity Loan Asset Backed Certificates,
Series 1998-1, Class A-1F Certificates, Class A-2F
Certificates, Class A-3F Certificates, Class A-4F
Certificates, Class A-5F Certificates, Class A-6F
Certificates, Class A-7F Certificates, Class A-IO
Certificates and Class A-1A Certificates. The Class
A-1F Certificates, Class A-2F Certificates, Class
A-3F Certificates, Class A-4F Certificates, Class
A-5F Certificates, Class A-6F Certificates, Class
A-7F Certificates and Class A-IO Certificates are
collectively referred to herein as the "Fixed Rate
Certificates." The Class A-1A Certificates are
referred to herein as the "Adjustable Rate
Certificates." The Fixed Rate Certificates and the
Adjustable Rate Certificates are collectively
referred to as the "Class A Certificates." The
Original Principal Balance or Original Notional
Amount (each as defined herein) 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
1998-1, will include the Class X, Class R, Class MR
and Class LR Certificates (together with the Class
A Certificates, the "Certificates"). Only the Class
A Certificates are offered hereby. The Class X,
Class R, Class MR and Class LR Certificates will
initially be held by the Depositors. The
Certificates will be issued pursuant to a Pooling
and Servicing Agreement to be dated as of April 1,
1998 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
and a subsidiary of NationsBank Corporation
("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.
S-5
<PAGE> 6
Servicer................... EquiCredit (in its capacity as servicer, the
"Servicer"). See "The Depositors, the Servicer, the
Representative and the Originators" in the
Prospectus.
Trustee.................... U.S. 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............... April 1, 1998 (the "Cut-off Date").
Closing Date............... April 23, 1998 (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 May 15, 1998 (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 of
$1 in excess thereof. Each Class A Certificate will
represent a percentage interest (a "Percentage
Interest") in the respective Class determined by
dividing the original dollar amount or notional
amount represented by such Certificate by the
Original Principal Balance (as defined herein) or
Original Notional Amount (as defined herein), as
applicable, of such Class.
Registration of the Class A
Certificates............. The Class A Certificates will initially be issued
in a book-entry form ("Book-Entry Certificates").
Persons acquiring beneficial ownership interests in
such 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, 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 "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 The Chase Manhattan Bank ("Chase"), 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
S-6
<PAGE> 7
issued under the limited circumstances described
herein. See "Risk Factors -- Book-Entry
Certificates" and "Description of the
Certificates -- Book-Entry Certificates" herein,
"Annex I" hereto and "Risk Factors -- Securities",
"Description of the Securities -- General" and
"-- Registration and Transfer of Securities" in
this Prospectus.
The Trust Property......... The Certificates represent interests in a trust
fund to be designated as EQCC Home Equity Loan
Trust 1998-1 (the "Trust" or the "Trust Fund"),
initially consisting primarily of (i) a pool (the
"Mortgage Pool") of fixed- and adjustable-rate
mortgage loans originated by or purchased and
re-underwritten by the Originators (each, a
"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, including manufactured
housing (each, a "Mortgaged Property"), with an
aggregate principal balance of approximately
$738,874,073 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 Ambac Assurance Corporation (the
"Insurer") in favor of the Trustee for the benefit
of the Class A Certificateholders, (iv) certain
rights of the Depositors under the Transfer
Agreement, (v) certain rights with respect to
amounts on deposit in the Spread Account and (vi)
certain other property. The Mortgage Loans will be
deposited into the Trust on the Closing Date. The
actual Mortgage Pool may vary from the description
below due to a number of factors, including
prepayments.
The Mortgage Pool will be divided into two groups
of Mortgage Loans (each, a "Mortgage Loan Group").
The Fixed Rate Certificates will represent an
undivided ownership interest in a group of
fixed-rate Mortgage Loans (the "Fixed Rate Group"),
and distributions on the Fixed Rate Certificates
will be based primarily on amounts available for
distribution in respect of Mortgage Loans in the
Fixed Rate Group. The Adjustable Rate Certificates
will represent an undivided ownership interest in a
group of Mortgage Loans that are subject to
periodic interest rate adjustment (the "Adjustable
Rate Group"), and distributions on the Adjustable
Rate Certificates will be based primarily on
amounts available for distribution in respect of
Mortgage Loans in the Adjustable Rate Group. As of
the Cut-off Date, the aggregate principal balance
of the Mortgage Loans in the Fixed Rate Group is
approximately $668,322,844 and the aggregate
principal balance of the Mortgage Loans in the
Adjustable Rate Group is approximately $70,551,229.
The Mortgage Loans will be deposited into the Trust
on the Closing Date.
Unless otherwise noted, all percentages of Mortgage
Loans herein are measured by the aggregate
principal balance of the Mortgage Loans or of the
Mortgage Loans in the applicable Mortgage Loan
Group, in each case as of the Cut-off Date, and
take into account principal payments and principal
prepayments received prior to the Cut-off Date.
S-7
<PAGE> 8
As of the Cut-off Date, the Mortgage Pool consisted
of fixed- and adjustable-rate Mortgage Loans (of
which approximately 81.08% are secured by first
Mortgages and approximately 18.92% are secured by
second Mortgages) having an aggregate outstanding
principal balance of approximately $738,874,073, a
weighted average Mortgage Interest Rate of
approximately 10.54% per annum, minimum and maximum
outstanding principal balances of approximately
$1,097 and $349,843, respectively, a weighted
average Combined Loan-to-Value Ratio of
approximately 78.87%, minimum and maximum Mortgage
Interest Rates of 6.75% per annum and 17.00% per
annum, respectively, a weighted average original
term to maturity of approximately 180 months, a
weighted average remaining term to maturity of
approximately 176 months and minimum and maximum
remaining terms to maturity of 7 and 360 months,
respectively, and origination dates between October
4, 1983 and January 30, 1998. The "Mortgage
Interest Rate" for a Mortgage Loan is the annual
rate of interest borne by such Mortgage Loan.
Approximately 46.57% of the Mortgage Loans are
Balloon Loans (as defined herein).
Fixed Rate Group. As of the Cut-off Date, the
Mortgage Loans in the Fixed Rate Group consisted of
14,114 Mortgage Loans (of which approximately
79.08% are secured by first Mortgages and
approximately 20.92% are secured by second
Mortgages) having an aggregate outstanding
principal balance of approximately $668,322,844, a
weighted average Mortgage Interest Rate of
approximately 10.75% per annum, minimum and maximum
outstanding principal balances of approximately
$1,097 and $224,832, respectively, a weighted
average Combined Loan-to-Value Ratio of
approximately 78.44%, minimum and maximum Mortgage
Interest Rates of 7.00% per annum and 17.00% per
annum, respectively, a weighted average original
term to maturity of approximately 187 months, a
weighted average remaining term to maturity of
approximately 183 months, minimum and maximum
remaining terms to maturity of 7 and 360 months,
respectively, and origination dates between October
4, 1983 and January 30, 1998. Approximately 41.77%
of the Mortgage Loans in the Fixed Rate Group are
Balloon Loans (as defined herein). Approximately
6.42% of the Mortgage Loans in the Fixed Rate Group
had Combined Loan-to-Value Ratios in excess of 95%.
Adjustable Rate Group. All of the Mortgage Loans
in the Adjustable Rate Group bear interest rates
that adjust based on the London interbank offered
rate for six-month United States dollar deposits.
The Mortgage Interest Rates with respect to all of
the Mortgage Loans in the Adjustable Rate Group are
subject to periodic interest rate adjustment caps,
interest rate ceilings and interest rate floors.
See "Description of the Mortgage Pool -- Adjustable
Rate Group."
As of the Cut-off Date, the Mortgage Loans in the
Adjustable Rate Group consisted of 753 Mortgage
Loans (all of which are secured by first Mortgages)
having an aggregate outstanding principal balance
of approximately $70,551,229, Mortgage Interest
Rates which range from 6.75% per annum to 11.25%
per annum, a weighted average Mortgage Interest
Rate of approximately 8.54% per annum, minimum and
maximum outstanding principal balances of
approximately $20,226 and $349,843, respectively, a
weighted average Combined Loan-to-Value
S-8
<PAGE> 9
Ratio of approximately 82.91%, a weighted average
original term to maturity of approximately 116
months, a weighted average remaining term to
maturity of approximately 113 months, minimum and
maximum remaining terms to maturity of 60 months
and 359 months, respectively, and origination dates
between March 30, 1996 and January 30, 1998.
Approximately 92.03% of the Mortgage Loans in the
Adjustable Rate Group are Balloon Loans (as defined
herein).
All of the Mortgage Loans in the Adjustable Rate
Group have minimum and maximum Mortgage Interest
Rates. The weighted average minimum Mortgage
Interest Rate of the Mortgage Loans in the
Adjustable Rate Group is approximately 8.48% per
annum, with minimum Mortgage Interest Rates that
range from approximately 6.75% per annum to 12.29%
per annum. The weighted average maximum Mortgage
Rate of the Mortgage Loans in the Adjustable Rate
Group is approximately 16.98% per annum, with
maximum Mortgage Interest Rates that range from
approximately 15.88% per annum to 20.00% per annum.
The Mortgage Loans in the Adjustable Rate Group
have a weighted average gross margin as of the
Cut-off Date of approximately 5.10% per annum. The
gross margin for the Mortgage Loans in the
Adjustable Rate Group ranges from approximately
4.00% per annum to 7.55% per annum.
The Class A Certificates... The Class A Certificates will have the original
principal balances or notional amount (each, an
"Original Principal Balance" or "Original Notional
Amount," as applicable) and pass-through rates
(each, a "Pass-Through Rate") set forth below:
<TABLE>
<CAPTION>
ORIGINAL PRINCIPAL
BALANCE OR ORIGINAL PASS-THROUGH
NOTIONAL AMOUNT RATE CLASS
------------------- ------------ -----
<C> <C> <S>
$251,364,000 6.210% Class A-1F Certificates
49,113,000 6.136% Class A-2F Certificates
145,552,000 6.225% Class A-3F Certificates
64,596,500 6.459% Class A-4F Certificates
57,497,343 6.847% Class A-5F Certificates
52,737,000 6.252% Class A-6F Certificates
47,463,000 6.415% Class A-7F Certificates
100,200,000 NotionalAmount 2.500%(1) Class A-IO Certificates
70,551,229 (2) Class A-1A Certificates
</TABLE>
(1) The Pass-Through Rate for the Class A-IO
Certificates will be equal to 2.50% for each
Accrual Period (as defined herein) occurring on
or prior to September 15, 2000 and will be
equal to zero for each Accrual Period occurring
thereafter. The Class A-IO Certificates are
"interest-only" certificates that will bear
interest on a notional principal amount (the
"Class A-IO Notional Amount") equal to the sum
of the Principal Balances of the Class A-6F and
Class A-7F Certificates immediately prior to
the related Payment Date. Because the
Pass-Through Rate for the Class A-IO
Certificates will be equal to zero for each
Payment Date occurring after September 15,
2000, following such date the Class A-IO
Certificates will not accrue interest and
holders of the Class A-IO Certificates will not
be entitled to distributions in respect
thereof.
(2) The Pass-Through Rate for the Class A-1A
Certificates with respect to any Accrual Period
will be equal to the lesser of (i) the London
interbank offered rate for one month U.S.
dollar deposits ("LIBOR") (calculated as
described under "Description of the
Certificates -- Calculation of LIBOR" herein)
as of the LIBOR Determination Date (as defined
herein) plus (a) 0.16% per annum on each
Payment Date on or prior to the Optional
Purchase Date (as defined herein) and (b) 0.32%
per annum on each Payment Date following the
Optional Purchase Date (the "Class A-1A
S-9
<PAGE> 10
LIBOR Rate") and (ii) the Net Funds Cap Rate
with respect to such Accrual Period. The "Net
Funds Cap Rate" for any Accrual Period shall be
a rate equal to the weighted average of the
Mortgage Interest Rates on the Mortgage Loans
in the Adjustable Rate Group as of the first
day of the related Due Period less either (i)
0.69% per annum, with respect to the first
twelve Accrual Periods or (ii) 1.19% per annum,
with respect to each subsequent Accrual Period.
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 (other than for the Class A-IO
Certificates) 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-1F Certificates: December 15, 2007
Class A-2F Certificates: April 15, 2009
Class A-3F Certificates: December 15, 2012
Class A-4F Certificates: March 15, 2021
Class A-5F Certificates: January 15, 2028
Class A-6F Certificates: December 15, 2007
Class A-7F Certificates: November 15, 2027
Class A-IO Certificates: September 15, 2000
Class A-1A Certificates: October 15, 2027
</TABLE>
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 in the related Mortgage Loan Group
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 in the order and
priority described herein. As described herein,
after payment of such amounts to the Class A
Certificateholders, certain amounts may be
distributed on the Class X, Class R, Class MR and
Class LR 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 from the related Mortgage Loan
Group 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, with respect to the Mortgage
Loans in the related Mortgage Loan Group, (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
amount of the Monthly Premium payable to the
Insurer during the related Due Period to the extent
provided in the Pooling and Servicing Agreement.
S-10
<PAGE> 11
The term "Available Payment Amount" generally
means, with respect to any Payment Date and each
Mortgage Loan Group (a) collections on or with
respect to the Mortgage Loans in the related
Mortgage Loan Group received by the Servicer during
the related Due Period, net of the related
Servicing Fee paid to the Servicer and
reimbursements for any accrued and 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 Fixed Rate Certificates will accrue
from and including the first day of each month,
commencing April 1, 1998 (whether or not such day
is a Business Day) to and including the last day of
such month (whether or not such day is a Business
Day). Interest on the Adjustable Rate Certificates
will accrue from and including the Closing Date, in
the case of the initial Payment Date, or from and
including the most recent Payment Date on which
interest has been paid, to, but excluding the next
succeeding Payment Date. Each period referred to
above relating to the accrual of interest is the
"Accrual Period" for the related Class of Class A
Certificates. 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 commencing May 15, 1998. Interest
with respect to the Fixed Rate Certificates will
accrue on the basis of a 360-day year consisting of
twelve 30-day months. Interest with respect to the
Adjustable Rate Certificates will accrue on the
basis of actual number of days over a 360-day year.
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 (or Class
A-IO Notional Amount, in the case of the Class A-IO
Certificates) 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 or
Original Notional Amount, as applicable, in the
case of the related initial Accrual Period) is
referred to herein as the "Class A Interest
Remittance Amount" for such Class of Class A
Certificates. See "Description of the
Certificates -- Distributions" herein and in the
Prospectus.
If on any Payment Date the Pass-Through Rate for
the Class A-1A Certificates is equal to the Net
Funds Cap Rate, an amount (the "LIBOR Interest
Carryover") equal to (i) the difference between (a)
the amount of interest the Adjustable Rate
Certificates would be entitled to receive on such
Payment Date without regard to the Net Funds Cap
Rate and (b) the amount of interest actually
distributed to the Adjustable Rate Certificates on
such Payment Date plus (ii) the portion of the
amount calculated pursuant to clause (i) remaining
unpaid from prior Payment Dates and interest
accrued thereon at the then-applicable Class A-1A
LIBOR Rate, shall be distributed on subsequent
Payment Dates, from the amount of the Excess Spread
allocable to the Mortgage Loans in the Adjustable
Rate Group to the Adjustable Rate Certificates. No
LIBOR Interest Carryover will be paid to the
Adjustable Rate Certificates after the Principal
Balance of the Adjustable Rate Certificates has
been reduced to zero. The ratings assigned to the
Adjustable Rate Certificates do not address the
likehood of the payment of the amount of any LIBOR
Interest Carryover. The Securi-
S-11
<PAGE> 12
ties Insurance Policy does not provide coverage of
the LIBOR Interest Carryover.
C. Principal............. Holders of the Class A Certificates (other than the
Class A-IO 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
in the related Mortgage Loan Group (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 in such Mortgage Loan Group 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
Mortgage Loans in such Mortgage Loan Group
("Principal Prepayments") received during the
related Due Period and partial prepayments of
principal on any Mortgage Loans in such Mortgage
Loan Group 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 in such Mortgage Loan
Group, a related Mortgaged Property (as defined
below) or a REO Property (as defined below), net of
proceeds to be applied to the repair of such
Mortgaged Property or released to the related
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 in such Mortgage Loan Group, 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
in such Mortgage Loan Group 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 in such Mortgage
Loan Group 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) in such Mortgage Loan Group 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, with respect to each Mortgage Loan Group,
the "Basic Principal Amount") and (b) the sum of
(i) the amount, if any, by which (A) the amount
required to be distributed to Fixed Rate
Certificateholders or Adjustable Rate
Certificateholders, as the case may be, as of the
preceding Payment Date exceeded (B) the amount of
the actual distribution to the Fixed
S-12
<PAGE> 13
Rate Certificateholders or Adjustable Rate
Certificateholders, as the case may be, 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 (with
respect to the Certificates related to each
Mortgage Loan Group, the "Carry-Forward Amount"
with respect to such Certificates, together with
the Basic Principal Amount for such Certificates,
the "Principal Remittance Amount" for such
Certificates and the aggregate Principal Remittance
Amount, with respect to all of the Class A
Certificates, the "Class A Principal Remittance
Amount").
On each Payment Date, the lesser of (i) the Fixed
Rate Certificate Principal Balance then outstanding
and (ii) the Principal Remittance Amount for the
Fixed Rate Group (together with the Class A
Interest Remittance Amount for the Fixed Rate
Certificates, the "Remittance Amount" for the Fixed
Rate Group) is payable to the Fixed Rate
Certificateholders as follows: first, to the Class
A-6F Certificates and then the Class A-7F
Certificates up to an amount equal to the Lockout
Remittance Amount (as defined herein); and then, to
the Class A-1F Certificates, Class A-2F
Certificates, Class A-3F Certificates, Class A-4F
Certificates, Class A-5F Certificates, Class A-6F
Certificates and Class A-7F Certificates (in each
case, without regard to the Lockout Remittance
Amount) in the manner and order of priority
described herein. See "Description of the
Certificates -- Distributions" herein. The yield
and average life of each Class of Fixed Rate
Certificates will be sensitive in varying degrees
to the rate of prepayments on the Mortgage Loans.
See "Certain Yield and Prepayment Considerations"
herein.
Concurrently with such distribution to the Fixed
Rate Certificates, on each Payment Date, the lesser
of (i) the Adjustable Rate Certificate Principal
Balance then outstanding and (ii) the Principal
Remittance Amount for the Adjustable Rate Group
(together with the Class A Interest Remittance
Amount for the Adjustable Rate Certificates, the
"Remittance Amount" for the Adjustable Rate Group)
is payable to the Class A-1A Certificates until the
Principal Balance of such Class is reduced to zero.
On any Payment Date, the aggregate Remittance
Amount for the Class A Certificates is referred to
herein as the "Class A Remittance Amount."
Notwithstanding the foregoing, if on any Payment
Date following the depletion of the Spread Account,
the Insurer fails to make an Insured Payment (as
defined herein) when due, the Class A Principal
Remittance Amount will be distributed to each Class
of Class A Certificates (other than the Class A-IO
Certificates) on a pro rata basis in proportion to
the respective Principal Balances for each such
Class.
As of any Payment Date, the "Class A Principal
Balance" will equal the sum of the Original
Principal Balance of each Class of Class A
Certificates (other than the Class A-IO
Certificates), less all amounts previously
distributed on account of principal to holders of
the Class A Certificates. As of any Payment Date,
the "Fixed Rate Certificate Principal Balance" will
equal the Original Fixed Rate Certificate Princi-
S-13
<PAGE> 14
pal Balance, less all amounts previously
distributed on account of principal to holders of
the Fixed Rate Certificates. As of any Payment
Date, the "Adjustable Rate Certificate Principal
Balance" will equal the Original Principal Balance
of the Class A-1A Certificates, less all amounts
previously distributed on account of principal to
holders of the Adjustable Rate Certificates. As of
any Payment Date, the "Principal Balance" for each
Class of Class A Certificates (other than the Class
A-IO Certificates) will equal the Original
Principal Balance for such Class, less all amounts
previously distributed on account of principal to
holders of such Class.
The Class A-IO Certificates are not entitled to
distributions in respect of principal and have no
Principal Balance. As of any Payment Date, the
Class A-IO Notional Amount will equal the Original
Notional Amount for the Class A-IO Certificates,
less all amounts previously distributed on account
of principal to the holders of the Class A-6F and
Class A-7F Certificates. References herein to the
Class A-IO Notional Amount and Original Notional
Amount are solely for convenience in certain
calculations and do not represent the right to
receive any distributions allocable to principal.
D. 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 Class A
Certificates, into which the Trustee 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 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 and (iii) 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 Base Spread Account Requirement
and the percentage used in determining the Periodic
Excess Spread Amount may be reduced at the sole
discretion of the Insurer in each case without the
consent of any Certificateholder.
S-14
<PAGE> 15
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 without regard to Mortgage Loan
Group; 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, after repayment of unreimbursed
Servicing Advances to the Servicer, first, to the
extent of Excess Spread with respect to the
Mortgage Loans in the Adjustable Rate Group, to the
Adjustable Rate Certificates to pay any LIBOR
Interest Carryover and second, to the Class X
Certificateholders.
Neither the Class X 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. The Spread Account will be funded with
Excess Spread from all Mortgage Loans, without
regard to Mortgage Loan Group, and will be
available for distributions to all of the Class A
Certificates.
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.
E. 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, subject to its terms, 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
S-15
<PAGE> 16
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
payment of any LIBOR Interest Carryover nor does it
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.
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 and the Servicer will
agree to service the Mortgage Loans.
Servicing Fee.............. The Servicer will be entitled to a per annum fee
(the "Servicing Fee"), 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.
S-16
<PAGE> 17
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 Investors
Service, Inc. ("Moody's") and "AAA" (or "AAAr" in
the case of the Class A-IO Certificates) by
Standard & Poors ("S&P", and 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 and do not
address the payment of any LIBOR Interest
Carryover. S&P assigns the additional rating of "r"
to highlight classes of securities that S&P
believes may experience high volatility or high
variability in expected returns due to non-credit
risks. 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 "Ratings" herein and
"Risk Factors" and "Ratings" in the Prospectus.
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 (the "Optional
Purchase Date") on which the Pool Principal Balance
as of the last day of the related Due Period is
less than 10% of the Original Pool Principal
Balance 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,
(y) accrued and unpaid interest on such amount
computed at a rate equal to the weighted average
Mortgage Interest Rate and (z) any unpaid LIBOR
Interest Carryover, 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 proceeds of such sale will be
deposited into the Collection Account 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.
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<PAGE> 18
Certain Legal Aspects of
the Mortgage Loans......... Approximately 20.92% of the Mortgage Loans in the
Fixed Rate Group, by aggregate principal balance as
of the Cut-off Date, are secured by second
Mortgages which are subordinate to a mortgage lien
on the related Mortgaged Property prior to the lien
of such 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" herein and in the
Prospectus and "Certain Legal Aspects of the
Mortgage Loans" in the Prospectus.
REMIC Elections and
Tax Status............... Elections will be made to treat certain assets of
the Trust Fund as three separate real estate
mortgage investment conduits (each, a "REMIC"). One
REMIC (the "Lower-Tier REMIC") will hold the
Mortgage Loans and any related property.
Collections in the Lower-Tier REMIC will be used to
make payments of principal and interest on the
regular interests in the Lower-Tier REMIC held by
the second REMIC (the "Middle Tier REMIC"). Those
payments in turn will be used to make distributions
on the regular interests in the Middle-Tier REMIC
which are held by the third REMIC (the "Upper-Tier
REMIC") and which in turn will be used to make
distributions on the regular interests in the
Upper-Tier REMIC. For ease of presentation,
distributions will generally be described herein as
if made directly from collections on the Mortgage
Loans to the holders of the Certificates.
Elections will be made to treat each of the
Lower-Tier REMIC, the Middle-Tier REMIC and the
Upper-Tier REMIC as REMICs and in the opinion of
counsel, each will qualify as a REMIC for federal
income tax purposes. The Class A Certificates and
Class X Certificates will represent regular
interests in the Upper-Tier REMIC. The Class A-1A
Certificates will also represent beneficial
interests in the right to receive payments in
respect of certain basis risk shortfalls from the
Spread Account, which right represents an interest
in a grantor trust for federal income tax purposes.
The Class R, Class MR and Class LR Certificates
will be designated as the sole classes of "residual
interests" in the Upper-Tier REMIC, Middle-Tier
REMIC and Lower-Tier REMIC, respectively.
The Class A-IO Certificates will be issued with
original issue discount and certain other 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 100% of the applicable Prepayment
Assumption (as defined herein) with respect to the
Fixed Rate Certificates and the Adjustable Rate
Certificates. 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. See
"Certain Federal Income Tax Consequences" herein
and "Certain Federal Income Tax Consequences for
REMIC Certificates -- Original Issue Discount" in
the Prospectus.
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<PAGE> 19
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 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" (or "AAAr" in the case of the Class A-IO
Certificates) by S&P, the Fixed Rate Certificates
will not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act
of 1984, as amended ("SMMEA") because the Fixed
Rate Group includes Mortgage Loans that are secured
by second Mortgages. The Adjustable Rate
Certificates will constitute "mortgage related
securities" for purposes of SMMEA so long as they
are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating organization. Prospective
purchasers whose investment activities are subject
to legal investment laws and regulations,
regulatory capital requirements or review by
regulatory authorities may be subject to
restrictions on investment in the Class A
Certificates and should consult their own legal,
tax and accounting advisors in determining the
suitability of and consequences to them of the
purchase, ownership and disposition of the Class A
Certificates. 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> 20
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
Unless otherwise specified, the following description refers to the
aggregate Mortgage Pool. References herein to "Mortgage Pool" and "Mortgage
Loans" refer to the Mortgage Loans included in the Fixed Rate Group and the
Mortgage Loans included in the Adjustable Rate Group. For information regarding
the Mortgage Loans in the Fixed Rate Group and the Mortgage Loans in the
Adjustable Rate Group, see "Description of the Mortgage Pool -- Fixed Rate
Group" and "-- Adjustable Rate Group" herein.
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 11.36%, 6.86%, 5.79%, 5.54% and 5.46% of the Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, are secured by
Mortgaged Properties located in Florida, Ohio, New York, Michigan, and
Pennsylvania, respectively. 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 18.92% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, all of which are in the
Fixed Rate Group, are secured by second Mortgages, and the related First Liens
are not included in the Mortgage Pool. Mortgage Loans secured by second
mortgages will be entitled to proceeds that remain from the sale of the related
Mortgaged Property after any related First Liens and prior statutory liens have
been satisfied and, if such liens were satisfied by the Servicer, after the
Servicer has been reimbursed. In the event that such proceeds are insufficient
to satisfy such First Liens and prior liens in the aggregate and the Insurer is
unable to perform its obligations under the Securities Insurance Policy, the
Class A Certificates may 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 or if a deficiency judgment is
not permitted under applicable law. See "Risk Factors -- Risks of the Mortgage
Loans -- Nature of Security" in the Prospectus. In addition, the rate default of
second mortgage loans may be greater than that of mortgage loans secured by
first liens on comparable properties.
Risk of Early Defaults. A substantial number of the Mortgage Loans in the
Mortgage Pool were recently originated. Although little data is available,
defaults on mortgage loans are generally expected to occur with greater
frequency in their early years.
Delinquent Mortgage Loans. As of the Cut-off Date, approximately 0.51% of
the Mortgage Loans, by aggregate principal balance as of the Cut-off Date, were
30 days or more contractually delinquent. As a result, the Mortgage Loans in the
aggregate may bear more risk than a pool of mortgage loans without any
delinquencies with otherwise comparable characteristics. No assurance can be
given as to whether or when any currently delinquent Mortgage Loan will become
current, or whether the existing delinquency will be extended. Furthermore, no
information can be provided concerning whether a borrower that cures a
delinquency is more likely to become delinquent again as compared with a
borrower that has never been delinquent. See "Description of the Mortgage Pool"
herein and "Risk Factors -- Risks of the Mortgage Loans -- Special Risks of the
Mortgage Loans" in the Prospectus.
