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Filed Pursuant to Rule No. 424(b)(5)
Registration Statement No. 333-37499
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 22, 1998)
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$728,250,000
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES,
SERIES 1998-D
UCFC ACCEPTANCE CORPORATION
DEPOSITOR
UNITED COMPANIES LENDING CORPORATION(REGISTERED) [LOGO]
INITIAL SERVICER
------------------------------
The depositor will form a trust, and the trust will issue Home Equity Loan
Asset-Backed Certificates, Series 1998-D. The depositor is offering only those
classes of certificates listed in the table below.
The trust will include a pool of fixed and adjustable rate home equity
loans that are secured primarily by first and second liens on residential
properties. The home equity loans are not insured or guaranteed by any person.
The certificates are obligations only of the trust. The offered
certificates are not insured or guaranteed by any person.
An investment in the offered certificates, and particularly the Class M and
Class B Certificates, involves significant risks. You should review the
information under the caption "Risk Factors" beginning on page S-8 of this
prospectus supplement and on page 12 of the attached prospectus before
making a decision to invest in the offered certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the offered certificates or determined
if this prospectus supplement or the attached prospectus is
accurate or complete. Making any contrary representation
is a criminal offense.
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INITIAL CLASS PASS-THROUGH
PRINCIPAL BALANCE RATE
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Class AF-1................ $ 128,000,000 6.105%
Class AF-2................ $ 59,000,000 5.905%
Class AF-3................ $ 18,000,000 6.035%
Class AF-4................ $ 10,000,000 6.210%
Class AF-5................ $ 10,000,000 6.280%
Class AF-6................ $ 13,274,000 6.660%(3)
Class AF-7................ $ 26,475,000 6.315%
Class AF-8................ $ 150,000,000 6.235%(3)
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INITIAL CLASS PASS-THROUGH
PRINCIPAL BALANCE RATE
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Class MF-1................ $ 39,638,000 6.905%
Class MF-2................ $ 33,863,000 7.750%(1)
Class BF-1................ $ 26,250,000 8.965%(1)
Class AV-1................ $ 165,150,000 (2)
Class MV-1................ $ 19,800,000 (2)
Class MV-2................ $ 16,537,000 (2)
Class BV-1................ $ 12,263,000 (2)
</TABLE>
(1) This rate may be limited to a maximum rate described under "Description of
the Certificates--Flow of Funds and Distributions on the Offered
Certificates" in this prospectus supplement.
(2) The interest rate on this class may change from month to month based on the
London interbank offered rate for one-month U.S. dollar deposits and may be
limited to a maximum rate described under "Description of the
Certificates--Flow of Funds and Distributions on the Offered Certificates"
in this prospectus supplement.
(3) This rate will increase by 0.50% if the holder of the residual certificates
does not exercise its option to terminate the trust under the circumstances
described under "The Pooling and Servicing Agreement--Termination" in this
prospectus supplement.
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Subject to the satisfaction of certain conditions, the underwriters named
below will purchase the offered certificates from the depositor. The
underwriters will offer the offered certificates, other than the Class BV-1
Certificates, to the public from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The
underwriters will pay the depositor an amount equal to approximately 97.965857%
of the aggregate principal balance of the offered certificates plus accrued
interest, before deducting issuance expenses payable by the depositor. The
Class BV-1 Certificates will be transferred to the depositor on or about
December 30, 1998, as partial consideration for the sale of the home equity
loans to the trust. See "Underwriting" in this prospectus supplement. The
offered certificates will be issued in book-entry form only on or about
December 30, 1998.
PRUDENTIAL SECURITIES INCORPORATED BEAR, STEARNS & CO. INC.
(CERTIFICATE GROUP I UNDERWRITERS)
MORGAN STANLEY DEAN WITTER BEAR, STEARNS & CO. INC.
(CERTIFICATE GROUP II UNDERWRITERS)
The date of this prospectus supplement is December 28, 1998
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
Page
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Summary of Terms..................................... S-3
Risk Factors......................................... S-8
Introduction......................................... S-12
The Home Equity Loans................................ S-12
Maturity, Prepayment and Yield Considerations........ S-29
Description of the Certificates...................... S-43
The Originators...................................... S-52
Transfer of Servicing................................ S-57
The Pooling and Servicing Agreement.................. S-59
Certain Federal Income Tax
Consequences....................................... S-61
Legal Investment..................................... S-62
ERISA Considerations................................. S-62
Underwriting......................................... S-66
Certain Legal Matters................................ S-66
Ratings.............................................. S-67
Annex I--Global Clearance, Settlement and Tax
Documentation Procedures........................... S-68
Appendix A--Certain Historical Prepayment
Information........................................ A-1
Appendix B--Certain Historical Information........... B-1
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PROSPECTUS
Page
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Prospectus Supplement................................ 2
Available Information................................ 2
Reports to Holders................................... 2
Incorporation of Certain Documents by
Reference.......................................... 2
Summary of Terms..................................... 3
Risk Factors......................................... 12
The Trusts........................................... 18
Use of Proceeds...................................... 23
The Depositor........................................ 23
The Originators...................................... 23
The Home Equity Loan Program......................... 24
Description of the Securities........................ 29
Credit Enhancement................................... 36
Maturity, Prepayment and Yield Considerations ....... 36
The Agreements....................................... 39
Certain Legal Aspects of the Mortgage
Loans.............................................. 54
Federal Income Tax
Considerations..................................... 58
ERISA Considerations................................. 76
Legal Investment..................................... 78
Method of Distribution............................... 80
Legal Matters........................................ 80
Financial Information................................ 81
Rating............................................... 81
Index of Principal Terms............................. 82
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset-Backed Certificates,
Series 1998-D in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Home Equity Loan Asset-Backed Certificates, Series 1998-D
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Home Equity Loan Asset-Backed Certificates, Series 1998-D
will be required to deliver a prospectus supplement and prospectus until
March 28, 1999.
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SUMMARY OF TERMS
This section gives a brief summary of the information contained in this
prospectus supplement. The summary does not include all of the important
information about the offered certificates. The depositor encourages prospective
investors to review carefully the more detailed information in this prospectus
supplement and in the attached prospectus. Any capitalized terms that are used
but not defined in this prospectus supplement shall have the meanings assigned
in the attached prospectus.
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TITLE OF CERTIFICATES..................... Home Equity Loan Asset-Backed Certificates, Series 1998-D.
ISSUER.................................... UCFC Home Equity Loan Trust 1998-D.
DEPOSITOR................................. UCFC Acceptance Corporation. See "The Depositor" in the attached
prospectus.
INITIAL SERVICER.......................... United Companies Lending Corporation(Registered). See "The
Originators" in this prospectus supplement and in the attached
prospectus.
SUBSTITUTE SERVICER....................... EMC Mortgage Corporation. See "Transfer of Servicing" in this
prospectus supplement.
TRUSTEE................................... Bankers Trust Company of California, N.A. (the "Trustee").
ORIGINATORS OF THE HOME EQUITY LOANS...... United Companies Lending Corporation(Registered) and certain of its
affiliates. See "The Originators" in this prospectus supplement and
in the attached prospectus and "The Home Equity Loan Program" in the
attached prospectus.
SELLERS OF THE HOME EQUITY LOANS.......... Approximately $207,081,995 of the home equity loans to be delivered
on the closing date will be sold to the trust by UCFC Home Equity
Loan Owner Trust 1998-MS2, a special purpose, Delaware business
trust, the sole owner of which is an affiliate of United Companies
Lending Corporation(Registered). The remaining home equity loans and
any subsequent loans will be sold to the trust by the depositor.
All of the home equity loans being sold by the MS2 Trust were
originated by the originators, were sold indirectly by the
originators to the MS2 Trust and are being serviced by the Initial
Servicer.
Upon sale of the applicable home equity loans by the MS2 Trust to the
trust, the MS2 Trust will be dissolved and will have no obligation
to the trust. The originators will make the same representations and
warranties with respect to all of the home equity loans in the trust
and will have the same obligations with respect to any breaches
thereof.
APPROXIMATE AGGREGATE LOAN BALANCE AS OF
THE CUT-OFF DATE........................ $646,002,364.
CLOSING DATE.............................. On or about December 30, 1998.
CUT-OFF DATE.............................. The opening of business on December 20, 1998, except that (i) the
Cut-Off Date with respect to any mortgage note dated on or after
December 20, 1998, will be the date of that mortgage note and (ii)
the Cut-Off Date with respect to all of the home equity loans being
sold by the MS2 Trust is the opening of business on December 13,
1998.
DISTRIBUTION DATES........................ The 15th day of each month or, if such day is not a business day, the
next business day, beginning in January 1999.
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RECORD DATES.............................. The last business day of the calendar month immediately before the
calendar month in which the applicable distribution date occurs.
FINAL SCHEDULED DISTRIBUTION DATES........ The final scheduled distribution date for each class of offered
certificates is as follows:
</TABLE>
<TABLE>
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FINAL SCHEDULED FINAL SCHEDULED
CLASS DISTRIBUTION DATE CLASS DISTRIBUTION DATE
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AF-1.. April 15, 2013 MF-1.. April 15, 2030
AF-2.. February 15, 2021 MF-2.. April 15, 2030
AF-3.. November 15, 2023 BF-1.. April 15, 2030
AF-4.. September 15, 2025 AV-1.. December 15, 2028
AF-5.. February 15, 2027 MV-1.. December 15, 2028
AF-6.. April 15, 2030 MV-2.. December 15, 2028
AF-7.. April 15, 2030 BV-1 December 15, 2028
AF-8.. April 15, 2030
</TABLE>
<TABLE>
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See "Maturity Prepayment and Yield Considerations--Final Scheduled
Distribution Dates" in this prospectus supplement.
DESIGNATIONS.............................. Each class of certificates will have different characteristics.
Certain of those characteristics are reflected in the following
general designations. These designations are used in this prospectus
supplement and the attached prospectus to provide a better
understanding to potential investors.
Class A Certificates.................... All classes of offered certificates with an "A" in the class
designation.
Class M Certificates.................... All classes of offered certificates with an "M" in the class
designation.
Class M-1 Certificates.................. Class MF-1 and Class MV-1 Certificates.
Class M-2 Certificates.................. Class MF-2 and Class MV-2 Certificates.
Class B Certificates.................... All classes of offered certificates with a "B" in the Class
designation.
Class B-1 Certificates.................. Class BF-1 and Class BV-1 Certificates.
Book-Entry Certificates................. All classes of offered certificates.
Fixed Rate Certificates................. All classes of offered certificates except for the Adjustable Rate
Certificates.
Adjustable Rate Certificates............ Class AV-1, Class MV-1, Class MV-2 and Class BV-1 Certificates.
Group I Certificates or Certificate
Group I.............................. The Fixed Rate Certificates.
Group II Certificates or Certificate
Group II............................. The Adjustable Rate Certificates.
Certificate Group....................... Group I Certificates or Group II Certificates, as applicable.
Loan Group I or Group I Loans........... All home equity loans bearing interest at fixed rates.
Loan Group II or Group II Loans......... All home equity loans bearing interest at adjustable rates, including
home equity loans which bear interest at rates that are fixed for
two years or three years before beginning to adjust.
Offered Certificates.................... Group I Certificates and Group II Certificates.
Subordinated Certificates............... Class MF-1, Class MF-2, Class BF-1, Class MV-1, Class MV-2 and
Class BV-1 Certificates.
</TABLE>
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<TABLE>
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OFFERED CERTIFICATES
Pass-Through Rates...................... The pass-through rates for the fixed rate certificates, other than
the Class MF-2 and Class BF-1 Certificates, are the respective per
annum fixed rates set forth on the cover of this prospectus
supplement. On any distribution date, the pass-through rates per
annum for the Class MF-2 and Class BF-1 Certificates will be equal
to the lesser of:
o the per annum rate for such class set forth on the cover of this
prospectus supplement, and
o the weighted average of the net interest rates on the group I
home equity loans (net of certain fees and expenses), which rate
is called the "group I net rate cap."
The pass-through rates for the adjustable rate certificates are
variable rates that may change from distribution date to
distribution date. On any distribution date, the pass-through rate
per annum for each class of adjustable rate certificates will be
equal to the lesser of:
o LIBOR plus the applicable pass-through margin for such class, and
o a maximum per annum rate referred to as the "group II net rate
cap," calculated as described under "Description of the
Certificates--Flow of Funds and Distributions on the Offered
Certificates--Interest Distributions" in this prospectus
supplement.
See "Description of the Certificates--Flow of Funds and Distributions
on the Offered Certificates--Interest Distributions" and
"--Calculation of One-Month LIBOR" in this prospectus supplement.
If on any distribution date, the pass-through rate for the
Class MF-2 or Class BF-1 Certificates is based upon the group I
net rate cap, or the pass-through rate for a class of adjustable
rate certificates is based upon the group II net rate cap, the
holders of those certificates will receive a smaller amount of
interest than such holders would have received on such distribution
date had the pass-through rate for that class not been calculated
based on the group I net rate cap or the group II net rate cap, as
applicable. The amount by which a certificateholder's interest
payment has been reduced by operation of the group I net rate cap
or the group II net rate cap will be paid to such certificateholder
on future distribution dates to the extent that money is available
to make such payments.
See "Description of the Certificates--Flow of Funds and Distributions
on the Offered Certificates" in this prospectus supplement.
Interest Payments....................... On each distribution date holders of the offered certificates will be
entitled to receive:
o the interest that has accrued on such certificates at the related
pass-through rate during the related accrual period, and
o any interest due on a prior distribution date that was not paid.
</TABLE>
S-5
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<TABLE>
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The "accrual period" for the fixed rate certificates will be the
calendar month immediately preceding the calendar month in which a
distribution date occurs. The "accrual period" for the adjustable
rate certificates will be the period from and including the
preceding distribution date (or from the closing date, in the case
of the first distribution date) to and including the day prior to
the current distribution date.
Calculations of interest on the fixed rate certificates will be
based on a 360-day year that consists of twelve 30-day months.
Calculations of interest on the adjustable rate certificates will
be based on a 360-day year and the actual number of days elapsed
during the related accrual period.
There are certain circumstances that could reduce the amount of
interest paid to you.
See "Description of the Certificates--Flow of Funds and Distributions
on the Offered Certificates--Interest Distributions" in this
prospectus supplement.
Principal Payments...................... On each distribution date, certificateholders entitled to receive
principal will receive a distribution of principal on their
certificates if there is cash available on that date for the payment
of principal. Monthly principal distributions:
o will generally include principal payments on the home equity
loans in the related loan group, and
o until certain overcollateralization levels have been reached,
will include excess interest payments on the home equity loans.
You should review the priority of payments described under
"Description of the Certificates--Flow of Funds and Distributions
on the Offered Certificates--Distributions of Principal" in this
prospectus supplement.
See "Description of the Certificates--Flow of Funds and
Distributions on the Offered Certificates" and
"--Overcollateralization and Crosscollateralization Provisions" in
this prospectus supplement.
Minimum Denominations................... $25,000 and integral multiples of $1,000 in excess of $25,000.
Form.................................... Book-Entry. See "Description of the Certificates--Book-Entry
Certificates" in this prospectus supplement.
SMMEA Eligibility....................... The offered certificates will not be mortgage related securities.
ERISA Eligibility....................... Subject to satisfaction of certain conditions, ERISA plans may
purchase the Class A Certificates. See "ERISA Considerations" in
this prospectus supplement.
OTHER CERTIFICATES........................ The trust will issue subordinated residual certificates. The
depositor is not offering these certificates to the public pursuant
to this prospectus supplement and the attached prospectus. The
depositor is including information about this class because it
provides credit enhancement to the offered certificates.
PRE-FUNDING ACCOUNTS...................... On the closing date, the depositor will deposit approximately
$64,808,850 and $39,188,786, respectively, into two segregated
pre-funding accounts maintained with the trustee. The trust will use
these amounts to buy additional home equity loans from the
</TABLE>
S-6
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<TABLE>
<S> <C>
depositor for loan group I and loan group II, respectively, after
the closing date. The depositor must satisfy certain conditions
before it can sell subsequent home equity loans to the trust. See
"The Home Equity Loans--Subsequent Loans" in this prospectus
supplement.
CREDIT ENHANCEMENT........................ Credit enhancement refers to a mechanism that is intended to protect
the holders of certain classes of certificates against losses due to
defaults by the borrowers under the home equity loans.
The offered certificates have the benefit of three types of credit
enhancement:
o the use of excess interest to cover losses and to create
overcollateralization
o crosscollateralization of the two loan groups
o subordination of distributions on the Subordinated Certificates
OPTIONAL TERMINATION...................... The holder of the residual certificates may, at its option, terminate
the trust on any distribution date when the aggregate principal
balance of the home equity loans is less than 10% of the sum of the
principal balances of the home equity loans delivered on the closing
date and the subsequent home equity loans. See "The Pooling and
Servicing Agreement--Termination" in this prospectus supplement.
FEDERAL INCOME TAX CONSIDERATIONS......... The trust will make an election to treat certain of its assets as a
"real estate mortgage investment conduit" (the "REMIC"). The offered
certificates will be designated as "regular interests" in a REMIC
and, as such, will be treated as debt instruments of a REMIC for
federal income tax purposes.
For further information regarding the federal income tax
consequences of investing in the offered certificates, see "Certain
Federal Income Tax Consequences" in this prospectus supplement and
"Federal Income Tax Considerations" in the prospectus.
CERTIFICATE RATING........................ The offered certificates will not be issued unless they receive the
following ratings from Fitch IBCA, Inc. ("Fitch"), Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P").
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CLASS FITCH MOODY'S S&P
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AF-1 - AF-8 AAA Aaa AAA
AV-1 AAA Aaa AAA
MF-1 and MV-1 AA Aa2 AA
MF-2 and MV-2 A A2 A
BF-1 and BV-1 BBB Baa2 BBB
</TABLE>
<TABLE>
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See "Ratings" in this prospectus supplement.
</TABLE>
S-7
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RISK FACTORS
An investment in the offered certificates involves significant risks.
Before you decide to invest in the offered certificates, you should consider the
following risk factors and the risk factors discussed under the heading "Risk
Factors" beginning on page 12 of the prospectus.
INVESTORS MAY HAVE DIFFICULTY SELLING CERTIFICATES
The offered certificates will not be listed on any securities exchange. As
a result, if you wish to sell your certificates, you will have to find a
purchaser that is willing to purchase your certificates. The underwriters intend
to make a secondary market for the offered certificates purchased by them. The
underwriters may do so by offering to buy the offered certificates purchased by
them from investors that wish to sell. However, the underwriters will not be
obligated to make offers to buy the offered certificates and may stop making
offers at any time. In addition, the prices offered, if any, may not reflect
prices that other potential purchasers, were they to be given the opportunity,
would be willing to pay. There have been times in the past where there have been
very few buyers of similar asset-backed securities (i.e., there has been a lack
of liquidity), and there may be such times in the future. As a result, you may
not be able to sell your certificates when you wish to do so or you may not be
able to obtain the price you wish to receive.
THE UNIQUE FEATURES OF THE HOME EQUITY LOANS CREATE SPECIAL RISKS
There are a number of unique features of the home equity loans that create
risks which are not present with other types of residential mortgage loans,
including the following:
o The Borrowers Have Less Than Perfect Credit. The originators'
underwriting standards are less restrictive than those of Fannie
Mae or Freddie Mac with respect to a borrower's credit history and
other factors. A derogatory credit history or a lack of credit
history will not necessarily prevent the originators from making a
loan but may reduce the size (and the loan-to-value ratio) of the
loan the originators will make. As a result of these less
restrictive standards, the trust may experience higher rates of
delinquencies, defaults and losses than if the home equity loans
were underwritten in a more traditional manner.
o Newly Originated Home Equity Loans May Default. Defaults on home equity
loans tend to occur at higher rates during the early years of the
home equity loans. Substantially all of the home equity loans will
have been originated within 6 months prior to the sale to the
trust. As a result, the trust may experience higher rates of
default than if the home equity loans had been outstanding for a
longer period of time.
o Balloon Loans May Have Higher Rates of Default. Based on the principal
balances of the home equity loans in existence on December 20,
1998, approximately 2.33% of the home equity loans in Loan Group I
and none of the home equity loans in Loan Group II are balloon
loans. A balloon loan has monthly payments that will not fully pay
off the loan balance by the maturity date. As a result, the
borrower usually will have to refinance the balloon loan in order
to pay the amount due. The borrower may not be able to refinance
the balloon loan for any number of reasons, including the level of
available mortgage rates, the value of the property or the
borrower's payment or credit history. The trust will not have any
funds to refinance a balloon loan, and the originators are not
obligated to do so.
o Defaults on Second Lien Loans May Result in More Severe Losses. Based on
the principal balances of the home equity loans in existence on
December 20, 1998, approximately 5.49% of the home equity loans in
Loan Group I and 0.03% of the home equity loans in Loan Group II
are secured by second liens on the related property. If a borrower
of a home equity loan secured by a second lien defaults, the
trust's rights to proceeds on liquidation of the related property
are subordinate to the rights of the holder of the first lien on
the related property. There may not be enough proceeds to pay both
the first lien and the second lien, and the trust would suffer a
loss.
o Geographic Concentration Increases Risks. Based on the principal
balances of the home equity loans in existence on December 20,
1998, approximately 9.92%, 6.41%, 6.03% and 5.71% of the home
S-8
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equity loans in Loan Group I are secured by properties in
Louisiana, New York, North Carolina and Ohio, respectively, and
approximately 16.37%, 7.86% and 7.60% of the home equity loans in
Loan Group II are secured by properties in California, Ohio and
Michigan, respectively. These states may suffer economic problems
or reductions in market values for residential properties that are
not experienced in other states. Because of the concentration of
home equity loans in these states, those types of problems may have
a greater effect on the offered certificates than if borrowers and
properties were more spread out in different geographic areas.
THE RETURN ON INVESTMENT WILL CHANGE OVER TIME
Your pre-tax return on your investment will change from time to time for a
number of reasons, including the following:
o The Rate of Return of Principal is Uncertain. The amount of
distributions of principal of the offered certificates and the time
when those distributions are received depends on the amount and the
times at which borrowers make principal payments on the home equity
loans. Those principal payments may be regularly scheduled payments
or unscheduled payments resulting from prepayments or defaults of
the home equity loans. The rate of prepayment may be affected by
the credit standings of the borrowers. If a borrower's credit
standing improves, that borrower may be able to refinance his
existing loan on more favorable terms. If a borrower's credit
standing declines, the borrower may not be able to refinance.