Balloon Mortgage Loans. Approximately 46.57% of the Mortgage Loans in the
Mortgage Pool, by aggregate principal balance as of the Cut-off Date, provide
for the payment of the unamortized principal balance of the Mortgage Loan in a
single payment at the maturity of the Mortgage Loan that is greater than the
preceding monthly payment ("Balloon Loans"). Balloon Loans involve a greater
degree of risk than fully amortizing loans because the ability of Mortgagor to
make a Balloon Payment typically will depend upon its ability either to fully
refinance the Balloon Loan or to sell the related Mortgaged Property at a price
sufficient to permit the Mortgagor to make the Balloon Payment. The ability of a
Mortgagor to accomplish either of
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<PAGE> 21
these goals will be affected by a number of factors. See "Certain Yield and
Prepayment Considerations" herein and "Description of the Mortgage Pool" and
"Risk Factors -- Risks of the Mortgage Loans -- Balloon Mortgage Loans" in the
Prospectus.
Recordation of Assignments. Under the terms of the Pooling and Servicing
Agreement, during the period that the Certificates are outstanding and so long
as the long-term senior unsecured debt of NationsBank Corporation or its
successor in interest is rated at least "A-" by S&P and at least "A3" by
Moody's, assignments of the Mortgages in favor of the Trustee will be delivered
in recordable form but will not be recorded. The failure to record assignments
of the Mortgages in favor of the Trustee in many states in which the Mortgaged
Properties are located will have the result of making the sale thereof
potentially ineffective against (i) any creditors of the Originators or
Depositors who may have been fraudulently or inadvertently induced to rely on
the Mortgage Loans as assets of the Originators or Depositors, or (ii) any
purchaser in the event the Originators or Depositors fraudulently or
inadvertently sell a Mortgage Loan to a purchaser who had no notice of the prior
sale thereof to the Trust and such purchaser takes possession of the Mortgage
and, as a result, neither the Trust nor Certificateholders would be entitled to
receive the distributions relating to, or have any other rights with respect to,
such Mortgage Loans. If the long-term senior unsecured debt rating of
NationsBank Corporation or its successor in interest does not satisfy the
above-described conditions, assignments of the Mortgages in favor of the Trustee
will be required to be recorded.
Mortgaged Properties in Severe Storm Areas. During the early part of 1998,
severe storms and/or major flooding (the "Storms") occurred in several regions
of the United States. The Storms caused significant damage and may have damaged
some of the Mortgaged Properties. The Originators will represent in the Transfer
Agreement, and the Depositors will represent in the Pooling and Servicing
Agreement, that each Mortgaged Property has not been damaged by the Storms in a
manner which affects adversely the value of the Mortgaged Property as security
for the related Mortgage Loan or the use for which the premises was intended.
Were a Mortgaged Property in a state affected by the Storms to be so adversely
affected as a result of the Storms, the Depositors, in accordance with the terms
of the Pooling and Servicing Agreement, may either provide qualifying Mortgage
Loans in substitution for the related Mortgage Loans or repurchase such Mortgage
Loans from the Trust. In the event such Mortgage Loans are repurchased, the
yield to maturity on the Class A Certificates may be affected. See "Certain
Yield and Prepayment Considerations" herein.
YIELD AND PREPAYMENT CONSIDERATIONS
The average life of the Class A Certificates and, if purchased at a price
other than par, 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
related Mortgage Loan Group, 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.
Principal distributions on the Class A-6F Certificates and Class A-7F
Certificates will vary on each Payment Date in accordance with the Lockout
Remittance Amount for such Payment Date until the Class A-5F Certificates have
been paid in full. Upon payment of the Class A-5F Certificates in full, the
entire Principal Remittance Amount for the Fixed Rate Group will be distributed
to the Class A-6F Certificates and Class A-7F Certificates, in that order, until
each such Class has been paid in full. See "Certain Yield and Prepayment
Considerations" herein and in the Prospectus and "Risk
Factors -- Securities -- Yield and Prepayment Considerations" in the Prospectus.
RISK OF MORTGAGE LOAN YIELD REDUCING THE CLASS A-1A PASS-THROUGH RATE
The Adjustable Rate Group contains Mortgage Loans which bear interest at
rates which adjust semi-annually based on the London interbank offered rate for
six-month United States dollar deposits, as described under "Description of the
Mortgage Pool -- Adjustable Rate Group," while the Pass-Through Rate for the
Class A-1A Certificates adjusts monthly based on one-month LIBOR (defined
herein). Consequently, the
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<PAGE> 22
interest which becomes due on such Mortgage Loans at their respective Mortgage
Interest Rates (in each case less 0.69% per annum for the first twelve Due
Periods and 1.19% for each subsequent Due Period) during any Due Period may not
equal the amount of interest that would accrue at one-month LIBOR, as applicable
to the Adjustable Rate Certificates plus the margin on the Adjustable Rate
Certificates during the related Accrual Period. As a result, the Net Funds Cap
Rate may be lower than the interest otherwise due at the applicable Pass-Through
Rate for the Class A-1A Certificates in a rising interest rate environment. In
addition, because the Mortgage Interest Rates of the Mortgage Loans in the
Adjustable Rate Group are subject to lifetime and periodic rate caps, such
interest rates may be subject to limitation despite changes in the six-month
London interbank offered rate for U.S. dollar deposits or LIBOR. Further, all of
the Mortgage Loans in the Adjustable Rate Group bear interest as of the Cut-off
Date or as of their dates of origination at initial rates which were determined
without regard to the applicable index. The application of the rate caps,
particularly the application of the periodic caps prior to the initial rates
becoming fully-indexed, may result in the Net Funds Cap Rate being lower than
the otherwise applicable Pass-Through Rate for the Class A-1A Certificates and a
LIBOR Interest Carryover could become payable with respect to the Adjustable
Rate Certificates. If the Net Funds Cap Rate results in a lower interest payment
to the Adjustable Rate Certificates for a Payment Date, the value of the
Adjustable Rate Certificates may be temporarily or permanently reduced. Any
LIBOR Interest Carryover will be payable only to the extent of certain amounts
which would otherwise be available to be distributed to the Class X
Certificateholders and such LIBOR Interest Carryover may remain unpaid on the
final Payment Date.
BOOK-ENTRY CERTIFICATES
Issuance of the Class A 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.
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 Registration" herein, "Annex I" hereto and "Risk
Factors -- Securities", "Description of the Securities -- General" and
"-- Registration and Transfer of Securities" in the Prospectus.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
The Depositors and the Servicer are aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "Year 2000" problem is pervasive and complex; virtually every
computer operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Servicer has committed to acquire a computer system that is year 2000
compliant, and it is anticipated that such computer system will be operational
and compliant prior to the year 2000. However, in the event that there are
computer problems arising out of a failure of such efforts to be completed on
time, or in the event that the Trustee's or the Insurer's computer systems are
not fully year 2000 compliant, the resulting disruptions in the collection and
distribution of receipts on the Mortgage Loans or amounts under the Securities
Insurance Policy could negatively affect the Class A Certificates.
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<PAGE> 23
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
Unless otherwise noted, the statistical information presented herein
concerning the Mortgage Pool is based on the Mortgage Loans included in such
pool as of the Cut-off Date. References herein to "Mortgage Loans" and the
"Mortgage Pool" refer to the Mortgage Loans included in the Fixed Rate Group and
the Mortgage Loans included in the Adjustable Rate Group. In addition, certain
loans included in such pool as of the Cut-off 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. The Mortgage Pool consists of Mortgage
Loans with an aggregate principal balance outstanding as of the Cut-off Date,
after giving effect to payments received prior to such date, of approximately
$738,874,073 (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"). This subsection describes generally certain characteristics
of the Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of Mortgage Loans refer in each case to the approximate percentage
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
based on the outstanding principal balances of the Mortgage Loans in the
applicable Mortgage Loan Group, in each case as of the Cut-off Date, and giving
effect to all payments received prior to the Cut-off Date. The Mortgage Pool
consists of fixed-rate and adjustable-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 Mortgage Loans were originated by
or purchased and re-underwritten by the Representative or by a wholly-owned
subsidiary of the Representative. The Mortgage Loans have the characteristics
set forth below as of the Cut-off Date. Percentages expressed herein based on
principal balances and number of 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.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group,"
respectively, and each a "Mortgage Loan Group") comprised of Mortgage Loans
which bear fixed interest rates only, in the case of the Fixed Rate Group, and
Mortgage Loans which bear adjustable interest rates only, in the case of the
Adjustable Rate Group. The Fixed Rate Certificates (defined below) represent
undivided ownership interests in all Mortgage Loans contained in the Fixed Rate
Group, and distributions on the Fixed Rate Certificates will be based primarily
on amounts available for distribution in respect of Mortgage Loans in the Fixed
Rate Group, and the Adjustable Rate Certificates (defined below) represent
undivided ownership interests in all Mortgage Loans contained in the Adjustable
Rate Group, and distributions on the Adjustable Rate Certificates will be based
primarily on amounts available for distribution in respect of Mortgage Loans in
the Adjustable Rate Group.
FIXED RATE GROUP
All of the Mortgage Loans in the Fixed Rate Group were originated between
October 4, 1983 and January 30, 1998 and have a scheduled maturity date no later
than February 15, 2028. No Mortgage Loan in the Fixed Rate Group has a remaining
term to maturity as of the Cut-off Date of less than 7 months. The weighted
average original term to maturity of the Mortgage Loans in the Fixed Rate Group
as of the Cut-off Date is approximately 187 months. The weighted average
remaining term to maturity of the Mortgage Loans in the Fixed Rate Group as of
the Cut-off Date is approximately 183 months.
The weighted average Mortgage Interest Rate of the Mortgage Loans in the
Fixed Rate Group as of the Cut-off Date was approximately 10.75% per annum. All
of the Mortgage Loans in the Fixed Rate Group had Mortgage Interest Rates as of
the Cut-off Date of at least 7.00% per annum but not more than 17.00% per annum.
The average principal balance outstanding of the Mortgage Loans in the Fixed
Rate Group as of the Cut-off Date was approximately $47,352, and the principal
balances of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date
ranged from approximately $1,097 to $224,832. The original principal balances of
the Mortgage Loans in the Fixed Rate Group as of Cut-off Date ranged from $5,000
to $225,000.
Approximately 20.92% of the Mortgage Loans in the Fixed Rate Group are
secured by a second Mortgage on the related Mortgaged Property that is junior to
a First Lien, and approximately 79.08% of the
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<PAGE> 24
Mortgage Loans in the Fixed Rate Group are secured by a first Mortgage on the
related Mortgage Property. None of the Mortgage Loans in the Fixed Rate Group
are secured by more than one property. The First Liens related to the Mortgage
Loans in the Fixed Rate Group secured by second Mortgages are not included in
the Mortgage Pool.
As used in this Prospectus Supplement, the "Combined Loan-to-Value Ratio"
of any Mortgage Loan is the ratio (expressed as a percentage) of (i) the sum of
(a) the principal balance of such Mortgage Loan at the Cut-off Date plus (b) the
outstanding balance of the Senior Lien at the date of origination of the
Mortgage Loan, if any, 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. As of the Cut-off Date, the weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans in the Fixed Rate Group was approximately 78.44%.
Approximately 6.42% of the Mortgage Loans in the Fixed Rate Group had a Combined
Loan-to-Value Ratio in excess of 95%.
At least 92.04% of the Mortgage Loans in the Fixed Rate Group are secured
by fee simple interests in detached single-family dwelling units, including
units in de minimis planned unit developments and townhouses, with the remaining
Mortgage Loans secured by fee simple interests in attached or detached two-to
four-family dwelling units, manufactured housing and condominiums. Approximately
0.90% of the Mortgage Loans in the Fixed Rate Group are secured by manufactured
housing. With respect to at least 94.15% of the Mortgage Loans in the Fixed Rate
Group, 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 0.05% of the Mortgage Loans in the Fixed Rate
Group are secured by Mortgaged Properties located in any one zip code area in
the State of California, and no more than 0.37% of the Mortgage Loans in the
Fixed Rate Group are secured by Mortgaged Properties located in any one zip code
area outside the State of California. Approximately 12.15%, 6.34%, 6.33% and
5.98% of the Mortgage Loans in the Fixed Rate Group are secured by Mortgaged
Properties located in Florida, Ohio, New York and Pennsylvania, respectively.
Except as indicated in the preceding sentence, no more than approximately 4.60%
of the Mortgage Loans in the Fixed Rate Group are secured by Mortgaged
Properties located in any one state.
Approximately 41.77% of the Mortgage Loans in the Fixed Rate Group are
Balloon Loans. Approximately 0.01%, 12.59%, 19.95%, 8.84% and 0.02% of the
Mortgage Loans in the Fixed Rate Group are Balloon Loans based on approximately
a 30 year amortization schedule and a single payment of the remaining loan
balance approximately 5, 7, 10, 15 and 20 years after origination, respectively.
Approximately 0.06% of the Mortgage Loans in the Fixed Rate Group are
Bankruptcy Mortgage Loans. Approximately 0.53% of the Mortgage Loans in the
Fixed Rate Group are 30 days or more contractually delinquent.
None of the Mortgage Loans in the Fixed Rate Group were originated in
connection with the sale of properties acquired by the Originators through
foreclosure.
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<PAGE> 25
MORTGAGE POOL STATISTICS -- FIXED RATE GROUP
The following table sets forth the number and outstanding principal balance
as of the Cut-off Date and the percentage of the Fixed Rate Group represented by
Mortgage Loans in the Fixed Rate Group having outstanding principal balances as
of the Cut-off Date in the ranges described therein:
<TABLE>
<CAPTION>
PERCENT OF FIXED RATE
AGGREGATE GROUP BY AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
$ 0.01 to $ 20,000.00.................... 2,618 $ 38,595,782.59 5.78%
20,000.01 to 30,000.00.................... 2,489 62,892,774.37 9.41
30,000.01 to 40,000.00.................... 2,264 79,689,253.12 11.92
40,000.01 to 50,000.00.................... 1,856 84,281,966.72 12.61
50,000.01 to 60,000.00.................... 1,423 78,374,818.46 11.73
60,000.01 to 70,000.00.................... 923 60,032,972.87 8.98
70,000.01 to 80,000.00.................... 691 51,803,118.90 7.75
80,000.01 to 90,000.00.................... 455 38,736,239.28 5.80
90,000.01 to 100,000.00.................... 337 32,055,366.73 4.80
100,000.01 to 110,000.00.................... 235 24,587,075.77 3.68
110,000.01 to 120,000.00.................... 215 24,772,000.35 3.71
120,000.01 to 130,000.00.................... 152 19,019,180.84 2.85
130,000.01 to 140,000.00.................... 89 12,018,729.59 1.80
140,000.01 to 150,000.00.................... 103 14,980,470.88 2.24
150,000.01 to 160,000.00.................... 75 11,622,600.43 1.74
160,000.01 to 170,000.00.................... 44 7,259,614.61 1.09
170,000.01 to 180,000.00.................... 41 7,177,100.68 1.07
180,000.01 to 190,000.00.................... 34 6,284,555.00 0.94
190,000.01 to 200,000.00.................... 38 7,389,140.99 1.11
200,000.01 to 227,150.00.................... 32 6,750,081.59 1.01
------ --------------- ------
Total............................... 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
S-25
<PAGE> 26
The following table sets forth the geographic distribution of the Mortgaged
Properties related to the Mortgage Loans in the Fixed Rate Group by geographic
area as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
GEOGRAPHIC AREA MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama.......................................... 29 $ 738,645.91 0.11%
Arizona.......................................... 280 12,454,703.78 1.86
Arkansas......................................... 96 4,784,934.25 0.72
California....................................... 603 27,263,248.99 4.08
Colorado......................................... 138 5,752,042.49 0.86
Connecticut...................................... 234 14,009,758.99 2.10
Delaware......................................... 136 6,731,911.16 1.01
District of Columbia............................. 16 1,044,007.40 0.16
Florida.......................................... 1,952 81,188,210.72 12.15
Georgia.......................................... 478 22,740,321.37 3.40
Idaho............................................ 107 4,800,718.07 0.72
Illinois......................................... 568 30,066,086.82 4.50
Indiana.......................................... 756 30,551,976.45 4.57
Iowa............................................. 257 12,430,170.92 1.86
Kansas........................................... 158 6,331,849.18 0.95
Kentucky......................................... 181 7,924,752.71 1.19
Louisiana........................................ 360 13,848,936.89 2.07
Maine............................................ 15 725,956.43 0.11
Maryland......................................... 410 22,144,860.52 3.31
Massachusetts.................................... 313 18,703,961.19 2.80
Michigan......................................... 560 30,765,044.80 4.60
Minnesota........................................ 405 17,407,153.74 2.60
Mississippi...................................... 145 5,924,810.68 0.89
Missouri......................................... 269 13,389,689.56 2.00
Nebraska......................................... 91 4,005,461.50 0.60
Nevada........................................... 68 2,684,682.47 0.40
New Hampshire.................................... 44 2,406,061.84 0.36
New Jersey....................................... 123 8,704,566.71 1.30
New Mexico....................................... 30 1,341,057.42 0.20
New York......................................... 648 42,299,768.56 6.33
North Carolina................................... 456 18,906,901.91 2.83
Ohio............................................. 808 42,382,203.45 6.34
Oklahoma......................................... 165 5,048,564.71 0.76
Oregon........................................... 90 4,219,319.89 0.63
Pennsylvania..................................... 911 39,983,517.35 5.98
Rhode Island..................................... 79 4,112,158.96 0.62
South Carolina................................... 375 16,015,736.17 2.40
Tennessee........................................ 483 23,829,921.07 3.57
Texas............................................ 127 10,569,821.31 1.58
Utah............................................. 196 7,813,910.79 1.17
Vermont.......................................... 27 1,988,019.22 0.30
Virginia......................................... 416 17,626,088.03 2.64
Washington....................................... 271 10,751,333.56 1.61
West Virginia.................................... 65 2,954,409.92 0.44
Wisconsin........................................ 175 8,955,585.91 1.34
------ --------------- ------
Total.................................. 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
S-26
<PAGE> 27
The following table sets forth the Combined Loan-to-Value Ratios of the
Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF FIXED RATE
AGGREGATE GROUP BY AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
0.01% to 5.00%............................. 6 $ 29,553.20 0.00%
5.01% to 10.00%............................. 13 135,198.73 0.02
10.01% to 15.00%............................. 28 468,982.58 0.07
15.01% to 20.00%............................. 59 1,080,346.14 0.16
20.01% to 25.00%............................. 81 1,769,351.88 0.26
25.01% to 30.00%............................. 100 2,453,937.49 0.37
30.01% to 35.00%............................. 130 3,597,574.25 0.54
35.01% to 40.00%............................. 167 4,926,195.84 0.74
40.01% to 45.00%............................. 175 5,576,165.50 0.83
45.01% to 50.00%............................. 304 10,229,018.87 1.53
50.01% to 55.00%............................. 280 10,575,537.37 1.58
55.01% to 60.00%............................. 402 17,489,124.20 2.62
60.01% to 65.00%............................. 469 21,466,999.82 3.21
65.01% to 70.00%............................. 964 46,297,371.16 6.93
70.01% to 75.00%............................. 1,894 101,269,197.57 15.15
75.01% to 80.00%............................. 2,329 131,150,313.29 19.62
80.01% to 85.00%............................. 3,157 169,484,545.56 25.36
85.01% to 90.00%............................. 1,330 70,318,949.38 10.52
90.01% to 95.00%............................. 507 27,082,731.80 4.05
95.01% to 100.00%............................. 1,719 42,921,749.14 6.42
------ --------------- ------
Total............................... 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
S-27
<PAGE> 28
The following table sets forth the Mortgage Interest Rates borne by the
Mortgage Notes relating to the Mortgage Loans in the Fixed Rate Group as of the
Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF FIXED RATE
NUMBER OF AGGREGATE GROUP BY AGGREGATE
MORTGAGE CUT-OFF DATE CUT-OFF DATE
RANGE OF MORTGAGE INTEREST RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
6.751% to 7.000%............................ 2 $ 142,168.57 0.02%
7.001% to 7.250%............................ 4 193,091.19 0.03
7.251% to 7.500%............................ 3 260,806.60 0.04
7.501% to 7.750%............................ 5 370,114.41 0.06
7.751% to 8.000%............................ 15 1,470,883.43 0.22
8.001% to 8.250%............................ 16 1,116,153.08 0.17
8.251% to 8.500%............................ 137 8,377,406.53 1.25
8.501% to 8.750%............................ 105 8,477,826.91 1.27
8.751% to 9.000%............................ 190 14,172,627.19 2.12
9.001% to 9.250%............................ 235 14,078,541.00 2.11
9.251% to 9.500%............................ 588 34,996,324.39 5.24
9.501% to 9.750%............................ 737 45,053,744.73 6.74
9.751% to 10.000%............................ 987 58,582,379.83 8.77
10.001% to 10.250%............................ 1,127 61,924,380.72 9.27
10.251% to 10.500%............................ 1,238 68,355,843.21 10.23
10.501% to 10.750%............................ 1,192 62,478,427.50 9.35
10.751% to 11.000%............................ 1,614 75,165,603.99 11.25
11.001% to 11.250%............................ 973 41,984,521.08 6.28
11.251% to 11.500%............................ 636 29,155,164.16 4.36
11.501% to 11.750%............................ 711 29,463,815.74 4.41
11.751% to 12.000%............................ 428 17,248,042.86 2.58
12.001% to 12.250%............................ 366 15,996,765.30 2.39
12.251% to 12.500%............................ 282 10,481,465.77 1.57
12.501% to 12.750%............................ 305 11,636,211.32 1.74
12.751% to 13.000%............................ 465 14,392,618.79 2.15
13.001% to 13.250%............................ 166 5,070,699.36 0.76
13.251% to 13.500%............................ 291 8,179,265.08 1.22
13.501% to 13.750%............................ 1,017 23,816,273.41 3.56
13.751% to 14.000%............................ 61 1,259,990.60 0.19
14.001% to 14.250%............................ 72 1,698,318.29 0.25
14.251% to 14.500%............................ 88 1,933,633.07 0.29
14.501% to 14.750%............................ 12 234,504.19 0.04
14.751% to 15.000%............................ 11 169,435.42 0.03
15.001% to 15.250%............................ 9 161,056.68 0.02
15.251% to 15.500%............................ 4 30,135.55 0.00
15.501% to 15.750%............................ 16 142,164.15 0.02
16.001% to 17.000%............................ 6 52,439.67 0.01
------ --------------- ------
Total............................... 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
S-28
<PAGE> 29
The following table sets forth the range of original months to stated
maturity of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF FIXED RATE
GROUP BY
NUMBER OF AGGREGATE CUT-OFF DATE AGGREGATE CUT-OFF DATE
RANGE OF ORIGINAL MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
37 to 48............................. 1 $ 18,856.50 0.00%
49 to 60............................. 74 1,268,100.95 0.19
61 to 72............................. 12 230,924.31 0.03
73 to 84............................. 1,318 85,013,911.29 12.72
85 to 96............................. 13 211,140.74 0.03
109 to 120............................. 2,347 144,597,351.82 21.64
133 to 144............................. 26 647,321.10 0.10
145 to 156............................. 3 161,630.41 0.02
157 to 168............................. 3 91,089.48 0.01
169 to 180............................. 7,955 286,495,430.70 42.87
229 to 240............................. 820 42,450,410.31 6.35
289 to 300............................. 3 128,891.90 0.02
349 to 360............................. 1,539 107,007,784.26 16.01
------ --------------- ------
Total........................ 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
The following table sets forth the range of remaining months to stated
maturity of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF FIXED RATE
GROUP BY
RANGE OF REMAINING MONTHS NUMBER OF AGGREGATE CUT-OFF DATE AGGREGATE CUT-OFF DATE
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
0 to 12........................ 2 $ 5,944.62 0.00%
13 to 24........................ 6 38,168.50 0.01
25 to 36........................ 21 240,864.02 0.04
37 to 48........................ 36 607,204.60 0.09
49 to 60........................ 113 2,222,878.46 0.33
61 to 72........................ 22 466,774.69 0.07
73 to 84........................ 1,334 85,318,954.98 12.77
85 to 96........................ 75 1,730,461.61 0.26
97 to 108........................ 53 1,202,345.92 0.18
109 to 120........................ 2,333 144,458,454.70 21.62
133 to 144........................ 21 650,909.97 0.10
145 to 156........................ 2 119,291.85 0.02
157 to 168........................ 9 298,920.84 0.04
169 to 180........................ 7,725 281,374,582.54 42.10
193 to 228........................ 1 58,744.85 0.01
229 to 240........................ 819 42,391,665.46 6.34
289 to 300........................ 3 128,891.90 0.02
337 to 348........................ 1 183,698.15 0.03
349 to 360........................ 1,538 106,824,086.11 15.98
------ --------------- ------
Total................... 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
S-29
<PAGE> 30
The following table sets forth the number of months since origination of
the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF FIXED
RATE GROUP BY
NUMBER OF AGGREGATE CUT-OFF DATE AGGREGATE CUT-OFF DATE
RANGE OF MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Less than 1............................... 2 $ 51,900.00 0.01%
1 to 6.................................... 13,583 651,676,971.88 97.51
7 to 12................................... 275 10,990,089.02 1.64
Greater than 12........................... 254 5,603,882.87 0.84
------ --------------- ------
Total........................... 14,114 $668,322,843.77 100.00%
====== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
All of the Mortgage Loans in the Adjustable Rate Group were originated
between March 30, 1996 and January 30, 1998 and have a scheduled maturity date
no later than February 1, 2028. No Mortgage Loan in the Adjustable Rate Group
has a remaining term to maturity as of the Cut-off Date of less than 60 months.
The weighted average original term to maturity of the Mortgage Loans in the
Adjustable Rate Group as of the Cut-off Date is approximately 116 months. The
weighted average remaining term to maturity of the Mortgage Loans in the
Adjustable Rate Group as of the Cut-off Date is approximately 113 months.
The average principal balance outstanding of the Mortgage Loans in the
Adjustable Rate Group as of the Cut-off Date was approximately $93,694 and the
principal balances of the Mortgage Loans in the Adjustable Rate Group as of the
Cut-off Date ranged from approximately $20,226 to $349,843. The original
principal balances of the Mortgage Loans in the Adjustable Rate Group as of the
Cut-off Date ranged from approximately $20,250 to $350,000.
The Mortgage Loans in the Adjustable Rate Group bear interest rates that
adjust based on the London interbank offered rate for six-month United States
dollar deposits ("Six-Month LIBOR") and accrue interest on the basis of a
360-day year consisting of twelve 30-day months.
All of the Mortgage Loans in the Adjustable Rate Group are secured by a
first Mortgage on the related Mortgaged Property.
As of the Cut-off Date the weighted average Mortgage Interest Rate of the
Mortgage Loans in the Adjustable Rate Group was approximately 8.54% per annum.
The Mortgage Interest Rates for the Mortgage Loans in the Adjustable Rate Group
ranged from 6.75% per annum to 11.25% per annum. The Mortgage Loans in the
Adjustable Rate Group had a weighted average gross margin as of the Cut-off Date
of approximately 5.10% per annum. The gross margin for the Mortgage Loans in the
Adjustable Rate Group as of the Cut-off Date ranged from 4.00% per annum to
7.55% per annum. All of the Mortgage Loans in the Adjustable Rate Group had
periodic adjustment caps of 1.00% as of the Cut-off Date. The Mortgage Loans in
the Adjustable Rate Group had a weighted average maximum Mortgage Interest Rate
as of the Cut-off Date of approximately 16.98% per annum, with maximum Mortgage
Interest Rates (i.e., lifetime caps) that ranged from approximately 15.88% per
annum to 20.00% per annum and a weighted average minimum Mortgage Interest Rate
as of the Cut-off Date of approximately 8.48% per annum, with minimum Mortgage
Interest Rates (i.e., lifetime floors) that range from approximately 6.75% per
annum to 12.29% per annum.
As of the Cut-off Date, the weighted average Combined Loan-to-Value Ratio
of the Mortgage Loans in the Adjustable Rate Group was approximately 82.91%.
At least 96.46% of the Mortgage Loans in the Adjustable Rate Group are
secured by fee simple interests in detached single-family dwelling units, which
may include units in de minimis planned unit developments and townhouses, with
the remaining Mortgage Loans secured by fee simple interests in attached or
detached two- to four-family dwelling units and condominiums. None of the
Mortgage Loans in the Adjustable Rate Group are secured by real property
improved with a single-family residence constituting a permanently affixed
S-30
<PAGE> 31
manufactured housing unit. For all of the Mortgage Loans in the Adjustable Rate
Group, the related Mortgaged Property is an Owner Occupied Mortgaged Property.
No more than approximately 0.29% of the Mortgage Loans in the Adjustable
Rate Group are secured by Mortgaged Properties located in any one zip code area
in the State of California, and no more than approximately 2.66% of the Mortgage
Loans in the Adjustable Rate Group are secured by Mortgaged Properties located
in any one zip code area outside the State of California. Approximately 14.42%,
11.73%, 8.34% and 8.10% of the Mortgage Loans in the Adjustable Rate Group are
secured by Mortgaged Properties located in Michigan, Ohio, Minnesota and
Illinois, respectively. Except as indicated in the preceding sentence, no more
than approximately 4.93% of the Mortgage Loans in the Adjustable Rate Group are
secured by Mortgaged Properties located in any one state.
Approximately 92.03% of the Mortgage Loans in the Adjustable Rate Group are
Balloon Loans. Approximately 54.32%, 33.95%, 3.60% and 0.15% of the Mortgage
Loans in the Adjustable Rate Group are Balloon Loans based on approximately a 30
year amortization schedule and a single payment of the remaining loan balance
approximately 7, 10, 15 and 20 years after origination, respectively.
None of the Mortgage Loans in the Adjustable Rate Group are Bankruptcy
Mortgage Loans. Approximately 0.11% of the Mortgage Loans in the Adjustable Rate
Group are contractually delinquent 30 or more days.
None of the Mortgage Loans in the Adjustable Rate Group were originated in
connection with the sale of properties acquired by the Originators through
foreclosure.
S-31
<PAGE> 32
MORTGAGE POOL STATISTICS -- ADJUSTABLE RATE GROUP
The following table sets forth the number and outstanding principal balance
as of the Cut-off Date and the percentage of the Adjustable Rate Group
represented by Mortgage Loans in the Adjustable Rate Group having outstanding
principal balances as of the Cut-off Date in the ranges described therein:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
$ 20,000.01 to $ 30,000.00..................... 9 $ 245,139.63 0.35%
30,000.01 to 40,000.00..................... 32 1,135,910.35 1.61
40,000.01 to 50,000.00..................... 63 2,870,541.84 4.07
50,000.01 to 60,000.00..................... 86 4,742,007.68 6.72
60,000.01 to 70,000.00..................... 90 5,866,021.92 8.31
70,000.01 to 80,000.00..................... 87 6,531,774.54 9.26
80,000.01 to 90,000.00..................... 61 5,175,958.63 7.34
90,000.01 to 100,000.00..................... 58 5,539,891.53 7.85
100,000.01 to 110,000.00..................... 54 5,645,982.66 8.00
110,000.01 to 120,000.00..................... 45 5,202,423.93 7.37
120,000.01 to 130,000.00..................... 39 4,867,010.18 6.90
130,000.01 to 140,000.00..................... 24 3,214,660.95 4.56
140,000.01 to 150,000.00..................... 20 2,916,602.79 4.13
150,000.01 to 160,000.00..................... 13 2,000,992.25 2.84
160,000.01 to 170,000.00..................... 13 2,142,633.98 3.04
170,000.01 to 180,000.00..................... 17 2,956,864.73 4.19
180,000.01 to 190,000.00..................... 7 1,300,282.37 1.84
190,000.01 to 200,000.00..................... 8 1,570,448.72 2.23
200,000.01 to 250,000.00..................... 18 3,970,349.29 5.63
250,000.01 to 300,000.00..................... 5 1,345,886.00 1.91
300,000.01 to 350,000.00..................... 4 1,309,845.48 1.86
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
S-32
<PAGE> 33
The following table sets forth the geographic distribution of the Mortgaged
Properties in the Adjustable Rate Group by geographic area as of the Cut-off
Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF DATE CUT-OFF DATE
GEOGRAPHIC AREA LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
Arizona........................................ 27 $ 2,974,760.82 4.22%
California..................................... 5 740,101.78 1.05
Colorado....................................... 2 275,780.71 0.39
Connecticut.................................... 7 1,098,941.20 1.56
Delaware....................................... 1 70,358.74 0.10
District of Columbia........................... 1 172,345.08 0.24
Florida........................................ 28 2,712,723.92 3.85
Georgia........................................ 15 1,653,936.66 2.34
Idaho.......................................... 6 565,598.21 0.80
Illinois....................................... 64 5,711,379.53 8.10
Indiana........................................ 51 3,475,197.76 4.93
Iowa........................................... 16 1,398,470.02 1.98
Kansas......................................... 4 551,039.33 0.78
Kentucky....................................... 11 837,257.87 1.19
Louisiana...................................... 7 537,647.36 0.76
Maryland....................................... 20 2,700,807.94 3.83
Massachusetts.................................. 4 483,647.59 0.69
Michigan....................................... 108 10,175,504.76 14.42
Minnesota...................................... 55 5,882,438.48 8.34
Mississippi.................................... 6 390,004.09 0.55
Missouri....................................... 31 2,678,074.37 3.80
Nebraska....................................... 8 759,246.95 1.08
New Jersey..................................... 10 1,477,972.96 2.09
New Mexico..................................... 2 151,737.95 0.22
New York....................................... 4 459,262.31 0.65
North Carolina................................. 33 3,190,553.28 4.52
Ohio........................................... 103 8,277,191.00 11.73
Oregon......................................... 2 269,059.31 0.38
Pennsylvania................................... 5 331,150.96 0.47
South Carolina................................. 2 174,763.37 0.25
Tennessee...................................... 12 1,567,680.41 2.22
Texas.......................................... 13 1,602,114.44 2.27
Utah........................................... 2 214,541.29 0.30
Virginia....................................... 19 2,040,792.32 2.89
Washington..................................... 7 738,631.67 1.05
West Virginia.................................. 42 2,655,121.23 3.76
Wisconsin...................................... 20 1,555,393.78 2.20
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
S-33
<PAGE> 34
The following table sets forth the Combined Loan-to-Value Ratios of the
Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
20.01% to 25.00%.............................. 1 $ 25,193.24 0.04%
25.01% to 30.00%.............................. 1 53,252.63 0.08
35.01% to 40.00%.............................. 3 163,039.72 0.23
40.01% to 45.00%.............................. 2 72,040.03 0.10
45.01% to 50.00%.............................. 3 371,240.74 0.53
50.01% to 55.00%.............................. 5 289,385.42 0.41
55.01% to 60.00%.............................. 10 934,192.13 1.32
60.01% to 65.00%.............................. 11 608,624.91 0.86
65.01% to 70.00%.............................. 21 2,209,236.49 3.13
70.01% to 75.00%.............................. 98 8,170,191.56 11.58
75.01% to 80.00%.............................. 145 13,283,217.95 18.83
80.01% to 85.00%.............................. 252 22,861,489.73 32.40
85.01% to 90.00%.............................. 98 9,909,658.22 14.05
90.01% to 95.00%.............................. 98 11,050,016.47 15.66
95.01% to 100.00%.............................. 5 550,450.21 0.78
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
The following table sets forth the Mortgage Interest Rates borne by the
Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group as of
the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MORTGAGE INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
6.501% to 6.750%............................. 1 $ 147,355.64 0.21%
6.751% to 7.000%............................. 2 85,488.05 0.12
7.001% to 7.250%............................. 7 703,727.06 1.00
7.251% to 7.500%............................. 30 2,685,826.61 3.81
7.501% to 7.750%............................. 66 6,285,807.74 8.91
7.751% to 8.000%............................. 54 4,849,260.21 6.87
8.001% to 8.250%............................. 147 14,852,174.51 21.05
8.251% to 8.500%............................. 143 13,210,960.31 18.73
8.501% to 8.750%............................. 116 12,357,733.43 17.52
8.751% to 9.000%............................. 33 3,048,856.64 4.32
9.001% to 9.250%............................. 72 6,001,268.36 8.51
9.251% to 9.500%............................. 9 806,154.85 1.14
9.501% to 9.750%............................. 15 1,361,157.04 1.93
9.751% to 10.000%............................. 10 941,057.44 1.33
10.001% to 10.250%............................. 37 2,421,523.12 3.43
10.501% to 10.750%............................. 5 301,242.01 0.43
10.751% to 11.000%............................. 3 222,958.25 0.32
11.001% to 11.250%............................. 3 268,678.18 0.38
--- -------------- ------
Total.............................. 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
S-34
<PAGE> 35
The following table sets forth the range of original months to stated
maturity of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off
Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF ORIGINAL MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
73 to 84..................................... 418 $38,326,190.46 54.32%
109 to 120..................................... 238 23,952,564.87 33.95
169 to 180..................................... 49 4,052,773.47 5.74
229 to 240..................................... 7 543,174.52 0.77
349 to 360..................................... 41 3,676,526.13 5.21
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
The following table sets forth the range of remaining months to stated
maturity of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off
Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF REMAINING MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
49 to 60..................................... 1 $ 81,534.80 0.12%
61 to 72..................................... 2 157,751.34 0.22
73 to 84..................................... 415 38,086,904.32 53.98
109 to 120..................................... 238 23,952,564.87 33.95
169 to 180..................................... 49 4,052,773.47 5.74
229 to 240..................................... 7 543,174.52 0.77
349 to 360..................................... 41 3,676,526.13 5.21
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
The following table sets forth the number of months since origination of
the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
1 to 6........................................ 707 $66,592,266.43 94.39%
7 to 12........................................ 43 3,719,676.88 5.27
Greater than 12................................ 3 239,286.14 0.34
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
S-35
<PAGE> 36
The following table sets forth the maximum Mortgage Interest Rates borne by
the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group
as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MAXIMUM MORTGAGE INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
15.501% to 16.000%............................. 4 $ 458,225.43 0.65%
16.001% to 16.500%............................. 137 12,194,624.37 17.28
16.501% to 17.000%............................. 346 33,303,200.74 47.20
17.001% to 17.500%............................. 155 16,040,983.65 22.74
17.501% to 18.000%............................. 89 6,866,646.22 9.73
18.001% to 18.500%............................. 17 1,300,235.29 1.84
18.501% to 19.000%............................. 3 236,546.91 0.34
19.001% to 19.500%............................. 1 64,044.11 0.09
19.501% to 20.000%............................. 1 86,722.73 0.12
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
The following table sets forth the minimum Mortgage Interest Rates borne by
the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group
as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MINIMUM MORTGAGE INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
6.501% to 6.750%............................. 1 $ 147,355.64 0.21%
6.751% to 7.000%............................. 4 233,115.68 0.33
7.001% to 7.250%............................. 7 703,727.06 1.00
7.251% to 7.500%............................. 34 3,006,817.91 4.26
7.501% to 7.750%............................. 71 6,772,234.17 9.60
7.751% to 8.000%............................. 58 5,266,277.21 7.46
8.001% to 8.250%............................. 166 16,497,585.74 23.38
8.251% to 8.500%............................. 144 13,235,056.76 18.76
8.501% to 8.750%............................. 112 12,060,539.34 17.09
8.751% to 9.000%............................. 27 2,484,212.01 3.52
9.001% to 9.250%............................. 56 4,649,119.08 6.59
9.251% to 9.500%............................. 4 461,067.10 0.65
9.501% to 9.750%............................. 15 1,216,296.24 1.72
9.751% to 10.000%............................. 10 941,057.44 1.33
10.001% to 10.250%............................. 34 2,105,019.93 2.98
10.501% to 10.750%............................. 4 256,870.47 0.36
10.751% to 11.000%............................. 3 222,958.25 0.32
11.001% to 11.250%............................. 2 187,143.38 0.27
12.251% to 12.500% 1 104,776.04 0.15
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
S-36
<PAGE> 37
The following table sets forth the gross margins borne by the Mortgage
Notes relating to the Mortgage Loans in the Adjustable Rate Group as of the
Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
3.751% to 4.000%............................... 1 $ 147,355.64 0.21%
4.001% to 4.250%............................... 32 2,845,964.99 4.03
4.251% to 4.500%............................... 68 6,295,864.16 8.92
4.501% to 4.750%............................... 38 3,546,673.59 5.03
4.751% to 5.000%............................... 177 17,424,301.29 24.70
5.001% to 5.250%............................... 210 20,632,182.22 29.24
5.251% to 5.500%............................... 68 7,396,152.53 10.48
5.501% to 5.750%............................... 70 5,281,448.56 7.49
5.751% to 6.000%............................... 63 4,990,821.40 7.07
6.001% to 6.250%............................... 6 501,373.24 0.71
6.251% to 6.500%............................... 15 1,065,766.99 1.51
6.501% to 6.750%............................... 1 122,733.82 0.17
6.751% to 7.000%............................... 2 187,143.38 0.27
7.001% to 7.250%............................... 1 49,403.53 0.07
7.501% to 7.750%............................... 1 64,044.11 0.09
--- -------------- ------
Total................................ 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
The following table sets forth the month of the next Mortgage Interest Rate
change for each of the Mortgage Notes relating to the Mortgage Loans in the
Adjustable Rate Group as of the Cut-off Date:
<TABLE>
<CAPTION>
PERCENT OF ADJUSTABLE
RATE GROUP BY
MONTH OF AGGREGATE AGGREGATE
NEXT MORTGAGE INTEREST NUMBER OF CUT-OFF DATE CUT-OFF DATE
RATE CHANGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- ---------------------
<C> <S> <C> <C> <C> <C>
February 1998 ............................... 1 $ 38,295.87 0.05%
March 1998 ............................... 1 103,354.44 0.15
April 1998 ............................... 151 14,258,939.02 20.21
May 1998 ............................... 207 18,832,846.31 26.69
June 1998 ............................... 146 14,266,621.90 20.22
July 1998 ............................... 126 12,770,578.11 18.10
August 1998 ............................... 83 6,973,442.47 9.88
September 1998 ............................... 3 280,813.83 0.40
October 1998 ............................... 34 2,964,093.36 4.20
December 1998 ............................... 1 62,244.14 0.09
--- -------------- ------
Total ............................... 753 $70,551,229.45 100.00%
=== ============== ======
</TABLE>
The months shown in the preceding table are the months in which the
Mortgage Interest Rates on the related Mortgage Loans were scheduled to be
adjusted. In the case of a Mortgage Loan which was delinquent in the month in
which such adjustment was scheduled to occur, such adjustment will not occur
until such Mortgage Loan has become current.
S-37
<PAGE> 38
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates (other than the
Class A-IO 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 in the
related Mortgage Loan Group, 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 (other than the Class
A-IO 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 on which the Pool Principal Balance (as defined herein) as of the
last day of the related Due Period is less than 10% of the Original Pool
Principal Balance. 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 in the Fixed Rate
Group 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. No assurance can be given as to
the level of prepayments that the Mortgage Loans in the Fixed Rate Group will
experience.
The yield on the Fixed Rate Certificates will be less than the yield
otherwise produced by their respective Pass-Through Rates and the prices at
which such Certificates are purchased because the interest which accrues on the
Mortgage Loans in the Fixed Rate Group during each month will not be passed
through to Certificateholders until the 15th day of the following month (or if
such 15th day is not a business day, the following business day).
All of the Mortgage Loans in the Adjustable Rate Group are adjustable-rate
mortgage loans. As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans such as the
Mortgage Loans in the Adjustable Rate Group could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed-rate mortgage loans at competitive interest rates may
encourage mortgagers to refinance their adjustable-rate mortgage loans to "lock
in" a lower fixed interest rate. However, no assurance can be given as to the
level of prepayments that the Mortgage Loans in the Adjustable Rate Group will
experience.
The Mortgage Loans in the Adjustable Rate Group bear interest rates that
adjust based on Six-Month LIBOR, which may differ from the rate of LIBOR used to
calculate interest on the Class A-1A Certificates. To the extent that the amount
of interest otherwise distributable in respect of the Class A-1A Certificates is
greater than the amount of available interest on the Mortgage Loans in the
Adjustable Rate Group with respect to any Payment Date, LIBOR Interest
Carryovers may occur in respect of the Class A-1A Certificates. Although the
holders of the Class A-1A Certificates are entitled to be reimbursed for any
such shortfalls as and to the extent described herein, the yield to such holders
on the Class A-1A Certificates may be adversely affected by the occurrence of
such shortfalls. See "Risk Factors -- Risk of Mortgage Loan Yield Reducing the
Class A-1A Pass-Through Rate" herein.
S-38
<PAGE> 39
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.
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 in the related Mortgage Loan Group and the recoveries, if any, on
defaulted Mortgage Loans and foreclosed properties in such Mortgage Loan Group.
Principal distributions on the Class A-6F Certificates and Class A-7F
Certificates will vary on each Payment Date in accordance with the Lockout
Remittance Amount for such Payment Date until the Class A-5F Certificates have
been paid in full. Upon payment of the Class A-5F Certificates in full, the
entire Principal Remittance Amount for the Fixed Rate Group will be distributed
to the Class A-6F Certificates and the Class A-7F Certificates, in that order,
until each such Class has been paid in full.
The Balloon Loans in the Trust Fund will not be fully amortizing over their
terms to maturity, and will require substantial principal payments at their
stated maturity. Balloon Loans involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make the final
payment due upon maturity of a Balloon Loan (a "Balloon Payment") typically will
depend upon its ability either to fully refinance the Balloon Loan or to sell
the related Mortgaged Property at a price sufficient to permit the mortgagor to
make the Balloon Payment. The ability of a mortgagor to accomplish either of
these goals will be affected by a number of factors, including the value of the
related Mortgaged Property, the level of available mortgage rates at the time of
sale or refinancing, the mortgagor's equity in the related Mortgaged Property,
tax laws, prevailing general conditions and the availability of credit for loans
secured by residential property. Because the ability of a mortgagor to make a
Balloon Payment typically will depend upon its ability either to refinance the
Balloon Loan or to sell the related Mortgaged Property, there is a risk that the
Balloon Loans may default at maturity. Any defaulted Balloon Payment that
extends the maturity of a Balloon Loan may delay distributions of principal on
the related Class A Certificates and thereby extend the weighted average life of
such Class A Certificates and, if such Class A Certificates were purchased at a
discount, reduce the yield thereon.
The "weighted average life" of a Class A Certificate (other than a Class
A-IO 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 in the related Mortgage Loan
Group, including Balloon Payments.
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. For
each Class of Fixed Rate Certificates, a 100% Prepayment Assumption assumes a
conditional prepayment rate ("CPR") of 4% per annum of the outstanding principal
balance of the Mortgage Loans in the Fixed Rate Group in the first month of the
life of such Mortgage Loans and an additional 1.818% (precisely 20/11%) 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 24% per annum each month is assumed. For the
Adjustable Rate Certificates, a 100% Prepayment Assumption assumes a CPR of 25%
per annum of the outstanding principal balance of the Mortgage Loans in the
Adjustable Rate Group in each month of the life of such Mortgage Loans. As used
in the table below, 0% Prepayment Assumption assumes a CPR of 0% on
S-39
<PAGE> 40
the outstanding principal balance of the Mortgage Loans in the Fixed Rate Group
and a CPR of 0% on the outstanding principal balance of the Mortgage Loans in
the Adjustable Rate Group. Correspondingly, 50% Prepayment Assumption assumes a
CPR of 2% per annum on the outstanding principal balance of the Mortgage Loans
in the Fixed Rate Group in the first month of the life of such Mortgage Loans
and an additional 0.909% per annum in each month thereafter until the twelfth
month, and each month thereafter a CPR of 12%, and assumes a CPR of 12.5% per
annum of the outstanding principal balance of the Mortgage Loans in the
Adjustable Rate Group in each month of the life of such Mortgage Loans. 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 table. Any such discrepancy may have an
effect upon the percentages of the Principal Balances outstanding and weighted
average lives of the Class A 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 Class A Certificates may be made earlier or later than as
indicated in the table.
S-40
<PAGE> 41
The tables below were prepared on the basis of the following assumptions
(the "Modeling Assumptions"): (i) the Mortgage Loans of each Mortgage Loan Group
consist of loans with the weighted average characteristics and amortization
methodologies set forth below, (ii) the Closing Date for the Class A
Certificates is April 23, 1998, (iii) 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 May 1998 in accordance with the
priorities described herein, (iv) the scheduled monthly payments of principal
and interest on the Mortgage Loans will be timely delivered to the Servicer each
month (with no defaults), (v) the Mortgage Interest Rate for each Mortgage Loan
in the Adjustable Rate Group is adjusted on its next rate adjustment date (and
on subsequent rate adjustment dates, if necessary) to equal the sum of (a) an
assumed level of Six-Month LIBOR (which remains constant at 5.6875% per annum)
and (b) the respective gross margin (such sum being subject to the applicable
periodic adjustment cap, maximum interest rate and minimum interest rate), (vi)
LIBOR remains constant at 5.65625% per annum, (vii) all prepayments are
prepayments in full received on the last day of each month (commencing April
1998) and include 30 days' interest thereon, (viii) no optional termination or
mandatory termination is exercised, (ix) the Class A Certificates of each Class
have the respective Pass-Through Rates and Original Principal Balances or
original notional amount as set forth herein, (x) the numbers under the "Monthly
Rate Change" heading for the Adjustable Rate Group table below indicate the
number of months from the Cut-off Date to the first interest rate change date
for the applicable pools of loans and (xi) each Mortgage Interest Rate is
reduced by 0.69% per annum with respect to the first twelve Accrual Periods and
1.19% per annum with respect to subsequent Accrual Periods.
FIXED RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL REMAINING
MORTGAGE AMORTIZATION TERM TO TERM TO
AMORTIZATION PRINCIPAL INTEREST TERM MATURITY MATURITY
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ------------ --------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Level Pay...................................... $ 18,856.50 11.750% 48 48 46
Level Pay...................................... 1,133,187.02 11.301 60 60 57
Level Pay...................................... 27,752.91 9.300 66 66 61
Level Pay...................................... 203,171.40 11.559 72 72 69
Level Pay...................................... 21,039.41 11.250 79 79 75
Level Pay...................................... 777,370.40 10.725 84 84 81
Level Pay...................................... 9,640.70 11.500 90 90 85
Level Pay...................................... 191,567.69 11.624 96 96 92
Level Pay...................................... 11,042,709.24 10.892 120 120 116
Level Pay...................................... 647,321.10 10.668 144 144 135
Level Pay...................................... 119,291.85 10.443 156 156 154
Level Pay...................................... 91,089.48 11.924 168 168 165
Level Pay...................................... 225,498,388.70 11.080 180 180 175
Level Pay...................................... 32,955.84 10.100 237 237 236
Level Pay...................................... 42,218,100.97 10.469 240 240 237
Level Pay...................................... 128,891.90 10.918 300 300 298
Level Pay...................................... 107,007,784.26 10.593 360 360 357
Balloon........................................ 13,571.18 10.990 60 57 52
Balloon........................................ 42,959.27 8.450 180 59 57
Balloon........................................ 78,383.48 8.450 360 59 57
Balloon........................................ 43,693.68 11.481 84 81 78
Balloon........................................ 84,171,807.80 10.624 360 83 80
Balloon........................................ 9,932.35 10.250 96 93 92
Balloon........................................ 127,191.47 11.785 120 117 114
Balloon........................................ 96,334.52 10.800 240 119 115
Balloon........................................ 133,331,116.59 10.587 360 119 116
Balloon........................................ 1,973,174.37 12.415 180 177 174
Balloon........................................ 59,066,206.19 10.463 360 179 176
Balloon........................................ 39,893.68 10.987 240 237 233
Balloon........................................ 159,459.82 10.062 360 239 237
</TABLE>
S-41
<PAGE> 42
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
PERIODIC
MONTHS MORTGAGE MAXIMUM MINIMUM RATE
AMORTIZATION PRINCIPAL TO RATE INTEREST GROSS INTEREST INTEREST ADJUSTMENT
METHODOLOGY BALANCE CHANGE RATE MARGIN RATE RATE CAP
- ------------ --------- ------- -------- ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Level Pay............................ $ 235,955.98 6 8.950% 4.800% 16.656% 8.200% 1.000%
Level Pay............................ 1,285,920.90 1 8.577 5.222 17.080 8.577 1.000
Level Pay............................ 1,724,312.43 2 8.713 5.047 16.909 8.713 1.000
Level Pay............................ 1,680,959.43 3 8.554 4.874 16.810 8.554 1.000
Level Pay............................ 462,414.97 4 8.809 4.977 16.833 8.809 1.000
Level Pay............................ 233,322.97 5 9.516 5.730 17.577 8.662 1.000
Balloon.............................. 2,333,641.87 6 8.961 5.102 16.958 7.976 1.000
Balloon.............................. 12,839,198.29 1 8.392 5.214 17.072 8.390 1.000
Balloon.............................. 9,877,123.93 2 8.488 5.106 17.005 8.470 1.000
Balloon.............................. 5,911,504.65 3 8.652 5.119 17.027 8.652 1.000
Balloon.............................. 4,875,230.18 4 8.648 5.112 17.057 8.632 1.000
Balloon.............................. 2,489,491.54 5 8.741 5.257 17.052 8.702 1.000
Balloon.............................. 2,583,970.24 1 7.973 4.827 16.682 7.973 1.000
Balloon.............................. 763,887.72 6 9.458 5.151 17.018 8.634 1.000
Balloon.............................. 4,699,608.35 2 8.427 4.990 16.864 8.427 1.000
Balloon.............................. 5,933,874.86 3 8.563 5.059 16.973 8.563 1.000
Balloon.............................. 6,655,564.89 4 8.493 5.030 16.964 8.493 1.000
Balloon.............................. 3,315,658.81 5 8.725 5.171 16.939 8.725 1.000
Balloon.............................. 124,401.48 6 8.650 4.900 16.750 7.650 1.000
Balloon.............................. 643,224.93 1 8.292 5.021 16.863 8.292 1.000
Balloon.............................. 183,540.01 5 8.515 4.992 16.853 7.969 1.000
Balloon.............................. 535,470.37 2 8.450 5.060 16.947 8.450 1.000
Balloon.............................. 654,170.34 3 8.293 4.760 16.702 8.293 1.000
Balloon.............................. 401,031.60 4 8.225 4.837 16.728 8.225 1.000
Balloon.............................. 107,748.71 2 8.750 5.100 17.000 8.750 1.000
<CAPTION>
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO
AMORTIZATION TERM MATURITY MATURITY
METHODOLOGY (MONTHS) (MONTHS) (MONTHS)
- ------------ ------------ -------- ---------
<S> <C> <C> <C>
Level Pay............................ 180 180 176
Level Pay............................ 293 293 288
Level Pay............................ 294 294 290
Level Pay............................ 319 319 316
Level Pay............................ 333 333 331
Level Pay............................ 360 360 354
Balloon.............................. 360 83 77
Balloon.............................. 360 83 78
Balloon.............................. 360 83 79
Balloon.............................. 360 83 80
Balloon.............................. 360 83 81
Balloon.............................. 360 83 82
Balloon.............................. 360 119 114
Balloon.............................. 360 119 114
Balloon.............................. 360 119 115
Balloon.............................. 360 119 116
Balloon.............................. 360 119 117
Balloon.............................. 360 119 118
Balloon.............................. 360 179 173
Balloon.............................. 360 179 174
Balloon.............................. 360 179 175
Balloon.............................. 360 179 175
Balloon.............................. 360 179 176
Balloon.............................. 360 179 177
Balloon.............................. 360 239 235
</TABLE>
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each Class of Class A Certificates
indicated, and set 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, based on
the assumptions described above.