Certain of the home equity loans in Loan Group II have fixed
interest rates for two or three years and then adjust. Those home
equity loans may have higher prepayments as they approach their
first adjustment dates because the borrowers may want to avoid
periodic changes to their monthly payments.
o Pre-Funding May Result in Prepayments. If the originators are unable to
deliver sufficient, eligible subsequent home equity loans to the
trust during the permitted period, amounts remaining in a
pre-funding account will be distributed as a prepayment (i) to the
owners of the Class AF-8 and Class AF-1 Certificates or the
Class AV-1 Certificates, as applicable or (ii) to all owners of
certificates of the related certificate group, pro rata, depending
on the amount of the funds remaining in such pre-funding account.
o You Bear Reinvestment Risk. Asset-backed securities, like the offered
certificates, usually produce more returns of principal to
investors when market interest rates fall below the interest rates
on the home equity loans and produce less returns of principal when
market interest rates are above the interest rates on the home
equity loans. If borrowers refinance their home equity loans as a
result of lower interest rates, you will receive an unanticipated
payment of principal. As a result, you are likely to receive more
money to reinvest at a time when other investments generally are
producing a lower yield than that on the offered certificates, and
are likely to receive less money to reinvest when other investments
generally are producing a higher yield than that on the offered
certificates. You will bear the risk that the timing and amount of
distributions on your offered certificates will prevent you from
attaining your desired yield.
o The Optional Termination May Affect the Yield. Your investment in the
offered certificates may be ended before you desire if the optional
termination is exercised. See "The Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
o Pass-Through Rates May be Limited. The rate at which interest accrues on
the Class MF-2 and Class BF-1 Certificates and the Adjustable Rate
Certificates is subject to a rate cap that differs by loan group.
The rate cap for the offered certificates is based on the weighted
average of the interest rates on the home equity loans in the
related loan group (net of certain fees and expenses). If home
equity loans with relatively higher mortgage rates prepay, the
maximum rate on the related classes of offered certificates will be
lower than otherwise would be the case.
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<PAGE>
Your investment in the Adjustable Rate Certificates also involves
the risk that the level of 1-month LIBOR may change in a direction
and/or at a rate that is different from the level of the index used
to determine the interest rates on the adjustable rate home equity
loans.
THE SUBORDINATED CERTIFICATES HAVE A GREATER RISK OF LOSS THAN THE OTHER
CERTIFICATES
When certain classes of certificates provide credit enhancement for other
classes of certificates this is sometimes referred to as "subordination." For
purposes of this prospectus supplement, "related subordinated classes" means:
o with respect to the senior certificates of a certificate group, the
Class M and Class B Certificates of the same certificate group.
o with respect to the Class M-1 Certificates, the Class M-2 and Class B
Certificates of the same certificate group, and
o with respect to the Class M-2 Certificates, the Class B Certificates of
the same certificate group.
Credit enhancement will be provided for the certificates, first, by the
right of the holders of the certificates to receive certain payments of
principal prior to the related subordinated classes and, second, by the
allocation of realized losses to the related subordinated classes. This form of
credit enhancement is provided by using collections on the home equity loans
otherwise payable to the holders of the related subordinated classes to pay
amounts due on the more senior classes. Such collections comprise the sole
source of funds from which such credit enhancement is provided. Realized losses
are allocated to the subordinated certificates, beginning with the subordinated
certificates with the lowest payment priority, until the principal amount of
that subordinated class has been reduced to zero. This means that with respect
to the certificates offered by this prospectus supplement, realized losses on
the home equity loans of a particular loan group would first be allocated to the
Class BF-1 or Class BV-1 Certificates, as applicable, until the principal
balance of such Class BF-1 or Class BV-1 Certificates was reduced to zero.
Subsequent realized losses would be allocated to the next most junior class of
subordinated certificates, until the principal balance of that class of
subordinated certificates was reduced to zero. Accordingly, if the aggregate
principal balance of the related subordinated classes were to be reduced to
zero, delinquencies and defaults on the home equity loans would reduce the
amount of funds available for monthly distributions to holders of the remaining
certificates.
You should fully consider the risks of investing in a subordinated
certificate, including the risk that you may not fully recover your initial
investment as a result of realized losses.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT
Each group of home equity loans is expected to generate more interest than
is needed to pay interest on the related classes of certificates because the
weighted average interest rate on the related home equity loans is expected to
be higher than the weighted average pass-through rate on the related classes of
certificates. If the related home equity loans generate more interest than is
needed to pay interest on the related certificates and related trust fees, such
"excess interest" will be used to make additional principal payments on the
related certificates to the extent required by the pooling and servicing
agreement. This application will reduce the total principal balance of such
certificates below the aggregate principal balance of the related home equity
loans, thereby creating "overcollateralization." Overcollateralization is
intended to provide limited protection to certificateholders by absorbing the
related certificates' share of losses from liquidated home equity loans.
However, there may be insufficient excess interest generated on the home equity
loans of either loan group to establish or maintain the required levels of
overcollateralization for the related certificate group.
The excess interest available on any distribution date will be affected by
the actual amount of interest received, collected or recovered with respect to
the home equity loans during the preceding month. Such amount will be influenced
by changes in the weighted average of the interest rates resulting from
prepayments and liquidations of the related home equity loans as well as from
adjustments of the interest rates on adjustable rate home equity loans. Because
the index used to determine the interest rates on the adjustable rate home
equity loans is different from the index used to determine the pass-through
rates on the related certificates, it is possible that the pass-through rates on
the related certificates may be higher than the interest rates on the related
home
S-10
<PAGE>
equity loans. In that event, it may be necessary to apply all or a portion of
the available excess interest to make required payments of interest on the
related classes of certificates. As a result, excess interest may be unavailable
for any other purpose.
If the protection afforded by overcollateralization and
crosscollateralization is insufficient, then the holders of the certificates
could experience a loss on their investment.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE OFFERED CERTIFICATES
All distributions on the offered certificates will be made from payments by
borrowers under the home equity loans. The trust has no other assets to make
distributions on the offered certificates. The home equity loans are not insured
or guaranteed by any person. The trust is the only person that is obligated to
make distributions on the offered certificates. The offered certificates are not
insured by any governmental agency or any other person.
COMPUTER PROBLEMS IN THE YEAR 2000 MAY RESULT IN LOSSES
Many computers and computer chips were not programed to recognize more than
two digits in the year of a date. As a result, in the year 2000 (year '00 to the
computer), those computers will not know whether the '00 refers to the year 1900
or the year 2000. The initial servicer, the substitute servicer, the originators
and their respective affiliates have each begun programs to identify and correct
this problem in their computer systems. The initial servicer, the substitute
servicer, the originators and their respective affiliates each expect to
complete the necessary changes by June 1999. However, since these entities rely
on the performance of computer systems of other companies, there may be problems
in the year 2000 due to other companies' computer systems. These problems may
cause delays or disruptions in the amount and timing of distributions to
certificateholders.
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL AFFECT THE PRICES FOR
CERTIFICATES
A security rating is not a recommendation to buy, sell or hold securities.
Similar ratings on different types of securities do not necessarily mean the
same thing. You are encouraged to analyze the significance of each rating
independently from any other rating. Any rating agency may change its rating of
the offered certificates after those offered certificates are issued if that
rating agency believes that circumstances have changed. Any subsequent change in
rating will likely affect the price that a subsequent purchaser will be willing
to pay for the offered certificates.
THE INITIAL SERVICER'S PARENT HAS RECENTLY EXPERIENCED FINANCIAL DIFFICULTIES
United Companies Financial Corporation, the parent of the initial servicer
and the originators, has financing agreements that require it to maintain a
minimum consolidated fixed charge ratio. This ratio has been declining. If the
ratio is not met as of December 31, 1998, it will be a default under the
financing agreements, and approximately $1.225 billion of unsecured debt would
become due unless, prior to the expiration of the cure periods, waivers were
sought and obtained. If the debt was accelerated, it would materially and
adversely affect United Companies Financial Corporation, including the initial
servicer and the originators; would likely adversely affect their abilities to
fulfill their obligations with respect to the home equity loans, including,
without limitation, the originators' obligation to repurchase home equity loans
for defects in documentation or breaches of representations and warranties, and
may prevent or adversely affect the servicing transfer. Even if the originators
and the initial servicer were to be able to fulfill their respective
obligations, the prices of the offered certificates in the secondary market may
be adversely affected. United Companies Financial Corporation may not satisfy
the minimum consolidated fixed charge coverage ratio at December 31, 1998.
In October, 1998, United Companies Financial Corporation announced a
restructuring plan that involved the termination of its manufactured housing
lending operation, closing branch offices, reducing the workforce and closing
the correspondent lending operation. Since July 1998, various rating agencies
have downgraded the ratings assigned to the preferred stock and debt securities
of United Companies Financial Corporation. These developments may adversely
affect the performance and liquidity of the offered certificates. See "The
Originators--Recent Developments" in this prospectus supplement.
S-11
<PAGE>
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered certificates are not suitable investments for any investor that
requires a regular or predictable schedule of payments or payment on any
specific date. The offered certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment, and the
interaction of these factors.
INTRODUCTION
The Home Equity Loan Asset-Backed Certificates, Series 1998-D (the
"Certificates") will represent the entire beneficial interest in UCFC Home
Equity Loan Trust 1998-D (the "Trust"). The Trust will be formed, and the
Certificates will be issued, pursuant to the pooling and servicing agreement
dated as of December 20, 1998 (the "Pooling and Servicing Agreement"), among
UCFC Acceptance Corporation, as depositor (the "Depositor"), United Companies
Lending Corporation(Registered), as initial servicer (the "Initial Servicer"),
UCFC Home Equity Loan Owner Trust 1998-MS2, as a seller (the "MS2 Trust"), EMC
Mortgage Corporation, as substitute servicer (the "Substitute Servicer") and
Bankers Trust Company of California, N.A., as trustee (the "Trustee").
On the Closing Date, a portion of the proceeds from the sale of the Offered
Certificates will be deposited into segregated trust accounts maintained with
the Trustee (the "Pre-Funding Accounts" and the "Capitalized Interest Accounts,"
respectively). Funds on deposit in the Pre-Funding Accounts will be used to
purchase up to approximately $64,808,850 and $39,188,786 of subsequent home
equity loans for Loan Group I and Loan Group II, respectively (each a "Maximum
Funding Amount"). Funds on deposit in the Capitalized Interest Accounts will be
used to cover shortfalls in interest attributable to the pre-funding feature.
THE HOME EQUITY LOANS
GENERAL
The Home Equity Loans were, and any Subsequent Loans will be, originated,
directly or through correspondents or mortgage brokers, or purchased and
re-underwritten, by the Originators in accordance with the policies set forth
under "The Home Equity Loan Program" in the Prospectus. All of the Home Equity
Loans are, and all Subsequent Loans will be, Single Family Loans as described
under "The Trusts" in the Prospectus. All of the Home Equity Loans are, and all
Subsequent Loans will be, non-conventional home equity and home improvement
loans bearing fixed or adjustable interest rates (the "Mortgage Rates") and
evidenced by promissory notes (the "Mortgage Notes") secured by deeds of trust,
security deeds or mortgages on single-family properties. Certain of the Home
Equity Loans (including Subsequent Loans) may have been made in connection with
the dispositions of previously foreclosed Mortgaged Properties. Except for the
Balloon Loans, all of the Home Equity Loans are fully amortizing loans. Although
the Home Equity Loans may be prepaid at any time, prepayment may subject the
borrower to a prepayment penalty, the terms and existence of which depend on
state regulation. The single-family properties (the "Mortgaged Properties")
securing the Home Equity Loans (including the Subsequent Loans) consist of
single-family residences (which may be townhouses, one- to four-family
dwellings, condominium units or mobile or manufactured homes treated as real
estate under local law). The Mortgaged Properties may be owner-occupied (which
includes second and vacation homes) and non-owner occupied investment
properties.
Loan Group I. The Home Equity Loans (including Subsequent Loans, if any)
in Loan Group I will bear interest at fixed rates and will be secured by first
or second liens on the related Mortgaged Properties. Certain of the Home Equity
Loans in Loan Group I will have original terms to stated maturity that differ
from their amortization schedules ("Balloon Loans"), leaving a substantial
payment due at the stated maturity (each, a "Balloon Payment"). Substantially
all of the Balloon Loans will have original terms to stated maturity of 15 years
and amortization schedules of 30 years.
Approximately 0.73% (by Principal Balance as of the Cut-Off Date) of the
Home Equity Loans in Loan Group I provide that if each of the first twelve
monthly payments are received within 30 days of the due dates
S-12
<PAGE>
therefor, the Mortgage Rate will be reduced by 100 basis points for the
remaining term of the Home Equity Loan and the monthly payments will be
recalculated to reflect such reduction and amortize the then-unpaid principal
balance by the original maturity date.
Loan Group II. The Home Equity Loans (including Subsequent Loans) in Loan
Group II are adjustable rate Home Equity Loans and Home Equity Loans the
interest rates on which will become adjustable after a period of time
(collectively, "ARMs"), all of which will be secured by first liens (except for
one Group II Loan, which will be secured by a second lien) on the related
Mortgaged Properties. The per annum interest rate (the "Mortgage Rate") borne by
each ARM is subject to adjustment on the date set forth in the Mortgage Note for
such ARM and at regular intervals thereafter (each, a "Change Date") to equal
the sum of (i) the applicable index (the "Index"), and (ii) the number of basis
points set forth in the related Mortgage Note (the "Gross Margin"), subject to
rounding and to the effects of the applicable Periodic Rate Cap, Lifetime Cap
and Lifetime Floor. The "Periodic Rate Cap" limits changes in the Mortgage Rate
for each ARM on each Change Date. The "Lifetime Cap" for each ARM is the maximum
Mortgage Rate that may be borne by such ARM, and the "Lifetime Floor" is the
minimum Mortgage Rate that may be borne by such ARM.
With respect to approximately 1.32% of the ARMs (by Principal Balance as of
the Cut-Off Date); (i) the Index is the weekly average yield on United States
treasury securities adjusted to a constant maturity of one year ("CMT"), as made
available by the Federal Reserve Board as of the date 45 days (as set forth in
the related Mortgage Note) before the applicable Change Date; (ii) the Change
Dates will occur on the date set forth in the related Mortgage Note and every
twelfth month thereafter; (iii) the Periodic Rate Cap for substantially all such
ARMs is 100 basis points or 200 basis points; (iv) the Lifetime Cap for
substantially all of the ARMs is 600 or 700 basis points greater than the
initial Mortgage Rate; and (v) the Lifetime Floor is as set forth in the related
Mortgage Note.
With respect to the remaining ARMs: (i) the Index is the London interbank
offered rate for six-month United States dollar deposits ("6-Month LIBOR"), as
published either in The Wall Street Journal, of the edition, if any, specified
in the related Mortgage Note or by the Federal National Mortgage Association
("Fannie Mae"), and available as of the date before the applicable Change Date
specified in the related Mortgage Note; and (ii) the Change Dates will occur on
the initial Change Date set forth in the related Mortgage Note and every sixth
month thereafter.
The initial Change Dates for approximately 1.90% and 84.55% (by Principal
Balance as of the Cut-Off Date) of the ARMs delivered on the Closing Date will
occur on the 24th and 36th due dates, respectively. The Periodic Rate Caps for
such ARMs generally range from 100 basis points to 300 basis points on the
initial Change Dates and from 100 basis points to 300 basis points for the
subsequent Change Dates.
STATISTICAL INFORMATION
Set forth below is certain approximate statistical information as of the
Cut-Off Date regarding the Home Equity Loans expected to be included in each
Loan Group as of the Closing Date. Prior to the Closing Date, Home Equity Loans
may be removed from either Loan Group and other Home Equity Loans may be
substituted therefor. The Depositor believes that the information set forth
herein with respect to each Loan Group as presently constituted is
representative of the characteristics of each Loan Group as it will be
constituted at the Closing Date, although certain characteristics of the Home
Equity Loans in either Loan Group may vary. The sum of the percentage columns in
the following tables may not equal 100% due to rounding.
Loan Group I. As of the Cut-Off Date: the Loan Balances ranged from
$4,485.22 to $560,624.11; the average Loan Balance was $50,492.77; the Mortgage
Rates ranged from 7.500% to 15.500% per annum; the weighted average Mortgage
Rate was 10.672% per annum; the original Combined Loan-to-Value Ratios ranged
from 5.00% to 100.00%; the weighted average original Combined Loan-to-Value
Ratio was 81.32%; the remaining terms to stated maturity ranged from 46 months
to 360 months; the weighted average remaining term to stated maturity was 271
months; the loan ages ranged from 0 months to 301 months; the weighted average
loan age was 1 month; Balloon Loans constituted 2.33% of the aggregate Principal
Balance as of the Cut-Off Date of the Group I Loans; and 0.52% of the aggregate
Principal Balance as of the Cut-Off Date of the Group I Loans were 30-59 days
delinquent as of the opening of business on December 20, 1998.
S-13
<PAGE>
GEOGRAPHIC DISTRIBUTION--LOAN GROUP I
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
STATE EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Alabama................................. 86 0.94% $ 3,865,721.75 0.84%
Arizona................................. 72 0.79 4,790,214.30 1.04
Arkansas................................ 259 2.84 10,524,739.18 2.29
California.............................. 232 2.55 19,686,168.92 4.28
Colorado................................ 88 0.97 6,560,525.23 1.43
Connecticut............................. 58 0.64 4,324,104.10 0.94
Delaware................................ 11 0.12 729,973.29 0.16
District Of Columbia.................... 15 0.16 1,083,321.14 0.24
Florida................................. 450 4.94 22,520,118.14 4.89
Georgia................................. 363 3.98 19,537,478.61 4.25
Idaho................................... 13 0.14 949,879.75 0.21
Illinois................................ 258 2.83 10,355,148.34 2.25
Indiana................................. 343 3.76 14,405,694.22 3.13
Iowa.................................... 122 1.34 5,499,693.63 1.20
Kansas.................................. 2 0.02 76,933.48 0.02
Kentucky................................ 241 2.64 10,942,630.53 2.38
Louisiana............................... 1,036 11.37 45,649,834.28 9.92
Maine................................... 132 1.45 7,913,902.63 1.72
Maryland................................ 76 0.83 5,506,721.48 1.20
Massachussetts.......................... 61 0.67 4,530,977.03 0.98
Michigan................................ 549 6.02 22,224,201.85 4.83
Minnesota............................... 49 0.54 1,661,063.04 0.36
Mississippi............................. 509 5.58 21,835,533.87 4.74
Missouri................................ 155 1.70 7,182,786.45 1.56
Montana................................. 1 0.01 62,522.74 0.01
Nebraska................................ 41 0.45 1,736,249.73 0.38
Nevada.................................. 9 0.10 615,725.70 0.13
New Hampshire........................... 64 0.70 4,697,446.35 1.02
New Jersey.............................. 83 0.91 7,321,815.40 1.59
New Mexico.............................. 54 0.59 3,293,522.93 0.72
New York................................ 430 4.72 29,481,507.49 6.41
North Carolina.......................... 539 5.91 27,753,008.37 6.03
North Dakota............................ 4 0.04 146,500.00 0.03
Ohio.................................... 536 5.88 26,279,908.19 5.71
Oklahoma................................ 301 3.30 12,417,090.00 2.70
Oregon.................................. 37 0.41 2,924,045.16 0.64
Pennsylvania............................ 336 3.69 15,805,709.72 3.43
Rhode Island............................ 10 0.11 1,120,382.68 0.24
South Carolina.......................... 198 2.17 8,413,930.73 1.83
Tennessee............................... 438 4.81 21,869,323.96 4.75
Texas................................... 291 3.19 12,247,095.19 2.66
Utah.................................... 45 0.49 3,280,522.24 0.71
Vermont................................. 4 0.04 286,348.01 0.06
Virginia................................ 98 1.08 5,954,953.61 1.29
Washington.............................. 45 0.49 3,429,023.56 0.75
West Virginia........................... 99 1.09 4,672,398.04 1.02
Wisconsin............................... 262 2.87 13,713,817.48 2.98
Wyoming................................. 9 0.10 310,937.37 0.07
------ ------ ---------------- ------
Total.............................. 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-14
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIO DISTRIBUTION--LOAN GROUP I
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF ORIGINAL COMBINED NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
LOAN-TO-VALUE RATIOS EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
0.01- 5.00%............................ 1 0.01% $ 8,728.89 0.00%
5.01- 10.00............................ 3 0.03 78,456.11 0.02
10.01- 15.00............................ 14 0.15 201.462.05 0.04
15.01- 20.00............................ 43 0.47 788,663.31 0.17
20.01- 25.00............................ 51 0.56 945,240.59 0.21
25.01- 30.00............................ 72 0.79 1,708,586.89 0.37
30.01- 35.00............................ 90 0.99 2,167,194.18 0.47
35.01- 40.00............................ 108 1.18 2,988,733.24 0.65
40.01- 45.00............................ 140 1.54 3,981.808.74 0.87
45.01- 50.00............................ 212 2.33 6,809,880.25 1.48
50.01- 55.00............................ 216 2.37 6,714,524.99 1.46
55.01- 60.00............................ 300 3.29 10,630,473.56 2.31
60.01- 65.00............................ 359 3.94 13,795,946.42 3.00
65.01- 70.00............................ 541 5.94 22,591,337.91 4.91
70.01- 75.00............................ 866 9.50 38,954,915.00 8.46
75.01- 80.00............................ 1,406 15.43 72,885,310.82 15.84
80.01- 85.00............................ 1,421 15.59 77,825,149.41 16.91
85.01- 90.00............................ 1,329 14.58 77,894,691.12 16.93
90.01- 95.00............................ 880 9.66 54,653,344.77 11.88
95.01-100.00............................ 1,062 11.65 64,566.701.64 14.03
------ ------ ---------------- ------
Total.............................. 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
The Combined Loan-to-Value Ratios shown above represent the ratio of the
sum of the principal amount of each Home Equity Loan and the unpaid principal
balance of the related first mortgage loan, if any, at the time of origination
of such Home Equity Loan divided by the lesser of the appraised value of the
related Mortgaged Property at the time of origination (the "Appraised Values")
or the purchase price of such Mortgaged Property, if applicable. No assurance
can be given that the values of the Mortgaged Properties have remained or will
remain at their levels on the dates of origination of the related Home Equity
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Home Equity
Loans become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, defaults, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry.
S-15
<PAGE>
MORTGAGE RATE DISTRIBUTION--LOAN GROUP I
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
RANGE OF MORTGAGE RATES EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
7.251- 7.500%........................... 1 0.01% $ 72,725.69 0.02%
7.501- 7.750............................ 2 0.02 133,355.39 0.03
7.751- 8.000............................ 31 0.34 3,157,056.89 0.69
8.001- 8.250............................ 30 0.33 3,033,139.11 0.66
8.251- 8.500............................ 147 1.61 13,511,340.38 2.94
8.501- 8.750............................ 153 1.68 13,532,119.52 2.94
8.751- 9.000............................ 307 3.37 21,202,820.45 4.61
9.001- 9.250............................ 286 3.14 22,039,351.42 4.79
9.251- 9.500............................ 507 5.56 29,893,332.27 6.50
9.501- 9.750............................ 545 5.98 36,127,244.37 7.85
9.751-10.000............................ 600 6.58 34,660,119.70 7.53
10.001-10.250............................ 495 5.43 28,560,527.59 6.21
10.251-10.500............................ 522 5.73 31,219,500.48 6.78
10.501-10.750............................ 472 5.18 28,293,972.91 6.15
10.751-11.000............................ 603 6.62 33,394,673.98 7.26
11.001-11.250............................ 593 6.51 24,473,559.49 5.32
11.251-11.500............................ 577 6.33 24,152,018.77 5.25
11.501-11.750............................ 584 6.41 19,800,627.38 4.30
11.751-12.000............................ 432 4.74 18,931,249.13 4.11
12.001-12.250............................ 462 5.07 14,221,119.57 3.09
12.251-12.500............................ 446 4.89 16,286,344.58 3.54
12.501-12.750............................ 317 3.48 8,761,254.72 1.90
12.751-13.000............................ 415 4.55 14,882,091.69 3.23
13.001-13.250............................ 178 1.95 7,412,165.58 1.61
13.251-13.500............................ 131 1.44 4,290,029.16 0.93
13.501-13.750............................ 91 1.00 2,725,927.15 0.59
13.751-14.000............................ 45 0.49 1,472,160.64 0.32
14.001-14.250............................ 39 0.43 1,100,048.00 0.24
14.251-14.500............................ 21 0.23 552,206.28 0.12
14.501-14.750............................ 14 0.15 389,281.23 0.08
14.751-15.000............................ 34 0.37 915,515.69 0.20
15.001-15.250............................ 10 0.11 309,015.36 0.07
15.251-15.500............................ 24 0.26 685,255.32 0.15
------ ------ ---------------- ------
------ ------ ---------------- ------
Total............................... 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-16
<PAGE>
DISTRIBUTION OF OUTSTANDING LOAN BALANCES AS OF THE CUT-OFF DATE--LOAN GROUP I
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
RANGE OF LOAN BALANCES EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
$ 0.01- 5,000.00.................... 1 0.01% $ 4,485.22 0.00%
5,000.01- 10,000.00.................... 123 1.35 1,033,267.03 0.22
10,000.01- 15,000.00.................... 461 5.06 5,958,587.90 1.29
15,000.01- 20,000.00.................... 646 7.09 11,506,190.78 2.50
20,000.01- 25,000.00.................... 817 8.96 18,527,517.28 4.03
25,000.01- 30,000.00.................... 840 9.22 23,216,909.48 5.05
30,000.01- 35,000.00.................... 787 8.64 25,647,349.53 5.57
35,000.01- 40,000.00.................... 779 8.55 29,286,424.44 6.36
40,000.01- 45,000.00.................... 669 7.34 28,461,008.65 6.18
45,000.01- 50,000.00.................... 598 6.56 28,469,865.31 6.19
50,000.01- 55,000.00.................... 520 5.71 27,300,092.73 5.93
55,000.01- 60,000.00.................... 463 5.08 26,654,532.87 5.79
60,000.01- 65,000.00.................... 352 3.86 22,030,501.61 4.79
65,000.01- 70,000.00.................... 336 3.69 22,656,825.38 4.92
70,000.01- 75,000.00.................... 246 2.70 17,848,489.33 3.88
75,000.01- 80,000.00.................... 223 2.45 17,295,259.57 3.76
80,000.01- 85,000.00.................... 155 1.70 12,801,354.70 2.78
85,000.01- 90,000.00.................... 119 1.31 10,442,792.62 2.27
90,000.01- 95,000.00.................... 86 0.94 7,968,891.30 1.73
95,000.01-100,000.00.................... 103 1.13 10,034,621.65 2.18
100,000.01-105,000.00.................... 88 0.97 9,010,925.09 1.96
105,000.01-110,000.00.................... 98 1.08 10,558,123.20 2.29
110,000.01-115,000.00.................... 77 0.84 8,670,978.87 1.88
115,000.01-120,000.00.................... 74 0.81 8,697,177.20 1.89
120,000.01-125,000.00.................... 57 0.63 6,994,932.16 1.52
125,000.01-130,000.00.................... 39 0.43 4,972,268.22 1.08
130,000.01-135,000.00.................... 42 0.46 5,558,090.44 1.21
135,000.01-140,000.00.................... 26 0.29 3,548,261.47 0.77
140,000.01-145,000.00.................... 28 0.31 3,993,524.04 0.87
145,000.01-150,000.00.................... 26 0.29 3,836,298.50 0.83
150,000.01-200,000.00.................... 155 1.70 26,373,806.55 5.73
200,000.01-250,000.00.................... 47 0.52 10,388,542.56 2.26
250,000.01-300,000.00.................... 21 0.23 5,771,644.40 1.25
300,000.01-350,000.00.................... 5 0.05 1,579,126.80 0.34
350,000.01-400,000.00.................... 3 0.03 1,147,326.11 0.25
400,000.01-450,000.00.................... 2 0.02 885,891.43 0.19
450,000.01-500,000.00.................... 1 0.01 498,641.36 0.11
550,000.01-600,000.00.................... 1 0.01 560,624.11 0.12
------ ------ ---------------- ------
Total............................... 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-17
<PAGE>
LIEN STATUS AND OCCUPANCY STATUS--LOAN GROUP I
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
LIEN STATUS AND OCCUPANCY STATUS EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
First Lien Owner Occupied................ 7,454 81.79% $ 411,211,477.72 89.36%
First Lien Part-Owner Occupied........... 1 0.01 75,870.80 0.02
First Lien Non-Owner Occupied............ 561 6.16 22,687,656.31 4.93
First Lien Second Home................... 10 0.11 572,371.45 0.12
Second Lien Owner Occupied............... 1,080 11.85 25,138,056.05 5.46
Second Lien Non-Owner Occupied........... 5 0.05 103,646.81 0.02
Second Lien Second Home.................. 1 0.01 19,063.66 0.00
Multiple Properties...................... 2 0.02 383,007.09 0.08
------ ------ ---------------- ------
Total............................... 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
DISTRIBUTION OF LOAN AGES (IN MONTHS)--LOAN GROUP I
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
RANGE OF % OF AGGREGATE LOAN BALANCE BALANCE AS OF
LOAN AGES NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
(MONTHS) EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- ------ ------ ---------------- ------
<S> <C> <C> <C> <C>
0- 6.................................. 8,902 97.67% $ 450,477,819.77 97.89%
7- 12.................................. 156 1.71 6,537,985.70 1.42
13- 18.................................. 21 0.23 839,181.79 0.18
19- 24.................................. 6 0.07 412,096.13 0.09
25- 30.................................. 3 0.03 234,219.02 0.05
31- 36.................................. 4 0.04 396,680.84 0.09
37- 42.................................. 1 0.01 48,709.98 0.01
43- 48.................................. 2 0.02 47,676.13 0.01
49- 54.................................. 3 0.03 469,939.99 0.10
55- 60.................................. 2 0.02 20,597.11 0.00
61- 66.................................. 1 0.01 30,779.44 0.01
67- 72.................................. 1 0.01 21,339.37 0.00
79- 84.................................. 4 0.04 287,532.42 0.06
85- 90.................................. 3 0.03 198,599.70 0.04
91- 96.................................. 1 0.01 14,131.11 0.00
217-228.................................. 1 0.01 99,659.04 0.02
253-264.................................. 1 0.01 26,531.86 0.01
277-288.................................. 1 0.01 16,880.72 0.00
301-312.................................. 1 0.01 10,789.77 0.00
------ ------ ---------------- ------
Total............................... 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-18
<PAGE>
PROPERTY TYPE--LOAN GROUP I
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
PROPERTY TYPE EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- ------ ------ ---------------- ------
<S> <C> <C> <C> <C>
Single Family Detached................... 7,669 84.15% $ 392,833,462.99 85.36%
Duplex................................... 261 2.86 15,710,232.89 3.41
Condominium.............................. 107 1.17 6,443,177.54 1.40
Fourplex................................. 27 0.30 1,973,989.67 0.43
Triplex.................................. 26 0.29 1,777,476.80 0.39
Rowhouse................................. 39 0.43 1,162,665.79 0.25
Townhouse................................ 14 0.15 802,051.27 0.17
PUD...................................... 9 0.10 718,110.90 0.16
Modular Housing.......................... 10 0.11 570,862.24 0.12
Manufactured Housing..................... 948 10.40 37,968,637.89 8.25
Multi Property/Combined.................. 2 0.02 178,467.20 0.04
Semi-Detached............................ 2 0.02 52,014.71 0.01
------ ------ ---------------- ------
Total............................... 9,114 100.00% $ 460,191,149.89 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-19
<PAGE>
DISTRIBUTION OF REMAINING TERM TO MATURITY
(IN MONTHS) AS OF THE CUT-OFF DATE--LOAN GROUP I
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF MONTHS NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
REMAINING TO MATURITY EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------ -------------- -------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
37-48............................... 6 0.07% $ 57,366.98 0.01%
49-60............................... 118 1.29 1,930,374.92 0.42
61-72............................... 18 0.20 324,247.70 0.07
73-84............................... 48 0.53 817,363.67 0.18
85-96............................... 23 0.25 567,290.42 0.12
97-108.............................. 9 0.10 189,779.27 0.04
109-120............................. 913 10.02 22,214,037.22 4.83
121-132............................. 7 0.08 350,355.75 0.08
133-144............................. 279 3.06 8,438,627.97 1.83
145-156............................. 17 0.19 735,103.00 0.16
157-168............................. 19 0.21 676,638.72 0.15
169-180............................. 3,445 37.80 138,400,265.56 30.07
181-192............................. 3 0.03 97,571.97 0.02
193-204............................. 6 0.07 304,946.03 0.07
205-216............................. 7 0.08 577,498.56 0.13
217-228............................. 7 0.08 320,805.85 0.07
229-240............................. 1,022 11.21 50,532,979.20 10.98
253-264............................. 4 0.04 158,894.00 0.03
265-276............................. 7 0.08 556,974.87 0.12
277-288............................. 5 0.05 349,267.57 0.08
289-300............................. 132 1.45 7,784,581.94 1.69
301-312............................. 4 0.04 631,068.02 0.14
313-324............................. 3 0.03 143,233.55 0.03
325-336............................. 12 0.13 898,532.64 0.20
337-348............................. 13 0.14 957,099.93 0.21
349-360............................. 2,987 32.77 222,176,244.58 48.28
------ -------- ---------------- -------
Total.......................... 9,114 100.00% $ 460,191,149.89 100.00%
------ -------- ---------------- -------
------ -------- ---------------- -------
</TABLE>
LOAN GROUP II. As of the Cut-Off Date: the Loan Balances ranged from
$7,744.64 to $519,762.49; the average Loan Balance was $82,729.84; the Current
Mortgage Rates ranged from 6.375% to 13.250% per annum; the weighted average
current Mortgage Rate was 10.035% per annum; the original Loan-to-Value Ratios
ranged from 9.60% to 100.00%; the weighted average original Loan-to-Value Ratio
was 82.09%; the remaining terms to stated maturity ranged from 60 months to
360 months; the weighted average remaining term to stated maturity was
348 months; the loan ages ranged from 0 months to 119 months; the weighted
average loan age was 2 months; the Gross Margins ranged from 2.750% to 9.250%;
the weighted average Gross Margin was 5.459%; the Lifetime Floors ranged from
4.750% to 12.250%; the weighted average Lifetime Floor was 8.878%; the Lifetime
Caps ranged from 12.750% to 19.250%; the weighted average Lifetime Cap was
16.083%; the weighted average current Mortgage Rate of the ARMs with initial
fixed Mortgage Rates was 10.145% per annum; the weighted average number of
months to the next Change Date for the ARMs with initial fixed Mortgage Rates
was 35 months; the weighted average number of months to the next Change Date for
the remaining ARMs was 7 months; and approximately 0.77% of the aggregate
Principal Balance as of the Cut-Off Date were 30-59 days delinquent as of the
opening of business on December 20, 1998.
S-20
<PAGE>
GEOGRAPHIC DISTRIBUTION--LOAN GROUP II
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
STATE EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Alabama................................. 23 1.02% $ 2,223,917.91 1.20%
Arizona................................. 21 0.93 1,910,985.31 1.03
Arkansas................................ 21 0.93 1,069,268.83 0.58
California.............................. 184 8.19 30,418,524.14 16.37
Colorado................................ 35 1.56 3,593,504.29 1.93
Connecticut............................. 23 1.02 2,399,347.69 1.29
District of Columbia.................... 3 0.13 549,620.18 0.30
Florida................................. 62 2.76 5,148,924.25 2.77
Georgia................................. 76 3.38 7,275,387.95 3.92
Idaho................................... 8 0.36 508,311.71 0.27
Illinois................................ 67 2.98 3,285,664.90 1.77
Indiana................................. 157 6.99 8,559,460.08 4.61
Iowa.................................... 42 1.87 2,512,100.63 1.35
Kansas.................................. 71 3.16 3,275,029.15 1.76
Kentucky................................ 59 2.63 3,582,462.23 1.93
Louisiana............................... 61 2.72 3,969,604.94 2.14
Maine................................... 36 1.60 2,929,574.76 1.58
Maryland................................ 28 1.25 2,879,823.61 1.55
Massachusetts........................... 30 1.34 3,835,216.14 2.06
Michigan................................ 207 9.22 14,117,383.88 7.60
Minnesota............................... 17 0.76 946,036.89 0.51
Mississippi............................. 84 3.74 5,786,281.98 3.11
Missouri................................ 27 1.20 1,802,557.94 0.97
Montana................................. 1 0.04 49,725.00 0.03
Nebraska................................ 8 0.36 573,428.64 0.31
Nevada.................................. 4 0.18 537,424.56 0.29
New Hampshire........................... 25 1.11 1,988,001.41 1.07
New Jersey.............................. 32 1.42 3,422,153.28 1.84
New Mexico.............................. 12 0.53 954,936.00 0.51
New York................................ 77 3.43 8,795,364.65 4.73
North Carolina.......................... 105 4.67 8,681,323.33 4.67
Ohio.................................... 227 10.11 14,605,540.10 7.86
Oklahoma................................ 50 2.23 3,089,200.36 1.66
Oregon.................................. 17 0.76 2,047,579.18 1.10
Pennsylvania............................ 52 2.32 3,492,025.72 1.88
Rhode Island............................ 3 0.13 301,173.16 0.16
South Carolina.......................... 44 1.96 4,210,876.08 2.27
Tennessee............................... 80 3.56 6,001,793.84 3.23
Texas................................... 30 1.34 2,100,713.77 1.13
Utah.................................... 33 1.47 3,229,917.33 1.74
Vermont................................. 1 0.04 91,960.59 0.05
Virginia................................ 48 2.14 4,058,336.68 2.18
Washington.............................. 16 0.71 2,176,245.23 1.17
West Virginia........................... 25 1.11 1,484,213.76 0.80
Wisconsin............................... 13 0.58 1,302,404.57 0.70
Wyoming................................. 1 0.04 37,887.20 0.02
------ ------ ---------------- ------
Total.............................. 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-21
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIO DISTRIBUTION--LOAN GROUP II
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF ORIGINAL NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
LOAN-TO-VALUE RATIOS EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
5.01- 10.00%........................... 1 0.04% $ 24,200.00 0.01%
10.01- 15.00............................ 1 0.04 22,733.61 0.01
15.01- 20.00............................ 1 0.04 25,200.00 0.01
20.01- 25.00............................ 7 0.31 195,964.29 0.11
25.01- 30.00............................ 7 0.31 303,754.76 0.16
30.01- 35.00............................ 11 0.49 333,593.12 0.18
35.01- 40.00............................ 20 0.89 864,828.70 0.47
40.01- 45.00............................ 17 0.76 1,118,217.91 0.60
45.01- 50.00............................ 25 1.11 1,571,983.37 0.85
50.01- 55.00............................ 29 1.29 1,963,748.63 1.06
55.01- 60.00............................ 40 1.78 2,290,594.97 1.23
60.01- 65.00............................ 59 2.63 4,407,609.64 2.37
65.01- 70.00............................ 104 4.63 8,719,325.64 4.69
70.01- 75.00............................ 165 7.35 12,958,225.40 6.97
75.01- 80.00............................ 423 18.83 40,642,766.26 21.87
80.01- 85.00............................ 352 15.67 31,771,789.86 17.10
85.01- 90.00............................ 498 22.17 43,556,753.69 23.44
90.01- 95.00............................ 329 14.65 24,782,547.73 13.34
95.01-100.00............................ 157 6.99 10,257,376.25 5.52
------ ------ ---------------- ------
Total.............................. 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
The Loan-to-Value Ratios shown above represent the ratio of the principal
amount of each Home Equity Loan at the time of origination of such Home Equity
Loan divided by the lesser of the appraised value of the related Mortgaged
Property at the time of origination (the "Appraised Values") or the purchase
price of such Mortgaged Property, if applicable. No assurance can be given that
the values of the Mortgaged Properties have remained or will remain at their
levels on the dates of origination of the related Home Equity Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Home Equity Loans become equal
to or greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, defaults, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry.