S-42
<PAGE> 43
PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES
OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1F CLASS A-2F
---------------------------------------------- ----------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200% 0% 50% 75% 100% 125% 150% 200%
------------ -- --- --- ---- ---- ---- ---- -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 15, 1999....... 96 71 58 45 32 19 0 100 100 100 100 100 100 64
April 15, 2000....... 91 39 14 0 0 0 0 100 100 100 57 0 0 0
April 15, 2001....... 86 10 0 0 0 0 0 100 100 0 0 0 0 0
April 15, 2002....... 81 0 0 0 0 0 0 100 41 0 0 0 0 0
April 15, 2003....... 75 0 0 0 0 0 0 100 0 0 0 0 0 0
April 15, 2004....... 69 0 0 0 0 0 0 100 0 0 0 0 0 0
April 15, 2005....... 36 0 0 0 0 0 0 100 0 0 0 0 0 0
April 15, 2006....... 32 0 0 0 0 0 0 100 0 0 0 0 0 0
April 15, 2007....... 26 0 0 0 0 0 0 100 0 0 0 0 0 0
April 15, 2008....... 0 0 0 0 0 0 0 45 0 0 0 0 0 0
April 15, 2009....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2010....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2011....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2012....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2013....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2014....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2015....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2016....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2017....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2018....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2019....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2020....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2021....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2022....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2027....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)*........ 6.50 1.69 1.21 0.95 0.79 0.68 0.53 10.07 3.94 2.68 2.05 1.66 1.39 1.05
<CAPTION>
CLASS A-3F
----------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100
April 15, 1999....... 100 100 100 100 100 100 100
April 15, 2000....... 100 100 100 100 82 48 0
April 15, 2001....... 100 100 97 50 9 0 0
April 15, 2002....... 100 100 54 6 0 0 0
April 15, 2003....... 100 81 20 0 0 0 0
April 15, 2004....... 100 55 0 0 0 0 0
April 15, 2005....... 100 18 0 0 0 0 0
April 15, 2006....... 100 11 0 0 0 0 0
April 15, 2007....... 100 2 0 0 0 0 0
April 15, 2008....... 100 0 0 0 0 0 0
April 15, 2009....... 99 0 0 0 0 0 0
April 15, 2010....... 82 0 0 0 0 0 0
April 15, 2011....... 62 0 0 0 0 0 0
April 15, 2012....... 39 0 0 0 0 0 0
April 15, 2013....... 0 0 0 0 0 0 0
April 15, 2014....... 0 0 0 0 0 0 0
April 15, 2015....... 0 0 0 0 0 0 0
April 15, 2016....... 0 0 0 0 0 0 0
April 15, 2017....... 0 0 0 0 0 0 0
April 15, 2018....... 0 0 0 0 0 0 0
April 15, 2019....... 0 0 0 0 0 0 0
April 15, 2020....... 0 0 0 0 0 0 0
April 15, 2021....... 0 0 0 0 0 0 0
April 15, 2022....... 0 0 0 0 0 0 0
April 15, 2023....... 0 0 0 0 0 0 0
April 15, 2024....... 0 0 0 0 0 0 0
April 15, 2025....... 0 0 0 0 0 0 0
April 15, 2026....... 0 0 0 0 0 0 0
April 15, 2027....... 0 0 0 0 0 0 0
Weighted Average
Life (Years)*........ 13.35 6.23 4.21 3.10 2.44 2.02 1.48
</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 Modeling Assumptions (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-43
<PAGE> 44
PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES
OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-4F CLASS A-5F
------------------------------------------------ -----------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200% 0% 50% 75% 100% 125%
- ------------ -- --- --- ---- ---- ---- ---- -- --- --- ---- ----
<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
April 15, 1999.................. 100 100 100 100 100 100 100 100 100 100 100 100
April 15, 2000.................. 100 100 100 100 100 100 72 100 100 100 100 100
April 15, 2001.................. 100 100 100 100 100 40 0 100 100 100 100 100
April 15, 2002.................. 100 100 100 100 29 0 0 100 100 100 100 100
April 15, 2003.................. 100 100 100 43 0 0 0 100 100 100 100 67
April 15, 2004.................. 100 100 93 3 0 0 0 100 100 100 100 38
April 15, 2005.................. 100 100 35 0 0 0 0 100 100 100 65 22
April 15, 2006.................. 100 100 30 0 0 0 0 100 100 100 65 22
April 15, 2007.................. 100 100 15 0 0 0 0 100 100 100 58 22
April 15, 2008.................. 100 40 0 0 0 0 0 100 100 73 35 16
April 15, 2009.................. 100 16 0 0 0 0 0 100 100 55 24 10
April 15, 2010.................. 100 0 0 0 0 0 0 100 94 41 17 6
April 15, 2011.................. 100 0 0 0 0 0 0 100 72 29 11 4
April 15, 2012.................. 100 0 0 0 0 0 0 100 54 20 7 2
April 15, 2013.................. 77 0 0 0 0 0 0 100 28 10 3 1
April 15, 2014.................. 68 0 0 0 0 0 0 100 24 8 2 1
April 15, 2015.................. 58 0 0 0 0 0 0 100 19 6 2 0
April 15, 2016.................. 47 0 0 0 0 0 0 100 16 4 1 0
April 15, 2017.................. 34 0 0 0 0 0 0 100 13 3 1 0
April 15, 2018.................. 22 0 0 0 0 0 0 100 10 2 1 0
April 15, 2019.................. 15 0 0 0 0 0 0 100 8 2 0 0
April 15, 2020.................. 8 0 0 0 0 0 0 100 7 1 0 0
April 15, 2021.................. 0 0 0 0 0 0 0 99 5 1 0 0
April 15, 2022.................. 0 0 0 0 0 0 0 88 4 1 0 0
April 15, 2023.................. 0 0 0 0 0 0 0 77 3 1 0 0
April 15, 2024.................. 0 0 0 0 0 0 0 64 2 0 0 0
April 15, 2025.................. 0 0 0 0 0 0 0 49 2 0 0 0
April 15, 2026.................. 0 0 0 0 0 0 0 33 1 0 0 0
April 15, 2027.................. 0 0 0 0 0 0 0 15 0 0 0 0
Weighted Average
Life (Years)*................... 17.85 10.12 7.28 5.00 3.77 2.98 2.13 26.76 15.16 12.15 9.49 6.71
<CAPTION>
CLASS A-5F CLASS A-6F
----------- ----------------------------------------------
PAYMENT DATE 150% 200% 0% 50% 75% 100% 125% 150% 200%
- ------------ ---- ---- -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............. 100 100 100 100 100 100 100 100 100
April 15, 1999.................. 100 100 100 100 100 100 100 100 100
April 15, 2000.................. 100 100 100 100 100 100 100 100 100
April 15, 2001.................. 100 7 100 100 100 100 100 100 100
April 15, 2002.................. 58 0 98 88 82 76 70 64 10
April 15, 2003.................. 10 0 96 76 66 55 45 35 0
April 15, 2004.................. 0 0 92 56 40 24 9 0 0
April 15, 2005.................. 0 0 61 17 0 0 0 0 0
April 15, 2006.................. 0 0 42 0 0 0 0 0 0
April 15, 2007.................. 0 0 24 0 0 0 0 0 0
April 15, 2008.................. 0 0 0 0 0 0 0 0 0
April 15, 2009.................. 0 0 0 0 0 0 0 0 0
April 15, 2010.................. 0 0 0 0 0 0 0 0 0
April 15, 2011.................. 0 0 0 0 0 0 0 0 0
April 15, 2012.................. 0 0 0 0 0 0 0 0 0
April 15, 2013.................. 0 0 0 0 0 0 0 0 0
April 15, 2014.................. 0 0 0 0 0 0 0 0 0
April 15, 2015.................. 0 0 0 0 0 0 0 0 0
April 15, 2016.................. 0 0 0 0 0 0 0 0 0
April 15, 2017.................. 0 0 0 0 0 0 0 0 0
April 15, 2018.................. 0 0 0 0 0 0 0 0 0
April 15, 2019.................. 0 0 0 0 0 0 0 0 0
April 15, 2020.................. 0 0 0 0 0 0 0 0 0
April 15, 2021.................. 0 0 0 0 0 0 0 0 0
April 15, 2022.................. 0 0 0 0 0 0 0 0 0
April 15, 2023.................. 0 0 0 0 0 0 0 0 0
April 15, 2024.................. 0 0 0 0 0 0 0 0 0
April 15, 2025.................. 0 0 0 0 0 0 0 0 0
April 15, 2026.................. 0 0 0 0 0 0 0 0 0
April 15, 2027.................. 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)*................... 4.25 2.71 7.67 5.84 5.39 5.04 4.72 4.47 3.56
</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 Modeling Assumptions (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-44
<PAGE> 45
PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES
OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-7F CLASS A-1A
----------------------------------------------- ----------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200% 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ---- -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 15, 1999............... 100 100 100 100 100 100 100 99 87 81 75 68 62 50
April 15, 2000............... 100 100 100 100 100 100 100 99 76 65 56 47 39 25
April 15, 2001............... 100 100 100 100 100 100 100 98 66 53 41 32 24 12
April 15, 2002............... 100 100 100 100 100 100 100 97 57 42 31 22 15 6
April 15, 2003............... 100 100 100 100 100 100 56 97 50 34 23 15 9 3
April 15, 2004............... 100 100 100 100 100 94 29 96 43 28 17 10 6 1
April 15, 2005............... 100 100 98 80 64 50 12 43 17 10 6 3 2 0
April 15, 2006............... 100 71 47 37 34 31 6 43 15 8 4 2 1 0
April 15, 2007............... 100 41 22 14 14 19 3 42 13 6 3 1 1 0
April 15, 2008............... 13 2 1 0 0 8 1 10 3 1 1 0 0 0
April 15, 2009............... 10 1 0 0 0 5 1 10 2 1 0 0 0 0
April 15, 2010............... 8 1 0 0 0 3 0 10 2 1 0 0 0 0
April 15, 2011............... 5 0 0 0 0 2 0 9 2 1 0 0 0 0
April 15, 2012............... 3 0 0 0 0 1 0 9 1 0 0 0 0 0
April 15, 2013............... 0 0 0 0 0 0 0 6 1 0 0 0 0 0
April 15, 2014............... 0 0 0 0 0 0 0 5 1 0 0 0 0 0
April 15, 2015............... 0 0 0 0 0 0 0 5 1 0 0 0 0 0
April 15, 2016............... 0 0 0 0 0 0 0 5 0 0 0 0 0 0
April 15, 2017............... 0 0 0 0 0 0 0 4 0 0 0 0 0 0
April 15, 2018............... 0 0 0 0 0 0 0 3 0 0 0 0 0 0
April 15, 2019............... 0 0 0 0 0 0 0 3 0 0 0 0 0 0
April 15, 2020............... 0 0 0 0 0 0 0 2 0 0 0 0 0 0
April 15, 2021............... 0 0 0 0 0 0 0 2 0 0 0 0 0 0
April 15, 2022............... 0 0 0 0 0 0 0 1 0 0 0 0 0 0
April 15, 2023............... 0 0 0 0 0 0 0 1 0 0 0 0 0 0
April 15, 2024............... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2025............... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2026............... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
April 15, 2027............... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)*................ 10.03 8.72 8.18 7.84 7.66 7.64 5.59 8.57 4.88 3.84 3.07 2.50 2.06 1.44
</TABLE>
- ---------------
* The weighted average life of a Class 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 Modeling Assumptions (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-45
<PAGE> 46
SENSITIVITY OF THE CLASS A-IO CERTIFICATES
THE YIELD TO AN INVESTOR IN THE CLASS A-IO CERTIFICATES WILL BE SENSITIVE
TO BOTH THE TIMING OF RECEIPT OF PREPAYMENTS AND THE OVERALL RATE OF PRINCIPAL
PREPAYMENT ON THE MORTGAGE LOANS IN THE FIXED RATE GROUP, WHICH RATE MAY
FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME. AN INVESTOR SHOULD FULLY CONSIDER THE
ASSOCIATED RISKS, INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) COULD RESULT IN THE FAILURE OF AN INVESTOR IN THE CLASS
A-IO CERTIFICATES TO FULLY RECOVER ITS INITIAL INVESTMENT.
The following table indicates the sensitivity to various rates of
prepayment on the Mortgage Loans in the Fixed Rate Group of the pre-tax yields
to maturity on a corporate bond equivalent ("CBE") basis, and of the weighted
average life of the Class A-IO Certificates at various percentages of the
Prepayment Assumption. Such calculations are based on distributions made in
accordance with "Description of Certificates" below, on the Modeling Assumptions
and on the further assumption that the Class A-IO Certificates will be purchased
on April 23, 1998 at a purchase price equal to approximately 5.447% of the
Original Notional Amount for the Class A-IO Certificates plus accrued interest
thereon from April 1, 1998 to (but not including) April 23, 1998.
SENSITIVITY OF THE PRE-TAX YIELD TO MATURITY OF THE CLASS A-IO CERTIFICATES TO
PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
-----------------------------------------------------------
0% 50% 75% 100% 125% 150% 200%
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE)... 6.36% 6.36% 6.36% 6.36% 6.36% 6.36% 6.36%
Weighted Average Life (Years)..... 2.39 2.39 2.39 2.39 2.39 2.39 2.39
</TABLE>
The pre-tax yields to maturity set forth in the preceding table were
calculated by (i) determining the monthly discount rates which, when applied to
the assumed stream of cash flows to be paid on the Class A-IO Certificates would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase described above and (ii) converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account the
interest rates at which an investor may be able to reinvest funds received by
such investor as distributions on the Class A-IO Certificates and consequently
does not purport to reflect the return on any investment in the Class A-IO
Certificates when such reinvestment rates are considered.
The weighted average lives of the Class A-IO Certificates set forth in the
preceding table were calculated as the lesser of (a) the number obtained by (i)
multiplying the amount of each distribution in reduction of the Class A-IO
Notional Amount by the number of years from the date of issuance of the Class
A-IO Certificates to the related Payment Date, (ii) adding the results and (iii)
dividing the sum by the highest Class A-IO Notional Amount and (b) the amount of
time that will elapse from the date of issuance until September 15, 2000.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans in the Fixed Rate Group
will prepay at a constant rate until maturity, that all of the Mortgage Loans in
the Fixed Rate Group will prepay at the same rate or that the Mortgage Loans in
the Fixed Rate Group will not experience any losses. The Mortgage Loans in the
Fixed Rate Group initially included in the Trust Fund will differ from those
assumed to be included. As a result of these factors, the pre-tax yields to
maturity on the Class A-IO Certificates are likely to differ from those shown in
such table, even if all of the Mortgage Loans in the Fixed Rate Group prepay at
the indicated percentages of the Prepayment Assumption.
S-46
<PAGE> 47
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.
On January 9, 1998, Barnett Banks, Inc., of which EquiCredit was a
wholly-owned indirect subsidiary, merged with NationsBank Corporation. As a
result EquiCredit is now an indirect wholly-owned subsidiary of NationsBank
Corporation.
As of December 31, 1997, the Company had a total of 1,356 employees; 635
employees at its Jacksonville, Florida headquarters and an additional 721
employees in 191 branch offices located nationwide. As of December 31, 1997, the
total stockholder's equity of the Company was $412.2 million. Copies of the
audited financial statements of the Company for the fiscal years ended December
31, 1997, 1996 and 1995, prepared on the basis of generally accepted accounting
principles, may be obtained upon request from Jay Bray, Senior Vice President
and Chief Financial Officer, EquiCredit Corporation of America, 10401 Deerwood
Park Boulevard, Jacksonville, Florida 32256 or by telephoning (904) 987-5566.
LOAN ORIGINATION HISTORY
At December 31, 1997, 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,
Kansas, 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,
1997, 1996 and 1995 were $2.9 billion, $2.0 billion and $1.1 billion,
respectively.
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
UNDERWRITING NUMBER OF POOL BY
PROGRAM* MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -------------------
<S> <C> <C> <C>
Class A....................................... 8,405 $420,960,773.26 56.97%
Class B....................................... 3,779 193,964,756.57 26.25
Class C....................................... 2,425 111,913,875.63 15.15
Class D....................................... 258 12,034,667.76 1.63
------ --------------- ------
Total............................... 14,867 $738,874,073.22 100.00%
====== =============== ======
</TABLE>
- ---------------
* Class A refers collectively to the Class A+ and Class A Underwriting Programs,
Class B refers collectively to the Class B+ and Class B Underwriting Programs,
Class C refers collectively to the Class C+ and Class C Underwriting Programs
and Class D refers to the Class D Underwriting Program. References to each of
the Class A, Class B, Class C and Class D Underwriting Programs also refer to
substantially similar programs employed by the Originators before August 1996.
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.
SERVICING PORTFOLIO
At December 31, 1996 and December 31, 1997, the Company serviced a total
portfolio of 83,454 and 115,309 mortgage loans, respectively, having aggregate
unpaid principal balances of $3.5 billion and $5.2
S-47
<PAGE> 48
billion, respectively, for itself and investors consisting primarily of major
commercial banks, savings and loan associations, brokerage houses and Fannie Mae
("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 YEAR ENDED
DECEMBER 31,
------------------------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Portfolio Unpaid Principal
Balance(1)................................................ $2,348,583 $3,513,223 $5,192,536
Average Portfolio Unpaid
Principal Balance......................................... $2,029,782 $2,930,903 $4,353,080
Period of Delinquency(2):
30-59 Days................................................ 1.38% 1.89% 2.28%
60-89 Days................................................ 0.68% 0.89% 0.96%
90 Days or More........................................... 2.38% 2.80% 3.57%
Total Delinquencies......................................... 4.45% 5.58% 6.81%
Total Credit Losses(3)...................................... $ 10,738 $ 14,418 $ 22,590
Total Credit Losses as a Percent of Average Portfolio Unpaid
Principal Balance......................................... 0.53% 0.49% 0.52%
</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.
S-48
<PAGE> 49
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.
OUTSTANDING REAL ESTATE OWNED
At each of December 31, 1996 and December 31, 1997, 267 and 355 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, 1996 and December
31, 1997 had recorded book values of $13.8 million and $17.2 million,
respectively.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The EQCC Home Equity Loan Asset Backed Certificates, Series 1998-1 (the
"Certificates"), will consist of thirteen classes of Certificates, designated
(i) the Class A-1F Certificates, Class A-2F Certificates, Class A-3F
Certificates, Class A-4F Certificates, Class A-5F Certificates, Class A-6F
Certificates, Class A-7F Certificates and Class A-IO Certificates (collectively,
the "Fixed Rate Certificates"), (ii) the Class A-1A Certificates (the
"Adjustable Rate Certificates" and, together with the Fixed Rate Certificates,
the "Class A Certificates"), (iii) the Class X Certificates and (iv) the Class
R, Class MR and Class LR Certificates (collectively, the "Residual
Certificates"). Only the Class A Certificates are offered hereby.
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 and Spread 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 of $1.00 in excess 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 or Class A-IO Notional Amount, as applicable, represented by such Class A
Certificate by the original aggregate principal amount or original aggregate
notional amount, as applicable of all Class A Certificates of such Class.
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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-1F Certificates:............................ December 15, 2007
Class A-2F Certificates:............................ April 15, 2009
Class A-3F Certificates:............................ December 15, 2012
Class A-4F Certificates:............................ March 15, 2021
Class A-5F Certificates:............................ January 15, 2028
Class A-6F Certificates:............................ December 15, 2007
Class A-7F Certificates:............................ November 15, 2027
Class A-IO Certificates:............................ September 15, 2000
Class A-1A Certificates:............................ October 15, 2027
</TABLE>
The Final Scheduled Payment Date for each Class of Class A Certificates
(other than the Class A-5F, Class A-7F and Class A-IO 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 in the Fixed Rate Group,
(y) each Monthly Payment of principal of and interest on each Mortgage Loan in
the Fixed Rate Group is timely received and (z) the Mortgage Loans in the Fixed
Rate Group have the applicable characteristics set forth in the Modeling
Assumptions. The Final Scheduled Payment Date for the Class A-5F and Class A-7F
Certificates is the Payment Date following the calendar month in which the
stated maturity of the Mortgage Loan in the Fixed Rate Group having the latest
stated maturity occurs, plus one year. The Final Scheduled Payment Date for the
Class A-IO Certificates is September 15, 2000, the date on which the
Pass-Through Rate for the Class A-IO Certificates is reduced to zero.
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 Original Pool Principal Balance
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. 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
Each Class of Class A Certificates will be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), the nominee of DTC.
No person acquiring an interest in the Class A Certificates ("Certificate
Owner") will be entitled to receive a physical certificate representing such
persons interest (a "Definitive Certificate"), except as set under "Description
of the Securities -- Registration and Transfer of the Securities" in the
Prospectus. Unless and until Definitive Certificates are issued for the Class A
Certificates under the limited circumstances described therein, all references
to actions by Certificateholders with respect to the Class A Certificates shall
refer to actions taken by DTC upon instructions from DTC Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Class A Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of the Class A Certificates, for distribution to Certificate Owners by
DTC in accordance with DTC procedures. Holders of Class A Certificates may hold
their Certificates through 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 (in Europe) if
they are participants of such
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<PAGE> 51
systems, or indirectly through organizations which are participants in such
systems. See "Annex I" hereto and "Description of the Securities -- Registration
and Transfer of the Securities" in the Prospectus.
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 May 15, 1998, 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 of record owns 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. Certificate Owners may experience some
delays in the receipt of their payments due to the operation of DTC. See "Risk
Factors -- Book-Entry Certificates" herein, "Annex I" hereto and "Risk
Factors -- Securities" and "Description of the Securities -- Registration and
Transfer of the Securities" in the Prospectus.
Except with respect to certain Payment Dates following the depletion of the
Spread Account as described below, 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, to each Class of Class A Certificates, from the amounts
attributable to the related Mortgage Loan Group, the related Class A
Interest Remittance Amount;
(iv) fourth, 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;
(v) fifth, to the Class A Certificates, from the amounts attributable
to the related Mortgage Loan Group, the Class A Principal Remittance Amount
concurrently as follows:
(a) to the Class A-6F Certificates and then to the Class A-7F
Certificates, in that order, until the Principal Balance of each such
Class has been reduced to zero, the Lockout Remittance Amount; and then
sequentially, to the Class A-1F, Class A-2F, Class A-3F, Class A-4F,
Class A-5F, Class A-6F and Class A-7F Certificates (in each case,
without regard to the Lockout Remittance Amount), in that order, in each
case until the Principal Balance of each such Class has been reduced to
zero, the Principal Remittance Amount for the Fixed Rate Group; and
(b) concurrently to the Class A-1A Certificates, to be applied to
reduce the Principal Balance of such Class to zero, the Principal
Remittance Amount for the Adjustable Rate Group;
(vi) sixth, 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;
(vii) seventh, 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;
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<PAGE> 52
(viii) eighth, to the Servicer, an amount equal to Nonrecoverable
Advances previously made by the Servicer and not previously reimbursed; and
(ix) ninth, to the Class X Certificateholders, to the extent of such
Class's entitlement under the Pooling and Servicing Agreement; and
(x) tenth, to the Class R, Class MR and Class LR Certificateholders,
the balance, if any, in the manner provided in the Pooling and Servicing
Agreement.
The "Lockout Remittance Amount" for any Payment Date will be the least of
(a) product of (i) the applicable Lockout Percentage for such Payment Date and
(ii) the Lockout Pro Rata Remittance Amount for such Payment Date, (b) the
Principal Remittance Amount for the Fixed Rate Group for such Payment Date and
(c) the aggregate Principal Balance of the Class A-6F Certificates and Class
A-7F Certificates immediately prior to such Payment Date.
The "Lockout Percentage" for each Payment Date shall be as follows:
<TABLE>
<CAPTION>
Payment Dates Lockout Percentage
------------- ------------------
<S> <C>
May 1998 - April 2001............................ 0%
May 2001 - April 2003............................ 45%
May 2003 - April 2004............................ 80%
May 2004 - April 2005............................ 100%
May 2005 and thereafter.......................... 300%
</TABLE>
The "Lockout Pro Rata Remittance Amount" for any Payment Date will be an
amount equal to the product of (x) a fraction, the numerator of which is the sum
of Principal Balances of the Class A-6F and Class A-7F Certificates immediately
prior to such Payment Date and the denominator of which is the Fixed Rate
Certificate Principal Balance immediately prior to such Payment Date and (y) the
Principal Remittance Amount for the Fixed Rate Group on such Payment Date.
Notwithstanding the foregoing, if on any Payment Date following the
depletion of the Spread Account, the Insurer fails to make an Insured Payment
when due, the Class A Principal Remittance Amount will be distributed to each
Class of Class A Certificates on a pro rata basis in proportion to the
respective Principal Balance of each such Class.
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 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 Fixed Rate Certificates will accrue
from and including the first day of each month, commencing April 1, 1998
(whether or not such day is a Business Day) to and including the last day of
such month (whether or not such day is a Business Day). Interest on the
Adjustable Rate Certificates will accrue from and including the Closing Date, in
the case of the initial Payment Date, or from and including the most recent
Payment Date on which interest has been paid, to but excluding the next
succeeding Payment Date. Each period referred to above relating to the accrual
of interest is the "Accrual Period" for the related Class of Class A
Certificates. Interest shall accrue on each Class of Fixed Rate Certificates at
the related Pass-Through Rate shown on the cover page hereof. Interest shall
accrue on the Adjustable Rate Certificates at a Pass-Through Rate equal to the
lesser of (i) the London interbank offered rate for one-month United States
dollar deposits (calculated as described under "-- Calculation of LIBOR" below)
as of the second business day prior to the immediately preceding Payment Date
(or the second business day prior to the
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<PAGE> 53
Closing Date with respect to the initial Payment Date) (the "LIBOR Determination
Date") plus (a) 0.16% per annum on each Payment Date on or prior to the Optional
Purchase Date (as defined herein) and (b) 0.32% per annum on each Payment Date
following the Optional Purchase Date (the "Class A-1A LIBOR Rate") and (ii) the
Net Funds Cap Rate with respect to such Accrual Period. The "Net Funds Cap Rate"
for any Accrual Period shall be a rate equal to the weighted average of the
Mortgage Interest Rates on the Mortgage Loans in the Adjustable Rate Group as of
the first day of the related Due Period less either (i) 0.69% per annum, with
respect to the first twelve Accrual Periods or (ii) 1.19% per annum, with
respect to each subsequent Accrual Period. 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
(other than the Adjustable Rate Certificates) will accrue on the basis of a 360
day year consisting of twelve 30 day months. Interest with respect to the
Adjustable Rate Certificates on each Payment Date will accrue on the basis of
the actual number of days from, and including, the preceding Payment Date to,
but excluding, such Payment Date, over a 360-day year. 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) (or Class A-IO Notional Amount, in the case of the
Class A-IO Certificates) 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 Balance or Original Notional Amount, as
applicable, 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 Certificates.
See "Description of the Certificates -- Distributions" in the Prospectus.
If on any Payment Date the Class A-1A Pass-Through Rate is equal to the Net
Funds Cap Rate, an amount equal to the LIBOR Interest Carryover (as defined
below) will be distributed on subsequent Payment Dates to the Adjustable Rate
Certificates from the Excess Spread with respect to the Mortgage Loans in the
Adjustable Rate Group which would otherwise be distributed to the holders of the
Class X Certificates on such Payment Date. The "LIBOR Interest Carryover" for
any Payment Date shall equal (i) the difference between (a) the amount of
interest the Adjustable Rate Certificates would be entitled to receive on such
Payment Date without regard to the Net Funds Cap Rate and (b) the amount of
interest actually distributed to the Adjustable Rate Certificates on such
Payment Date, plus (ii) the portion of any amount calculated pursuant to clause
(i) remaining unpaid from prior Payment Dates (and interest accrued thereon at
the then-applicable Class A-1A LIBOR Rate).