S-22
<PAGE>
CURRENT MORTGAGE RATE DISTRIBUTION--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
RANGE OF MORTGAGE RATES EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
6.001- 6.500%........................... 2 0.09% $ 133,087.92 0.07%
6.501- 7.000............................ 2 0.09 130,194.46 0.07
7.001- 7.500............................ 9 0.40 1,350,102.84 0.73
7.501- 8.000............................ 30 1.34 5,294,208.78 2.85
8.001- 8.500............................ 93 4.14 13,363,737.89 7.19
8.501- 9.000............................ 190 8.46 23,124,457.71 12.45
9.001- 9.500............................ 267 11.89 24,834,179.90 13.37
9.501-10.000............................ 358 15.94 31,650,843.17 17.03
10.001-10.500............................ 274 12.20 21,796,474.14 11.73
10.501-11.000............................ 406 18.08 29,571,156.50 15.91
11.001-11.500............................ 154 6.86 9,816,620.06 5.28
11.501-12.000............................ 294 13.09 16,127,302.09 8.68
12.001-12.500............................ 103 4.59 5,608,924.88 3.02
12.501-13.000............................ 61 2.72 2,893,875.00 1.56
13.001-13.500............................ 3 0.13 116,048.49 0.06
------ ------ ---------------- ------
------ ------ ---------------- ------
Total............................... 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
DISTRIBUTION OF OUTSTANDING LOAN BALANCES AS OF THE CUT-OFF DATE--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
RANGE OF LOAN BALANCES EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
$ 0.01- 50,000.00.................... 676 30.10% $ 24,773,894.67 13.33%
50,000.01-100,000.00.................... 1,013 45.10 71,210,267.12 38.32
100,000.01-150,000.00.................... 323 14.38 38,693,840.06 20.82
150,000.01-200,000.00.................... 123 5.48 21,187,880.35 11.40
200,000.01-250,000.00.................... 56 2.49 12,642,809.82 6.80
250,000.01-300,000.00.................... 29 1.29 8,019,011.92 4.32
300,000.01-350,000.00.................... 16 0.71 5,217,012.43 2.81
350,000.01-400,000.00.................... 6 0.27 2,235,721.81 1.20
400,000.01-450,000.00.................... 3 0.13 1,311,013.16 0.71
500,000.01-550,000.00.................... 1 0.04 519,762.49 0.28
------ ------ ---------------- ------
Total............................... 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
LIEN STATUS AND OCCUPANCY STATUS--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
LIEN STATUS AND OCCUPANCY STATUS EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
First Lien Non-Owner Occupied............ 49 2.18% $ 3,657,273.94 1.97%
First Lien Second Home................... 4 0.18 378,293.04 0.20
First Lien Owner Occupied................ 2,192 97.60 181,712,846.85 97.79
Second Lien Owner Occupied............... 1 0.04 62,800.00 0.03
------ ------ ---------------- ------
Total............................... 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
S-23
<PAGE>
DISTRIBUTION OF LOAN AGES (IN MONTHS)--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
RANGE OF % OF AGGREGATE LOAN BALANCE BALANCE AS OF
LOAN AGES NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
(MONTHS) EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
0- 6................................... 2,213 98.53% $ 182,166,757.26 98.04%
7- 12................................... 27 1.20 3,269,218.64 1.76
13- 18................................... 3 0.13 208,313.40 0.11
19- 24................................... 1 0.04 33,520.21 0.02
25- 84................................... 1 0.04 71,684.81 0.04
85-120................................... 1 0.04 61,719.51 0.03
------ ------ ---------------- ------
Total............................... 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
PROPERTY TYPE--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID UNPAID LOAN
% OF AGGREGATE LOAN BALANCE BALANCE AS OF
NUMBER OF HOME NUMBER OF HOME AS OF THE THE CUT-OFF
PROPERTY TYPE EQUITY LOANS EQUITY LOANS CUT-OFF DATE DATE
- ----------------------------------------- ------ ------ ---------------- ------
<S> <C> <C> <C> <C>
Duplex................................... 45 2.00% $ 4,471,235.75 2.41%
Triplex.................................. 3 0.13 310,944.94 0.17
Fourplex................................. 12 0.53 1,353,669.48 0.73
Rowhouse................................. 4 0.18 256,116.47 0.14
Modular Housing.......................... 2 0.09 138,937.27 0.07
Manufactured Housing..................... 4 0.18 240,793.84 0.13
PUD...................................... 21 0.93 3,452,507.40 1.86
Townhouse................................ 8 0.36 680,350.45 0.37
Condominium.............................. 54 2.40 5,463,150.02 2.94
Single Family Detached................... 2,093 93.19 169,443,508.21 91.19
------ ------ ---------------- ------
Total............................... 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- ------
------ ------ ---------------- ------
</TABLE>
DISTRIBUTION OF REMAINING TERM TO MATURITY
(IN MONTHS) AS OF THE CUT-OFF DATE--LOAN GROUP II
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF MONTHS NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
REMAINING TO MATURITY EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- -------------- -------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
0- 60................................. 1 0.04% $ 11,800.00 0.01%
61-120................................. 6 0.27 210,397.60 0.11
121-180................................. 146 6.50 5,775,214.02 3.11
181-192................................. 1 0.04 18,500.00 0.01
193-240................................. 133 5.92 6,200,107.79 3.34
241-252................................. 1 0.04 61,719.51 0.03
253-288................................. 1 0.04 71,684.81 0.04
289-348................................. 6 0.27 704,035.77 0.38
349-360................................. 1,951 86.87 172,757,754.33 92.97
------ ------ ---------------- -------
Total.............................. 2,246 100.00% $ 185,811,213.83 100.00%
------ ------ ---------------- -------
------ ------ ---------------- -------
</TABLE>
S-24
<PAGE>
DISTRIBUTION OF GROSS MARGINS--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF NUMBER OF LOAN BALANCE UNPAID LOAN
RANGE OF HOME EQUITY HOME EQUITY AS OF THE BALANCE AS OF
GROSS MARGINS LOANS LOANS CUT-OFF DATE THE CUT-OFF DATE
- ----------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
2.501-2.750%..... 1 0.04% $ 61,719.51 0.03%
2.751-3.000...... 9 0.40 916,530.23 0.49
3.001-3.250...... 7 0.31 786,877.17 0.42
3.251-3.500...... 31 1.38 3,614,332.96 1.95
3.501-3.750...... 24 1.07 2,726,264.60 1.47
3.751-4.000...... 122 5.43 9,382,988.38 5.05
4.001-4.250...... 61 2.72 5,320,305.71 2.86
4.251-4.500...... 261 11.62 20,114,609.85 10.83
4.501-4.750...... 46 2.05 4,003,480.73 2.15
4.751-5.000...... 152 6.77 17,691,090.67 9.52
5.001-5.250...... 347 15.45 28,092,618.40 15.12
5.251-5.500...... 56 2.49 5,385,861.44 2.90
5.501-5.750...... 340 15.14 25,881,086.31 13.93
5.751-6.000...... 278 12.38 18,027,940.45 9.70
6.001-6.250...... 69 3.07 6,637,600.54 3.57
6.251-6.500...... 238 10.60 14,688,108.64 7.90
6.501-6.750...... 41 1.83 5,761,408.92 3.10
6.751-7.000...... 49 2.18 5,121,501.76 2.76
7.001-7.250...... 34 1.51 3,144,006.93 1.69
7.251-7.500...... 29 1.29 2,763,722.35 1.49
7.501-7.750...... 31 1.38 4,011,057.86 2.16
7.751-8.000...... 9 0.40 917,140.14 0.49
8.001-8.250...... 6 0.27 358,702.81 0.19
8.251-8.500...... 3 0.13 170,452.44 0.09
8.501-8.750...... 1 0.04 107,775.71 0.06
9.001-9.250...... 1 0.04 124,029.32 0.07
----- ------- ---------------- ------
Total....... 2,246 100.00% $ 185,811,213.83 100.00%
----- ------- ---------------- ------
----- ------- ---------------- ------
</TABLE>
S-25
<PAGE>
DISTRIBUTION OF LIFETIME CAPS--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF NUMBER OF LOAN BALANCE UNPAID LOAN
RANGE OF HOME EQUITY HOME EQUITY AS OF THE BALANCE AS OF
LIFETIME CAPS LOANS LOANS CUT-OFF DATE THE CUT-OFF DATE
- ----------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
12.501-13.000%... 1 0.04% $ 71,684.81 0.04%
13.001-13.500.... 6 0.27 995,003.76 0.54
13.501-14.000.... 21 0.93 4,091,844.09 2.20
14.001-14.500.... 84 3.74 11,953,358.70 6.43
14.501-15.000.... 186 8.28 22,633,774.53 12.18
15.001-15.500.... 264 11.75 24,626,803.43 13.25
15.501-16.000.... 369 16.43 32,742,465.40 17.62
16.001-16.500.... 291 12.96 24,271,283.65 13.06
16.501-17.000.... 403 17.94 29,185,641.44 15.71
17.001-17.500.... 156 6.95 9,965,772.11 5.36
17.501-18.000.... 295 13.13 16,454,887.24 8.86
18.001-18.500.... 103 4.59 5,608,924.88 3.02
18.501-19.000.... 64 2.85 3,093,721.30 1.66
19.001-19.500.... 3 0.13 116,048.49 0.06
----- ------- ---------------- ------
Total....... 2,246 100.00% $ 185,811,213.83 100.00%
----- ------- ---------------- ------
----- ------- ---------------- ------
</TABLE>
DISTRIBUTION OF LIFETIME FLOORS--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF NUMBER OF LOAN BALANCE UNPAID LOAN
RANGE OF HOME EQUITY HOME EQUITY AS OF THE BALANCE AS OF
LIFETIME FLOORS LOANS LOANS CUT-OFF DATE THE CUT-OFF DATE
- ----------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
4.501- 5.000%... 1 0.04% $ 71,684.81 0.04%
5.001- 5.500.... 3 0.13 628,482.75 0.34
5.501- 6.000.... 14 0.62 3,106,533.72 1.67
6.001- 6.500.... 39 1.74 6,071,779.76 3.27
6.501- 7.000.... 59 2.63 7,380,629.37 3.97
7.001- 7.500.... 135 6.01 13,850,736.87 7.45
7.501- 8.000.... 203 9.04 21,571,245.97 11.61
8.001- 8.500.... 264 11.75 24,718,277.76 13.30
8.501- 9.000.... 364 16.21 32,957,522.29 17.74
9.001- 9.500.... 198 8.82 16,244,311.04 8.74
9.501-10.000.... 302 13.45 21,014,934.69 11.31
10.001-10.500.... 146 6.50 9,413,118.38 5.07
10.501-11.000.... 329 14.65 19,065,557.84 10.26
11.001-11.500.... 117 5.21 6,277,664.34 3.38
11.501-12.000.... 67 2.98 3,267,913.04 1.76
12.001-12.500.... 5 0.22 170,821.20 0.09
----- ------- ---------------- ------
Total....... 2,246 100.00% $ 185,811,213.83 100.00%
----- ------- ---------------- ------
----- ------- ---------------- ------
</TABLE>
S-26
<PAGE>
NUMBER OF MONTHS TO NEXT CHANGE DATE--LOAN GROUP II
<TABLE>
<CAPTION>
% OF AGGREGATE AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF NUMBER OF LOAN BALANCE UNPAID LOAN
MONTHS TO HOME EQUITY HOME EQUITY AS OF THE BALANCE AS OF
NEXT CHANGE DATE LOANS LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
3.............. 20 0.89% $ 3,326,813.20 1.79%
4.............. 50 2.23 5,451,744.05 2.93
5.............. 40 1.78 2,976,031.08 1.60
6.............. 16 0.71 1,227,832.93 0.66
7.............. 81 3.61 6,525,632.41 3.51
8.............. 27 1.20 2,952,942.92 1.59
9.............. 14 0.62 1,485,439.78 0.80
11.............. 3 0.13 220,626.86 0.12
12.............. 4 0.18 217,169.72 0.12
13.............. 1 0.04 95,800.00 0.05
14.............. 1 0.04 61,719.51 0.03
18.............. 3 0.13 161,679.21 0.09
22.............. 2 0.09 266,039.66 0.14
23.............. 7 0.31 1,301,424.24 0.70
24.............. 13 0.58 2,908,313.31 1.57
25.............. 3 0.13 673,204.23 0.36
27.............. 1 0.04 147,205.57 0.08
28.............. 3 0.13 292,089.69 0.16
29.............. 4 0.18 435,442.12 0.23
30.............. 12 0.53 1,568,897.64 0.84
31.............. 12 0.53 1,046,770.61 0.56
32.............. 13 0.58 1,620,735.77 0.87
33.............. 26 1.16 2,032,371.40 1.09
34.............. 106 4.72 8,450,825.95 4.55
35.............. 740 32.95 59,111,644.59 31.81
36.............. 399 17.76 34,883,237.67 18.77
37.............. 513 22.84 37,025,779.71 19.93
38.............. 132 5.88 9,343,800.00 5.03
----- ------- ---------------- ------
Total...... 2,246 100.00% $ 185,811,213.83 100.00%
----- ------- ---------------- ------
----- ------- ---------------- ------
</TABLE>
S-27
<PAGE>
SUBSEQUENT LOANS
The Depositor expects to sell Subsequent Loans to the Trust for Loan
Group I and Loan Group II during the applicable Pre-Funding Periods. The
purchase price for such Subsequent Loans will equal the outstanding principal
balances thereof as the related subsequent cut-off date and will be paid by
withdrawal of funds on deposit in the applicable Pre-Funding Account. The
Subsequent Loans may have characteristics which differ from the Home Equity
Loans initially included in each Loan Group; however, the overall credit quality
of the Subsequent Loans to be sold to each Loan Group will not differ materially
from those initially included in the related Loan Group. As a result, following
any sale of Subsequent Loans, the description of Loan Group I and/or Loan
Group II set forth above may not accurately reflect the characteristics of all
of the Home Equity Loans and Subsequent Loans in such Loan Group. However, the
Subsequent Loans must conform to the representations and warranties set forth in
the Pooling and Servicing Agreement. Following the end of each Pre-Funding
Period, the Depositor expects that the Home Equity Loans (including Subsequent
Loans) in Loan Group I and Loan Group II will have the following approximate
characteristics.
<TABLE>
<S> <C>
Loan Group I
Average Unpaid Principal Balance................................................... at least $45,000
Weighted Average Mortgage Rate..................................................... 10.60% - 11.125%
Weighted Average Remaining Term to Stated Maturity................................. 270 months - 280 months
Weighted Average Original Combined Loan-to-Value Ratio............................. not more than 83%
Weighted Average Loan Age.......................................................... 0 months - 6 months
Loans Secured by Primary Residences................................................ at least 90%
Single Family Detached............................................................. at least 85%
State Distribution
Louisiana....................................................................... not more than 12%
New York........................................................................ not more than 9%
North Carolina.................................................................. not more than 9%
Ohio............................................................................ not more than 9%
Any other individual state...................................................... not more than 7%
Loan Group II
Average Unpaid Principal Balance................................................... at least $80,000
Weighted Average Mortgage Rate..................................................... 10.00% - 10.625%
Weighted Average Remaining Term to Stated Maturity................................. 347 months - 353 months
Weighted Average Original Loan-to-Value Ratio...................................... not more than 83%
Weighted Average Loan Age.......................................................... 0 months - 4 months
Weighted Average Gross Margin...................................................... at least 5.45%
Loans Secured by Primary Residences................................................ at least 95%
Single Family Detached............................................................. at least 90%
Hybrid Loans (2/28, 3/12, 3/17 and 3/27 Loans)..................................... not more than 87%
State Distribution
California...................................................................... not more than 18%
Michigan........................................................................ not more than 9%
Ohio............................................................................ not more than 9%
Any other individual state...................................................... not more than 7%
</TABLE>
S-28
<PAGE>
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Prepayments. The weighted average life of and, if purchased at a price
other than par, the yield to maturity on, a Class of Offered Certificates will
be directly related to the rate of payment of principal of the Home Equity Loans
(which, for purposes of this discussion, includes Subsequent Loans, if any),
including for this purpose Prepayments, delinquencies, liquidations due to
defaults, casualties and condemnations, and repurchases of Home Equity Loans by
the Originators or the Servicer. "Prepayment" includes any full or partial
payment or other recovery of principal on a Home Equity Loan (exclusive of
liquidation proceeds) which is received in advance of its scheduled Due Date.
The Home Equity Loans may be prepaid by the related obligors on the Mortgage
Notes ("Mortgagors") at any time. However, prepayment may subject the Mortgagor
to a prepayment penalty, the existence and terms of which depend on state
regulation. The actual rate of principal prepayments on pools of home equity
loans is influenced by a variety of economic, tax, geographic, demographic,
social, legal and other factors and has fluctuated considerably in recent years.
In addition, the rate of principal prepayments may differ among pools of home
equity loans at any time because of specific factors relating to the home equity
loans in the particular pool, including, among other things, the age of the home
equity loans, the geographic locations of the properties securing the home
equity loans, the extent of the mortgagors' equity in such properties, and
changes in the mortgagors' housing needs, job transfers and unemployment.
Generally, however, because the Home Equity Loans in Loan Group I bear interest
at fixed rates, and the rate of prepayment on fixed rate home equity loans is
sensitive to prevailing interest rates, if prevailing interest rates were to
fall, the Home Equity Loans may be subject to higher prepayment rates.
Conversely, if prevailing interest rates were to rise, the rate of prepayments
on the Home Equity Loans in Loan Group I could decrease.
Although all of the Home Equity Loans in Loan Group II are ARMs, the
initial Change Dates for approximately 1.90% and 84.55% (by Principal Balance as
of the Cut-Off Date) of the ARMs delivered on the Closing Date will occur on the
24th and 36th due dates, respectively ("Delayed Adjustment Loans"). As is the
case with fixed rate home equity loans, the ARMs may be subject to a greater
rate of principal prepayments in a low interest rate environment. For example,
if prevailing interest rates were to fall, Mortgagors with ARMs may be inclined
to refinance their ARMs with a fixed rate loan to "lock in" a lower interest
rate. The prepayment behavior of the Delayed Adjustment Loans may differ from
that of the fixed rate Home Equity Loans and the other ARMs. As a Delayed
Adjustment Loan approaches its initial Change Date, the borrower may become more
likely to refinance such loan to avoid an increase in the Mortgage Rate, even if
fixed rate loans are only available at rates that are slightly lower or higher
than the Mortgage Rate before adjustment. The existence of the applicable
Periodic Rate Cap, Lifetime Cap and Lifetime Floor also may affect the
likelihood of prepayments resulting from refinancings. In addition, the
delinquency and loss experience on the ARMs may differ from that on the fixed
rate home equity loans because the amount of the monthly payments on the ARMs
are subject to adjustment on each Change Date.
The prepayment experience on non-conventional home equity loans may differ
from that on conventional first mortgage loans, primarily due to the credit
quality of the typical borrower. Because the credit histories of many home
equity borrowers may preclude them from other traditional sources of financing,
such borrowers may be less likely to refinance due to a decline in market
interest rates. Non-conventional home equity loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default. However, the increased level of competition
among home equity lenders has increased the awareness among credit-impaired
borrowers of the availability of credit and the attraction of refinancing.
If purchased at a price other than par, the yield to maturity on an Offered
Certificate will be affected by the rate and timing of payments of principal,
including Prepayments, of the Home Equity Loans within the related Loan Group
and, in some circumstances, in the other Loan Group. If the actual rate of
payments on the Home Equity Loans within the related Loan Group is slower than
the rate anticipated by an investor who purchases an Offered Certificate at a
discount, the actual yield to maturity to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the Home Equity
Loans within the related Loan Group is faster than the rate anticipated by an
investor who purchases an Offered Certificate at a premium, the actual yield to
maturity to such investor will be lower than such investor's anticipated yield.
S-29
<PAGE>
Appendix A hereto sets forth life-to-date prepayment rates and pool factors
as of September 30, 1998, with respect to certain home equity loans previously
securitized by the Depositor.
The Pass-Through Rates on the Class MF-2 and Class BF-1 Certificates may be
limited by the Group I Net Rate Cap. If Home Equity Loans in Loan Group I
bearing higher Mortgage Rates were to prepay, the weighted average Mortgage Rate
of such Home Equity Loans would be lower than would otherwise be the case.
The Class AF-7 Certificates will not receive any principal distributions
for three years unless the Class Principal Balance of the Class AF-1, Class
AF-2, Class AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates (these
Classes, together with the Class AF-7 and Class AF-8 Certificates, the "Group I
Class A Certificates") are reduced to zero prior thereto. The application of the
Priority Percentage to distributions of principal of the Group I Class A
Certificates will affect the rate of such distributions over time such that the
Class AF-7 Certificates will be entitled to a greater proportion of the
Principal Distribution Amount for Certificate Group I.
Subsequent Loans. As described herein, the Depositor expects to sell
Subsequent Loans to the Trust for Loan Group I and Loan Group II during the
applicable Pre-Funding Periods. If a Pre-Funded Amount is not used to purchase
Subsequent Loans for the related Loan Group, the unused portion will be applied
as a Prepayment and allocated to the related Class or Classes of Offered
Certificates then entitled to distributions of principal as provided herein, if
such unused portion is less than $100,000; otherwise, such unused funds will be
distributed as principal of the outstanding Classes of Offered Certificates in
the applicable Certificate Group pro rata on the basis of their respective Class
Principal Balances, in either case on the Distribution Date at or immediately
after the end of the applicable Pre-Funding Period.
Final Scheduled Distribution Dates. The Final Scheduled Distribution Date
for each Class of Offered Certificates is set forth in the summary. The Final
Scheduled Distribution Dates for the Class AF-1, Class AF-2, Class AF-3,
Class AF-4 and Class AF-5 Certificates were determined on the basis of the
Structuring Assumptions (defined below), with the following exceptions: the Home
Equity Loans are not purchased on the first Optional Termination Date, there are
no Prepayments on the Home Equity Loans and that excess spread from the Home
Equity Loans is not used to make accelerated payments of principal to the
holders of the related Certificates. The Final Scheduled Distribution Date for
the Class AF-6, Class AF-7, Class AF-8, Class MF-1, Class MF-2 and Class BF-1
Certificates was determined by adding thirteen months to the date of maturity of
the latest possible maturing Home Equity Loan in Loan Group I and, further
assuming that the Subsequent Loans are purchased in March 1999 with the first
scheduled payment due in April 1999 and have a remaining term to maturity of 360
months. The Final Scheduled Distribution Date for the Class AV-1, Class MV-1,
Class MV-2 and Class BV-1 Certificates is the 360th Distribution Date. The
weighted average life of each Class of Offered Certificates is likely to be
shorter, and the final Distribution Date could occur significantly earlier than
the applicable Final Scheduled Distribution Date because (i) Prepayments are
likely to occur, (ii) the Originators may repurchase Home Equity Loans in the
event of breaches of representations and warranties, (iii) the Holder of the
Residual Certificates may purchase the Home Equity Loans on or after the
Optional Termination Date and (iv) Excess Cashflow and Remainder Excess Cashflow
to the extent available will be applied as an accelerated payment of principal
on the Offered Certificates as described herein.
Balloon Loans. The ability of Mortgagors to make payments of Balloon
Payments will normally depend on each Mortgagor's ability to obtain refinancing
of its Balloon Loan. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing is required, including, without
limitation, real estate values, the Mortgagor's financial situation and
prevailing mortgage loan interest rates. Although the Originators sometimes
provide refinancing of Balloon Loans and may refinance any Home Equity Loan,
they are under no obligation to do so, and make no representation or warranty
that they will do so in the case of any Home Equity Loan. Delinquencies, if any,
in the payment of Balloon Payments may delay the date on which the Class
Principal Balance of one or more Classes of Offered Certificates in Certificate
Group I is reduced to zero, and may increase the weighted average lives of such
Certificates. Although a low interest rate environment may facilitate the
refinancing of a Balloon Loan, the receipt and reinvestment by
Certificateholders of the proceeds in such an environment may produce a lower
return than that previously received in respect of the related Balloon
S-30
<PAGE>
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.
Adjustable Rate Certificates. Each Accrual Period for the Adjustable Rate
Certificates will consist of the actual number of days elapsed from the
Distribution Date in the month preceding the month of the applicable
Distribution Date (or, in the case of the first Accrual Period, from the Closing
Date) through the day preceding such Distribution Date. After the initial
Accrual Period, the Pass-Through Rates for the Adjustable Rate Certificates will
be adjusted by reference to changes in the level of 1-Month LIBOR, subject to
the effects of the applicable limitation described herein.
The Pass-Through Rates for the Adjustable Rate Certificates may be
calculated by reference to the Group II Net Rate Cap. If Home Equity Loans in
Loan Group II bearing higher Mortgage Rates were to prepay, the weighted average
Mortgage Rate of such Home Equity Loans would be lower than otherwise would be
the case. In addition, changes in 1-Month LIBOR may not correlate with changes
in prevailing rates of interest. It is possible that a lower level of prevailing
interest rates, which would be expected to result in faster prepayments, could
occur simultaneously with an increased level of 1-Month LIBOR. If 1-Month LIBOR
were to be higher than the Group II Net Rate Cap, the Pass-Through Rates for the
Adjustable Rate Certificates would be lower than otherwise would be the case.
Certain of the ARMs, including the Delayed Adjustment Loans, were
originated with initial Mortgage Rates that were based on competitive conditions
and did not equal the sum of the Index and the related Gross Margin. As a
result, the Mortgage Rates on such ARMs are more likely to adjust on their
first, and possibly subsequent Change Dates, subject to the effects of the
applicable Periodic Rate Cap and Lifetime Cap. Because each Pass-Through Rate on
the Adjustable Rate Certificates is limited by the Group II Net Rate Cap on each
Distribution Date, limits on changes in the Mortgage Rates of the ARMs may limit
changes in the Pass-Through Rate. In addition, the Mortgage Rates for the
Delayed Adjustment Loans will not adjust until the date on which the 24th or
36th scheduled monthly payment is due.
The Group II Net Rate Cap on a Payment Date will depend, in part, on the
weighted average of the then-current Mortgage Rates of the outstanding Home
Equity Loans in Loan Group II. If Home Equity Loans in Loan Group II bearing
higher Mortgage Rates were to prepay, the weighted average Mortgage Rate of such
Home Equity Loans, and consequently the Group II Net Rate Cap, would be lower
than otherwise would be the case. Although the Owners of the Adjustable Rate
Certificates will be entitled to receive any related LIBOR Interest Carryover
from and to the extent of funds available therefor as described herein, there is
no assurance that such funds will be available or sufficient for such purposes.
The ratings of the Adjustable Rate Certificates do not address the likelihood of
receipt, of any LIBOR Interest Carryover.
For additional factors which may affect the yield on the Offered
Certificates, see "Maturity, Prepayment and Yield Considerations" in the
Prospectus.
PAYMENT LAG FEATURE OF THE FIXED RATE CERTIFICATES
The Pooling and Servicing Agreement provides that each Accrual Period for
the Group I Certificates will be the calendar month prior to each Distribution
Date. Collections on the Home Equity Loans are not distributed to the Owners of
the Offered Certificates until at least the 15th day of the following month. As
a result, the yield to the Owners of the Group I Certificates will be slightly
lower than would be the case if each Accrual Period were to be from Distribution
Date to Distribution Date.
SUBORDINATED CERTIFICATES
The Subordinated Certificates provide credit enhancement for the Class A
Certificates and may absorb losses on the Home Equity Loans in the related Loan
Group. The Class B Certificates in each Certificate Group are the most
subordinate Classes of Offered Certificates. The weighted average life of, and
the yield to maturity on, the Subordinated Certificates will be sensitive to the
rate and timing of Mortgagor defaults and the severity of ensuing losses on the
Home Equity Loans in the related Loan Group. If the actual rate and severity of
losses on
S-31
<PAGE>
the related Home Equity Loans is higher than those expected by an Owner of the
Subordinated Certificates, the actual yield to maturity on such Owner's
Certificate may be lower than the yield expected by such Owner based. The timing
of losses on the Home Equity Loans also will affect an investor's actual yield
to maturity, even if the rate of defaults and severity of losses over the life
of the Trust are consistent with an investor's expectations. In general, the
earlier a loss occurs, the greater the effect on an investor's yield to
maturity. Realized losses on the Home Equity Loans in a Loan Group may reduce
the Class Principal Balance of one or more Classes of Subordinated Certificates
in the related Certificate Group if and to the extent that the aggregate of the
Class Principal Balances of all Classes of Certificates in such Certificate
Group, following all distributions on a Distribution Date, exceeds the related
Loan Group Balance. As a result of such reductions, less interest will accrue on
the the applicable Class of Subordinated Certificates than otherwise would be
the case.
The Principal Remittance Amount includes the net proceeds in respect of
principal received upon liquidation of a Liquidated Loan. If such net proceeds
are less than the unpaid principal balance, the related Loan Group Balance will
decline more than the aggregate Class Principal Balance of the Offered
Certificates in such Certificate Group, thereby reducing the amount of
overcollateralization. If such difference is not otherwise covered by the
cashflow priorities, one or more Classes of Subordinated Certificates in the
related Certificate Group will bear such loss. In addition, the Subordinated
Certificates will not be entitled to any principal distributions prior to the
applicable Stepdown Date or during the continuation of a Trigger Event (unless
the more senior Classes in the applicable Certificate Group have been paid in
full). Because of the disproportionate distribution of principal to the Class A
Certificates, depending on the timing of realized losses, the Subordinated
Certificates may bear a disproportionate percentage of the realized losses on
the related Home Equity Loans.
The Substitute Servicer may become entitled to the Supplemental Servicing
Fee which is based, in part, on the delinquency rates on the Home Equity Loans.
The payment of this fee will reduce the Interest Funds related to such Loan
Group available to cover losses, create overcollateralization and make required
interest distributions on the related Subordinated Certificates.
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis of
the following assumed characteristics of the Home Equity Loans and the following
additional assumptions (collectively, the "Structuring Assumptions"): (i) the
Home Equity Loans in Loan Group I prepay at the specified percentages of HEP (as
defined below) and the Home Equity Loans in Loan Group II prepay at the
specified percentages of PPC (as defined below), (ii) no defaults or
delinquencies in the payment by Mortgagors of principal of and interest on the
Home Equity Loans are experienced, (iii) the initial Class Principal Balance of
each Class of Offered Certificates is as set forth on the cover page hereof,
(iv) interest accrues on each Class of Offered Certificates in each period at
the applicable Pass-Through Rate or initial Pass-Through Rate described herein,
(v) distributions in respect of the Offered Certificates are received in cash on
the 15th day of each month commencing in January 1999, (vi) the Servicer does
not exercise its option to repurchase the Home Equity Loans described herein
under "The Pooling and Servicing Agreement--Realization Upon Defaulted Home
Equity Loans," and, with respect to Certificate Group I, the Home Equity Loans
are purchased by the holder of the Residual Certificates on the first Optional
Termination Date and, with respect to Certificate Group II, the Home Equity
Loans are not purchased by the holder of the Residual Certificates on the first
Optional Termination Date (except as indicated with respect to the weighted
average lives), (vii) the Group I Certificates and the Group II Certificates are
purchased on December 30, 1998, (viii) scheduled payments on the Home Equity
Loans are received on the first day of each month commencing in the calendar
month following the Closing Date and are computed prior to giving effect to
prepayments received on the last day of the prior month, (ix) prepayments
represent prepayments in full of individual Home Equity Loans and are received
on the last day of each month and include 30 days' interest thereon, commencing
in the calendar month of the Closing Date, (x) the scheduled monthly payment for
each Home Equity Loan has been calculated based on the assumed Home Equity Loan
characteristics set forth in the following table such that each Home Equity Loan
will amortize in amounts sufficient to repay the balance of such Home Equity
Loan by its indicated remaining amortizing term, (xi) all of the indicated
Subsequent Loans purchased with funds from the Pre-Funding Accounts are
purchased during February 1999 as indicated in the following table, (xii) the
Trust consists of 36 Home Equity Loans with the characteristics set forth in the
S-32
<PAGE>
following table, (xiii) the levels of 6-Month LIBOR, CMT and 1-Month LIBOR
remain constant at 5.04%, 4.46% and 5.03%, respectively, (xiv) the Mortgage Rate
for each ARM is adjusted on its next Change Date (and on subsequent Change
Dates, if necessary) to equal the sum of (a) the assumed level of the applicable
Index and (b) the Gross Margin (such sum being subject to the applicable
Periodic Rate Cap), (xv) the Servicing Fee Rate is 0.50% per annum for each Home
Equity Loan, and (xvi) each Specified Overcollateralization Amount declines in
accordance with its terms. While it is assumed that each of the Home Equity
Loans prepays at the specified percentages of HEP or PPC, as applicable, this is
not likely to be the case. Moreover, discrepancies will exist between the
characteristics of the actual Home Equity Loans which will be delivered to the
Trustee (including Subsequent Loans) and characteristics of the Home Equity
Loans assumed in preparing the tables herein.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to Loan Group I is the
Home Equity Prepayment ("HEP") assumption. HEP assumes that a pool of loans
prepays in the first month of the life of such loan at a constant prepayment
rate that corresponds in CPR to one-tenth the given HEP percentage and increases
by an additional one-tenth each month thereafter until the tenth month, where it
remains at a CPR equal to the given HEP percentage. "CPR" represents an assumed
constant rate of prepayment each month, expressed as an annual rate, relative to
the then outstanding principal balance of a pool of home equity loans for the
life of such home equity loans. The model used with respect to Loan Group II is
the Prepayment Curve ("PPC"). 100% PPC assumes (i) for ARMs with initial Change
Dates after 24 months (" 3/27 Loans"), a CPR of 4% in month one of the life of
such home equity loans, increasing in a linear fashion to 30% CPR in month 30,
remaining constant at 30% CPR for months 30 to 40 and reducing to 25% CPR in
month 41 and thereafter and (ii) for all other ARMs, a CPR of 28%. Neither model
purports to be either an historical description of the prepayment experience of
any pool of home equity loans or a prediction of the anticipated rate of
prepayment of any home equity loans, including the Home Equity Loans to be
included in the Loan Groups.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Rate Loans(1)... 0% 18% 25% 27% 32%
ARMs(2)............... 0% 100% 100% 100% 100%
</TABLE>
<TABLE>
<CAPTION>
SCENARIO VI SCENARIO VII SCENARIO VIII SCENARIO IX SCENARIO X
----------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Rate Loans(1)... 0% 18.75% 25% 37.50% 50%
ARMs(2)............... 0% 75% 100% 150% 200%
</TABLE>
- ------------------
(1) As a percentage of HEP.
(2) As a percentage of PPC.
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Class Principal Balance of the Classes of Offered
Certificates that would be outstanding after each of the dates shown under the
various Prepayment Scenarios, and the corresponding weighted average lives of
such Classes. It is not likely that (i) all of the Home Equity Loans will have
the characteristics assumed, the Home Equity Loans will prepay in accordance
with the specified Prepayment Scenarios, or at any other constant percentage or
(ii) the levels of 1-Month LIBOR, CMT and 6-Month LIBOR will remain constant at
the levels assumed or at any other levels. Moreover, the diverse remaining terms
to maturity of the Home Equity Loans could produce slower or faster principal
distributions than indicated in the tables under the specified Prepayment
Scenarios even if the weighted average remaining term to maturity of the Home
Equity Loans is consistent with the remaining terms to maturity of the Home
Equity Loans specified in the Structuring Assumptions.
S-33
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING REMAINING
CURRENT TERM TO TERM TO AMORTIZING
MORTGAGE MATURITY MATURITY TERM GROSS
PRINCIPAL BALANCE($) RATE(%) (IN MONTHS) (IN MONTHS) (IN MONTHS) MARGIN(%)
-------------------- -------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
LOAN GROUP ONE
Fixed....................... 22,617,720.64 11.403 113 112 112 n/a
Fixed....................... 125,921,250.00 10.868 178 176 176 n/a
Fixed....................... 55,647,924.05 10.764 250 248 248 n/a
Fixed....................... 200,364,040.97 10.450 360 358 358 n/a
Fixed(2).................... 3,277,417.34 12.337 295 293 293 n/a
Fixed Balloon............... 10,707,533.01 10.239 177 174 356 n/a
Fixed(1).................... 64,808,850.11 10.644 279 279 279 n/a
Fixed(1).................... 41,655,263.88 10.605 278 278 278 n/a
LOAN GROUP TWO
6-Month LIBOR............... 869,000.22 8.696 360 355 355 6.758
6-Month LIBOR(1)............ 258,129.12 8.696 358 358 358 6.758
6-Month LIBOR............... 4,874,338.99 8.581 360 356 356 6.170
6-Month LIBOR(1)............ 1,447,880.90 8.581 358 358 358 6.170
6-Month LIBOR............... 5,268,326.09 8.610 355 352 352 5.949
6-Month LIBOR(1)............ 1,564,911.41 8.610 355 355 355 5.949
6-Month LIBOR............... 2,921,453.00 10.136 339 337 337 5.086
6-Month LIBOR(1)............ 867,792.74 10.136 339 339 339 5.086
6-Month LIBOR............... 1,291,313.01 9.539 342 341 341 5.019
6-Month LIBOR(1)............ 383,573.54 9.539 342 342 342 5.019
6-Month LIBOR............... 6,942,103.65 9.817 336 335 335 5.509
6-Month LIBOR(1)............ 2,062,092.79 9.817 336 336 336 5.509
6-Month LIBOR............... 3,755,694.50 9.019 359 357 357 5.748
1-Year CMT.................. 98,677.80 9.125 360 353 353 5.750
1-Year CMT(1)............... 29,311.40 9.125 358 358 358 5.750
1-Year CMT.................. 290,762.77 9.592 281 280 280 5.523
1-Year CMT(1)............... 86,368.61 9.592 281 281 281 5.523
1-Year CMT.................. 61,832.04 8.125 349 230 230 2.750
1-Year CMT(1)............... 18,366.68 8.125 349 349 349 2.750
6-Month LIBOR(1)(3)......... 1,115,597.08 9.019 358 358 358 5.748
6-Month LIBOR(3)............ 110,798,364.47 9.982 350 348 348 5.381
6-Month LIBOR(1)(3)......... 32,911,710.88 9.982 350 350 350 5.381
6-Month LIBOR(3)............ 34,695,470.50 10.604 351 351 351 5.515
6-Month LIBOR(1)(3)......... 10,305,994.13 10.604 351 351 351 5.515
1-Year CMT(3)............... 1,257,769.41 10.509 337 335 335 5.446
1-Year CMT(1)(3)............ 373,609.70 10.509 337 337 337 5.446
1-Year CMT(3)............... 346,600.00 10.198 327 327 327 4.745
1-Year CMT(1)(3)............ 102,954.58 10.198 327 327 327 4.745
<CAPTION>
MONTHS TO INITIAL SUBSEQUENT
NEXT RATE LIFETIME LIFETIME PERIODIC PERIODIC
CHANGE DATE CAP(%) FLOOR(%) RATE CAP(%) RATE CAP(%)
----------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
LOAN GROUP ONE
Fixed....................... n/a n/a n/a n/a n/a
Fixed....................... n/a n/a n/a n/a n/a
Fixed....................... n/a n/a n/a n/a n/a
Fixed....................... n/a n/a n/a n/a n/a
Fixed(2).................... n/a n/a n/a n/a n/a
Fixed Balloon............... n/a n/a n/a n/a n/a
Fixed(1).................... n/a n/a n/a n/a n/a
Fixed(1).................... n/a n/a n/a n/a n/a
LOAN GROUP TWO
6-Month LIBOR............... 2 14.696 8.572 1.000 1.000
6-Month LIBOR(1)............ 2 14.696 8.572 1.000 1.000
6-Month LIBOR............... 3 14.918 8.450 1.018 1.000
6-Month LIBOR(1)............ 3 14.918 8.450 1.018 1.000
6-Month LIBOR............... 4 15.453 8.584 1.000 1.000
6-Month LIBOR(1)............ 4 15.453 8.584 1.000 1.000
6-Month LIBOR............... 5 16.230 10.136 1.000 1.000
6-Month LIBOR(1)............ 5 16.230 10.136 1.000 1.000
6-Month LIBOR............... 6 15.539 9.539 1.000 1.000
6-Month LIBOR(1)............ 6 15.539 9.539 1.000 1.000
6-Month LIBOR............... 7 15.865 9.804 1.010 1.010
6-Month LIBOR(1)............ 7 15.865 9.804 1.010 1.010
6-Month LIBOR............... 23 15.524 8.527 2.486 1.200
1-Year CMT.................. 3 15.125 7.125 2.000 2.000
1-Year CMT(1)............... 3 15.125 7.125 2.000 2.000
1-Year CMT.................. 11 15.592 8.003 2.000 2.000
1-Year CMT(1)............... 11 15.592 8.003 2.000 2.000
1-Year CMT.................. 14 13.500 5.500 2.000 2.000
1-Year CMT(1)............... 14 13.500 5.500 2.000 2.000
6-Month LIBOR(1)(3)......... 23 15.524 8.527 2.486 1.200
6-Month LIBOR(3)............ 35 15.988 8.587 1.910 1.001
6-Month LIBOR(1)(3)......... 35 15.988 8.587 1.910 1.001
6-Month LIBOR(3)............ 37 16.604 9.859 1.406 1.000
6-Month LIBOR(1)(3)......... 37 16.604 9.859 1.406 1.000
1-Year CMT(3)............... 35 16.573 8.737 2.150 2.031
1-Year CMT(1)(3)............ 35 16.573 8.737 2.150 2.031
1-Year CMT(3)............... 37 16.198 10.198 2.000 2.000
1-Year CMT(1)(3)............ 37 16.198 10.198 2.000 2.000
</TABLE>
- ------------------
(1) Assumes transfer to the respective Loan Group in February 1999 with monthly
payments calculated thereafter using the assumed characteristics set forth
above. During the first two interest Accrual Periods, interest is assumed to
be available at a rate equal to the Current Mortgage Rate less the Servicing
Fee.
(2) Assumes the Current Mortgage Rate is reduced on October 1, 1999 by 1.00% and
the scheduled monthly payment is recalculated for the November 1, 1999
principal and interest payment.
(3) Such Home Equity Loans are the 3/27 Loans.
S-34
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AF-1 CLASS AF-2
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------- --------------------------------
DATE I II III IV V I II III IV V
- ----------------------------------- --- --- --- --- --- ---- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999...................... 84 52 39 35 26 100 100 100 100 100
December 2000...................... 78 6 0 0 0 100 100 59 44 8
December 2001...................... 73 0 0 0 0 100 36 0 0 0
December 2002...................... 68 0 0 0 0 100 0 0 0 0
December 2003...................... 62 0 0 0 0 100 0 0 0 0
December 2004...................... 56 0 0 0 0 100 0 0 0 0
December 2005...................... 49 0 0 0 0 100 0 0 0 0
December 2006...................... 43 0 0 0 0 100 0 0 0 0
December 2007...................... 36 0 0 0 0 100 0 0 0 0
December 2008...................... 29 0 0 0 0 100 0 0 0 0
December 2009...................... 22 0 0 0 0 100 0 0 0 0
December 2010...................... 13 0 0 0 0 100 0 0 0 0
December 2011...................... 3 0 0 0 0 100 0 0 0 0
December 2012...................... 0 0 0 0 0 81 0 0 0 0
December 2013...................... 0 0 0 0 0 48 0 0 0 0
December 2014...................... 0 0 0 0 0 40 0 0 0 0
December 2015...................... 0 0 0 0 0 32 0 0 0 0
December 2016...................... 0 0 0 0 0 24 0 0 0 0
December 2017...................... 0 0 0 0 0 14 0 0 0 0
December 2018...................... 0 0 0 0 0 3 0 0 0 0
December 2019...................... 0 0 0 0 0 0 0 0 0 0
December 2020...................... 0 0 0 0 0 0 0 0 0 0
December 2021...................... 0 0 0 0 0 0 0 0 0 0
December 2022...................... 0 0 0 0 0 0 0 0 0 0
December 2023...................... 0 0 0 0 0 0 0 0 0 0
December 2024...................... 0 0 0 0 0 0 0 0 0 0
December 2025...................... 0 0 0 0 0 0 0 0 0 0
December 2026...................... 0 0 0 0 0 0 0 0 0 0
December 2027...................... 0 0 0 0 0 0 0 0 0 0
December 2028...................... 0 0 0 0 0 0 0 0 0 0
--- --- --- --- --- ---- --- --- --- ---
Weighted Average Life (years)(1)... 6.7 1.1 0.9 0.8 0.7 15.9 2.8 2.1 2.0 1.7
--- --- --- --- --- ---- --- --- --- ---
--- --- --- --- --- ---- --- --- --- ---
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
S-35
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AF-3 CLASS AF-4
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------ ------------------------------------
DATE I II III IV V I II III IV V
- ------------------------------------ ---- --- --- --- --- ---- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999....................... 100 100 100 100 100 100 100 100 100 100
December 2000....................... 100 100 100 100 100 100 100 100 100 100
December 2001....................... 100 100 0 0 0 100 100 97 0 0
December 2002....................... 100 85 0 0 0 100 100 34 0 0
December 2003....................... 100 17 0 0 0 100 100 0 0 0
December 2004....................... 100 0 0 0 0 100 49 0 0 0
December 2005....................... 100 0 0 0 0 100 0 0 0 0
December 2006....................... 100 0 0 0 0 100 0 0 0 0
December 2007....................... 100 0 0 0 0 100 0 0 0 0
December 2008....................... 100 0 0 0 0 100 0 0 0 0
December 2009....................... 100 0 0 0 0 100 0 0 0 0
December 2010....................... 100 0 0 0 0 100 0 0 0 0
December 2011....................... 100 0 0 0 0 100 0 0 0 0
December 2012....................... 100 0 0 0 0 100 0 0 0 0
December 2013....................... 100 0 0 0 0 100 0 0 0 0
December 2014....................... 100 0 0 0 0 100 0 0 0 0
December 2015....................... 100 0 0 0 0 100 0 0 0 0
December 2016....................... 100 0 0 0 0 100 0 0 0 0
December 2017....................... 100 0 0 0 0 100 0 0 0 0
December 2018....................... 100 0 0 0 0 100 0 0 0 0
December 2019....................... 73 0 0 0 0 100 0 0 0 0
December 2020....................... 41 0 0 0 0 100 0 0 0 0
December 2021....................... 4 0 0 0 0 100 0 0 0 0
December 2022....................... 0 0 0 0 0 58 0 0 0 0
December 2023....................... 0 0 0 0 0 20 0 0 0 0
December 2024....................... 0 0 0 0 0 0 0 0 0 0
December 2025....................... 0 0 0 0 0 0 0 0 0 0
December 2026....................... 0 0 0 0 0 0 0 0 0 0
December 2027....................... 0 0 0 0 0 0 0 0 0 0
December 2028....................... 0 0 0 0 0 0 0 0 0 0
---- --- --- --- --- ---- --- --- --- ---
Weighted Average Life (years)(1).... 21.7 4.5 2.8 2.6 2.2 24.2 6.0 3.9 2.9 2.4
---- --- --- --- --- ---- --- --- --- ---
---- --- --- --- --- ---- --- --- --- ---
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
S-36
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AF-5 CLASS AF-6
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------ -----------------------------------------
DATE I II III IV V I II III IV V
- ----------------------------------- ---- --- --- --- --- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999...................... 100 100 100 100 100 100 100 100 100 100
December 2000...................... 100 100 100 100 100 100 100 100 100 100
December 2001...................... 100 100 100 95 0 100 100 100 100 0
December 2002...................... 100 100 100 75 0 100 100 100 100 0
December 2003...................... 100 100 28 0 0 100 100 100 83 0
December 2004...................... 100 100 0 0 0 100 100 80 50 0
December 2005...................... 100 90 0 0 0 100 100 58 35 0
December 2006...................... 100 84 0 0 0 100 100 0 0 0
December 2007...................... 100 58 0 0 0 100 100 0 0 0
December 2008...................... 100 0 0 0 0 100 0 0 0 0
December 2009...................... 100 0 0 0 0 100 0 0 0 0
December 2010...................... 100 0 0 0 0 100 0 0 0 0
December 2011...................... 100 0 0 0 0 100 0 0 0 0
December 2012...................... 100 0 0 0 0 100 0 0 0 0
December 2013...................... 100 0 0 0 0 100 0 0 0 0
December 2014...................... 100 0 0 0 0 100 0 0 0 0
December 2015...................... 100 0 0 0 0 100 0 0 0 0
December 2016...................... 100 0 0 0 0 100 0 0 0 0
December 2017...................... 100 0 0 0 0 100 0 0 0 0
December 2018...................... 100 0 0 0 0 100 0 0 0 0
December 2019...................... 100 0 0 0 0 100 0 0 0 0
December 2020...................... 100 0 0 0 0 100 0 0 0 0
December 2021...................... 100 0 0 0 0 100 0 0 0 0
December 2022...................... 100 0 0 0 0 100 0 0 0 0
December 2023...................... 100 0 0 0 0 100 0 0 0 0
December 2024...................... 78 0 0 0 0 100 0 0 0 0
December 2025...................... 31 0 0 0 0 100 0 0 0 0
December 2026...................... 0 0 0 0 0 0 0 0 0 0
December 2027...................... 0 0 0 0 0 0 0 0 0 0
December 2028...................... 0 0 0 0 0 0 0 0 0 0
---- --- --- --- --- ---- ---- ----- ---- ----
Weighted Average Life (years)(1)... 26.6 8.9 4.8 4.2 2.6 27.6 9.7 7.1 6.2 2.8
---- --- --- --- --- ---- ---- ----- ---- ----
---- --- --- --- --- ---- ---- ----- ---- ----
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
S-37
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AF-7 CLASS AF-8
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------ -----------------------------------------
DATE I II III IV V I II III IV V
- ----------------------------------- ---- --- --- --- --- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999...................... 100 100 100 100 100 92 77 71 69 64
December 2000...................... 100 100 100 100 100 89 55 42 39 31
December 2001...................... 100 100 100 100 97 87 37 22 19 10
December 2002...................... 99 86 94 98 97 84 27 19 18 10
December 2003...................... 97 78 82 84 90 81 22 14 13 9
December 2004...................... 94 65 63 64 59 78 17 10 9 6
December 2005...................... 89 52 46 45 0 74 14 7 6 0
December 2006...................... 75 25 0 0 0 70 11 0 0 0
December 2007...................... 61 12 0 0 0 65 8 0 0 0
December 2008...................... 49 0 0 0 0 61 0 0 0 0
December 2009...................... 38 0 0 0 0 56 0 0 0 0
December 2010...................... 29 0 0 0 0 51 0 0 0 0
December 2011...................... 20 0 0 0 0 45 0 0 0 0
December 2012...................... 12 0 0 0 0 39 0 0 0 0
December 2013...................... 6 0 0 0 0 31 0 0 0 0
December 2014...................... 5 0 0 0 0 29 0 0 0 0
December 2015...................... 4 0 0 0 0 27 0 0 0 0
December 2016...................... 3 0 0 0 0 25 0 0 0 0
December 2017...................... 2 0 0 0 0 23 0 0 0 0
December 2018...................... 2 0 0 0 0 20 0 0 0 0
December 2019...................... 1 0 0 0 0 18 0 0 0 0
December 2020...................... 1 0 0 0 0 15 0 0 0 0
December 2021...................... 0 0 0 0 0 13 0 0 0 0
December 2022...................... 0 0 0 0 0 11 0 0 0 0
December 2023...................... 0 0 0 0 0 10 0 0 0 0
December 2024...................... 0 0 0 0 0 8 0 0 0 0
December 2025...................... 0 0 0 0 0 6 0 0 0 0
December 2026...................... 0 0 0 0 0 0 0 0 0 0
December 2027...................... 0 0 0 0 0 0 0 0 0 0
December 2028...................... 0 0 0 0 0 0 0 0 0 0
---- --- --- --- --- ---- ---- ----- ---- ----
Weighted Average Life (years)(1)... 10.4 6.7 6.4 6.4 6.0 12.6 3.2 2.4 2.2 1.8
---- --- --- --- --- ---- ---- ----- ---- ----
---- --- --- --- --- ---- ---- ----- ---- ----
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
S-38
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS MF-1 CLASS MF-2
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------ -----------------------------------------
DATE I II III IV V I II III IV V
- ----------------------------------- ---- --- --- --- --- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999...................... 100 100 100 100 100 100 100 100 100 100
December 2000...................... 100 100 100 100 100 100 100 100 100 100
December 2001...................... 100 100 100 100 100 100 100 100 100 100
December 2002...................... 100 89 64 58 85 100 89 64 58 45
December 2003...................... 100 71 47 41 30 100 71 47 41 30
December 2004...................... 100 57 34 29 20 100 57 34 29 20
December 2005...................... 100 45 25 21 0 100 45 25 21 0
December 2006...................... 100 35 0 0 0 100 35 0 0 0