Calculation of LIBOR. On each LIBOR Determination Date (as defined above),
the Trustee will determine the London interbank offered rate for one-month U.S.
dollar deposits ("LIBOR") for the next Accrual Period for the Adjustable Rate
Certificates on the basis of the British Bankers' Association ("BBA") "Interest
Settlement Rate" for one-month deposits in U.S. dollars as found on Telerate
page 3750 as of 11:00 a.m. London time on such LIBOR Determination Date. Such
Interest Settlement Rates currently are based on rates quoted by 16 BBA
designated banks as being, in the view of such banks, the offered rate at which
deposits are being quoted to prime banks in the London interbank market. Such
Interest Settlement Rates are calculated by eliminating the four highest rates
and the four lowest rates, averaging the eight remaining rates, carrying the
results (expressed as a percentage) out to six decimal places, and rounding to
five decimal places. As used herein "Telerate page 3750" means the display
designated as page 3750 on the Dow Jones Telerate Service.
If, on any LIBOR Determination Date the Trustee is unable to determine
LIBOR on the basis of the method set forth in the preceding paragraph, LIBOR for
that day will be determined on the basis of the rates at which deposits in
United States dollars are offered by the Reference Banks at approximately 11:00
a.m., London time, on that day to prime banks in the London interbank market for
a period equal to the relevant Accrual Period (commencing on the first day of
such Accrual Period). The Trustee will request the principal London office of
each of the Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided as requested, the
rate for that day will be the arithmetic mean of the rates quoted by major banks
in New York City, selected by the Servicer, at approximately 11:00 a.m., New
York City time, on that day for
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<PAGE> 54
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"Reference Banks" means four major banks in the London interbank market
selected by the Servicer.
Principal. Holders of the Class A Certificates (other than the Class A-IO
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 in the
related Mortgage Loan Group (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 in such Mortgage
Loan Group 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 in such Mortgage Loan Group ("Principal Prepayments")
and partial prepayments on any such Mortgage Loan in the related Mortgage Loan
Group 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 in such Mortgage Loan Group, 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 in such Mortgage
Loan Group, 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 in such Mortgage Loan
Group 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 in such Mortgage Loan Group 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 in such Mortgage Loan Group 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" with respect to such Mortgage Loan Group)
and (b) the sum of (i) the amount, if any, by which (A) the amount required to
be distributed to Fixed Rate Certificateholders or Adjustable Rate
Certificateholders, as the case may be, as of the preceding Payment Date
exceeded (B) the amount of the actual distribution to such Fixed Rate
Certificateholders or Adjustable Rate Certificateholders, as the case may be, 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 (with respect to the Certificates related to each
Mortgage Loan Group, the "Carry-Forward Amount" with respect to such
Certificates, together with the Basic Principal Amount for such Certificates,
the Principal Remittance Amount for such Certificates and the aggregate
Principal Remittance Amount, with respect to all of the Class A Certificates,
the "Class A Principal Remittance Amount").
Except as otherwise provided herein, on each Payment Date, after payment of
the Lockout Remittance Amount to the Class A-6F Certificates and the Class A-7F
Certificates, the lesser of (i) the Fixed Rate Certificate Principal Balance
then outstanding and (ii) the remaining Principal Remittance Amount for the
Fixed Rate Group (together with the Class A Interest Remittance Amount for the
Fixed Rate Certificates, the "Remittance Amount" for the Fixed Rate Group) is
payable to the Fixed Rate Certificates (other than the Class A-IO Certificates),
in the order and priority described under "Description of the Certificates --
Distributions -- General" above. Concurrently with such distribution to the
Fixed Rate Certificates, on each Payment Date, the lesser of (i) the Adjustable
Rate Certificate Principal Balance then outstanding and (ii) the Principal
Remittance Amount for the Adjustable Rate Group (together with the Class A
Interest
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<PAGE> 55
Remittance Amount for the Adjustable Rate Certificates, the "Remittance Amount"
for the Adjustable Rate Group) is payable to the Adjustable Rate Certificates
until the Principal Balance of such Class is reduced to zero. On any Payment
Date, the aggregate Remittance Amount for the Class A Certificates is referred
to herein as the "Class A Remittance Amount."
As of any Payment Date, the "Class A Principal Balance" will equal the sum
of the Original Principal Balance of each Class of Class A Certificates (other
than the Class A-IO Certificates) less all amounts previously distributed on
account of principal to holders of the Class A Certificates. As of any Payment
Date, the "Fixed Rate Certificate Principal Balance" will equal the Original
Fixed Rate Certificate Principal Balance, less all amounts previously
distributed on account of principal to holders of the Fixed Rate Certificates.
As of any Payment Date, the "Adjustable Rate Certificate Principal Balance" will
equal the Original Class A-1A Principal Balance, less all amounts previously
distributed on account of principal to holders of the Class A-1A Certificates.
As of any Payment Date, the "Principal Balance" for each Class of Class A
Certificates (other than the Class A-IO Certificates) will equal the Original
Principal Balance for such Class, less all amounts previously distributed on
account of principal to holders of such Class. The Class A-IO Certificates are
not entitled to distributions in respect of principal and have no Principal
Balance. As of any Payment Date, the Class A-IO Notional Amount will equal the
Original Notional Amount for the Class A-IO Certificates, less all amounts
previously distributed on account of principal to the Class A-6F and Class A-7F
Certificates.
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") and (iii) 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").
Excess Spread amounts deposited into the Spread Account will be deemed to have
been paid to the Class X Certificates and deposited into the Spread Account.
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 Base Spread Account
Requirement and the percentage used in determining the Periodic Excess Spread
Amount may be reduced at the sole discretion of the Insurer, may be reduced at
the sole in each case without the consent of any Certificateholder.
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
without regard to Mortgage Loan Group; 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. Amounts on deposit in the Spread
Account are available for payments to the Class A Certificates, without regard
to the related Mortgage Loan Groups.
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<PAGE> 56
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, after payment of
unreimbursed Servicing Advances to the Servicer, first, to the extent of Excess
Spread with respect to the Mortgage Loans in the Adjustable Rate Group, to the
Adjustable Rate Certificateholders to pay any LIBOR Interest Carryover and
second, to the holders of the Class X Certificates.
Neither the holders of the Class X 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. The use of any of the following terms with
respect to either the Fixed Rate Group or the Adjustable Rate Group shall have
the same meaning as set forth below, except that all amounts referred to shall
include only the Fixed Rate Group or the Adjustable Rate Group, as applicable.
"Available Payment Amount" generally equals (a) collections on or with
respect to the Mortgage Loans in the related Mortgage Loan Group 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.
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"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 (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
April 1998.
April 1.................... Cut-off Date. The Original Pool Principal Balance
will be the aggregate principal balance of the
Mortgage Loans on the Cut-off Date after
application of all payments received prior to the
Cut-off Date.
April 1 - April 30......... 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).
April 26................... LIBOR Determination Date. The Trustee determines
LIBOR with respect to the Adjustable Rate
Certificates for the related Accrual Period
commencing on the Closing Date.
May 9...................... 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 May 15, 1998.
May 10..................... The Servicer transfers funds, including any
Advances, in the Principal and Interest Account to
the Collection Account.
Not later than 10:00 a.m.
(eastern standard time)
on May 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 May 15, 1998.
May 14..................... First Record Date. Distributions on May 15, 1998
will be made to Certificateholders of record at the
close of business on May 14, 1998.
May 15..................... Payment Date. The Trustee or its designee will
transfer funds from the Collection Account into the
Insurance Account and the Spread 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 X Certificateholders.
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
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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. The
Securities Insurance Policy does not guarantee payment of any LIBOR Interest
Carryover. See "The Securities Insurance Policy and the Insurer" herein.
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 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 for each Mortgage Loan
Group (net of the related Servicing Fee and, after the Cross-Over Date, 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 for each
Mortgage Loan Group or otherwise.
SERVICING COMPENSATION
As compensation for servicing and administering the Mortgage Loans, the
Servicer is entitled to a per annum fee (the "Servicing Fee"), 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 Original Pool Principal Balance 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 and (z) any unpaid LIBOR
Interest Carryover minus (ii) any amounts representing collections on the
Mortgage Loans and REO Properties not yet applied to reduce the principal
balance thereof or interest
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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.
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 or mistake, 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 or a letter from each Rating Agency
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 each of the Class X, Class
R, Class MR and Class LR 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 three separate REMICs or cause any tax to be imposed on a
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. For purposes of determining the Majority in Aggregate Voting Interest,
the Class X Certificates will be deemed to hold 5% of the aggregate voting
interests and the Class A Certificates will be deemed to hold in the aggregate
95% of the aggregate voting interests. The voting interest of each Class of
Class A Certificates will be its pro rata portion of the aggregate voting
interest of the Class A Certificates based on the respective outstanding
Principal Balances of the Classes of Class A Certificates.
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 three separate REMICs at
any time that any Certificate is outstanding.
THE TRUSTEE
U.S. 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.
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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.
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 has been provided by Ambac
Assurance Corporation (the "Insurer"). 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.
THE INSURER
The Insurer is a Wisconsin-domiciled stock insurance corporation regulated
by the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the District of Columbia, the Commonwealth
of Puerto Rico and Guam. The Insurer primarily insures newly issued municipal
and structured finance obligations. The Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly AMBAC Inc.), a 100% publicly-held company.
Moody's, S&P and Fitch Investors Service, L.P. have each assigned a triple-A
claims-paying ability rating to the Insurer.
The consolidated financial statements of the Insurer and its subsidiaries
as of December 31, 1997 and December 31, 1996 and for the three years ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Current Report on Form 8-K of Ambac Financial Group,
Inc. (which was filed with the Commission on March 27, 1998; Commission File No.
1-10777) are hereby
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incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained herein by reference herein
also modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Insurer as of
December 31, 1994, December 31, 1995, December 31, 1996 and December 31, 1997,
respectively, in conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
(AUDITED) (AUDITED) (AUDITED) (AUDITED)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Unearned premiums............................. $ 840 $ 906 $ 995 $1,184
Other liabilities............................. 136 295 259 520
------ ------ ------ ------
Total liabilities............................. $ 976 $1,201 $1,254 $1,704
------ ------ ------ ------
Stockholder's equity
Common stock................................ $ 82 $ 82 $ 82 $ 82
Additional paid-in capital.................. 444 481 515 521
Unrealized gains (losses) on investments,
net of tax............................... (46) 87 66 118
Retained earnings........................... 782 907 992 1,180
------ ------ ------ ------
Total stockholder's equity.................... $1,262 $1,557 $1,655 $1,901
------ ------ ------ ------
Total liabilities and stockholder's equity.... $2,238 $2,758 $2,909 $3,605
====== ====== ====== ======
</TABLE>
For additional financial information concerning the Insurer, see the
audited financial statements of the Insurer incorporated by reference herein.
Copies of the financial statements of the Insurer incorporated herein by
reference and copies of the Insurer's annual statement for the year ended
December 31, 1997 prepared in accordance with statutory accounting standards are
available, without charge, from the Insurer. The address of the Insurer's
administrative offices and its telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Insurer and presented
under this heading "The Securities Insurance Policy and the Insurer" and in the
financial statements incorporated herein by reference.
THE SECURITIES INSURANCE POLICY
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 Insured Payments 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.
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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 Insurer only insures the timely receipt of interest on the Class A
Certificates and the timely receipt of Class A Principal Remittance Amount on
the Class A Certificates. The Securities Insurance Policy does not guarantee to
the Class A Certificateholders any rate of principal payments on the Class A
Certificates. The Securities Insurance Policy does not guarantee payment of any
LIBOR Interest Carryover. The Securities Insurance Policy expires and terminates
without any action on the part of the Insurer or any other person on the date
that is one year and one day following the date on which the Class A
Certificates have been paid in full.
In the absence of payments under the Securities Insurance Policy,
Certificateholders will directly bear the credit and other risks associated with
their undivided interest in the Trust Fund.
The Securities Insurance Policy is non-cancelable.
The Securities Insurance Policy is issued under and pursuant to and shall
be construed under, the laws of the State of Illinois, without giving effect to
the conflict of laws principles thereof.
THE SECURITIES INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft, special tax counsel to the Depositors.
Assuming compliance with all provisions of the Pooling and Servicing
Agreement for federal income tax purposes, the Trust Fund will qualify as three
separate REMICs (the "Upper-Tier REMIC", the "Middle-Tier REMIC" and the
"Lower-Tier REMIC," respectively) under the Code. The Lower-Tier REMIC will hold
the Mortgage Loans, proceeds therefrom, and any REO Property, and will issue (i)
certain uncertificated classes of regular interests (the "Lower-Tier Regular
Interests") to the Middle-Tier REMIC and (ii) the Class LR Certificates, which
will represent the sole class of residual interests in the Lower-Tier REMIC. The
Middle-Tier REMIC will hold the Lower-Tier Regular Interests and will issue (i)
certain uncertificated classes of regular interests (the "Middle-Tier Regular
Interests") and (ii) the Class MR Certificates, which will represent the sole
class of residual interest in the Middle-Tier REMIC. The Upper-Tier REMIC will
hold the Middle-Tier Regular Interests and will issue (i) classes of regular
interests represented by the Class A Certificates and Class X Certificates and
(ii) the Class R Certificates, which will represent the sole class of residual
interests in the Upper-Tier REMIC. The right of the Class A-1A Certificates to
receive certain payments in respect of basis risk shortfall from the Spread
Account (the "Basis Risk Arrangement") will not be an asset of the Upper-Tier
REMIC, Middle-Tier REMIC or Lower-Tier REMIC, but will be treated as the asset
of a grantor trust for federal income tax purposes. In addition to representing
a beneficial interest in a regular interest in the Upper Tier REMIC, the Class
A-1A Certificates will represent a beneficial interest in the Basis Risk
Arrangement. Because it appears that the value of the Basis Risk Arrangement
will be minimal, initial holders of Class A-1A Certificates should not be
required to allocate any portion of the purchase price to the Basis Risk
Arrangement. Investors in the Class A-1A Certificates should consult their own
tax advisors in this regard.
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TAXATION OF CLASS A REGULAR INTERESTS
For federal income tax reporting purposes, the Class A-IO Certificates
will, and the other classes of Class A Certificates may, be treated as having
been issued with original issue discount. The prepayment assumption that will be
used with respect to the Class A Certificates in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that, subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to the
Prepayment Assumption. No representation is made that the Mortgage Loans will
prepay at the Prepayment Assumption or at any other particular rate. See
"Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Original Issue Discount" in the Prospectus.
Except as described below with respect to the Class A-1A Certificates, the
Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates (except
as described below with respect to the Class A-1A Certificates) will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code generally to the extent that such Class A Regular
Interests are treated as "real estate assets" under Section 856(c)(4)(A) of the
Code. Moreover, the Class A Certificates (except as described below with respect
to the Class A-1A Certificates) will be "qualified mortgages" within the meaning
of Section 860G(a)(3) of the Code. The foregoing discussion shall be applicable
to the Class A-1A Certificates to the extent they represent a beneficial
interest in the related regular interest in the Upper-Tier REMIC. See "The
Pooling and Servicing Agreement -- Termination" herein and "Certain Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
TAXATION OF BASIS RISK ARRANGEMENT
Each holder of an Adjustable Rate Certificate will be treated for federal
income tax purposes as having entered into a notional principal contract
pursuant to its rights to receive payment for LIBOR Interest Carryovers under
the Basis Risk Arrangement on the date it purchases its Certificate. The
Internal Revenue Service (the "IRS") has issued final regulations under Section
446 of the Code relating to notional principal contracts (the "Swap
Regulations").
In general, the holders of the Adjustable Rate Certificates must allocate
the price they pay for the Adjustable Rate Certificates between their regular
interest and the Basis Risk Arrangement. For purposes of tax information
reporting, it is anticipated that the Trustee will assume that all of the
purchase price for the Adjustable Rate Certificates will be wholly allocable to
such Certificates' proportionate interest in the corresponding regular interest.
However, if rights to receive payment for LIBOR Interest Carryovers under the
Basis Risk Arrangement are determined to have a value on the Startup Day that is
greater than zero, a portion of such purchase price will be allocable to such
rights, and such portion will be treated as a cap premium (the "Cap Premium").
In this event, a holder of an Adjustable Rate Certificate will be required to
amortize the Cap Premium under a level payment method as if the Cap Premium
represented the present value of a series of equal payments made over the life
of the Basis Risk Arrangement (adjusted to take into account decreases in
notional principal amount), discounted at a rate equal to the rate used to
determine the amount of the Cap Premium (or some other reasonable rate).
Prospective purchasers of Adjustable Rate Certificates should consult their own
tax advisors regarding the appropriate method of amortizing any Cap Premium. The
Swap Regulations treat a nonperiodic payment made under a cap contract as a loan
for federal income tax purposes if the payment is "significant." It is not known
whether any Cap Premium would be treated in part as a loan under the Swap
Regulations.
Under the Swap Regulations, (i) all taxpayers must recognize periodic
payments with respect to a notional principal contract under the accrual method
of accounting, and (ii) any periodic payments received
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under the Basis Risk Arrangement must be netted against payments, if any, deemed
made as a result of the Cap Premiums over the recipient's taxable year, rather
than accounted for on a gross basis. Net income or deduction with respect to net
payments under a notional principal contract for a taxable year should
constitute ordinary income or ordinary deduction. The IRS could contend the
amount is capital gain or loss, but such treatment is unlikely, at least in the
absence of further regulations. Any regulations requiring capital gain or loss
treat treatment presumably would apply only prospectively.
Any amount of proceeds from the sale, redemption or retirement of an
Adjustable Rate Certificate that is considered to be allocated to rights under
the Basis Risk Arrangement would be considered a "termination payment" under the
Swap Regulations. It is anticipated that the Trustee will account for any
termination payments for reporting purposes in accordance with the Swap
Regulations, as described below.
TERMINATION PAYMENTS
Any amount of sales proceeds that is considered to be allocated to the
selling beneficial owner's rights under the Basis Risk Arrangement in connection
with the sale or exchange of an Adjustable Rate Certificate would be considered
a "termination payment" under the Swap Regulations allocable to the Adjustable
Rate Certificates. An Adjustable Rate Certificateholder will have gain or loss
from such a termination of the Basis Risk Arrangement equal to (i) any
termination payment it received or is deemed to have received minus (ii) the
unamortized portion of any Cap Premium paid (or deemed paid) by the beneficial
owner upon entering into or acquiring its interest in the Basis Risk
Arrangement.
Gain or loss realized upon the termination of the Basis Risk Arrangement
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
APPLICATION OF THE STRADDLE RULES
The regular interest represented by the Adjustable Rate Certificates and
the Basis Risk Arrangement may constitute positions in a straddle, in which
case, the straddle rules of Code Section 1092 would apply. A selling beneficial
owner's capital gain or loss with respect to such regular interest would be
short-term because the holding period would be tolled under the straddle rules.
Similarly, capital gain or loss realized in connection with the termination of
the Basis Risk Arrangement would be short-term. If the holder of an Adjustable
Rate Certificate incurred or continued indebtedness to acquire or hold such
Certificate, the holder would generally be required to capitalize a portion of
the interest paid on such indebtedness until termination of the Basis Risk
Arrangement.
ERISA CONSIDERATIONS
As described in the Prospectus under "ERISA Considerations," Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
Section 4975 of the Code impose certain duties and restrictions on employee
benefit plans and certain other retirement plans and arrangements subject
thereto (collectively, "Plans") and on persons who have certain specified
relationships to Plans, including fiduciaries and service providers. Comparable
duties and restrictions may exist with respect to any "governmental plan" (as
defined in Section 3(32) of ERISA) subject to a federal, state or local law
("Similar Law") which is, to a material extent, similar to the foregoing
provisions of ERISA or the Code. There are certain exemptions issued by the
United States Department of Labor (the "DOL") that may be applicable to an
investment by a Plan in the Class A Certificates, including the individual
administrative exemption described below. For a further discussion of the
individual administrative exemption, including the necessary conditions to its
applicability, and other important factors to be considered by a Plan
contemplating investing in the Class A Certificates, see "ERISA Considerations"
in the Prospectus.
On May 14, 1993, the DOL issued to NationsBank Corporation an individual
administrative exemption, Prohibited Transaction Exemption 93-31 (the
"NationsBank Exemption"), on May 24, 1990, the DOL issued to Merrill Lynch an
individual administrative exemption, Prohibited Transaction Exemption 90-29 (the
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<PAGE> 65
"Merrill Lynch Exemption"), and on February 22, 1991, the DOL issued to Lehman
Brothers an individual administrative exemption, Prohibited Transaction
Exemption 91-14 (the "Lehman Brothers Exemption" and, together with the
NationsBank Exemption and the Merrill Lynch Exemption, the "Exemptions" and
each, an "Exemption") from certain of the prohibited transaction rules of ERISA
with respect to the initial purchase, the holding and the subsequent resale by a
Plan of certificates in pass-through trusts that meet the conditions and
requirements of the Exemptions. An Exemption might apply to the acquisition,
holding and resale of the Class A Certificates by a Plan, provided that
specified conditions are met.
Among the conditions which would have to be satisfied for an Exemption to
apply to the acquisition by a Plan of the Class A Certificates is the condition
that the Plan investing in the Class A Certificates be an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Before purchasing a Class A Certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided in
the applicable Exemption or the availability of any other prohibited transaction
exemptions, and whether the conditions of any such exemption will be applicable
to the Class A Certificates, and fiduciary of a governmental plan should make
its own determination as to the need for an availability of any exemptive relief
under Similar Law. Any fiduciary of a Plan or governmental plan considering
whether to purchase a Class A Certificate should also carefully review with its
own legal advisors the applicability of the fiduciary duty and prohibited
transaction provisions of ERISA, the Code or Similar Law to such investment. See
"ERISA Considerations" in the Prospectus.
INVESTMENTS BY PLANS ARE SUBJECT TO ERISA'S GENERAL FIDUCIARY REQUIREMENTS.
ACCORDINGLY, BEFORE INVESTING IN A CLASS A CERTIFICATE, A PLAN FIDUCIARY SHOULD
DETERMINE WHETHER SUCH AN INVESTMENT IS PERMITTED IN ACCORDANCE WITH THE
DOCUMENTS GOVERNING THE PLAN AND IS PRUDENT FOR THE PLAN IN VIEW OF ITS OVERALL
INVESTMENT POLICY AND THE COMPOSITION AND DIVERSIFICATION OF ITS PORTFOLIO.
The sale of Class A Certificates to a Plan is in no respect a
representation by the Depositors or Underwriters that this investment meets all
relevant legal requirements with respect to investments by Plans generally or
any particular Plan, or that this investment is appropriate for Plans generally
or any particular Plan.
LEGAL INVESTMENT
Although upon their initial issuance the Class A Certificates will be rated
"Aaa" by Moody's and "AAA" (or "AAAr" in the case of the Class A-IO
Certificates) by S&P, the Fixed Rate Certificates will not constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of 1984,
as amended ("SMMEA") because the Fixed Rate Group includes Mortgage Loans that
are secured by second Mortgages. The Adjustable Rate Certificates will
constitute "mortgage related securities" under SMMEA so long as they are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization.
Prospective purchasers whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities may be subject to restrictions on investment in the Class
A Certificates and should consult their own legal, tax and accounting advisors
in determining the suitability of and consequences to them of the purchase,
ownership and disposition of the Class A Certificates. See "Legal Investment" in
the Prospectus.
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> 66
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Depositors, NationsBanc Montgomery
Securities LLC ("NationsBanc Montgomery"), Lehman Brothers Inc. ("Lehman
Brothers") and Merrill Lynch Pierce, Fenner & Smith Incorporated ("Merrill
Lynch", and together with NationsBanc Montgomery and Lehman Brothers, the
"Underwriters"), the Depositors have agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase the Class A Certificates as follows:
NationsBanc Montgomery will acquire approximately 76% of the Class A
Certificates (other than the Class A-IO Certificates), Merrill Lynch and Lehman
Brothers will each acquire approximately 12% of the Class A Certificates (other
than the Class A-IO Certificates) and NationsBanc Montgomery will acquire 100%
of the Class A-IO Certificates.
The distribution of the Class A Certificates by the Underwriters may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositors from the sale of the Class A Certificates, before deducting expenses
payable by the Depositors, will be approximately $742,337,000 plus accrued
interest (except in the case of the Class A-1A Certificates) from April 1, 1998
to (but not including) April 23, 1998. The Underwriters may effect such
transactions by selling the Class A Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Class A Certificates, the Underwriters may be deemed to have received
compensation from the Depositors in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters and
any profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
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.
This Prospectus Supplement and Prospectus may be used by NationsBanc
Montgomery, an affiliate of the Depositors, to the extent required, in
connection with market making transactions in the Class A Certificates.
NationsBanc Montgomery may act as principal or agent in such transaction.
The Underwriting Agreement provides that the Depositors will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
In connection with the offering, the Underwriters may purchase and sell the
Class A Certificates in the open market. These transactions may include
purchases to cover short positions created by an Underwriter in connection with
the offering. Short positions created by an Underwriter involve the sale by an
Underwriter of a greater number of Class A Certificates than they are required
to purchase from the Depositors in the offering. An Underwriter also may impose
a penalty bid, whereby selling concessions allowed to broker-dealers in respect
of the securities sold in the offering may be reclaimed by such Underwriter if
such Class A Certificates are repurchased by such Underwriter in covering
transactions. These activities may maintain or otherwise affect the market price
of the Class A Certificates, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
SECONDARY MARKET
There will not be any market for Class A Certificates prior to the issuance
thereof. The Underwriters intend to act as market makers in the Class A
Certificates, subject to applicable provisions of federal and state securities
laws and other regulatory requirements, but are under no obligation to do so.
There can be no assurance that a secondary market for the Class A Certificates
will develop or, if it does develop, that it will continue. Further, no
application will be made to list the Class A Certificates on any securities
exchange. Accordingly, the liquidity of the Class A Certificates may be limited.
The primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed under
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<PAGE> 67
"Description of the Securities -- Reports to Holders" in the Prospectus. There
can be no assurance that any additional information regarding the Class A
Certificates will be available through any other source. In addition, the
Depositors are not aware of any source through which price information about the
Class A Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Class A Certificates may
adversely affect the liquidity of the Class A Certificates, even if a secondary
market for the Class A Certificates becomes available.
EXPERTS
The consolidated financial statements of the Insurer, Ambac Assurance
Corporation, as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 are incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
RATINGS
The Class A Certificates will be rated at their initial issuance "Aaa" by
Moody's and "AAA" (or "AAAr" in the case of the Class A-IO Certificates) 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 th Insurer. S&P assigns the additional
rating of "r" to highlight classes of securities that S&P believes may
experience high volatility or high variability in expected returns due to
non-credit risks.
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 or that holders of the Class A
Certificates may receive a lower than anticipated yield.
LEGAL MATTERS
Certain legal matters relating to the Offered Securities will be passed
upon for the Originators, Depositors and EquiCredit by Hunton & Williams,
Charlotte, North Carolina and for the Underwriters by Cadwalader, Wickersham &
Taft, New York, New York. Certain federal income tax matters and ERISA matters
will also be passed upon for the Depositors by Cadwalader, Wickersham & Taft,
New York, New York.