December 2007...................... 100 28 0 0 0 100 28 0 0 0
December 2008...................... 100 0 0 0 0 100 0 0 0 0
December 2009...................... 100 0 0 0 0 100 0 0 0 0
December 2010...................... 100 0 0 0 0 100 0 0 0 0
December 2011...................... 100 0 0 0 0 100 0 0 0 0
December 2012...................... 100 0 0 0 0 100 0 0 0 0
December 2013...................... 100 0 0 0 0 100 0 0 0 0
December 2014...................... 95 0 0 0 0 95 0 0 0 0
December 2015...................... 89 0 0 0 0 89 0 0 0 0
December 2016...................... 82 0 0 0 0 82 0 0 0 0
December 2017...................... 75 0 0 0 0 75 0 0 0 0
December 2018...................... 67 0 0 0 0 67 0 0 0 0
December 2019...................... 58 0 0 0 0 58 0 0 0 0
December 2020...................... 51 0 0 0 0 51 0 0 0 0
December 2021...................... 43 0 0 0 0 43 0 0 0 0
December 2022...................... 36 0 0 0 0 36 0 0 0 0
December 2023...................... 32 0 0 0 0 32 0 0 0 0
December 2024...................... 26 0 0 0 0 26 0 0 0 0
December 2025...................... 20 0 0 0 0 20 0 0 0 0
December 2026...................... 0 0 0 0 0 0 0 0 0 0
December 2027...................... 0 0 0 0 0 0 0 0 0 0
December 2028...................... 0 0 0 0 0 0 0 0 0 0
---- --- --- --- --- ---- ---- ----- ---- ----
Weighted Average Life (years)(1)... 22.3 6.8 5.2 5.0 4.9 22.3 6.8 5.2 4.9 4.5
---- --- --- --- --- ---- ---- ----- ---- ----
---- --- --- --- --- ---- ---- ----- ---- ----
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
S-39
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS BF-1
PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------
DATE I II III IV V
- ----------------------------------------------------------------------------- ---- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percent.............................................................. 100% 100% 100% 100% 100%
December 1999................................................................ 100 100 100 100 100
December 2000................................................................ 100 100 100 100 100
December 2001................................................................ 100 100 100 100 100
December 2002................................................................ 100 89 64 58 45
December 2003................................................................ 100 71 47 41 30
December 2004................................................................ 100 57 34 29 20
December 2005................................................................ 100 45 25 21 0
December 2006................................................................ 100 35 0 0 0
December 2007................................................................ 100 28 0 0 0
December 2008................................................................ 100 0 0 0 0
December 2009................................................................ 100 0 0 0 0
December 2010................................................................ 100 0 0 0 0
December 2011................................................................ 100 0 0 0 0
December 2012................................................................ 100 0 0 0 0
December 2013................................................................ 100 0 0 0 0
December 2014................................................................ 95 0 0 0 0
December 2015................................................................ 89 0 0 0 0
December 2016................................................................ 82 0 0 0 0
December 2017................................................................ 75 0 0 0 0
December 2018................................................................ 67 0 0 0 0
December 2019................................................................ 58 0 0 0 0
December 2020................................................................ 51 0 0 0 0
December 2021................................................................ 43 0 0 0 0
December 2022................................................................ 36 0 0 0 0
December 2023................................................................ 32 0 0 0 0
December 2024................................................................ 26 0 0 0 0
December 2025................................................................ 20 0 0 0 0
December 2026................................................................ 0 0 0 0 0
December 2027................................................................ 0 0 0 0 0
December 2028................................................................ 0 0 0 0 0
---- --- --- --- ---
Weighted Average Life (years)(1)............................................. 22.3 6.8 5.2 4.9 4.4
---- --- --- --- ---
---- --- --- --- ---
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
S-40
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AV-1 CLASS MV-1
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------- -----------------------------------------
DATE VI VII VIII IX X VI VII VIII IX X
- ------------------------------------- ---- --- ---- --- --- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent...................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999........................ 96 83 79 71 62 100 100 100 100 100
December 2000........................ 95 63 53 35 19 100 100 100 100 100
December 2001........................ 94 40 26 2 0 100 100 100 100 0
December 2002........................ 93 26 20 2 0 100 93 70 100 0
December 2003........................ 91 21 15 2 0 100 75 52 57 0
December 2004........................ 90 17 11 2 0 100 60 38 28 0
December 2005........................ 89 14 8 2 0 100 48 28 10 0
December 2006........................ 87 11 6 1 0 100 38 21 5 0
December 2007........................ 85 9 4 1 0 100 31 15 3 0
December 2008........................ 84 7 3 1 0 100 24 11 1 0
December 2009........................ 81 6 2 0 0 100 20 8 0 0
December 2010........................ 79 4 2 0 0 100 15 6 0 0
December 2011........................ 76 3 1 0 0 100 12 4 0 0
December 2012........................ 73 3 1 0 0 100 10 3 0 0
December 2013........................ 70 2 1 0 0 100 8 2 0 0
December 2014........................ 67 2 0 0 0 100 6 0 0 0
December 2015........................ 63 1 0 0 0 100 5 0 0 0
December 2016........................ 58 1 0 0 0 100 4 0 0 0
December 2017........................ 53 1 0 0 0 100 3 0 0 0
December 2018........................ 48 1 0 0 0 100 1 0 0 0
December 2019........................ 41 0 0 0 0 100 0 0 0 0
December 2020........................ 35 0 0 0 0 100 0 0 0 0
December 2021........................ 28 0 0 0 0 99 0 0 0 0
December 2022........................ 24 0 0 0 0 86 0 0 0 0
December 2023........................ 21 0 0 0 0 73 0 0 0 0
December 2024........................ 16 0 0 0 0 58 0 0 0 0
December 2025........................ 12 0 0 0 0 41 0 0 0 0
December 2026........................ 6 0 0 0 0 23 0 0 0 0
December 2027........................ 1 0 0 0 0 4 0 0 0 0
December 2028........................ 0 0 0 0 0 0 0 0 0 0
---- --- ---- --- --- ---- ---- ----- ---- ----
Weighted Average Life (years)(1)..... 18.0 3.6 2.8 1.7 1.3 26.3 8.0 6.1 5.5 2.7
Weighted Average Life (years)(1)(2).. 18.0 3.4 2.6 1.6 1.3 26.1 7.1 5.4 4.9 2.7
---- --- ---- --- --- ---- ---- ----- ---- ----
---- --- ---- --- --- ---- ---- ----- ---- ----
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
(2) To the Optional Termination Date.
S-41
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS MV-2 CLASS BV-1
PREPAYMENT SCENARIOS PREPAYMENT SCENARIOS
DISTRIBUTION ------------------------------------ ------------------------------------
DATE VI VII VIII IX X VI VII VIII IX X
- -------------------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent............................. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 1999............................... 100 100 100 100 100 100 100 100 100 100
December 2000............................... 100 100 100 100 100 100 100 100 100 100
December 2001............................... 100 100 100 100 66 100 100 100 100 100
December 2002............................... 100 93 70 43 66 100 93 70 37 40
December 2003............................... 100 75 52 23 41 100 75 52 23 8
December 2004............................... 100 60 38 14 20 100 60 38 14 1
December 2005............................... 100 48 28 9 7 100 48 28 9 0
December 2006............................... 100 38 21 5 0 100 38 21 4 0
December 2007............................... 100 31 15 2 0 100 31 15 0 0
December 2008............................... 100 24 11 0 0 100 24 11 0 0
December 2009............................... 100 20 8 0 0 100 20 8 0 0
December 2010............................... 100 15 6 0 0 100 15 6 0 0
December 2011............................... 100 12 4 0 0 100 12 2 0 0
December 2012............................... 100 10 2 0 0 100 10 0 0 0
December 2013............................... 100 8 0 0 0 100 8 0 0 0
December 2014............................... 100 6 0 0 0 100 5 0 0 0
December 2015............................... 100 5 0 0 0 100 2 0 0 0
December 2016............................... 100 3 0 0 0 100 0 0 0 0
December 2017............................... 100 1 0 0 0 100 0 0 0 0
December 2018............................... 100 0 0 0 0 100 0 0 0 0
December 2019............................... 100 0 0 0 0 100 0 0 0 0
December 2020............................... 100 0 0 0 0 100 0 0 0 0
December 2021............................... 99 0 0 0 0 99 0 0 0 0
December 2022............................... 86 0 0 0 0 86 0 0 0 0
December 2023............................... 73 0 0 0 0 73 0 0 0 0
December 2024............................... 58 0 0 0 0 58 0 0 0 0
December 2025............................... 41 0 0 0 0 41 0 0 0 0
December 2026............................... 23 0 0 0 0 23 0 0 0 0
December 2027............................... 0 0 0 0 0 0 0 0 0 0
December 2028............................... 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average Life (years)(1)............ 26.3 8.0 6.0 4.5 4.7 26.3 7.9 6.0 4.3 4.0
Weighted Average Life (years)(1)(2)......... 26.1 7.1 5.4 4.2 3.4 26.1 7.1 5.4 3.9 3.6
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in Class
Principal Balance of such Certificate referred to in clause (a).
(2) To the Optional Termination Date.
S-42
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Class of Offered Certificates will be issued in original principal
amounts of $25,000 and integral multiples of $1,000 in excess thereof. The Trust
also will issue a residual class in the REMIC created by the Trust (the
"Residual Certificates") which are not being offered hereby.
DISTRIBUTION DATES AND DISTRIBUTIONS
On the 15th day of each month, or, if such day is not a business day then
the next succeeding business day, commencing in January 1999 (each, a
"Distribution Date"), the Trustee will be required to distribute to the Owners
of record of the Certificates as of the last business day of the calendar month
immediately preceding the calendar month in which such Distribution Date occurs
(the "Record Date"), such Owners' Percentage Interests in the amounts required
to be distributed to the Owners of each Class of Certificates on such
Distribution Date.
Each Owner of record of a Certificate will be entitled to receive such
Owner's Percentage Interest in the amounts due on such Distribution Date to the
Owners of the related Class of Certificates. The "Percentage Interest" of each
Offered Certificate as of any date of determination will be equal to the
percentage obtained by dividing the principal balance of such Certificate as of
the Closing Date by the Class Principal Balance of the applicable Class of
Certificates as of the Closing Date.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners" or "Owners" or "Holders") will hold their
Offered Certificates through the Depository Trust Company ("DTC") in the United
States, or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System
("Euroclear") (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which equal
the aggregate principal balance of the Offered Certificates and will initially
be registered in the name of Cede & Co. ("Cede"), the nominee of DTC. Unless and
until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede, as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC. Monthly and
annual reports on the Trust will be provided to Cede, as nominee of DTC, and may
be made available by Cede to beneficial owners upon request, in accordance with
the rules, regulations and procedures creating and affecting the Depository, and
to the Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates of such beneficial owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities--Book-Entry Registration" in
the Prospectus and Annex I hereto.
None of the Depositor, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
FLOW OF FUNDS AND DISTRIBUTIONS ON THE OFFERED CERTIFICATES
The Principal and Interest Accounts. The Pooling and Servicing Agreement
requires the Servicer to establish one or more custodial accounts with respect
to each Loan Group (each, a "Principal and Interest Account") on behalf of the
Trustee at a depository institution meeting the requirements set forth in the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement requires
the Servicer to deposit all collections (other than amounts escrowed for taxes
and insurance) related to the Home Equity Loans in a Loan Group to the
applicable Principal and Interest Account on a daily basis (but no later than
the first business day after receipt). All funds in the Principal and Interest
Accounts are required to be invested in Eligible Investments. Investment
earnings on funds held in the Principal and Interest Account are for the account
of the Servicer.
S-43
<PAGE>
Pursuant to the Pooling and Servicing Agreement, on the tenth day of each
month so long as the Initial Servicer is servicing all of the Home Equity Loans,
or two business days prior to each Distribution Date once the Substitute
Servicer begins servicing all of the Home Equity Loans, (each, a "Remittance
Date") commencing in January 1999, the Servicer is required to remit to the
Trustee the Interest Remittance Amount and the Principal Remittance Amount
(collectively, the "Monthly Remittance Amount") for each Loan Group.
The "Interest Remittance Amount" for a Loan Group and any Remittance Date
will equal the sum of the following with respect to the Home Equity Loans
(including Subsequent Loans) in such Loan Group: (i) all scheduled interest
collected during the related Remittance Period, less the Servicing Fee and the
Supplemental Servicing Fee, (ii) Delinquency Advances, (iii) Compensating
Interest and (iv) the interest portion of Net Liquidation Proceeds, Loan
Purchase Prices and Substitution Amounts.
The "Principal Remittance Amount" for a Loan Group and any Remittance Date
will equal the sum of the following with respect to the Home Equity Loans
(including Subsequent Loans) in such Loan Group: (i) all scheduled principal
collected by the Servicer on the Home Equity Loans during the immediately
preceding Remittance Period, (ii) any Prepayments, Insurance Proceeds, Net
Liquidation Proceeds (but only to the extent that such Net Liquidation Proceeds
do not exceed the Loan Balance of the related Home Equity Loan), REO Proceeds
and Released Mortgaged Property Proceeds, in each case, only to the extent
collected on the Home Equity Loans during the preceding Remittance Period and
(iii) the principal portion of all Loan Purchase Prices and Substitution Amounts
with respect to such Remittance Date.
Delinquency Advances. The Pooling and Servicing Agreement requires the
Servicer to advance the interest portion of each scheduled monthly payment that
was due during the related Remittance Period but was not received by the
Remittance Date ("Delinquency Advances") but only to the extent the Servicer, in
good faith, determines that the amount of such advance will be recoverable by it
out of late payments by the borrower or Insurance Proceeds, Liquidation
Proceeds, REO Proceeds or Released Mortgaged Property Proceeds with respect to
that Home Equity Loan.
The Servicer is permitted to fund its payment of Delinquency Advances on
any Remittance Date from collections on the Home Equity Loans deposited in the
applicable Principal and Interest Account subsequent to the related Remittance
Period, but must reimburse such Principal and Interest Account for any such
amounts on or prior to a subsequent Remittance Date on which such amounts are
required.
Accounts. The Pooling and Servicing Agreement provides that the Trustee
will create and maintain the Certificate Accounts, the Pre-Funding Accounts, and
the Capitalized Interest Accounts. The Pooling and Servicing Agreement provides
that the Trustee will (i) deposit each Pre-Funded Amount in the applicable Pre-
Funding Account, (ii) deposit the required amounts in each Capitalized Interest
Account, and (iii) deposit monthly in the applicable Certificate Account (each,
a "Certificate Account") the Monthly Remittance Amount received from the
Servicer with respect to the related Home Equity Loans.
Distributions on Offered Certificates. On each Distribution Date, in
preparation of making distributions to Certificate Owners, the Trustee will be
required (i) on the Distribution Dates prior to termination of the Pre-Funding
Period, to transfer from each Capitalized Interest Account to the related
Certificate Account an amount equal to the excess of (a) the Current Interest
and the Interest Carryover Amount (if any) for each Class of Certificates, over
(b) the Interest Remittance Amount, and (ii) on the Distribution Date occurring
at or immediately following the end of the Pre-Funding Period, to transfer from
each Pre-Funding Account to the related Certificate Account the amount remaining
on deposit in the related Pre-Funding Account.
Interest Distributions. On each Distribution Date, the sum of (i) the
Interest Remittance Amount, and (ii) amounts transferred from the Capitalized
Interest Account to the related Certificate Account (the "Interest Funds") for
each Loan Group, will be distributed in the following order of priority, until
such Interest Funds have been fully distributed:
(i) to the Trustee, the fees of the Trustee related to such Loan
Group;
(ii) to each Class of the Class A Certificates of the Certificate
Group related to such Loan Group, the Current Interest and any Interest
Carryover Amount for such Class; provided, however, that if the Interest
Funds for the Fixed Rate Certificates are not sufficient to make a full
distribution of the aggregate Current Interest and the aggregate Interest
Carryover Amount, the Interest Funds for Loan Group I will be
S-44
<PAGE>
distributed pro rata among each Class of the Group I Class A Certificates
based upon the ratio of (x) the sum of the Current Interest and Interest
Carryover Amount for each such Class to (y) the total amount of Current
Interest and any Interest Carryover Amount for the Group I Class A
Certificates;
(iii) to the Class M-1 Certificates of such Certificate Group, the
Current Interest for such Class;
(iv) to the Class M-2 Certificates of such Certificate Group, the
Current Interest for such Class;
(v) to the Class B-1 Certificates of such Certificate Group, the
Current Interest for such Class; and
(vi) any remainder to be distributed as described below under
"--Overcollateralization and Crosscollateralization Provisions."
"Accrual Period" means with respect to any Distribution Date and (i) the
Group I Certificates, the calendar month preceding the month of such
Distribution Date and (ii) the Group II Certificates, the period beginning on
the Distribution Date in the month preceding the month of such Distribution Date
(or, in the case of the first Distribution Date, beginning on the Closing Date)
and ending on the day preceding such Distribution Date.
"Current Interest," with respect to each Class of the Offered Certificates
and each Distribution Date, is the interest accrued at the applicable
Pass-Through Rate for the applicable Accrual Period on the Class Principal
Balance of such Class.
"Supplemental Servicing Fee" means, for any Distribution Date on which the
Substitute Servicer is a servicer, $50.00 (per Remittance Period) per each Home
Equity Loan which is 90 days or more delinquent.
"Interest Carryover Amount," with respect to each Class of the Offered
Certificates and each Distribution Date, is the sum of (i) the excess of (A)
Current Interest for such Class with respect to prior Distribution Dates
(excluding any LIBOR Interest Carryover and any Group I Net Rate Carryover) over
(B) the amount actually distributed to such Class with respect to interest on
such prior Distribution Dates and (ii) 30 days' interest on such excess (to the
extent permitted by applicable law) at the applicable Pass-Through Rate.
The "Pass-Through Rate" for each Class of Fixed Rate Certificates (other
than the Class MF-2 and Class BF-1 Certificates) is the respective rate set
forth on the cover of this Prospectus Supplement. The "Pass-Through Rate" for
each of the Class MF-2 and Class BF-1 Certificates is the lesser of: (i) the
respective rate for each such Class set forth on the cover of this Prospectus
Supplement, and (ii) the weighted average Mortgage Rates on the Group I Loans
less the Servicing Fee, the Trustee's Fee and the Supplemental Servicing Fee as
an annualized percentage of the outstanding principal balance of the Group I
Loans (such weighted average rate, the "Group I Net Rate Cap"). The
"Pass-Through Rates" per annum for the Adjustable Rate Certificates will be
equal to the lesser of (i) the London interbank offered rate for one month
United States dollar deposits ("1-Month LIBOR") (calculated as described below
under "--Calculation of 1-Month LIBOR") plus the related Pass-Through Margin (as
defined below) for such Class, and (ii) the product of (A) the weighted average
of the Mortgage Rates on the Group II Loans less the Servicing Fee, the
Trustee's Fee and the Supplemental Servicing Fee as an annualized percentage of
the outstanding principal balance of the Group II Loans and commencing with the
seventh Distribution Date minus 0.75% per annum and (B) a fraction equal to 30
over the actual number of days elapsed in the related Accrual Period (the
"Group II Net Rate Cap").
The "Pass-Through Margin" for each Class of Adjustable Rate Certificates is
as follows: for any Distribution Date on or prior to the Optional Termination
Date: Class AV-1, 0.70%; Class MV-1, 1.25%; Class MV-2, 1.75%; and Class BV-1,
2.75%; and for any Distribution Date after the Optional Termination Date:
Class AV-1, 1.20%; Class MV-1, 1.75%; Class MV-2, 2.25%; and Class BV-1, 3.25%.
The "LIBOR Interest Carryover" for a Class of Adjustable Rate Certificates
on any Distribution Date on which the Pass-Through Rate for such Class is based
upon the Group II Net Rate Cap is the excess of (i) the amount of interest that
such Class would have been entitled to receive on such Distribution Date had the
Pass-Through Rate for that Class not been calculated based on the Group II Net
Rate Cap over (ii) the amount of interest such Class received on such
Distribution Date based on the Group II Net Rate Cap, up to but not exceeding
the weighted average of the Lifetime Rate Caps on the Home Equity Loans in Loan
Group II, less the Servicing Fee, the Trustee's Fee and the Supplemental
Servicing Fee relating to the Group II Loans together with the unpaid portion of
any such excess from prior Distribution Dates (and interest accrued thereon at
the then applicable Pass-Through Rate, without giving effect to the Group II Net
Rate Cap).
S-45
<PAGE>
The "Group I Net Rate Carryover" for the Class MF-2 or Class BF-1
Certificates on any Distribution Date on which the Pass-Through Rate for such
Class is based upon its Group I Net Rate Cap is the excess of (i) the amount of
interest that such Class would have been entitled to receive on such
Distribution Date had the Pass-Through Rate for that Class not been calculated
based on the Group I Net Rate Cap over (ii) the amount of interest such Class
received on such Distribution Date based on the Group I Net Rate Cap, together
with the unpaid portion of any such excess from prior Distribution Dates (and
interest accrued thereon at the then applicable Pass-Through Rate, without
giving effect to the Group I Net Rate Cap).
Distributions of Principal. On each Distribution Date, the Principal
Distribution Amount for such Distribution Date with respect to each Loan Group
is required to be distributed as follows until such Principal Distribution
Amount has been fully distributed:
(i) to the Class A Certificates of the Certificate Group related to
such Loan Group, the related Class A Principal Distribution Amount in
respect of such Certificate Group, in the priority described below;
(ii) to the Class M-1 Certificates of each Certificate Group, the
Class M-1 Principal Distribution Amount for such Certificate Group;
(iii) to the Class M-2 Certificates of each Certificate Group, the
Class M-2 Principal Distribution Amount for such Certificate Group;
(iv) to the Class B-1 Certificates of each Certificate Group, the
Class B-1 Principal Distribution Amount for such Certificate Group; and
(v) any remainder to be distributed as described under
"--Overcollateralization and Crosscollateralization Provisions" below.
The Class A Principal Distribution Amount for Loan Group I will be
distributed in the following order of priority:
1. To the Class AF-8 Certificates, the Class AF-8 Pro Rata Share, until the
Class Principal Balance thereof has been reduced to zero.
2. To the Class AF-7 Certificates, the Class AF-7 Principal Distribution
Amount, until the Class Principal Balance thereof has been reduced to zero.
3. Sequentially, to the Class AF-1, Class AF-2, Class AF-3, Class AF-4,
Class AF-5, Class AF-6 and Class AF-7 Certificates, in that order, until the
respective Class Principal Balances thereof have been reduced to zero.
Notwithstanding the foregoing, if the aggregate Class Principal Balances of the
Group I Certificates exceed the sum of the aggregate Principal Balance of the
Group I Loans plus the Allocated Pre-Funded Amount for Loan Group I, the
Class A Principal Distribution Amount for Loan Group I will be distributed
concurrently to all classes of Group I Class A Certificates on a pro rata basis.
The Class A Principal Distribution Amount for Loan Group II will be
distributed to the Class AV-1 Certificates until the Class Principal Balance
thereof has been reduced to zero.
"Allocated Pre-Funded Amount" for either Loan Group and any Distribution
Date is the amount on deposit in the related Pre-Funding Account (excluding any
investment earnings therein) as of the last day of the related Remittance
Period.
"Principal Distribution Amount," with respect to each Distribution Date and
a Certificate Group, is the sum of (i) the Principal Funds for such Distribution
Date for such Certificate Group less the Excess Overcollateralization Amount for
such Certificate Group and (ii) any Extra Principal Distribution Amount for such
Distribution Date for the related Certificate Group.
"Class AF-8 Pro Rata Share" means for any Distribution Date the product of
(i) the Class A Principal Distribution Amount for Loan Group I and (ii) the
Class AF-8 Pro Rata Percentage for the Class AF-8 Certificates for such
Distribution Date.
"Class AF-7 Principal Distribution Amount" means for any Distribution Date,
the product of (i) the applicable Priority Percentage, (ii) the Class AF-7 Pro
Rata Percentage for the Class AF-7 Certificates for such
S-46
<PAGE>
Distribution Date and (iii) the Class A Principal Distribution Amount for Loan
Group I, less the Class AF-8 Pro Rata Share.
"Class A Principal Distribution Amount," for a Loan Group is (i) with
respect to any Distribution Date prior to the related Stepdown Date (as defined
herein) or as to which a Trigger Event (as defined herein) exists, 100% of the
Principal Distribution Amount for the related Loan Group for such Distribution
Date and (ii) with respect to any Distribution Date on or after the Stepdown
Date and as to which a Trigger Event does not exist, the excess of (A) the Class
Principal Balance of the Class A Certificates for such Certificate Group
immediately prior to such Distribution Date over (B) the lesser of (I) 47.80%
for Loan Group I and 41.40% (or 38.80% during a Trigger Event) for Loan
Group II, of the Principal Balances of the Home Equity Loans in such Loan Group
as of the last day of the related Remittance Period and (II) the Principal
Balances of the Home Equity Loans in such Loan Group as of the last day of the
related Remittance Period less approximately $2,625,000 for Loan Group I and
approximately $1,125,000 for Loan Group II.
"Class M-1 Principal Distribution Amount," for a Loan Group and with
respect to any Distribution Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for such Loan Group, is the excess of
(i) the sum for such Loan Group of (A) the Class Principal Balance of the
Class A Certificates (after taking into account distributions of the Class A
Principal Distribution Amount for such Distribution Date) and (B) the Class
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date over (ii) the lesser of (A) 62.90% for Loan Group I and 59.00%
(or 56.40% during a Trigger Event) for Loan Group II of the Principal Balances
of the Home Equity Loans in such Loan Group as of the last day of the related
Remittance Period and (B) the Principal Balances of the Home Equity Loans in
such Loan Group as of the last day of the related Remittance Period less
approximately $2,625,000 for Loan Group I and approximately $1,125,000 for Loan
Group II.
"Class M-2 Principal Distribution Amount," for a Loan Group and with
respect to any Distribution Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for such Loan Group, is the excess of
(i) of the sum for such Loan Group of (A) the Class Principal Balance of the
Class A Certificates (after taking into account distributions of the Class A
Principal Distribution Amount for such Distribution Date), (B) the Class
Principal Balance of the Class M-1 Certificates (after taking into account
distribution of the Class M-1 Principal Distribution Amount for such
Distribution Date) and (C) the Class Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (ii) the lesser of
(A) 75.80% for Loan Group I and 73.70% (or 71.10% during a Trigger Event) for
Loan Group II, of the aggregate Principal Balances of the Home Equity Loans in
such Loan Group as of the last day of the related Remittance Period and (B) the
Principal Balances of the Home Equity Loans in such Loan Group as of the last
day of the related Remittance Period less approximately $2,625,000 for Loan
Group I and approximately $1,125,000 for Loan Group II.
"Class B-1 Principal Distribution Amount," for a Loan Group and with
respect to any Distribution Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for such Loan Group, is the excess of
(i) of the sum for such Loan Group of (A) the Class Principal Balance of the
Class A Certificates (after taking into account distributions of the Class A
Principal Distribution Amount for such Distribution Date), (B) the Class
Principal Balance of the Class M-1 Certificates (after taking into account
distribution of the Class M-1 Principal Distribution Amount for such
Distribution Date), (C) the Class Principal Balance of the Class M-2
Certificates (after taking into account distributions of the Class M-2 Principal
Distribution Amount for such Distribution Date) and (D) the Class Principal
Balance of the Class B-1 Certificates immediately prior to such Distribution
Date over (ii) the lesser of (A) 85.80% for Loan Group I and 84.60% (or 82.00%
during a Trigger Event) for Loan Group II, of the Principal Balances of the Home
Equity Loans in such Loan Group as of the last day of the related Remittance
Period and (B) the Principal Balances of the Home Equity Loans in such Loan
Group as of the last day of the related Remittance Period less approximately
$2,625,000 for Loan Group I and approximately $1,125,000 for Loan Group II,
provided, however, that after the Class Principal Balances of the Class A,
Class M-1 and Class M-2 Certificates for such Certificate Group are reduced to
zero, the Class B-1 Principal Distribution Amount for such Distribution Date
will equal 100% of the Principal Distribution Amount for the related Loan Group.
Notwithstanding the foregoing, in the event that the Class Principal
Balances of all of the Class A Certificates relating to a Certificate Group have
been reduced to zero prior to the related Stepdown Date, all
S-47
<PAGE>
amounts of principal that would have been distributed to such Class A
Certificates will be distributed to the related Subordinated Certificates of
such Certificate Group sequentially in the following order: Class M-1, Class M-2
and Class B-1 Certificates. Similarly, if the Class Principal Balance of the
Class M-1 Certificates has been reduced to zero, all amounts of principal that
would have been distributed to such Class M-1 Certificates will be distributed
to the related Class M-2 and Class B-1 Certificates, in that order. If the Class
Principal Balance of the Class M-2 Certificates has been reduced to zero, all
amounts of principal that would have been distributed on such Class M-2
Certificates will be distributed to the related Class B-1 Certificates.
"Extra Principal Distribution Amount," for a Loan Group and with respect to
any Distribution Date, is the lesser of (i) the excess, if any, of the Specified
Overcollateralization Amount for such Loan Group and Distribution Date over the
Overcollateralization Amount (after giving effect to distributions of principal
on the related Certificate Group other than any Extra Principal Distribution
Amount) for such Loan Group and Distribution Date and (ii) the sum of the Excess
Cashflow for such Loan Group and Distribution Date and any Remainder Excess
Cashflow from the other Loan Group for such Distribution Date available therefor
in the priority set forth herein.
"Excess Cashflow," for a Loan Group and with respect to any Distribution
Date, is the excess, if any, of the Interest Funds and Principal Funds for such
Loan Group and Distribution Date over required distributions of interest and
principal (excluding any Extra Principal Distribution Amount) on the Offered
Certificates in the related Certificate Group on such Distribution Date.
"Excess Overcollateralization Amount" means, with respect to a Certificate
Group and any Distribution Date, the lesser of (i) the related Principal Funds
and (ii) the excess, if any, of (a) the Overcollateralization Amount (assuming
100% of the Principal Funds are applied as payment of principal to the related
Certificates) on such Distribution Date over (b) the Specified
Overcollateralization Amount.
"Maximum Collateral Amount" means for Loan Group I, $525,000,000 and for
Loan Group II, $225,000,000.
"Principal Funds" for either Loan Group and any Distribution Date will
equal the sum of the related Principal Remittance Amount and any amounts
transferred from the related Pre-Funding Account to the related Certificate
Account at the end of the Pre-Funding Period.
"Remainder Excess Cashflow," for a Loan Group and with respect to any
Distribution Date, is the excess, if any, of the Excess Cashflow for such Loan
Group and Distribution Date over the portion thereof, if any, applied to the
Offered Certificates in the related Certificate Group pursuant to clauses (i)
through (vii) under the third paragraph under "--Overcollateralization and
Crosscollateralization Provisions" below.
"Specified Overcollateralization Amount" means, with respect to each Loan
Group prior to the Stepdown Date for the related Certificate Group, an amount
equal to 7.10% for Loan Group I and 7.70% (or 9.00% during a Trigger Event) for
Loan Group II of the Maximum Collateral Amount for the related Loan Group, and
with respect to each Loan Group on and after the Stepdown Date for the related
Certificate Group, an amount equal to 14.20% for Loan Group I and 15.40% (or
18.00% during a Trigger Event) for Loan Group II of the Principal Balance of the
Mortgage Loans in such Loan Group as of the last day of the related Remittance
Period, subject to a minimum amount equal to 0.50% for Loan Group I and 0.50%
for Loan Group II of the Maximum Collateral Amount for the related Loan Group;
provided, however, that, if on any Distribution Date, a Trigger Event for a
Certificate Group has occurred, the Specified Overcollateralization Amount shall
not be reduced to the applicable percentage of the then current Principal
Balance of the Home Equity Loans in the related Loan Group until the
Distribution Date on which a Trigger Event for such Certificate Group no longer
exists.
"Overcollateralization Amount," with respect to any Distribution Date and
Loan Group, is the excess, if any, of (a) the sum of the related Allocated
Pre-Funded Amount and the aggregate Principal Balances of the Home Equity Loans
in such Loan Group as of the last day of the related Remittance Period over
(b) the Class Principal Balance of the Offered Certificates in the related
Certificate Group as of such date (after taking into account the payment of
principal on such Certificates on such Distribution Date).
"Stepdown Date," with respect to each Certificate Group, is the later to
occur of (i) the Distribution Date in January 2002 or (ii) the first
Distribution Date on which the Senior Enhancement Percentage (calculated for
this
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purpose only after taking into account the payment of principal on the related
Home Equity Loans but prior to the distribution of principal on such
Certificates on such Distribution Date) of such Certificate Group is greater
than or equal to 52.20% for Loan Group I and 58.60% (or 61.20% during a Trigger
Event) for Loan Group II.
A "Trigger Event," with respect to each Certificate Group and a
Distribution Date after the Stepdown Date, exists if either a Delinquency Event
or a Cumulative Loss Event exists with respect to the applicable Certificate
Group.
A "Cumulative Loss Event" will exist for a Certificate Group if cumulative
losses on the Home Equity Loans in the related Loan Group exceed the percentages
of the respective Maximum Collateral Amounts in the applicable time periods set
forth below:
<TABLE>
<CAPTION>
CERTIFICATE GROUP I CERTIFICATE GROUP II
------------------- --------------------
<S> <C> <C>
January 2002 - December 2002.......................... 3.00% 3.50%
January 2003 - December 2003.......................... 5.00% 5.50%
January 2004 - December 2004.......................... 6.25% 6.00%
January 2005 - December 2005.......................... 7.25% 6.15%
January 2006 and thereafter........................... 7.75% 6.25%
</TABLE>
Cumulative losses on delinquent Home Equity Loans which have been purchased
by the Servicer as permitted by the Pooling and Servicing Agreement shall be
included in this calculation.
A "Delinquency Event" will exist (A) with respect to Certificate Group I if
the Sixty Day Delinquency Percentage exceeds 40% of the Senior Enhancement
Percentage for Certificate Group I and (B) with respect to Certificate Group II
if the Sixty Day Delinquency Percentage exceeds the lesser of (i) 40% of the
Senior Enhancement Percentage for Certificate Group II and (ii) 20% of the
aggregate Principal Balance of the Home Equity Loans in Loan Group II as of the
last day of the related Remittance Period.
"Sixty Day Delinquency Percentage" means with respect to either Loan Group
and any Distribution Date, the percentage equivalent of a fraction, the
numerator of which is the aggregate Principal Balances of all Home Equity Loans
in such Loan Group that are 60 or more days delinquent, in litigation or
foreclosure or REO, and the denominator of which is the aggregate Principal
Balance of all the Home Equity Loans in such Loan Group as of the last day of
the related Remittance Period. Any delinquent Home Equity Loans which otherwise
fall into the applicable category shall be included in this calculation.
"Priority Percentage" for any Distribution Date will be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATES PRIORITY PERCENTAGE
- --------------------------------------------------------------------------- -------------------
<S> <C>
January 1999 - December 2001............................................... 0%
January 2002 - December 2003............................................... 45%
January 2004 - December 2004............................................... 80%
January 2005 - December 2005............................................... 100%
January 2006 and thereafter................................................ 300%
</TABLE>
"Class AF-7 Pro Rata Percentage" means with respect to any Distribution
Date, the percentage equivalent of a fraction, the numerator of which is the
Class Principal Balance of the Class AF-7 Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate Class Principal
Balance of the Group I Class A Certificates less the Class Principal Balance of
the Class AF-8 Certificates immediately prior to such Distribution Date.
"Class AF-8 Pro Rata Percentage" means with respect to any Distribution
Date, the percentage equivalent of a fraction, the numerator of which is the
Class Principal Balance of the Class AF-8 Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate Class Principal
Balance of the Group I Class A Certificates immediately prior to such
Distribution Date.
"Senior Enhancement Percentage" means with respect to each Certificate
Group and a Distribution Date, the percentage equivalent of a fraction, the
numerator of which is the sum of (i) the Class Principal Balance of the
Subordinated Certificates in the related Certificate Group (after taking into
account the payment of principal on such Certificates on such Distribution Date)
and (ii) the Overcollateralization Amount for the related Loan Group and the
denominator of which is the sum of the related Allocated Pre-Funded Amount and
the aggregate Principal
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Balances of the Home Equity Loans in such Loan Group; provided, however, that if
the most senior class (treating the Class A Certificates in Certificate Group I
as a single class) of Certificates in a Certificate Group have been paid in
full, the applicable Senior Enhancement Percentage will be calculated on the
basis of the Class Principal Balances of the outstanding Subordinated
Certificates other than the next most senior class.
OVERCOLLATERALIZATION AND CROSSCOLLATERALIZATION PROVISIONS
As set forth below, the Excess Cashflow for a Loan Group will be required
to be applied as an Extra Principal Distribution Amount with respect to the
related Certificate Group whenever the Overcollateralization Amount for such
Loan Group is less than the related Specified Overcollateralization Amount. In
addition, any Remainder Excess Cashflow with respect to a Loan Group will be
required to be applied as an Extra Principal Distribution Amount with respect to
the Certificate Group related to the other Loan Group whenever the
Overcollateralization Amount for such other Loan Group is less than the related
Specified Overcollateralization Amount. If on any Distribution Date, after
giving effect to any Extra Principal Distribution Amount, the aggregate Class
Principal Balances of the Offered Certificates with respect to a Certificate
Group exceed the sum of the related Allocated Pre-Funded Amount and the
Principal Balances of the Home Equity Loans in the related Loan Group, the Class
Principal Balances of the Subordinated Certificates (but not the Class A
Certificates) of such Certificate Group will be reduced, in inverse order of
seniority (beginning with the Class B Certificates) by an amount equal to such
excess.
If the Class Principal Balance of a Class of Subordinated Certificates is
reduced, that Class thereafter will be entitled to distributions of interest and
principal only with respect to the Class Principal Balance as so reduced. On
subsequent Distribution Dates, however, as described below, Excess Cashflow from
the related Loan Group and Remainder Excess Cashflow from the other Loan Group
will be applied to reduce Unpaid Realized Loss Amounts previously allocated to
such Certificates in order of seniority.
On each Distribution Date, the Excess Cashflow with respect to a Loan Group
will be required to be distributed as follows:
(i) the Extra Principal Distribution Amount for such Loan Group;
(ii) to the Class M-1 Certificates of such Certificate Group, any
Interest Carryover Amount for such Class;
(iii) to the Class M-1 Certificates of such Certificate Group, any
Unpaid Realized Loss Amount for such Class;
(iv) to the Class M-2 Certificates of such Certificate Group, any
Interest Carryover Amount for such Class;
(v) to the Class M-2 Certificates of such Certificate Group, any
Unpaid Realized Loss Amount for such Class;
(vi) to the Class B-1 Certificates of such Certificate Group, any
Interest Carryover Amount for such Class; and
(vii) to the Class B-1 Certificates of such Certificate Group, the
Unpaid Realized Loss Amount for such Class.
On each Distribution Date, the Remainder Excess Cashflow with respect to a
Loan Group will be required to be distributed as follows:
(i) for distribution to the Certificates in the other Certificate
Group to the extent that any of the amounts listed in clauses (i) through
(vii) in the immediately preceding paragraph with respect to the other
Certificate Group have not otherwise been funded in full for such
Distribution Date in accordance with the priorities set forth above;
(ii) in the case of Loan Group I, sequentially, to the Class MF-2 and
Class BF-1 Certificates, in that order, the Group I Net Rate Carryover;
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(iii) in the case of Loan Group II, sequentially, to the Class AV-1,
Class MV-1, Class MV-2 and Class BV-1 Certificates, in that order, the
LIBOR Interest Carryover;
(iv) if the Substitute Servicer is servicing all of the Home Equity
Loans, the Incentive Servicing Fee (as defined under "--Transfer of
Servicing"), if any, for such Distribution Date; and
(v) to the Residual Certificates, any remaining amount.
"Applied Realized Loss Amount," with respect to any Class of Subordinated
Certificates and as to any Distribution Date, means the sum of the Realized
Losses with respect to Home Equity Loans which have been applied in reduction of
the Class Principal Balance of such Class.
"Realized Loss" is the excess of the Principal Balance of a defaulted Home
Equity Loan over the net liquidation proceeds with respect thereto that are
allocated to principal.
"Unpaid Realized Loss Amount," with respect to any Class of the
Subordinated Certificates and as to any Distribution Date, is the excess of
(i) Applied Realized Loss Amounts with respect to such Class over (ii) the sum
of all distributions in reduction of the Applied Realized Loss Amounts on all
previous Distribution Dates. Any amounts distributed to a Class of Subordinated
Certificates in respect of any Unpaid Realized Loss Amount will not be applied
to reduce the Class Principal Balance of such Class.
In the event that a Specified Overcollateralization Amount is permitted to
decrease or "step down" on a Distribution Date in the future, or in the event
that an Excess Overcollateralization Amount (as defined below) for a Certificate
Group otherwise exists, the Remainder Excess Cashflow for the related Loan Group
will be distributed (to the extent not otherwise required to be applied to the
other Certificate Group) to the holders of the Residual Certificates on such
Distribution Date until the applicable Excess Overcollateralization Amount is
reduced to zero. This has the effect of decelerating the amortization of the
Certificates in the related Certificate Group relative to the amortization of
the Home Equity Loans in the related Loan Group, and of reducing the related
Overcollateralization Amount to the applicable Specified Overcollateralization
Amount. If, on any Distribution Date, the Excess Overcollateralization Amount
is, or, after taking into account all other distributions to be made on such
Distribution Date, would be, greater than zero (i.e., the related
Overcollateralization Amount is or would be greater than the related Specified
Overcollateralization Amount), then any amounts relating to principal which
would otherwise be distributed to the holders of the Certificates in the related
Certificate Group on such Distribution Date will (to the extent not otherwise
required to be applied to the other Certificate Group) instead be distributed to
the holders of the Residual Certificates.
CALCULATION OF 1-MONTH LIBOR
The Pass-Through Rates for the Adjustable Rate Certificates for the initial
Accrual Period will be determined on the business day preceding the Closing
Date. With respect to each other Distribution Date, 1-Month LIBOR will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to the first day of the related Accrual Period.
"Telerate Page 3750" means the display designated as page 3750 on Bridge
Telerate (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee after
consultation with the Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee after consultation with the Servicer) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the aggregate
Class Principal Balance of the Adjustable Rate Certificates. 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
will be the arithmetic mean of the quotations. If on such date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
Trustee after consultation with the Servicer, as of 11:00 A.M., New York City
time, on such date for loans in U.S. Dollars to leading European banks for a
period
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of one month in amounts approximately equal to the aggregate Class Principal
Balance of the Adjustable Rate Certificates. If no such quotations can be
obtained, the rate will be LIBOR for the prior Distribution Date. "LIBOR
Business Day" means any day on which commercial banks are open for business and
foreign currency deposits in the London interbank market.