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<PAGE> 68
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Accrual Period....................... S-52
Adjustable Rate Certificate Principal
Balance............................ S-55
Adjustable Rate Certificates......... Cover
Adjustable Rate Group................ S-2
Advance.............................. S-58
Available Payment Amount............. S-56
Balloon Loans........................ S-20
Balloon Payment...................... S-39
Base Spread Account Requirement...... S-55
Basic Principal Amount............... S-56
Basis Risk Arrangement............... S-62
BBA.................................. S-53
Book-Entry Certificates.............. S-6
Cap Premium.......................... S-63
Carry-Forward Amount................. S-54
CBE.................................. S-46
CEDEL................................ S-50
Cede................................. S-3
Certificate Owners................... S-6
Certificateholders................... S-2
Certificates......................... Cover
Chase................................ S-6
Citibank............................. S-6
Class A Carry-Forward Amount......... S-56
Class A Certificateholder............ S-62
Class A Certificates................. Cover
Class A Interest Remittance Amount... S-54
Class A Principal Balance............ S-55
Class A Principal Remittance
Amount............................. S-54
Class A-IO Notional Amount........... S-9
Class A Remittance Amount............ S-56
Class A-1A LIBOR Rate................ S-53
Closing Date......................... Cover
Code................................. S-19
Collection Account................... S-51
Commission........................... S-3
Company.............................. S-47
CPR.................................. S-39
Cross-Over Date...................... S-55
Cumulative Spread Account Receipts... S-55
Curtailment.......................... S-54
Cut-off Date......................... S-6
Definitive Certificate............... S-50
Depositaries......................... S-6
Depositors........................... S-5
Determination Date................... S-6
DOL.................................. S-64
DTC.................................. S-3
Due Period........................... S-54
EquiCredit........................... S-2
ERISA................................ S-64
Euroclear............................ S-50
Exchange Act......................... S-3
Excess Spread........................ S-56
Exemption............................ S-65
First Lien........................... S-18
Fixed Rate Certificate Principal
Balance............................ S-55
Fixed Rate Certificates.............. Cover
Fixed Rate Group..................... S-2
FNMA................................. S-48
Insurance Account.................... S-16
Insurance Proceeds................... S-54
Insured Payment...................... S-57
Insurer.............................. S-2
Interest Settlement Rate............. S-53
IRS.................................. S-63
Lehman Brothers...................... S-66
Lehman Brothers Exemption............ S-65
LIBOR................................ S-2
LIBOR Determination Date............. S-53
LIBOR Interest Carryover............. S-53
Liquidated Mortgage Loan............. S-54
Liquidation Proceeds................. S-54
Lockout Percentage................... S-52
Lockout Pro Rata Remittance Amount... S-52
Lockout Remittance Amount............ S-52
Lower-Tier REMIC..................... S-2
Lower-Tier Regular Interests......... S-62
Merrill Lynch........................ S-66
Merrill Lynch Exemption.............. S-65
Middle-Tier REMIC.................... S-2
Middle-Tier Regular Interests........ S-62
Modeling Assumptions................. S-41
Monthly Payments..................... S-54
Monthly Premium...................... S-55
Moody's.............................. S-17
Mortgage............................. S-2
Mortgage Interest Rate............... S-56
Mortgage Loan........................ S-2
Mortgage Loan Group.................. S-2
Mortgage Loan Losses................. S-57
Mortgage Note........................ S-7
Mortgage Pool........................ Cover
Mortgaged Property................... S-2
NationsBanc Montgomery............... S-2
NationsBank Exemption................ S-64
Net Funds Cap Rate................... S-53
Net Liquidation Proceeds............. S-54
Optional Purchase Date............... S-17
</TABLE>
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<PAGE> 69
<TABLE>
<S> <C>
Original Notional Amount............. S-9
Original Principal Balance........... S-9
Original Pool Principal Balance...... S-23
Originator........................... S-2
Owner-Occupied Mortgaged Property.... S-24
Pass-Through Rate.................... S-9
Payment Date......................... S-2
Percentage Interest.................. S-49
Periodic Excess Spread Amount........ S-55
Plans................................ S-64
Pooling and Servicing Agreement...... S-2
Prepayment Assumptions............... S-39
Primary Servicing Portfolio.......... S-48
Principal Balance.................... S-55
Principal Prepayments................ S-54
Principal Remittance Amount.......... S-13
Rating Agency........................ S-17
REMIC................................ S-2
REO Properties....................... S-17
Record Date.......................... S-6
Reference Banks...................... S-54
Released Mortgaged Property
Proceeds........................... S-54
Remainder Excess Spread Amount....... S-56
Remittance Amount.................... S-55
Representative....................... S-2
Representative's Yield............... S-17
Residual Certificates................ Cover
S&P.................................. S-17
Securities Act....................... S-65
Securities Insurance Policy.......... S-2
Servicer............................. S-2
Servicing Fee........................ S-58
Similar Law.......................... S-64
Six-Month LIBOR...................... S-30
SMMEA................................ S-65
Specified Spread Account
Requirement........................ S-55
Spread Account....................... S-55
Spread Account Draw.................. S-57
Spread Account Excess................ S-56
Storms............................... S-21
Subordinated Amount.................. S-55
Swap Regulations..................... S-63
Telerate page 3750................... S-53
Termination Price.................... S-59
Trust................................ Cover
Trust Fund........................... Cover
Trustee.............................. S-2
Underwriter's PTE's.................. S-19
Underwriters......................... S-2
Underwriting Agreement............... S-66
Upper-Tier REMIC..................... S-2
</TABLE>
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<PAGE> 70
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered EQCC Home
Equity Loan Trust 1998-1 Class A-1F Certificates, Class A-2F Certificates, Class
A-3F Certificates, Class A-4F Certificates, Class A-5F Certificates, Class A-6F
Certificates, Class A-7F Certificates, Class A-IO Certificates and Class A-1A
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.
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
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<PAGE> 71
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 form 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
proceeding 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 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.
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<PAGE> 72
(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.
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, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of such trust and
one or more United States Persons have the authority to control all substantial
decisions of such trust. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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PROSPECTUS
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
DEPOSITORS
EQUICREDIT CORPORATION OF AMERICA
SERVICER
EQCC HOME EQUITY LOAN ASSET BACKED SECURITIES
EQUICREDIT FUNDING ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
------------------------
The EQCC Home Equity Loan Asset Backed Securities and EquiCredit Funding
Asset Backed Securities (collectively, the "Securities") offered hereby and by
Supplements to this Prospectus (the "Offered Securities") 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 and re-underwritten by EquiCredit Corporation of
America ("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" BEGINNING ON PAGE 17 OF THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is April 16, 1998.
<PAGE> 74
(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 the
Securities -- Description of Credit Enhancement" herein.
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" or a "financial
asset securitization investment trust" 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.
2
<PAGE> 75
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, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048. 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.
In addition, the Commission maintains a public access site on the Internet
through the World Wide Web at which site reports, information statements and
other information, including all electronic filings, regarding the Depositors
may be viewed. The Internet address of such World Wide Web site is
http://www.sec.gov.
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
Michael E. Franz, Vice President and Treasurer, EQCC Receivables Corporation and
EQCC Asset Backed Corporation, 10401 Deerwood Park Blvd., Jacksonville, Florida
32256, (904) 987-5000.
3
<PAGE> 76
PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information....................................... 3
Reports to Holders.......................................... 3
Incorporation of Certain Documents By Reference............. 3
Summary of Prospectus....................................... 7
Risk Factors................................................ 17
Securities................................................ 17
Risks of the Mortgage Loans............................... 19
The Status of the Mortgage Loans in the Event of
Bankruptcy of an Originator............................ 22
Increased Risk of Loss as a Result of Subordination of the
Subordinated Securities; Effect of Losses on the
Mortgage Loans......................................... 23
Limitations on Interest Payments and Foreclosures......... 23
Original Issue Discount................................... 24
Special Federal Tax Considerations Regarding REMIC
Residual Certificates and FASIT Securities............. 24
Description of the Mortgage Pools........................... 24
General................................................... 24
Payments on the Mortgage Loans............................ 26
Certain Yield and Prepayment Considerations................. 28
General................................................... 28
Securities Interest Rate.................................. 28
Timing of Payment of Interest............................. 28
Payments of Principal; Prepayments........................ 29
Other Factors Affecting Weighted Average Life............. 29
Type of Mortgage Loan.................................. 29
Termination............................................ 31
Defaults............................................... 31
Foreclosures........................................... 31
Refinancing............................................ 31
Due-on-Sale Clauses.................................... 32
Special Payments....................................... 32
Prefunding Accounts.................................... 32
The Trusts.................................................. 32
The Depositors, The Servicer, The Representative and the
Originators............................................... 33
General................................................... 33
Loan Origination History.................................. 33
General Loan Underwriting................................. 34
Income Verification....................................... 34
Appraisals; Title Companies and Closing Agents............ 35
Specific Underwriting Criteria; Underwriting Programs..... 36
Summaries of the Underwriting Programs.................... 36
Class A+............................................... 36
Class A................................................ 38
Class B+............................................... 38
Class B................................................ 39
Class C+............................................... 40
Class C................................................ 40
Class D................................................ 41
Monthly Income............................................ 42
Balloon Mortgage Loans.................................... 42
Certain Calculations Relating to Combined Loan-To-Value
Ratios................................................. 42
</TABLE>
4
<PAGE> 77
<TABLE>
<S> <C>
Quality Control Audit Procedures.......................... 42
Collection Procedures..................................... 43
Delinquency and Loss Experience........................... 44
Outstanding Real Estate Owned............................. 44
Description of the Securities............................... 45
General................................................... 45
Interest.................................................. 46
Principal................................................. 46
Assignment of the Mortgage Loans.......................... 47
Representations and Warranties of the Originators and the
Depositors............................................. 49
Payments on the Mortgage Loans............................ 51
Advances from the Principal and Interest Account;
Servicing Advances..................................... 52
Distributions............................................. 53
Special Payments.......................................... 54
Optional Disposition of Mortgage Loans.................... 54
Mandatory Disposition of Mortgage Loans................... 54
Forward Commitments; Prefunding........................... 55
Cash Flow Agreements...................................... 55
Reports to Holders........................................ 56
Description of Credit Enhancement......................... 57
Payment of Certain Expenses............................... 60
Servicing Compensation.................................... 60
Servicing Standards....................................... 60
Use of Subservicers....................................... 62
Servicing Certificates and Audits......................... 62
Limitations on Liability of the Servicer and Its Agents... 63
Removal and Resignation of Servicer....................... 63
Registration and Transfer of the Securities............... 64
Certain Legal Aspects of the Mortgage Loans................. 67
General................................................... 67
Types of Mortgage Instruments............................. 68
Interest in Real Property................................. 68
Cooperative Loans......................................... 68
Land Sale Contracts....................................... 69
Foreclosure............................................... 70
General................................................ 70
Judicial Foreclosure................................... 70
Equitable Limitations on Enforceability of Certain
Provisions............................................ 70
Non-Judicial Foreclosure/Power of Sale................. 71
Public Sale............................................ 71
Cooperative Loans...................................... 72
Junior Mortgages.......................................... 73
Rights of Redemption...................................... 73
Anti-Deficiency Legislation and Other Limitations on
Lenders................................................ 74
Enforceability of Certain Provisions...................... 75
"Due-on-Sale Clauses"..................................... 75
Subordinate Financing..................................... 75
Applicability of Usury Laws............................... 76
Environmental Considerations.............................. 76
Soldiers' and Sailors' Relief Act of 1940................. 78
Forfeitures in Drug and RICO Proceedings.................. 78
</TABLE>
5
<PAGE> 78
<TABLE>
<S> <C>
Certain Federal Income Tax Consequences..................... 78
General................................................... 78
Federal Income Tax Consequences for REMIC Certificates...... 79
REMIC Elections........................................ 79
Status of REMIC Certificates........................... 79
Tiered REMIC Structures................................ 80
Regular Certificates................................... 80
Taxation of Residual Certificates...................... 84
Residual Certificates Transferred to or Held by
Disqualified Organizations............................ 88
Mark to Market Regulations............................. 89
Other Matters Relating to REMIC Certificates........... 89
Federal Income Tax Consequences for Notes and Certificates
as to Which No REMIC Election is Made.................. 92
Certificates and Notes................................. 92
Taxation of the Notes.................................. 92
Taxation of the Certificates........................... 92
Partnership Taxation................................... 92
Formation of the Trust; Code Section 708 Termination... 93
Partnership Income and Allocations..................... 93
Premium/Discount....................................... 94
Disposition of Certificates............................ 94
Allocations Between Transferors and Transferees........ 94
Section 731 Distributions.............................. 95
Transferees of Certificates/Section 754 Election....... 95
Administrative Matters................................. 95
Foreign Certificateholders............................. 96
Backup Withholding..................................... 96
Certain State Tax Consequences.............................. 96
ERISA Considerations........................................ 96
Legal Investment............................................ 100
Use of Proceeds............................................. 100
Plan of Distribution........................................ 100
Ratings..................................................... 101
Legal Matters............................................... 101
Index of Principal Definitions.............................. 102
</TABLE>
6
<PAGE> 79
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 beginning on page 102 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" or
"EquiCredit Funding Trust," as specified in the
related Prospectus Supplement (the "Trust" or the
"Issuer"), with an additional designation to
indicate the Series of Securities to which it
relates. The Mortgage Loans related to an
EquiCredit Funding Trust will consist primarily of
loans purchased and re-underwritten by one or more
of the Originators. 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, 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.
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
7
<PAGE> 80
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 and re-underwritten 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 Payment Date occurs (each, a "Monthly
Deposit Date") specified in the related Prospectus
Supplement on which certain deposits and transfers
will be made.
8
<PAGE> 81
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 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 (such net proceeds, "Insurance Proceeds"),
(B) proceeds received in connection with the
liquidation of any
9
<PAGE> 82
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 ("Definitive Securities")
or may initially be held through The Depository
Trust Company ("DTC") in the United States, or
Cedel Bank, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe
("Book-Entry Securities"). Transfers within DTC,
CEDEL or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
parties holding directly or indirectly through
CEDEL or Euroclear, on the other, will be effected
in DTC through Citibank, N.A. or The Chase
Manhattan Bank, the relevant depositaries
(collectively, the "Depositaries") of CEDEL or
Euroclear, respectively, and each a participating
member of DTC. The Book-Entry Securities will
initially be represented by one or more
certificates registered in the name of Cede & Co.,
as nominee of DTC. The interests of owners of the
Book-Entry Securities will be represented by book
entries on the records of DTC and its participating
organizations. Certificates representing Book-Entry
Securities will be issued as Defini-
10
<PAGE> 83
tive Securities 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, CEDEL, Euroclear
and their participating organizations, 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 (including fully
amortizing mortgage loans, balloon mortgage loans
and/or revolving home equity loans or certain
balances thereof) 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 as
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. See
"Description of the Mortgage Pools." 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 the Securities -- 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 (as defined herein), the
maximum and minimum Gross Margins (as 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 contained in the
Current Report on Form 8-K referred to below. See
"Description of the Mortgage Pools -- General"
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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.
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,
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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. See
"Description of the Securities -- Forward
Commitments; Prefunding" herein.
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 the Securities -- 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).
Unless otherwise specified in the related
Prospectus Supplement, the Servicer will 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.
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
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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"), Duff & Phelps
Credit Rating Co. ("DCR") Standard & Poor's ("S&P")
and Fitch IBCA, Inc. ("Fitch" and each of Fitch,
Moody's, DCR 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 -- Securities -- Limited Nature of
Ratings," "-- Lowering of Rating on Securities" 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 made to treat the Trust or one or
more segregated pools of assets comprising the
Trust as a "financial asset securitization
investment trust" (a "FASIT"), the Securities will
constitute "regular interests" in a FASIT or the
"ownership interest" in a FASIT as specified in the
related Prospectus Supplement. If a FASIT election
is made, the federal income tax consequences of
such election will be discussed in the related
Prospectus Supplement. No such discussion is
included herein.
If an election is not made to treat the Trust as a
REMIC or a FASIT, (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
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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 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 assets described
in section 7701(a)(19)(C) of the Internal Revenue
Code of 1986 (the "Code"), and probably will not be
treated as "real estate assets" within the meaning
of section 856(c)(5)(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)(5)(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 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 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)(5)(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,
as amended, because the related Mortgage Pool will
include Mortgage Loans that are 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.
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<PAGE> 88
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 Depositors will apply such proceeds
to the purchase of the related Mortgage Loans from
the Originators.
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<PAGE> 89
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.
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.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each Class of Offered 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 ("S&P"), Duff & Phelps Credit Rating Co. ("DCR")
or Fitch IBCA, Inc. ("Fitch"; and each of Moody's, S&P, DCR and Fitch, a "Rating
Agency"). See "Ratings" herein. Any rating assigned by a Rating Agency to a
Class of Securities of any Series will reflect such Rating Agency's assessment
solely of the likelihood that holders of Securities of such Class will receive
payments to which such holders are entitled under the related Pooling and
Servicing Agreement or Indenture. Such rating will not constitute an assessment
of the likelihood that principal prepayments (including those caused by
defaults) on the related Mortgage Loan will be made, the degree to which the
rate of such prepayments might differ from that originally anticipated or the
likelihood of early optional termination or redemption of the Series of
Securities. Such rating will not address the possibility that prepayment at
higher or lower rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor purchasing a
Security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
Lowering of Rating on Securities. The rating of any Series of Securities
by any applicable Rating Agency may be lowered following the initial issuance
thereof as a result of the downgrading of the obligations of any applicable
Credit Provider, or as a result of losses on the related Mortgage Loans
substantially in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. The lowering of a rating on a Series or
Class of Securities may adversely affect the market value of such Securities and
the liquidity of such Securities. None of the Depositors, the Servicer or any of
their affiliates will have any obligation to replace or supplement any credit
enhancement or to take any other action to maintain any rating of any Series of
Securities.
Difficulty in Pledging. Because transactions in Securities of a Series in
book-entry form can be effected only through DTC, CEDEL, Euroclear,
participating organizations, indirect participants and certain banks, the
ability of the beneficial owner thereof to pledge such Securities to persons or
entities that do not participate in the DTC, CEDEL or Euroclear systems, or
otherwise to take actions in respect of such Securities, may be limited due to
lack of a physical certificate representing such Securities. See "Description of
the Securities -- Registration and Transfer 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
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<PAGE> 90
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.
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 the
Securities -- Description of Credit Enhancement" herein.
A Series of Securities may include one or more Classes of Subordinated
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Securities of a Series are made in a specified order or priority, any limits
with respect to the aggregate amount of claims under any related credit
enhancement may be reached before the principal of the lower priority classes of
Securities of such Series has been repaid. As a result, the impact of
significant losses and shortfalls on the Mortgage Loans may fall primarily upon
those Classes of Securities having a lower priority of payment. Moreover, if a
form of credit enhancement covers more than one Series of Securities (each, a
"Covered Trust") holders of Securities evidencing an interest in a Covered Trust
will be subject to the risk that such credit enhancement will be exhausted by
the claims of other Covered Trusts.
The amount of any applicable credit enhancement supporting one or more
Classes of Offered Securities, including the subordination of one or more
Classes of Securities, will be determined on the basis of criteria established
by each Rating Agency rating such Classes of Securities based on an assumed
level of defaults, delinquencies, other losses or other factors. There can,
however, be no assurance that the loss experience on the related Mortgage Loans
will not exceed such assumed levels. See "-- Securities -- Limited Nature of
Ratings" and "Description of the Securities -- Description of Credit
Enhancement."
Yield and Prepayment Considerations. Prepayments (including those caused
by defaults) on the Mortgage Loans in any Trust generally will result in a
faster rate of principal payments on one or more Classes of the related
Securities than if payments on such Mortgage Loans were made as scheduled. Thus,
the prepayment experience on the Mortgage Loans may affect the average life of
each Class of related Securities. The rate of principal payments on pools of
mortgage loans varies between pools and from time to time is influenced by a
variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Mortgage
Loans in any Trust or that the rate of payments will conform to any model
described herein or in any Prospectus Supplement. If prevailing interest rates
fall significantly below the applicable mortgage interest rates, principal
prepayments are likely to be higher than if prevailing rates remain at or above
the rate borne by the Mortgage Loans underlying or comprising the Mortgage Loans
in any Trust. As a result, the actual maturity of any Class of Securities
evidencing an interest in or an obligation of a Trust could occur significantly
earlier than expected. Conversely, if prevailing interest rates rise
significantly above the applicable Mortgage Interest Rates, principal
prepayments are likely to be
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<PAGE> 91
lower than if prevailing rates remain at or below the rates borne by the
Mortgage Loans underlying or comprising the Mortgage Loans in any Trust and the
maturity of any Class of Securities evidencing an interest in or an obligation
of such Trust could occur significantly later than expected. In addition, the
yield to investors may be adversely affected by interest shortfalls which may
result from the timing of the receipt of prepayments or liquidations to the
extent that such interest shortfalls are not covered by credit enhancement or
some other mechanism specified in the applicable Prospectus Supplement.
A Series of Securities may include one or more Classes of Securities with
priorities of payment and, as a result, yields on other Classes of Securities,
including Classes of Offered Securities, of such Series may be more sensitive to
prepayments on the Mortgage Loans. A Series of Securities may include one or
more Classes offered at a significant premium or discount. Yields on such
Classes of Securities will be sensitive, and in some cases extremely sensitive,
to prepayments on the related Mortgage Loans and, where the amount of interest
payable with respect to a Class is disproportionately high, as compared to the
amount of principal, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A Series of Securities may include one or more
Classes of Securities, including Classes of Offered Securities, that provide for
distribution of principal thereof from amounts attributable to interest accrued
but not currently distributable on one or more Classes of Accrual Securities
and, as a result, yields on such Securities will be sensitive to (a) the
provisions of such Accrual Securities relating to the timing of distributions of
interest thereon and (b) if such Accrual Securities accrue interest at a
variable or adjustable Securities Interest Rate, changes in such rate.
RISKS OF THE MORTGAGE LOANS
Increased Risk of Delinquencies and Foreclosures on Sub-prime Mortgage
Loans. All or a portion of the Mortgage Loans may consist of mortgage loans
underwritten in accordance with the underwriting for "Sub-prime Mortgage Loans."
A Sub-prime Mortgage Loan is a mortgage loan that is ineligible for purchase by
Fannie Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") due
to borrower credit characteristics, property characteristics, loan documentation
guidelines or other credit characteristics that do not meet FNMA or FHLMC
underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines and a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments or prior bankruptcies. As a consequence, delinquencies and
foreclosures may be expected to be more prevalent with respect to Sub-prime
Mortgage Loans than with respect to mortgage loans originated in accordance with
FNMA or FHLMC underwriting guidelines, and changes in the values of the
Mortgaged Properties may have a greater effect on the loss experience of
Sub-prime Mortgage Loans than on mortgage loans originated in accordance with
FNMA or FHLMC underwriting guidelines.
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. 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 information regarding the rates of delinquency
and net losses experienced on the mortgage loans included in the servicing
portfolio of EquiCredit Corporation of America (together with its wholly-owned
subsidiaries, including the other Originators, the "Company").
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
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<PAGE> 92
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 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.
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Special Risks of 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.
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. Credit enhancement
provided with respect to a particular Series of Securities may not cover all
losses related thereto. Prospective investors should consider the risk that the
inclusion in a Trust of delinquent Mortgage Loans and Mortgage Loans with
respect to which the Mortgagor is the subject of bankruptcy proceedings may
cause the rate of defaults and prepayments on the Mortgage Loans to increase
and, in turn, may cause losses to exceed the available credit enhancement for
such Series and affect the yield on the Securities of such Series. 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" 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
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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.
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 Considerations" 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
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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. 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
or FASIT 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.
INCREASED RISK OF LOSS AS A RESULT OF SUBORDINATION OF THE SUBORDINATED
SECURITIES; EFFECT OF LOSSES ON THE MORTGAGE LOANS.
The rights of holders of Subordinated Securities to receive distributions
to which they would otherwise be entitled with respect to the Mortgage Loans
will be subordinate to the rights of the Servicer (to the extent of its
Servicing Fee, including any unpaid Servicing Fees with respect to one or more
prior Due Periods, and its reimbursement for certain unreimbursed advances and
unreimbursed liquidation expenses) and the holders of Senior Securities to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinated Securities. See "Description of the Securities -- General" and
"-- Description of Credit Enhancement -- Subordination."
The yields on the Subordinated Securities may be extremely sensitive to the
loss experience of the related Mortgage Loans and the timing of any such losses.
If the actual rate and amount of losses experienced by the Mortgage Loans exceed
the rate and amount of such losses assumed by an investor, the yield to maturity
on the Subordinated Securities may be lower than anticipated.
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
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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. See "Certain
Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act
of 1940."
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.
SPECIAL FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES AND
FASIT SECURITIES.
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the related REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates."
Accordingly, under certain circumstances, holders of Securities that constitute
Residual Certificates may have taxable income and tax liabilities arising from
such investment during a taxable year in excess of the cash received during such
period. Individual holders of Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In addition,
Residual Certificates are subject to certain restrictions on transfer. Because
of the special tax treatment of Residual Certificates, the taxable income
arising in a given year on a Residual Certificate will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on a Residual Certificate may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics. Additionally, prospective purchasers of Residual
Certificates should be aware that applicable regulations prevent the ability to
mark-to-market Residual Interests. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates." Special
tax considerations relating to FASIT securities will be discussed 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 fully amortizing Mortgage
Loans, Balloon Loans and/or revolving home equity loans or certain balances
thereof) 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. To the
extent specified in the related Prospectus Supplement, the Mortgage Loans will
be secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on the related Mortgaged
Property. The Mortgaged Properties may include one- to four-family dwellings,
units in condominium developments, units in planned unit developments, shares of
stock in cooperative housing corporations, manufactured housing units or long
term residential leasehold interests. In addition, the Mortgage Loans may
include certain Mortgage Loans evidenced by contracts ("Land Sale Contracts")
for the sale of properties pursuant to which the Mortgagor promises to pay the
amount due thereon to the holder thereof with fee title to the related property
held by such holder until the Mortgagor has made all of the payments required
pursuant to such Land Sale Contract, at which time fee title is conveyed to the
Mortgagor.
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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 (as defined below) at origination (as
defined below) and the weighted average Combined Loan-to-Value 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 (as 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, except to the extent otherwise specified in
the related Prospectus Supplement, 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 (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.
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 Mortgage Interest
Rates, the
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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 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 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").
Each Mortgage Loan may contain prohibitions on prepayment or require
payment of a premium or a yield maintenance penalty (a "Prepayment Premium") in
connection with a prepayment, in each case as described in the related
Prospectus Supplement. Any such Prepayment Premiums will generally be a part of
the Representative's Yield. However, in the event that holders of any Class or
Classes of Offered Securities will be entitled to all or a portion of any
Prepayment Premiums collected in respect of Mortgage Loans, the related
Prospectus Supplement will specify the method or methods by which any such
amounts will be allocated.
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
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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-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.
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As more fully described in the related Prospectus Supplement, the Mortgage
Loans may consist, in whole or in part, of revolving home equity loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid. If specified in the related Prospectus Supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust described in such Prospectus Supplement. Alternatively,
principal repayments may be used by the Trust during the period specified in the
related Prospectus Supplement to acquire additional Revolving Credit Line Loans.
As a result, the aggregate balance of the Revolving Credit Line Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
holder of the Security, the Securities Interest Rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average remaining term to maturity of the Mortgage Loans in the related Trust
(which may be affected by prepayments, defaults, liquidations or repurchases).
See "Risk Factors."
SECURITIES INTEREST RATE
The Securities Interest Rate which may be applicable to any Class within a
Series may be fixed, variable or adjustable, and may or may not be based upon
the weighted average Mortgage Interest Rate of the Mortgage Loans in the related
Trust. The Prospectus Supplement with respect to any Series of Securities will
specify the Securities Interest Rate for each Class of such Securities or, in
the case of a variable or adjustable Securities Interest Rate, the method of
determining such Securities Interest Rate; the effect, if any, of the prepayment
of any Mortgage Loan on the Securities Interest Rate of one or more Classes of
Securities; and whether the distributions of interest on the Securities of any
Class will be dependent, in whole or in part, on the performance of any obligor
under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Securities Interest Rate and
purchase price of such Security because, while interest may accrue on each
Mortgage Loan during a specified Accrual Period, the distribution of such
interest will be made on a day which may be several days, weeks or months
following such Accrual Period.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the principal
balance of a class of Accrual Securities) on a Payment Date will include
interest accrued during the Accrual Period for such Payment Date. As indicated
above under "-- Securities Interest Rate," if the Accrual Period ends on a date
other than the day before a Payment Date for the related Series, the yield
realized by the holders of such Securities may be lower than the yield that
would result if the Accrual Period ended on such day before the Payment Date.
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PAYMENTS OF PRINCIPAL; PREPAYMENTS
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 (including principal prepayments on the
Mortgage Loans resulting from both voluntary prepayments by the borrowers and
involuntary liquidations). 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. 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.
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.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Loan
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount), and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a
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number of Balloon Loans may default at maturity. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the mortgagor's financial situation, prevailing mortgage loan interest
rates, the mortgagor's equity in the related Mortgaged Property, tax laws and
prevailing general economic conditions. Neither the Depositors, the Servicer,
nor any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to sell the Mortgaged Property except to the extent provided in
the related Prospectus Supplement. In the case of defaults, recovery of proceeds
may be delayed by, among other things, bankruptcy of the mortgagor or adverse
conditions in the market where the property is located. In order to minimize
losses on defaulted Mortgage Loans, the Servicer may modify Mortgage Loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
Mortgage Loan will tend to extend the weighted average life of the Securities
and may thereby lengthen the period of time elapsed from the date of issuance of
a Security until it is retired.
With respect to certain Mortgage Loans, including ARMs, the Mortgage
Interest Rate at origination may be below the rate that would result if the
Index and Margin relating thereto were applied at origination. Under the
underwriting procedures of the Company, the mortgagor or obligor under each
Mortgage Loan generally will be qualified on the basis of the Mortgage Interest
Rate in effect at origination. The repayment of any such Mortgage Loan may thus
be dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Interest Rate. In
addition, certain Mortgage Loans may be subject to temporary buydown plans
("Buydown Mortgage Loans") pursuant to which the monthly payments made by the
mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "Buydown Period"). The periodic increase
in the amount paid by the Mortgagor of a Buydown Mortgage Loan during or at the
end of the applicable Buydown Period may create a greater financial burden for
the Mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Interest Rates on certain ARMs subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Interest Rates are generally lower than the
sum of the applicable Index at origination and the related Margin over such
Index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Interest Rate.
The addition of any such deferred interest to the principal balance of any
related Class or Classes of Securities will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARMs subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will be
applied to reduce the principal balance of the related Class or Classes of
Securities, the weighted average life of such Securities will be reduced and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the Revolving Credit Line Loans may be
applied by the related Trustee to the acquisition of additional Revolving Credit
Line Loans during a specified period (rather than used to fund payments of
principal to holders of Securities during such period) with the result that the
related Securities possess an interest-only period, also commonly referred to as
a revolving period, which will be followed by an amortization period. Any such
interest-only or revolving period may, upon the occurrence of certain events to
be described in the related Prospectus Supplement, terminate prior to the end of
the specified period and result in earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement or Indenture may provide that all or
a portion of such collected principal may be
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retained by the Trustee (and held in certain temporary investments, including
Mortgage Loans) for a specified period prior to being used to fund payments of
principal to holders of Securities.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Termination
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.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Mortgage Loans and thus the yield
on the Securities. In general, 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 Mortgage Loans which are refinance or limited documentation mortgage
loans, and on Mortgage Loans with high Combined Loan-to-Value Ratios may be
higher than for other types of Mortgage Loans. In addition, 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. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans that are foreclosed or repossessed in relation to the number and
principal amount of Mortgage Loans that are repaid in accordance with their
terms will affect the weighted average life of the Mortgage Loans and that of
the related Series of Securities.
Refinancing
At the request of a Mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan in any Trust by accepting prepayments thereon and permitting a new
loan secured by a mortgage on the same property. In the event of such a
refinancing, the new loan would not be included in the related Trust and,
therefore, such refinancing would have the same effect as a prepayment in full
of the related Mortgage Loan. The Servicer, the Company or the Originators may,
from time to time, implement programs designed to encourage refinancing. Such
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, the Servicer may encourage the refinancing of Mortgage Loans,
including defaulted Mortgage Loans, that would permit creditworthy borrowers to
assume the outstanding indebtedness of such Mortgage Loans.
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Due-on-Sale Clauses
Acceleration of mortgage payments on a Mortgage Loan as a result of certain
transfers of the underlying Mortgaged Property is another factor affecting
prepayment rates that may not be reflected in the prepayment standards or models
used in the relevant Prospectus Supplement. A number of the Mortgage Loans
underlying a Series may include "due-on-sale" clauses that allow the holder of
the Mortgage Loans to demand payment in full of the remaining principal balance
of the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the related
Prospectus Supplement, the Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law. See "Certain Legal Aspects of the Mortgage Loans -- Due-on-Sale
Clauses" and "Description of the Securities -- Servicing
Standards -- Enforcement of Due-on-Sale Clauses."
Special Payments
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.
Prefunding Accounts
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.
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 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.
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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 9, 1998, Barnett Banks, Inc., the parent and sole stockholder of
EquiCredit Corporation, merged with NationsBank Corporation. As a result
EquiCredit Corporation is now an indirect wholly-owned subsidiary of NationsBank
Corporation.
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 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.
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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 underwriters, each of whom is granted specific credit approval
limits based on experience and seniority (which approval limits may be waived at
the discretion of management). Approval of a majority of the Company's Board of
Directors is generally required for all loan applications over a dollar limit
established from time to time, currently $400,000, except that such approval is
not always obtained for loans acquired as part of a portfolio acquisition.
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
(calculated at the current rate plus 200 basis points) 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.
With respect to the Company's loan and loan portfolio acquisition
activities, the Company reviews procedures and calculations used by each
individual seller to achieve a certain "level of confidence" that the process
used is correct and pragmatic. This is done by reviewing a sample size of loans
under each seller's pool. The Company's goal in underwriting loan purchases is
to follow the Company's published underwriting guidelines for each individual
loan. However, flexibility is used to some extent to include some loans outside
of the guidelines to successfully price and acquire the majority of the loan
pool being considered. This flexibility is only used on loans that are believed
to be acceptable by strong compensating factors, and exceptions to the
underwriting guidelines are reviewed on a case by case basis. Therefore, the
references to application to the underwriting guidelines to purchased loan
portfolios assumes the possibility of any of the aforementioned exceptions.
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, but not limited to, 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 in addition to receipt of the potential borrower's W-2s, last two to
four paycheck stubs or other similar items of verification as may be required by
the underwriter. With respect to any acquired loan, the Company relies upon the
supporting documentation in the loan application file relating to the
applicant's employment status.
Self-Employed Applicants -- Commissions/Bonuses/Tax Returns. Federal tax
returns for at least 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 50% or more of their total
income from commissions and/or bonuses. Consistency in commission and/or bonus
income must be
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established. 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
the 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. Except with respect to loan portfolio
purchases, 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. The Company's underwriters may, in their discretion, accept an
appraisal from a non-approved appraiser based solely on the appraisal's content.
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 interior and exterior of the subject property, obtaining
front, rear 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 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 generally closed by personnel at the respective branches of the
Company, the related approved Originator, approved attorneys, title insurers or
agents of title insurers, and title insurance is issued by one of several
nationally recognized title companies.
35
<PAGE> 108
SPECIFIC UNDERWRITING CRITERIA; UNDERWRITING PROGRAMS
Prior to August 1, 1996, the Company originated and purchased loans under
six underwriting programs. Beginning August 1, 1996, the Company originates and
purchases loans under seven 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 and/or each portfolio acquired. From time to time, the Company
purchases or 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 or purchase.
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+
1. The Company generally 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 which has not been
filed in the last five years, or a Chapter 13 bankruptcy that has been
discharged for a minimum of 24 months, 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.
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.
Second mortgage loans originated or
acquired under these criteria must not
exceed $50,000, must have fixed rates, and
may not have terms exceeding 15 years.
</TABLE>
36
<PAGE> 109
<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.................... 95% 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 $350,000 and
$60,000, respectively and may have fixed-
or adjustable-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>
- ---------------
(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.
(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)
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.
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, townhouses or manufactured housing (at lower Combined
Loan-to-Value Ratios), in at least average repair, comparable to neighboring
properties and generally 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 or have established residential stability
to date.
37
<PAGE> 110
CLASS A
1. The Company generally 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 that has been
discharged for a minimum of 36 months or a Chapter 13 bankruptcy that has been
discharged for a minimum of 24 months 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.
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 and Non-Owner
Occupied One- to
Four-Family............... 85% 50%
</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 generally required to be an owner occupied
one- to four-family or single family dwelling, which may include condominiums,
townhouses or manufactured housing, in at least average repair, comparable to
neighboring properties and generally 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 or have established residential stability
to date.
CLASS B+
1. The Company generally 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 two years is acceptable
if the borrower has since established a payment history, notwithstanding such
bankruptcy, consistent with this Underwriting Program.
2. Generally, the borrower must exhibit both employment and residential
stability to date.
38
<PAGE> 111
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 and Non-Owner
Occupied One- to
Four-Family............... 85% 50% None
</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 generally required to be an owner-occupied,
one- to four-family dwelling, which may include condominiums, townhouses or
manufactured housing, in at least average repair, comparable to neighboring
properties and generally 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 B
1. The Company generally 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 to
90-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 three 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 two years is acceptable
if the borrower has since established a payment history, notwithstanding such
bankruptcy, consistent with this Underwriting Program.
2. Generally, the borrower must exhibit both employment and residential
stability to date.
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 and Non-Owner
Occupied One- to
Four-Family............... 80% 50% None
</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 generally required to be an owner-occupied,
one- to four-family dwelling, which may include condominiums, townhouses or
manufactured housing, in at least average repair, comparable to neighboring
properties and generally 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%.
39
<PAGE> 112
CLASS C+
1. The Company generally 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 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 12-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 four 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 Chapter 7 bankruptcy or a Chapter 13 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 this
Underwriting Program.
2. Generally, the borrower must have been employed with the same employer
for at least one year or have established employment stability to date.
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 and Non-Owner
Occupied One- to
Four-Family............... 80% 50% Exceptions to the Maximum
Debt-to-Income Ratio may be considered
on a case-by-case basis.
</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 generally required to be an owner occupied
one- to four-family dwelling, which may include condominiums, townhouses or
manufactured housing, in at least average repair, comparable to neighboring
properties and generally 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 generally 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.
40
<PAGE> 113
2. Employment and income verification is required by direct employer
contact and written documentation, such as pay stubs, W-2s and tax returns.
<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% 50% Only first mortgage loans may be originated
or acquired pursuant to these criteria.
Owner Occupied One- to
Four-Family............... 70% 50% Second 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.
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 determining whether the loan
is approved. Mortgage payment history will be considered on a case-by-case
basis. The borrower may use the proceeds of a loan to discharge a bankruptcy.
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 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. All mortgaged property must be in good repair and
well maintained such that pride of ownership is evidenced.
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.
41
<PAGE> 114
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>
$1,500 or less.............................................. 40%
$1,501 to $4,000............................................ 45%
$4,001 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, generally no
Balloon 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 95%; (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 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.
Quality control audits ("Quality Control Audits") are conducted on
approximately thirty 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 a
Senior Management Representative 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.
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.
42
<PAGE> 115
Underwriting: 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 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. Up to 8% margin between the values reflected by each appraisal is
acceptable.
2. In the case of a margin of 8% or above 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, when
appropriate, 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.
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 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. The Company utilizes additional collection assistance
from field collectors located in selected areas of the country. 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 experienced mortgage collection
supervisors. When an account becomes 7 days past due (or sooner depending on the
level of the borrower's FICO Score), the mortgagor is generally called by phone
with simultaneous notices being sent if contact by phone is not made. A "FICO
Score" is a credit bureau risk score that statistically ranks likely future
credit performance based upon certain predictive criteria. When an account
becomes 30-59 days delinquent, it is assigned to a higher level Home Office
collector experienced in default accounts. A default management supervisor
contacts area field collectors on a daily basis to assign field work. 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 worked by 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. 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.
43
<PAGE> 116
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 Trustee, 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 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.
44
<PAGE> 117
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.
To the extent specified in the related Prospectus Supplement, distributions
on a Class of Securities may be based on a combination of two or more different
components. To such extent, the descriptions set forth under "-- Interest" and
"-- Principal" below also relate to components of such a Class of Securities. In
such case, reference in such sections to Securities Interest Rate refers to the
Securities Interest Rate, if any, on any such component, respectively.
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 the Securities of the
respective Class, determined by dividing the original dollar amount (or Notional
Principal Amount, in the
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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"). If so specified in the related Prospectus
Supplement, holders of Securities may hold beneficial interests in Book-Entry
Securities through DTC (in the United States) or CEDEL or Euroclear (in Europe)
directly if they are participants of such systems, or indirectly through
organizations which are participants in such systems. 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, CEDEL, Euroclear and their
participating organizations, except as otherwise specified herein. See
"-- Registration and Transfer 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 prepayments of any such Mortgage Loans in
full ("Principal Prepayments") and in part ("Curtailments") received during the
related Due Period or such
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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 and the Combined Loan-to-Value 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. Unless otherwise specified in
the Prospectus Supplement, 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
original filed financing statement and assignments thereof in form sufficient
for filing shall be so delivered and, where required, filed.
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Notwithstanding the preceding paragraph, with respect to any Mortgage which
has been recorded in the name of Mortgage Electronic Registration Systems, Inc.
("MERS") or its designee, the Originators will not be required to deliver an
assignment of Mortgage in favor of the Trustee to the Depositor. Instead, the
Trustee and the Servicer will be required to take all actions as are necessary
to cause the applicable Trust to be shown as the owner of the related Mortgage
Loan on the records of MERS for purposes of the system of recording transfers of
beneficial ownership of mortgages maintained by MERS.
In addition, the Originators will not be required to deliver an assignment
of the Mortgage to the Depositors 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"), 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
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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 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 Note and (ii) the Mortgagor is the trustee of
such
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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;
and
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.
Such Originator will also make representations as to the percentage of
Mortgage Loans which are secured by an Owner-Occupied Mortgaged Property, 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
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
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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 or FASIT election has
been made with respect to the related Series of Securities, a substitution may
only be made if it occurs within the maximum period permitted therefor by the
Code or applicable regulations of the Department of Treasury. 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
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;
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(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.
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. Unless otherwise specified in the related Prospectus
Supplement, the Servicer will 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
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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 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
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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.
The "Available Payment Amount" with respect to a Payment Date 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.
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 as of the record date established therefor (each a "Special
Record Date") 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 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.
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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 from the
sale of one or more Classes of Securities of the related Series will be
deposited in such account. The Depositors will be obligated (subject only to the
availability thereof) to sell at a predetermined price, and the Trust for the
related Series of Securities will be obligated to purchase (subject to the
availability thereof), additional Mortgage Loans (the "Subsequent Mortgage
Loans") from time to time (as frequently as daily) within the period (generally
not to exceed three months) specified in the related Prospectus Supplement (the
"Prefunding Period") after the issuance of such Series of Securities having an
aggregate principal balance approximately equal to the amount on deposit in the
Prefunding Account (the "Prefunding Amount") for such Series on the date of such
issuance. The Prefunding Amount with respect to a Series is not expected to
exceed 25% of the aggregate initial principal balance of the related Securities.
Any Subsequent Mortgage Loans will be required to satisfy certain eligibility
criteria more fully set forth in the related Prospectus Supplement, which
eligibility criteria will be consistent with the eligibility criteria of the
Mortgage Loans initially included in the Trust, subject to such exceptions as
are expressly stated in the Prospectus Supplement. For example, the Subsequent
Mortgage Loans will be subject to the same underwriting standards and
representations and warranties as the Mortgage Loans initially included in the
Trust. Unless otherwise specified in the related Prospectus Supplement, a
Prefunding Account will be required to be maintained as an Eligible Account.
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. In addition, if specified in the related Prospectus Supplement, the
Depositors may be required to deposit cash into an account maintained by the
Trustee (the "Capitalized Interest Account") for the purpose of assuring the
availability of funds to pay interest with respect to the Securities during the
Prefunding Period. Any amount remaining in the Capitalized Interest Account at
the end of the Prefunding Period will be remitted as specified in the related
Prospectus Supplement.
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related Series will be invested at a specified
rate. The Trust Fund may also include certain other agreements, such as interest
rate exchange agreements, interest rate cap or floor agreements or similar
agreements provided to reduce the effects of interest rate fluctuations on the
related Mortgage Loans or on one or more Classes of Securities. The principal
terms of any such guaranteed investment contract or other agreement (any such
agreement, a "Cash Flow Agreement"), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related Series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
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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;
(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;
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(xviii) the number of Mortgage Loans outstanding at the beginning and
at the end of the related Due Period;
(xix) the amounts that are reimbursable to the Servicer, the
Representative or the Depositors, as appropriate;
(xx) during the Prefunding Period, the remaining Prefunded Amount and
the portion of the amount used to acquire Subsequent Mortgage Loans since
the preceding Distribution Date;
(xxi) during the Prefunding Period, the amount remaining in the
Capitalized Interest Account; and
(xxii) 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.
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
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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 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
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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 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.
Cross-Support Provisions. If the Mortgage Loans for a Series are divided
into separate groups, each supporting a separate Class or Classes of Securities
of a Series, credit enhancement may be provided by cross-
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support provisions requiring that distributions be made on Senior Securities
evidencing interests in one group of Mortgage Loans prior to distributions on
Subordinated Securities evidencing interests in a different group of Mortgage
Loans within the Trust. The Prospectus Supplement for a Series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
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 (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 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
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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 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
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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.
The Servicer will not be permitted to foreclose on any Mortgaged Property
which it knows to be located within a one mile radius of any site contaminated
with or affected by hazardous wastes or hazardous substances without the prior
written consent of the Trustees and, if applicable, the Insurer. See "Certain
Legal Aspects of the Mortgage Loans -- Environmental Considerations." In
addition, the Servicer will not be obligated to foreclose on any Mortgaged
Property which it believes may be contaminated with or affected by hazardous
wastes or hazardous substances. If a Servicer does not foreclose on a Mortgaged
Property, the holders of Securities of the related Series may experience a loss
on the related Mortgage Loan. The Servicer will not be liable to holders of
Securities if it fails to foreclose on a Mortgaged Property which it believes
may be so contaminated or affected, even if such Mortgaged Property is, in fact,
not so contaminated or affected. Conversely, the Servicer will not be liable to
holders of Securities if, based on its belief that no such contamination or
effect exists, the Servicer forecloses on a Mortgaged Property and takes title
to such Mortgaged Property, and thereafter such Mortgaged Property is determined
to be so contaminated or affected.
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 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 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
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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 Attestation 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 (or do majority of such other
voting interests as are provided for in the applicable Pooling and Servicing
Agreement), 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) 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 (B) 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 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
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(vii) under certain circumstances, and to the extent required by any
Credit Provider, the aggregate Mortgage Loan Losses (as defined below) and
delinquencies on the related Mortgage Pool shall exceed certain thresholds
described in the related Pooling and Servicing Agreement.
"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 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.
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 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, Book-Entry Securities
may be initially represented by one or more certificates registered in the name
of DTC and be available only in the form of book-entries. If specified in the
related Prospectus Supplement, holders of Securities may hold beneficial
interests in Book-Entry Securities through DTC (in the United States) or CEDEL
or Euroclear (in Europe) directly if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
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CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur 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 or
Euroclear, 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, each such cross-market transaction 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. 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 through DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. CEDEL Participants and Euroclear Participants may
not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the 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.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, 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 Section 17A of the Exchange Act. DTC was created
to hold securities for its participating members ("DTC Participants") and to
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Securities of any Class or
Series. 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 DTC Participant, either directly or indirectly
("Indirect DTC Participants"). The rules applicable to DTC and DTC Participants
are on file with the Commission.
Beneficial owners ("Owners") that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Book-Entry Securities may do so only through DTC
Participants and Indirect DTC Participants. DTC Participants who are Owners of
Book-Entry Securities will receive a credit for such Securities on DTC's
records. The ownership interest of such holder will in turn be recorded on
respective records of the DTC Participants and Indirect DTC Participants. Such
holders will not receive written confirmation from DTC of their purchase, but
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect DTC Participant through which the Securityholder entered
into the transaction. 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 DTC Participants and DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among DTC
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
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Book-Entry Securities. DTC Participants and Indirect DTC Participants with which
Owners have accounts with respect to the Book-Entry Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders.
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 DTC 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 DTC Participants with respect to such Percentage Interests of
the Book-Entry Securities. DTC may take actions, at the direction of the related
DTC Participants, with respect to some Book-Entry Securities which conflict with
actions taken with respect to other Book-Entry Securities.
Cedel Bank, societe anonyme ("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 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 any underwriters, agents or dealers with
respect to any Class or Series of Securities offered hereby. 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 any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the "Euroclear
Operator" or "Euroclear"), under contract with Euroclear Clearance System S.C.,
a Belgian cooperative corporation (the Euroclear "Cooperative"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Euroclear Cooperative establishes policy for the
Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include any underwriters,
agents or dealers with respect to any Class or Series of Securities offered
hereby. 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 is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the
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Euroclear System and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Payments and distributions with respect to Book-Entry Securities held
through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by Citibank, N.A. or The Chase
Manhattan Bank, the relevant depositary of CEDEL and Euroclear (the
"Depositaries"), respectively. Such payments and distributions will be subject
to tax withholding in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Considerations". CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Securityholder on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf through
DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
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.
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
All of the Mortgage Loans are loans evidenced by a note or other
contractual payment obligation and secured by instruments granting a security
interest in real property which may be mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice and law in the
state in which the Mortgaged Property is located. Any of the foregoing
instruments will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the Mortgaged Property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority
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over governmental claims for real estate taxes and assessments and other charges
imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). Although a deed of
trust is similar to a mortgage, a deed of trust has three parties, the borrower-
homeowner called the trustor (similar to a mortgagor), a lender called the
beneficiary (similar to a mortgagee), and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the trustee
to secure payment of the obligation. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by law, the
express provisions of the deed of trust or mortgage, and, in some cases, the
directions of the beneficiary. Some states use a security deed or deed to secure
debt which is similar to a deed of trust except that it has only two parties: a
grantor (similar to a mortgagor) and a grantee (similar to a mortgagee).
Mortgages, deeds of trust and deeds to secure debt are not prior to liens for
real estate taxes and assessments and other charges imposed under governmental
police powers. Priority between mortgages, deeds of trust and deeds to secure
debt and other encumbrances depends on their terms in some cases and generally
on the order of recordation of the mortgage, deed of trust or the deed to secure
debt in the appropriate recording office. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a deed to secure debt are governed by the express provisions of
the mortgage, the law of the state in which the real property is located,
certain federal laws (including, without limitation, the Relief Act) and, in
some cases, in deed of trust transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Originators will make certain representations and
warranties to the Depositors, and substantially similar representations and
warranties will be made by the Depositors pursuant to the related Pooling and
Servicing Agreement with respect to any Mortgage Loans that are secured by an
interest in a leasehold estate. Such representations and warranties, if
applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
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 (a "Cooperative"), 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 directly responsible for property management and generally for
the payment of real estate taxes, insurance and similar charges. If there is a
blanket mortgage or
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mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property mortgagor, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the Cooperative in connection with
either the construction or purchase of the Cooperative's apartment building or
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the Mortgage Loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the Cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "Foreclosure -- Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"Contract Lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire
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indebtedness is accelerated, and the buyer's equitable interest in the property
is forfeited. The contract lender in such a situation does not have to foreclose
in order to obtain title to the property, although in some cases a quiet title
action is in order if the contract borrower has filed the land sale contract in
local land records and an ejectment action may be necessary to recover
possession. In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit ejectment
of the buyer and a forfeiture of his or her interest in the property. However,
most state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under land sale contracts from the harsh consequences of
forfeiture. Under such statues, a judicial contract may be reinstated upon full
payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a given state are simpler and less time consuming
and costly than are the procedures for foreclosing and obtaining clear title to
a mortgaged property.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed generally equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual
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circumstances of each case presented to it. Finally, some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for adequate notice require that a mortgagor receive notice
in addition to statutorily-prescribed minimum notice. For the most part, these
cases have upheld the reasonableness of the notice provisions or have found that
a public sale under a mortgage providing for a power of sale does not involve
sufficient state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obligated to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly,
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with respect to those Mortgage Loans, if any, that are junior mortgage loans, if
the lender purchases the property, the lender's title will be subject to all
senior mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Under the REMIC Regulations currently in effect, property acquired by
foreclosure generally must not be held for more than three years. With respect
to a Series of Securities for which an election is made to qualify the Trust or
a part thereof as a REMIC, the Pooling and Servicing Agreement will permit
foreclosed property to be held for more than three years if the Internal Revenue
Service grants an extension of time within which to sell such property or
independent counsel renders an opinion to the effect that holding such property
for such additional period is permissible under the REMIC Regulations. The
applicability of these limitations if a FASIT election is made with respect to
all or a part of the Trust will be described in the applicable Prospectus
Supplement.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder or pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
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Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
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" above.
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 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
"Risk Factors -- Risks of the Mortgage Loans -- Nature of Security" for a
further discussion of certain risks associated with junior mortgage loans.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only
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upon payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
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, anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq., (the "Bankruptcy Code") may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan 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 foreclosure sale 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.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits such mortgage
loan to be modified. Such modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted such modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
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.
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ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Unless otherwise specified in the related Prospectus Supplement, late
charges and prepayment fees (to the extent permitted by law and not waived by
the Servicer) will be included in the Representative's Yield.
"DUE-ON-SALE" CLAUSES
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. However, effective October 15, 1982, Congress enacted
the Garn-St Germain Depository Institutions Act of 1982 (the "Garn Act"), which
purports to preempt state laws that prohibit the enforcement of "due-on-sale"
clauses by providing, among other matters, that "due-on-sale" clauses in certain
loans (which loans may include the Mortgage Loans) made after the effective date
of the Garn Act are enforceable, within certain limitations, as set forth in the
Garn Act and the regulations promulgated thereunder. "Due-on-sale" clauses
contained in mortgage loans originated by federal savings and loan associations
or federal savings banks are fully enforceable pursuant to regulations of the
Office of Thrift Supervision ("OTS"), as successor to the Federal Home Loan Bank
Board ("FHLBB"), which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
By virtue of the Garn Act, the Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale" clause
upon transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or transfer where the spouse or children become an owner of the property in each
case where the transferee(s) will occupy the property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, (vi) a transfer into an inter vivos trust in which the borrower is
the beneficiary and which does not relate to a transfer of rights of occupancy;
and (vii) other transfers as set forth in the Garn Act and the regulations
thereunder. The extent of the Garn Act on the average lives and delinquency
rates of the Mortgage Loans cannot be predicted. See "Certain Yield and
Prepayment Considerations."
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.
SUBORDINATE FINANCING
Where a mortgagor encumbers a mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan
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does not, a mortgagor may be more likely to repay sums due on the junior loan
than those on the senior loan. Second, acts of the senior lender that prejudice
the junior lender or impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the mortgagor and the
senior lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority to the
extent any existing junior lender is harmed or the mortgagor is additionally
burdened. Third, if the mortgagor defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior lenders
can impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March, 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The 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 CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; or removal and disposal of asbestos-containing materials; or management
of electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("Superliens"). In the latter states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state laws in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial
and could exceed the value of the property and the aggregate assets of the owner
or operator. CERCLA imposes strict as well as joint and several liability for
environmental remediation and/or damage costs on several classes of "potentially
responsible parties," including current "owners and/or operators" of property,
irrespective of whether those owners or operators caused or contributed to
contamination on the property. In addition, owners and operators of properties
that generate hazardous substances that are disposed of at other "off-site"
locations may be held strictly, jointly and severally liable for environmental
remediation and/or damages at those off-site locations. Many states also have
laws that are similar to CERCLA. Liability under CERCLA or under similar state
law could exceed the value of the property itself as well as the aggregate
assets of the property owner.
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The law is unclear as to whether and under what precise circumstances
Cleanup Costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even through the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator" is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances including, among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under certain circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 30, 1996, however, the President signed into law the Asset
Conservation Lender Liability and Deposit Insurance Protection Act of 1996 (the
"Asset Conservation Act"). The Asset Conservation Act was intended to clarify
the scope of the secured-creditor exemption under both CERCLA and RCRA. The
Asset Conservation Act more explicitly defined the kinds of "participation in
management" that would trigger liability under CERCLA and specified certain
activities that would not constitute "participation in management" or otherwise
result in a forfeiture of the secured-creditor exemption prior to foreclosure or
during a workout period. The Asset Conservation Act also clarified the extent of
protection against liability under CERCLA in the event of foreclosure and
authorized certain regulatory clarifications of the scope of the
secured-creditor exemption for purposes of RCRA, similar to the statutory
protections under CERCLA. However, since the courts have not yet had the
opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
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If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust and occasion a loss to the Trust and to holders of Securities in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for potential for liability in
actions by either a state or a private party under other federal or state laws
which may impose liability on "owners or operators" but do not incorporate the
secured-creditor exemption.
See "Description of the Securities -- Servicing Standards -- Realization
Upon Defaulted Mortgage Loans" above.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940 (the
"Relief Act"), a mortgagor who enters military service after the origination of
such mortgagor's Mortgage Loan (including a mortgagor who was in reserve status
and is called to active duty after origination of the Mortgage Loan), 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. The Relief Act applies to mortgagors
who are members of the Army, Navy, Air Force, Marines, National Guard, Reserves,
Coast Guard and officers of the U.S. Public Health Service assigned to duty with
the military. Because the Relief Act applies to mortgagors who enter miliary
service (including reservists who are called to active duty) after origination
of the related mortgage loan, no information can be provided as to the number of
loans that may be affected by the Relief Act. Application of the Relief Act
would adversely affect, for an indeterminate period of time, the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans in
a Trust. Any shortfalls in interest collections resulting from the application
of the Relief Act would result in a reduction of the amounts distributable to
the holders of the related series of Securities, and would not be covered by
advances. Such shortfalls will be covered by the credit enhancement provided in
connection with such Securities only to the extent provided in the related
Prospectus Supplement. In addition, the Relief Act imposes limitations that
would impair the ability of the Servicer to foreclose on an affected mortgage
loan during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan which is subject to the Relief Act goes into
default, there may be delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act") the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the Securities offered hereunder. This
discussion is directed solely to Securityholders that hold the Securities as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"), and does not
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purport to discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Securities. See "Certain State Tax Consequences" below. Holders of Securities
are advised to consult their own tax advisors concerning the federal, state,
local or other tax consequences to them of the purchase, ownership and
disposition of the Offered Securities.
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."
The discussion below assumes that no election will be made to treat the Trust,
or any portion thereof, as a "financial asset securitization investment trust"
(a "FASIT") under sections 860H through 860L of the Code. If a FASIT election is
made for a particular series, the Prospectus Supplement for that Series will
address the material federal income tax consequences of such election.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
REMIC ELECTIONS
Upon issuance of each series of REMIC Certificates, Cadwalader, Wickersham
& Taft ("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 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
In general, the REMIC Certificates will be treated as "real estate assets"
within the meaning of section 856(c)(4)(B) of the Code and assets described in
section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC Pool underlying such REMIC Certificates would be so treated. Moreover, if
95% or more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Certificates will be
treated as such assets in their entirety for that calendar year. Interest
(including original issue discount) on the Regular Certificates and income
allocated to
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the class of Residual Certificates will be interest described in section
856(c)(3)(B) of the Code to the extent that such Certificates are treated as
"real estate assets" within the meaning of section 856(c)(4)(B) of the Code. In
addition, the Regular Certificates generally will be "qualified mortgages"
within the meaning of section 860G(a)(3) of the Code if transferred to another
REMIC on its Startup Day in exchange for regular or residual interests therein.
Effective September 1, 1997, Regular Certificates held by a FASIT will qualify
for treatment as "permitted assets" within the meaning of section 860L(c)(1)(G)
of the Code. The determination as to the percentage of the REMIC Pool's assets
that constitute assets described in the foregoing sections of the Code will be
made with respect to each calendar quarter based on the average adjusted basis
of each category of the assets held by the REMIC Pool during such calendar
quarter. The REMIC will report those determinations to Certificateholders in the
manner and at the times required by applicable Treasury regulations. The Small
Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve
method of accounting for bad debts of domestic building and loan associations
and mutual savings banks, and thus has eliminated the asset category of
"qualifying real property loans" in former section 593(d) of the Code for
taxable years beginning after December 31, 1995. The requirements in the SBJPA
of 1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under section 7701(a)(19)(C)(v) of the Code, but only if
such loans were made to acquire, construct or improve the related real property
and not for the purpose of refinancing. However, no effort will be made to
identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
The assets of the REMIC Pool will include, in addition to the Mortgage
Loans, payments on Mortgage Loans held pending distribution on the REMIC
Certificates and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. The Treasury Regulations pertaining to the REMIC
provisions of the Code (the "REMIC Regulations") do provide, however, that
payments on Mortgage Loans held pending distribution are considered part of the
Mortgage Loans for purposes of section 856(c)(4)(B) of the Code. Furthermore,
foreclosure property generally will qualify as "real estate assets" under
section 856(c)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of REMIC Certificates, Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Certificates issued by the Tiered REMICs, respectively, will be considered
to evidence ownership of Regular Certificates or Residual Certificates in the
related REMIC with the meaning of the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of section 856(c)(4)(B) of the Code and
"loans secured by an interest in real property" under section 7701(a)(19)(C) of
the Code, and whether the income on such REMIC Certificates is interest
described in section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated
as one REMIC.
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.
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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 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 Regular
Certificate must be the same as that used in pricing the initial offering of
such Regular Certificate. The prepayment assumption used by the Company in
reporting original issue discount for each series of 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 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 Regular
Certificate.
In the case of 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 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 (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
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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, income
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 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
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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 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
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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.
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. Furthermore, such gain will be treated as ordinary income
(i) if a Regular Certificate is held as part of a "conversion transaction" as
defined in section 1258(c) of the Code, up to the amount of interest that would
have accrued on the Regular Certificateholder's net investment in the conversion
transaction at 120% of the appropriate applicable federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior distribution of property
that was held as part of such transaction, or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
section 163(d)(4) of the Code to have net capital gains taxed as investment
income at ordinary rates. Long-term capital gains of certain noncorporate
taxpayers generally are subject to a lower maximum tax rate (28%) than ordinary
income of such taxpayers (39.6%) for property held for more than one year but
not more than 18 months and a still lower maximum tax rate (20%) for property
held for more than 18 months. Currently, the maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
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
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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. Under the REMIC Regulations, section 163(d)
of the Code does not apply to limit a REMIC's deductions for any 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
Regular Certificates, will increase over time as the earlier classes of 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 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
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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 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. Finally, Residual Certificateholders who
are Non-U.S. Persons (as defined below) will not be entitled to any exemption
from the 30% withholding tax or a reduced treaty rate with respect to their
excess inclusion income from the REMIC.
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
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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 at the highest corporate rate (currently 35%)
will be imposed on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of three years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
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, long-term
capital gains are subject to a maximum rate of tax of 28% (20% in the case of
capital assets held for longer than 18 months). 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.
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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 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 distributed
at or after the time at which the excess inclusion accrues and not later than
the close of the calendar year following the calendar year of accrual. 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 the income of which is includible in gross income for U.S. tax
purposes regardless of its source, or a trust if a court within the United
States is able to exercise primary supervision over the administration of such
trust and one or more such U.S. Persons have the authority to control all
substantial decisions of such trust (or, to the extent provided in applicable
Treasury regulations, certain trusts in existence on August 20, 1996 which are
eligible to elect to be treated as U.S. Persons). See "Limitations on Offset or
Exemption of REMIC Income" and "Other Matters Relating to REMIC
Certificates -- Taxation of Certain Foreign Investors -- Residual Certificates."
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 (currently 35%) 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
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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 provides its 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.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a pass-through entity by section 860E(c) of the Code.
The exception to this tax, otherwise available to a pass-through entity that is
furnished certain affidavits as described above, is not available to an electing
large partnership.
MARK TO MARKET REGULATIONS
On December 24, 1996, the Internal Revenue Service (the "IRS") issued final
regulations (the "Mark to Market Regulations") under section 475 of the Code
relating to the requirement that a securities dealer mark to market securities
held for sale to customers. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Mark to Market Regulations
provide that, for purposes of this mark-to-market requirement, a Residual
Certificate is not treated as a security and thus may not be marked to market.
The Mark to Market Regulations apply to all Residual Certificates acquired on or
after January 4, 1995.
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 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 gain (or 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
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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, (iii) an estate or trust the
income of which is includible in gross income for U.S. tax purposes regardless
of its source or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of such trust and one or
more United States Persons have the authority to control all substantial
decisions of such trust (or, to the extent provided in applicable Treasury
regulations, certain trusts in existence on August 20, 1996 which are eligible
to elect to be treated as U.S. Persons). 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 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.
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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 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)(4)(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)(4)(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 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 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)(4)(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 not 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.
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
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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
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.
Under section 708 of the Code, the partnership comprised by the Trust for
tax purposes will be deemed to terminate if 50% of more of the capital and
profits interests in the Trust are sold or exchanged within a 12-month period.
If such a termination occurs, it would cause a deemed contribution of the assets
of the Trust (the "old partnership") to a new partnership (the "new
partnership") in exchange for interest in the new partnership. Such interests
would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange. 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.
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
Certificateholder's
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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.
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 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 TRANSFERORS AND 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
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(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.
SECTION 731 DISTRIBUTIONS
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate does not exceed the adjusted basis
of such Certificateholder's interest in that Certificate. To the extent that the
amount of money distributed exceeds such Certificateholder's adjusted basis,
gain will be currently recognized. In the case of any distribution to a
Certificateholder, no loss will be recognized except upon a distribution in
liquidation of a Certificateholder's interest. Any gain or loss recognized by a
Certificateholder generally will be capital gain or loss.
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 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.
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FOREIGN CERTIFICATEHOLDERS
It is not clear whether a Trust taxed as a partnership would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to persons who are not U.S. Persons
("Non-U.S. Persons"), because there is no clear authority dealing with that
issue under facts substantially similar to those described herein. Although it
not expected that the Trust would be engaged in a trade or business in the
United States for such purposes, the Trust will withhold as if it were so
engaged in order to protect the Trust from possible adverse consequences of a
failure to withhold. The Trust expects to withhold on the portion of its taxable
income that is allocable to Certificateholders who are Non-U.S. Persons pursuant
to section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for Non-U.S. Persons that are taxable
as corporations and 39.6% for all other foreign holders. Amounts withheld will
be deemed distributed to the Non-U.S. Person Certificateholders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust to change its withholding procedures. In
determining a holder's withholding status, the Trust may rely on IRS Form W-8,
IRS Form W-9 or the holder's certification of nonforeign status under penalties
of perjury.
Each Non-U.S. Person holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each Non-U.S. Person holder
must obtain a taxpayer identification number from the IRS and submit that number
to the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A Non-U.S. Person holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade of business. However, interest payments made (or accrued) to a
Certificateholder who is a Non-U.S. Person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust. If these interest payments are properly characterized
as guaranteed payments, then the interest may not be considered "portfolio
interest." As a result, Certificateholders who are Non-U.S. Persons may be
subject to United States federal income tax and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable treaty. In such
case, a Non-U.S. Person holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with respect
to the guaranteed payments.
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 the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
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separate accounts in which such plans, accounts or arrangements are invested,
that are subject to Title I of ERISA and Section 4975 of the Code ("Plans") and
on persons who are fiduciaries with respect to such Plans in connection with the
investment of Plan assets. Certain employee benefit plans such as governmental
plans (as defined in ERISA Section 3(32)), and, if no election has been made
under Section 410(d) of the Code, church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such plans
may be invested in Securities without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal, state
and local law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans and other
assets included in a related Trust to be deemed Plan assets. Section 2510.3-101
of the regulations of the United States Department of Labor ("DOL") provides
that when a Plan acquires an equity interest in an entity, the Plan's assets
include both such equity interest and an undivided interest in each of the
underlying assets of the entity, unless certain exceptions not applicable here
apply, or unless the equity participation in the entity by "benefit plan
investors" (i.e., Plans and certain employee benefit plans not subject to ERISA)
is not "significant", both as defined therein. For this purpose, in general,
equity participation by benefit plan investors will be "significant" on any date
if 25% or more of the value of any class of equity interests in the entity is
held by benefit plan investors. To the extent the Securities are treated as
equity interests for purposes of DOL regulations section 2510.3-101, equity
participation in a Trust will be significant on any date if immediately after
the most recent acquisition of any Security, 25% or more of any class of
Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans and other assets included in a Trust constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the Services, may be deemed to be a Plan "fiduciary" and
thus subject to the fiduciary responsibility provisions and prohibited
transaction provisions of ERISA and the Code with respect to the investing Plan.
In addition, if the Mortgage Loans and other assets included in a Trust
constitute Plan assets, the purchase of Securities by a Plan, as well as the
operation of the Trust, may constitute or involve a prohibited transaction under
ERISA and the Code.
The DOL issued an individual exemption, Prohibited Transaction Exemption
93-31 (the "Exemption"), on May 14, 1993 to NationsBank Corporation
("NationsBank"), which generally exempts from the application of the prohibited
transaction provisions of Sections 406(a) and 407 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of Securities
underwritten by an Underwriter (as hereinafter defined), that (a) represent a
beneficial ownership interest in the assets of a Trust and entitle the holder
the pass-through payments of principal, interest and/or other payments made with
respect to the assets of the Trust or (b) are denominated as a debt instrument
and represent an interest in a REMIC, provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations," the term "Underwriter" shall include (a) NationsBank, (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with NationsBank, including NationsBank,
Inc., and (c) any member of the underwriting syndicate or selling group of which
a person described in (a) or (b) is a manager or co-manager with respect to a
Class of Securities.
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<PAGE> 170
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Securities evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Securities of
the same series. Third, the Securities at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by S&P,
Moody's, DCR or Fitch. Fourth, the Trustee cannot be an affiliate of any member
of the "Restricted Group" which consists of the Underwriter, the Depositors, the
Trustee, the Servicer, any insurer and any obligor with respect to Mortgage Bank
constituting more than 5% of the aggregate unamortized principal balance of the
Mortgage Loans in the related Trust as of the date of initial issuance of the
Securities. Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the Securities; the sum of all payments made to and retained by the
Depositors pursuant to the assignment of the Mortgage Loans to the related Trust
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Servicer must represent not more
than reasonable compensation for such person's services under the Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the investing Plan must be an accredited investor
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended. In addition, the Trust
must meet the following requirements: (i) the assets of the Trust must consist
solely of assets of the type that have been included in other investment pools;
(ii) securities evidencing interests in such other investment pools must have
been rated in one of the three highest generic rating categories by S&P,
Moody's, DCR, or Fitch for at least one year prior to the Plan's acquisition of
the securities; and (iii) securities evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied with
respect to such Security. However, to the extent Securities are subordinate, the
Exemption will not apply to an investment by a Plan.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(e)(1)(A) through (D) of the Code) in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities by
Plans. However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Security on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes of the Securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of Securities between the Depositor or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan assets in the Securities is (a) an
obligor with respect to 5% or less of the fair market value of the Mortgage
Loans or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Securities by a Plan and
(3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust. The
Depositors expect that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of
98
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ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) for transactions in connection
with the servicing, management and operation of the Mortgage Pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of the Plan's ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("Non-Equity Securities") would not cause the assets included in a
related Trust to be deemed Plan assets. However, the Depositors, the Servicer,
the Trustee, or Underwriter may be the sponsor of or investment advisor with
respect to one or more Plans. Because such parties may receive certain benefits
in connection with the sale of Non-Equity Securities, the purchase of Non-Equity
Securities using Plan assets over which any such parties has investment
authority might be deemed to be a violation of the prohibited transaction rules
of ERISA and the Code for which no exemption may be available. Accordingly,
Non-Equity Securities may not be purchased using the assets of any Plan if a
Depositors, or any of the Servicer, the Trustee or the Underwriter has
investment authority with respect to such assets.
In addition, certain affiliates of the Depositors might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTE") B4-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager", PTE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTE-91-38, which exempts certain transactions involving bank
collective investment funds, PTE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The Prospectus Supplement with respect to a series of
Securities may contain additional information regarding the application of the
Exemption, PTE 83-1 or any other exemption, with respect to the Securities
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Securities representing a Stripped REMIC Certificate should consider
the federal income tax consequences of such investment.
The sale of Securities to a Plan is in no respect a representation by the
Depositors or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
99
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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.
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, as amended ("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 offered hereby and by the Supplements to this Prospectus
will be offered in Series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by NationsBanc Montgomery Securities
LLC ("NationsBanc Montgomery") acting as underwriter with other underwriters, if
any, named therein. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositors. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositors or from purchasers of the Securities in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositors.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by NationsBanc Montgomery acting as agent or in some cases
as principal with respect to Securities which it has previously purchased or
agreed to purchase. If NationsBanc Montgomery acts as agent in the sale of
Securities, NationsBanc Montgomery will receive a selling commission with
respect to each series of Securities, depending on market conditions, expressed
as a percentage of the aggregate principal balance of the related Mortgage Loans
as of the Cut-off Date. The exact percentage for each series of Securities will
be disclosed in the related Prospectus Supplement. To the extent that
NationsBanc Montgomery elects to purchase Securities as principal, NationsBanc
Montgomery may realize losses or profits based upon the difference between its
purchase price and the sales price. The Prospectus Supplement with respect to
any series offered other than through underwriters will contain information
regarding the nature of such offering and any agreements to be entered into
between the Depositors and purchasers of Securities of such series.
NationsBanc Montgomery is an affiliate of the Depositors. This Prospectus
may be used by NationsBanc Montgomery, to the extent required, in connection
with market making transactions in the Securities. NationsBanc Montgomery may
act as principal or agent in such transactions.
The Depositors will indemnify NationsBanc Montgomery and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments NationsBanc Montgomery and any
underwriters may be required to make in respect thereof.
100
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In the ordinary course of business, NationsBanc Montgomery and the
Depositors may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositors'
mortgage loans pending the sale of such mortgage loans or interests therein,
including the Securities.
The Depositors anticipate that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities, Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositors, and may be sold by
the Depositors at any time to one or more institutional investors.
RATINGS
Each Class of Offered Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
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 Cadwalader, Wickersham & Taft, New York, New
York and Charlotte, North Carolina or Hunton & Williams, Charlotte, North
Carolina. Certain federal income tax matters will be passed upon for the
Depositors by Cadwalader Wickersham & Taft, New York, New York and Charlotte,
North Carolina.
101
<PAGE> 174
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Accrual Period.............................................. 9,46
Accrual Securities.......................................... 9,46
Actuarial Mortgage Loan..................................... 26
Adjustable Rate Mortgages................................... 25
Advance..................................................... 13,52
ARMs........................................................ 25
Asset Conservation Act...................................... 77
Available Payment Amount.................................... 54
Bankruptcy Code............................................. 74
Bankruptcy Plan............................................. 25
Balloon Loans............................................... 21
Basic Principal Amount...................................... 10,47
Book-Entry Securities....................................... 10,46
Buydown Mortgage Loans...................................... 30
Buydown Period.............................................. 30
Capitalized Interest Account................................ 55
Cash Collateral Account..................................... 59
Cash Collateral Lender...................................... 59
Cash Flow Agreement......................................... 55
Cede........................................................ 46
CEDEL....................................................... 10,66
CEDEL Participants.......................................... 66
CERCLA...................................................... 76
Certificates................................................ 45
Class....................................................... 2,8
Cleanup Costs............................................... 76
Closing Date................................................ 8
Code........................................................ 15
Collection Account.......................................... 53
Combined Loan-to-Value Ratio................................ 25
Commission.................................................. 3
Company..................................................... 19
Contract borrower........................................... 69
Contract Lender............................................. 69
Cooperative................................................. 68
Cooperative Loans........................................... 68
Covered Trust............................................... 18
Credit Provider............................................. 57
Crime Control Act........................................... 78
Curtailments................................................ 9,46
Custodian................................................... 49
Cut-off Date................................................ 8
DCR......................................................... 14,17
Debt-to-Income Ratio........................................ 37
Definitive Securities....................................... 10,67
Depositaries................................................ 10,67
</TABLE>
102
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<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Depositors.................................................. 7
Determination Date.......................................... 9
Disqualified Organization................................... 88
DOL......................................................... 97
DTC......................................................... 10,46
DTC Participants............................................ 65
Due Period.................................................. 9,46
Eligible Account............................................ 51
ERISA....................................................... 15,96
EquiCredit.................................................. 1,7,33
EquiCredit Corporation...................................... 33
Equity Protection Act....................................... 22
Euroclear................................................... 10,66
Euroclear Cooperative....................................... 66
Euroclear Operation......................................... 66
Euroclear Participants...................................... 66
Excess Spread............................................... 51
Exemption................................................... 97
FASIT....................................................... 14,79
FHLMC....................................................... 19
FICO Score.................................................. 43
Fitch....................................................... 14,17
Fixed Monthly Debt.......................................... 37
FHLBB....................................................... 75
FNMA........................................................ 19
Foreign Holder.............................................. 90
Garn Act.................................................... 75
Gross Margin................................................ 26
Holders..................................................... 10
Illinois Land Trust......................................... 48
Indenture Trustee........................................... 7
Index....................................................... 26
Indirect DTC Participants................................... 65
Insolvency Laws............................................. 23
Insurance Proceeds.......................................... 9,46
Insurer..................................................... 57
IRS......................................................... 89
Issuer...................................................... 7
Land Sale Contract.......................................... 24
Letter of Credit............................................ 58
Letter of Credit Issuer..................................... 58
Liquidated Mortgage Loan.................................... 10,46
Liquidation Proceeds........................................ 10,46
Majority in Aggregate Voting Interest....................... 63
Mark to Market Regulations.................................. 89
market discount............................................. 83
Maximum Mortgage Rate....................................... 26
MERS........................................................ 48
</TABLE>
103
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<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Minimum Mortgage Rate....................................... 26
Monthly Deposit Date........................................ 8,51
Monthly Payments............................................ 9,46
Monthly Period.............................................. 51
Moody's..................................................... 14,17
Mortgage.................................................... 1,11
Mortgage File............................................... 46
Mortgage Interest Rate...................................... 11
Mortgage Loan............................................... 1,8
Mortgage Loan Losses........................................ 64
Mortgage Loan Schedule...................................... 46
Mortgage Pool............................................... 1,8
Mortgaged Property.......................................... 1,11
Mortgagor................................................... 19
NationsBanc Montgomery...................................... 100
NationsBank................................................. 97
Net Liquidation Proceeds.................................... 10,46
Non-Equity Securities....................................... 99
Nonrecoverable Advances..................................... 53
Non-U.S. Persons............................................ 96
Notes....................................................... 45
Offered Securities.......................................... 1
OID Regulations............................................. 81
Original Pool Principal Balance............................. 11,24
Originator.................................................. 1,7
OSCC-Florida................................................ 33
OTS......................................................... 75
Owners...................................................... 65
Owner Trustee............................................... 7,32
Parties in Interest......................................... 97
Partnership................................................. 14
pass-through entity......................................... 89
Payment Cap................................................. 26
Payment Date................................................ 8
PCBs........................................................ 76
Percentage Interest......................................... 10,45
Periodic Cap................................................ 26
Permitted Instruments....................................... 51
Plans....................................................... 97
Pooling and Servicing Agreement............................. 32
Pool Insurance Policy....................................... 58
Pool Insurer................................................ 58
Pool Principal Balance...................................... 56
Prefunded Amount............................................ 55
Prefunding Account.......................................... 12,55
Prefunding Period........................................... 55
Prepayment Assumption....................................... 81
Prepayment Period........................................... 9,46
</TABLE>
104
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<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Prepayment Premium.......................................... 26
Primary Servicing Portfolio................................. 44
Principal and Interest Account.............................. 51
Principal Prepayments....................................... 9,46
PTE......................................................... 99
Qualified Substitute Mortgage Loan.......................... 49
Quality Control Audits...................................... 42
Rating Agency............................................... 14,17
RCRA........................................................ 77
Record Date................................................. 9
Regular Certificates........................................ 79
Released Mortgaged Property Proceeds........................ 10,46
Relief Act.................................................. 23,78
REMIC....................................................... 14,79
REMIC Certificates.......................................... 79
REMIC Pool.................................................. 79
REMIC Regulations........................................... 80
REO Properties.............................................. 12
Representative.............................................. 1,7
Representative's Yield...................................... 13
Reserve Fund................................................ 58
Residual Certificateholders................................. 84
Residual Certificates....................................... 79
Restricted Group............................................ 98
Revolving Credit Line Loans................................. 28
RICO........................................................ 78
Rule of 78s Mortgage Loan................................... 26
SBJPA of 1996............................................... 80
Securities.................................................. 1
Securities Insurance Policy................................. 57
Securities Interest Rate.................................... 8,45
Senior Liens................................................ 14,20
Senior Certificates......................................... 84
Senior Securities........................................... 59
Series...................................................... 1
Servicer.................................................... 1,7
Servicer Termination Event.................................. 63
Servicing Advances.......................................... 52
Servicing Fee............................................... 13,60
Simple Interest Mortgage Loan............................... 26
SMMEA....................................................... 100
S&P......................................................... 14,17
Special Hazard Policy....................................... 58
Special Payment Amount...................................... 54
Special Payment Date........................................ 32,54
Special Payments............................................ 32,54
Special Record Date......................................... 54
Spread Account.............................................. 58
</TABLE>
105
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<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
standard hazard insurance................................... 61
Stripped REMIC Certificates................................. 82
Subordinated Certificates................................... 84
Subordinated Securities..................................... 59
Sub-prime Mortgage Loans.................................... 19
Subsequent Mortgage Loans................................... 55
Substitution Adjustment..................................... 49
Successor Servicer.......................................... 64
Superliens.................................................. 76
Tax Counsel................................................. 79
Temporary Regulations....................................... 90
Terms and Conditions........................................ 66
Tiered REMICs............................................... 80
Title V..................................................... 76
Transfer Agreement.......................................... 8,46
Trust....................................................... 1,7
Trust Agreement............................................. 32
Trustee..................................................... 7,32
Underwriter................................................. 97
Underwriting Program........................................ 35
UST......................................................... 77
weighted average life....................................... 29
</TABLE>
106
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======================================================
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-5
Risk Factors............................... S-20
Description of the Mortgage Pool........... S-23
Certain Yield and Prepayment
Considerations........................... S-38
The Originators and the
Servicer -- Origination, Foreclosure and
Loss Experience.......................... S-47
Description of the Certificates............ S-49
The Trustee................................ S-59
The Securities Insurance Policy and the
Insurer.................................. S-60
Federal Income Tax Consequences............ S-62
ERISA Considerations....................... S-64
Legal Investment........................... S-65
Use of Proceeds............................ S-65
Underwriting............................... S-66
Secondary Market........................... S-66
Experts.................................... S-67
Ratings.................................... S-67
Legal Matters.............................. S-67
Index of Principal Definitions............. S-68
Global Clearance, Settlement and Tax
Documentation Procedures................. I-1
PROSPECTUS
Available Information...................... 3
Reports to Holders......................... 3
Incorporation of Certain Documents by
Reference................................ 3
Summary of Prospectus...................... 7
Risk Factors............................... 17
Description of the Mortgage Pools.......... 24
Certain Yield and Prepayment
Considerations........................... 28
The Trusts................................. 32
The Depositors, the Servicer, the
Representative and the Originators....... 33
Description of the Securities.............. 45
Certain Legal Aspects of the Mortgage
Loans.................................... 67
Certain Federal Income Tax Consequences.... 78
Certain State Tax Consequences............. 96
ERISA Considerations....................... 96
Legal Investment........................... 100
Use of Proceeds............................ 100
Plan of Distribution....................... 100
Ratings.................................... 101
Legal Matters.............................. 101
Index of Principal Definitions............. 102
</TABLE>
======================================================
======================================================
EQCC HOME EQUITY LOAN
TRUST 1998-1
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
DEPOSITORS
EQUICREDIT CORPORATION OF AMERICA
SERVICER
A SUBSIDIARY OF
NATIONSBANK CORPORATION
$738,874,072
(APPROXIMATE)
EQCC HOME EQUITY LOAN
ASSET BACKED CERTIFICATES,
SERIES 1998-1
CLASS A CERTIFICATES
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
LEHMAN BROTHERS
MERRILL LYNCH & CO.
Dated April 16, 1998
======================================================