The establishment of 1-Month LIBOR by the Trustee and the Trustee's
calculation of the rates of interest applicable to the Adjustable Rate
Certificates for the related Accrual Period shall (in the absence of manifest
error) be final and binding. Each such rate of interest may be obtained by
telephoning the Trustee at (949) 253-7575 or accessing the Trustee's website at
http:\\online.bankerstrust.com\invr.
THE ORIGINATORS
OVERVIEW
United Companies Lending Corporation(Registered) ("United Companies") is a
Louisiana corporation, headquartered in Baton Rouge, Louisiana, and a
wholly-owned indirect subsidiary of United Companies Financial Corporation (the
"Parent"). United Companies originates, purchases, sells and services primarily
first lien, non-conventional, home equity loans which are typically not loans
for the purchase of homes. These loans are made primarily to individuals who may
not otherwise qualify for conventional loans which are readily marketable to
government-sponsored mortgage agencies or conduits and available through most
commercial banks and many other lending institutions. It operates through a
branch network and correspondent (i.e., wholesale) loan programs. As of
September 30, 1998, United Companies' branch network consisted of 236 offices
located in 42 states. Pursuant to a restructuring plan publicly announced by the
Parent on October 28, 1998 (the "Restructuring Plan"), 32 of these offices have
been closed.
Also pursuant to the Restructuring Plan, UNICOR Mortgage(Registered), Inc.
("UNICOR"),which had operated through a wholesale loan network of correspondents
and brokers, was shut down. As of September 30, 1998, UNICOR had operated in
47 states. UNICOR had offered fixed and adjustable rate home equity loans to
borrowers of a credit quality comparable to borrowers who typically receive
loans through the United Companies' branch network. Loans may be secured by one
or more single family, owner-occupied or non-owner occupied, and multi-family
properties. A network of field account executives solicited qualifying loans
from mortgage correspondents and brokers within target markets by employing a
combination of direct solicitation, participation in seminars, trade shows and
conventions, as well as advertising directed at the mortgage lender/broker
market.
Correspondents and brokers were subjected to an approval process, which
included, but was not limited to, requiring evidence of appropriate licensing
and execution of a contract with UNICOR prior to closing any loans. Appraisers
and closing agents were also subjected to an approval process including
verification that certification and licensing requirements were obtained and
maintained. All loans were underwritten prior to approval and funding by UNICOR
personnel under guidelines comparable to those used for loans originated by
United Companies through its branch network.
United Companies operates another wholesale loan network which offers
substantially the same products as the now discontinued UNICOR program to banks
and other financial depository institutions through its division operating under
the registered servicemark GINGER MAE(Registered), the acronym for the Good
Neighbor Reinvestment Mortgage Assistance Loan Program. This program is intended
to permit participating institutions to originate loans to borrowers who do not
qualify for conventional credit. Loans purchased by United Companies under this
program are underwritten by the United Companies personnel prior to approval and
funding under substantially the same guidelines as those which had been utilized
by UNICOR. As of September 30, 1998, GINGER MAE(Registered) had 407 contracted
active financial institutions in 35 states participating in the GINGER
MAE(Registered) program. GINGER MAE(Registered) is separate from, and is not
related to, the Government National Mortgage Association, which is sometimes
referred to as "Ginnie Mae."
Home equity loans also are purchased in bulk by Southern Mortgage
Acquisition, Inc. d/b/a UC Acquisition, an affiliate of United Companies, and
are generally re-underwritten by United Companies personnel prior to purchase
utilizing the underwriting guidelines of United Companies.
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RECENT DEVELOPMENTS
Credit Agreements. United Companies Financial Corporation (the "Parent")
has an unsecured revolving credit facility provided by a group of 22
participating banks with a maximum commitment amount of $850 million (the
"Credit Facility") and outstanding senior and subordinated unsecured notes
(collectively, the "Unsecured Notes") in an aggregate principal amount of $375
million. The Credit Facility is unsecured, is guaranteed by the Initial Servicer
and the Originators and matures in April 2000. The Credit Facility and the
Unsecured Notes require the Parent to comply with various financial covenants,
one of which is to maintain a minimum consolidated fixed charge coverage ratio.
The Parent has experienced a declining trend in this ratio. Failure to maintain
such minimum consolidated fixed charge coverage ratio as of December 31, 1998,
would result in an event of default under the Credit Facility and the Unsecured
Notes. In such event the outstanding principal amount of the Credit Facility and
the Unsecured Notes would become due unless, prior to the cure periods provided
therein, waivers were to be obtained. Any such event would have a material
adverse effect on the Parent and its consolidated subsidiaries, including the
Originators and the Initial Servicer, would likely adversely affect their
abilities to fulfill their obligations with respect to the Home Equity Loans and
may prevent or adversely affect the Servicing Transfer. Even if the Originators
and the Initial Servicer were to be able to fulfill their respective
obligations, the prices of the Offered Certificates in the secondary market may
be adversely affected.
Factors which may adversely affect the ability of the Parent to maintain
the minimum consolidated fixed charge coverage ratio as of December 31, 1998,
include the following: (i) the impact on the Parent's financial statements as of
and for the period ending December 31, 1998, of the implementation by the
Company during the 1998 fourth quarter of Statement of Financial Accounting
Standards ("SFAS") Nos. 133 and 134 and the proposed guidance by the Financial
Accounting Standards Board ("FASB") of SFAS No. 125 (see "--Accounting Matters"
below); (ii) the excess, if any, of the actual costs of the shutdown of the
wholesale and manufactured housing units over the cost thereof previously
estimated by the Parent; (iii) the mark to market impact related to the Parent's
loan inventory as of December 31, 1998; (iv) the mark to market impact related
to the valuation of the Parent's interest-only and residual certificates as of
December 31, 1998, and (v) the ability of the Depositor to sell, and the sales
prices of, the Certificates.
There can be no assurance that the Parent will be in compliance with its
fixed charge coverage ratio covenants at December 31, 1998.
In September 1998, the Parent reached agreement in principle with the agent
bank for the bank group (the "Agent Bank") on the terms of a proposed
restructure of the Credit Facility into a secured warehouse/interest receivable
warehouse facility, to mature in two years, and a secured residual-financing
credit facility, to mature in April 2000, aggregating $850 million. The Parent
continues to analyze the terms of the proposed restructured secured facility and
intends to engage in further discussions with the bank group. There can be no
assurance that an agreement will be reached with the bank group on the terms of
the proposed restructured facility.
In December 1998, the Agent Bank requested information and supporting
documentation from the Parent in order to assist with a determination whether
defaults or events of default under the Credit Facility may have occurred. The
Parent has responded and is in the process of completing its delivery of the
requested supporting documentation. The Agent Bank also has requested that, as
permitted by the Credit Facility, its representatives be permitted to conduct an
audit of the Parent's books and records. The Parent is seeking to arrange a
mutually convenient date for that audit.
Restructuring Plan. On October 28, 1998, the Parent announced its decision
to implement a restructuring plan (the "Restructuring Plan") intended to create
a streamlined, more focused company. Under the Restructuring Plan, the Parent
has closed down its wholesale and manufactured housing units and is selling its
credit card unit. Further, future dividends on the Parent's common and preferred
stock have been suspended indefinitely.
In July 1998, the Parent had announced it was seeking a potential strategic
partnership to improve its access to capital and accelerate its growth, but
efforts as of the date of the October 28, 1998 announcement, and as of the date
hereof, have been unsuccessful.
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There can be no assurance that the Parent will be able to successfully
implement the Restructuring Plan. Factors that will affect the Parent's ability
to accomplish the Restructuring Plan include its ability to: (i) generate and
maintain adequate liquidity for a sufficient period of time to execute the
Restructuring Plan; (ii) maintain compliance with the financial covenants under
the Credit Facility and Unsecured Notes; (iii) continue to securitize on a
quarterly basis its home equity loan production; (iv) achieve the loan
production levels projected by the Restructuring Plan; and (vi) timely implement
the downsizing and other requirements of the Restructuring Plan. In addition,
increases in prepayment rates and loan losses above historical levels could
adversely affect the Parent's ability to implement the Restructuring Plan.
Ratings. On October 7, 1998, Fitch IBCA, Inc. ("Fitch") lowered the rating
of the Parent's senior notes to BB from BBB- at June 30, 1998, and its
subordinated notes to BB- from BB+ at June 30, 1998.
On October 9, 1998, Moody's Investor Service ("Moody's") downgraded the
Parent's senior unsecured debt rating to B3 from Ba3 at June 30, 1998, and its
subordinated debt to Caa2 from B2 at June 30, 1998. Moody's rating outlook
remained negative.
On October 23, 1998, Standard & Poor's ("S&P") lowered the counterparty
credit rating and senior unsecured debt rating to BB- from BB+ at June 30, 1998,
its subordinated debt to B from BB- at June 30, 1998, and its preferred stock to
B- from B+ at June 30, 1998. All ratings were removed from S&P's CreditWatch,
where they were placed with developing implications in August 1998 following the
Parent's announcement that it had retained Salomon Smith Barney to explore
potential strategic alternatives. On December 18, 1998, S&P further lowered the
counterparty credit rating and senior unsecured debt rating to B+, its
subordinated debt to B-, and its preferred stock to C.
On October 28, 1998, Duff & Phelps Credit Rating Co. ("DCR") downgraded the
senior, subordinated, and preferred stock ratings of the Parent to B, B-, and
CCC, respectively. The ratings remain on DCR's Rating Watch-Down, pending
further information and DCR's analysis of the Parent's proposed Restructuring
Plan. DCR also stated that the preferred stock rating will be lowered to DP
(Preferred Stock with Dividend Arrearage) if the dividend payment scheduled for
January 1, 1999, is not honored.
Accounting Matters. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize, at fair value, all derivatives as either assets or liabilities. The
accounting for changes in the fair value of a derivative is dependent upon the
intended use of the derivative. SFAS No. 133 is effective for all periods
beginning after June 15, 1999. Earlier application of the provisions of SFAS No.
133 is encouraged, but is permitted only as of the beginning of any quarter that
begins after issuance of SFAS No 133. Retroactive application is not allowed.
The Parent is reviewing the provisions of this pronouncement but has not yet
determined the effect of its implementation on the Parent's financial condition
or results of operations.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS No. 134"), which is effective for the first fiscal quarter beginning
after December 15, 1998. Early application is encouraged and is permitted as of
the issuance of the Statement. SFAS No. 134 requires that, after the
securitization of mortgage loans held for sale, any retained investment in
mortgage-backed securities be classified in accordance with the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," based on the entity's ability and intent to sell or hold the
investment. Prior to SFAS No. 134, the Parent was required to classify its
retained interests as a trading security even though it had no intent to dispose
of the security. Upon adoption, the Parent intends to classify its interest-only
and residual certificates as "available-for-sale" and subsequent adjustments in
carrying value, other than those deemed to be permanent, will result in such
adjustments being made in stockholders' equity on the Parent's balance sheet and
will be reflected as a component in the Parent's Comprehensive Income Statement.
However, the effects of changes in default assumptions would still have to be
recognized in income immediately. Securities subject to substantial prepayment
risk, such as the interest-only and residual certificates, cannot be classified
as held-to-maturity. The Parent is reviewing the provisions of this prouncement
but has not yet determined the effect of its implementation on the Parent's
financial condition or results of operations.
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The FASB is completing SFAS No. 125 Guidance which may affect the way the
Parent discounts the expected "cash-out" of trust under Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." If issued, this Guidance
could have the effect of causing a revaluation of the carrying value of the
interest-only and residual certificates and, on a going forward basis, lower the
income recorded as loan sale gains on future loan securitizations. The Parent
cannot determine the impact, if any, of the Guidance until it is finalized.
HOME EQUITY LOANS
The Originators' principal products are home equity loans with a fixed
amount, and term to maturity, which is typically secured by a first mortgage on
the borrower's residence. These types of loans are commonly referred to as "B"
and "C" grade or "sub-prime" loans. These loans are distinct from home equity
revolving lines of credit, which are generally secured by a second mortgage and
typically carry a floating interest rate. The Originators and their affiliates
originated $2.888 billion and $2.596 billion in home equity loans during the
year ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. The Originators also make second mortgage loans. Most of the
Originators' loan originations are sold in the secondary market, and servicing
rights have been retained by United Companies on substantially all loans sold.
Certain loan products are originated by the Originators for sale on a whole
loan, servicing released basis.
As of September 30, 1998 approximately 96.5% in aggregate principal amount
of the home equity loans owned by the Originators and/or serviced by United
Companies are secured by a first mortgage with the remaining 3.5% in aggregate
principal amount secured by second or multi-property mortgages. The average home
equity loan at origination was approximately $58,000 during 1997 and $59,000
during the first nine months of 1998. Typically, the proceeds of the home equity
loan will be used by the borrower to refinance an existing first mortgage in
order to finance home improvements or for debt consolidation. On most home
equity loans for home improvements, the loan proceeds are disbursed to an escrow
agent which, according to guidelines established by the Originators, releases
such proceeds upon completion of the improvements or in draws as the work on the
improvements progresses. Costs incurred by the borrower for loan origination,
including origination points, and appraisal, legal and title fees, are often
included in the amount financed.
The Originators' principal market for home equity loans is individuals who
may not otherwise qualify for conventional loans which are readily marketable to
the government-sponsored mortgage agencies or conduits and available through
most commercial banks and many other lending institutions. Loans to such
borrowers may present a greater risk and therefore produce higher loan
origination fees and interest rates as compared to loans to customers of banks
and thrifts. There are generally numerous competitors for these borrowers in
each of the Originators' geographic markets. Principal competitors include
recognized national and regional lenders. The Originators believe that prompt
underwriting and response to loan applications provide a competitive advantage
in loan originations.
DELINQUENCY AND LOSS EXPERIENCE
The following two tables set forth information relating to certain
contractual delinquency, default and loss experience of United Companies for its
servicing portfolio of home equity loans as of the dates indicated in the first
table and for the periods indicated in the second table, including loans owned
by United Companies or its affiliates and loans serviced for others.
S-55
<PAGE>
DELINQUENCY EXPERIENCE ON UNITED COMPANIES' PORTFOLIO
OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Dollar amount of home equity loans serviced...... $2,701,481 $4,040,138 $5,528,923 $5,001,501 $6,431,877
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Delinquency Period(1)
30-59 days..................................... 2.73% 3.39% 3.20% 3.71% 2.60%
60-89 days..................................... 0.61% 1.31% 1.05% 0.95% 0.98%
90 days and over............................... 0.28% 0.71% 0.85% 0.50% 0.86%
Defaults(1)
Foreclosures in process........................ 2.78% 3.36% 3.43% 3.81% 4.20%
Bankruptcy..................................... 1.75% 1.83% 2.10% 2.27% 2.18%
Real Estate Owned & Serviced..................... $ 30,073 $ 52,573 $ 98,924 $ 84,867 $ 121,071
</TABLE>
- ------------------
(1) As a percentage of total "dollar amount of home equity loans serviced" as of
the date indicated.
LOAN LOSS EXPERIENCE ON UNITED COMPANIES' PORTFOLIO
OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
NINE MONTHS ENDING
YEAR ENDING DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average dollar amount of home equity loans
outstanding during period...................... $2,192,590 $3,370,810 $4,784,531 $4,503,136 $5,888,145
Net Losses
Gross Losses (1)............................... $ 13,818 $ 19,484 $ 32,984 $ 23,263 $ 37,963
Recoveries (2)................................. $ (1,597) $ (2,371) $ (1,937) $ (1,449) $ (1,765)
---------- ---------- ---------- ---------- ----------
Net Losses..................................... $ 12,221 $ 17,113 $ 31,047 $ 21,764 $ 36,198
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Losses for the last four quarters as a
percentage of average amount outstanding....... 0.56% 0.51% 0.65% 0.62% 0.80%
</TABLE>
- ------------------
(1) "Gross Losses" are amounts which have been determined to be uncollectible
relating to home equity loans for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
The Initial Servicer believes that the increase in the total percentage of
delinquencies and defaults at September 30, 1998 compared to December 31, 1997
is not attributable to any single factor but rather reflects a combination of
factors, including the seasonal nature of delinquencies inherent in the
portfolio.
Loans are placed on a non-accrual status when they are 150 days past due.
The above delinquency, default and loan loss experience represents United
Companies' recent experience. However, the delinquency, default and net loss
percentages may be affected by the increase in the size and aging of the
portfolio. In addition, United Companies can neither quantify the impact of
property value declines, if any, on the Home Equity Loans nor predict whether,
to what extent or how long such declines may exist. In a period of such decline,
the rates of delinquencies, defaults and losses on the Home Equity Loans could
be higher than those heretofore experienced in the residential mortgage lending
industry in general. Adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Home Equity Loans and, accordingly,
the actual rates of delinquencies, defaults and losses. As a result, the
information in the above tables should not be considered as a basis for
assessing the likelihood, amount or severity of delinquencies or losses on the
Home Equity Loans and no assurance can be given that the delinquency, default
and loss experience presented in the tables will be indicative of such
experience on the Home Equity Loans.
Appendix B hereto sets forth certain historical contractual delinquency,
default and cumulative loss information by year of origination for home equity
loans originated or acquired by the Originators and serviced by the Initial
Servicer.
S-56
<PAGE>
TRANSFER OF SERVICING
GENERAL
It is anticipated that on January 31, 1999 and February 28, 1999 (each a
"Transfer Date") the servicing of the Home Equity Loans will be transferred by
United Companies Lending Corporation(Registered) (the "Initial Servicer") to EMC
Mortgage Corporation, an affiliate of Bear, Stearns & Co. Inc. (the "Substitute
Servicer"). All references to the "Servicer" refer to the Initial Servicer prior
to the applicable Transfer Date and to the Substitute Servicer after the
applicable Transfer Date, in each case, with respect to the Home Equity Loans
the servicing of which has been transferred on that date. The Substitute
Servicer will receive the same monthly servicing fee as the Initial Servicer,
and will also be entitled to receive the Supplemental Servicing Fee on each
Distribution Date on account of Home Equity Loans which are 90 or more days
delinquent. In addition, the Substitute Servicer may be eligible to receive a
monthly performance based fee once it is servicing all of the Home Equity Loans
if the delinquency and default experience with respect to such Home Equity Loans
is significantly better than the historical performance of the Initial Servicer
(such fee, the "Incentive Servicing Fee"). The Incentive Servicing Fee will not
exceed an amount equal to 0.25% per annum of the aggregate Loan Balances.
However, if the Substitute Servicer's performance is significantly less
favorable than such historical experience, the Supplemental Servicing Fee may be
reduced by up to $12.50 per covered Home Equity Loan.
There can be no assurance that either or both Transfer Dates will occur
when anticipated. In addition, if the Initial Servicer were to become involved
in a bankruptcy proceeding prior to completion of the transfer of servicing,
such transfer may be prevented. Even if the transfer is completed, there are
likely to be some disruptions in the servicing that could result in higher rates
of delinquency and losses. There can be no assurance as to the duration or
severity of any such disruptions and the related effects on the servicing of the
Home Equity Loans.
The Initial Servicer has the option to reacquire the servicing from the
Substitute Servicer after 18 months at market prices. The Initial Servicer also
has a right of first refusal if the Substitute Servicer sells the servicing
within 18 months. Any such acquisition of the servicing is conditional on
confirmation from the Rating Agencies that such acquisition would not result in
a withdrawal or downgrading of any of the then-current ratings on the Offered
Certificates.
The Substitute Servicer. EMC Mortgage Corporation ("EMC"), a wholly-owned
subsidiary of The Bear Stearns Companies Inc., was established as a full-line
mortgage banking company to facilitate the purchase and servicing of whole loan
portfolios containing various levels of quality from "investment grade" to
varying degerees of "non-investment grade" up to and including mortgaged
properties acquired through foreclosure or deed-in-lieu of foreclosure (each
such mortgaged property, a "REO Property"). EMC was incorporated in the State of
Delaware on September 26, 1990 and commenced operation in Texas on October 9,
1990.
The principal business of EMC has been the resolution of non-performing
residential mortgage loan portfolios acquired from the Resolution Trust
Corporation ("RTC"), from private investors and, most recently, from the
Department of Housing and Urban Development through its auctions of defaulted
Federal Housing Authority mortgage loans. EMC's servicing portfolio consists
primarily of two categories: (i) performing investment-quality loans serviced
for EMC's own account or the account of Federal National Mortgage Association
("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac"), private
mortgage conduits and various institutional investors, and (ii) non-investment
grade, sub-performing loans, non-performing loans and REO Properties serviced
for EMC's own account and for the account of investors in securitized performing
and non-performing collateral transactions.
EMC's operations resemble those of most mortgage banking companies, except
that significant emphasis is placed on the collections and due diligence areas,
due to the nature of the mortgage portfolios purchased. As of September 30,
1998, EMC was servicing approximately $2.8 billion of mortgage loans and REO
Property.
Delinquency and Foreclosure Experience. The following table sets forth the
delinquency and foreclosure experience of mortgage loans serviced by EMC as of
the dates indicated. EMC's portfolio of mortgage loans may differ significantly
from the Home Equity Loans in terms of interest rates, principal balances,
geographic distribution, types of properties and other possibly relevant
characteristics. There can be no assurance, and no representation is made, that
the delinquency and foreclosure experience with respect to the Home Equity Loans
will be similar to that reflected in the table below, nor is any representation
made as to the rate at which losses may be experienced on liquidation of
defaulted Home Equity Loans. The actual delinquency experience on the Home
Equity Loans will depend, among other things, upon the value of the real estate
securing such Home Equity Loans and the ability of borrowers to make required
payments.
S-57
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE (1)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 AS OF JUNE 30, 1997 AS OF JUNE 30, 1998
--------------------------------- --------------------------------- ---------------------------------
% BY % BY % BY
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE
------ -------------- --------- ------ -------------- --------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current loans......... 8,991 $ 643,906,476 48.4% 23,481 $1,806,208,715 68.3 24,159 $1,869,900,359 70.7
Period of
delinquency (3)
30-59 days.......... 1,362 65,753,357 4.9 2,730 175,887,794 6.7 2,877 187,511,932 7.1
60-89 days.......... 541 28,594,964 2.1 1,166 77,149,276 2.9 1,091 71,415,699 2.7
90 days or more..... 1,679 90,584,027 6.8 2,382 168,959,315 6.4 2,042 143,439,906 5.4
Total
delinquencies... 3,582 184,932,348 6,278 421,996,386 6,010 402,367,537
Foreclosure/
bankruptcies(4)..... 2,140 258,524,499 19.4 4,562 376,456,832 14.2 4,091 305,592,230 11.6
Real estate owned..... 1,883 244,173,131 18.3 438 38,011,430 1.4 783 $ 66,294,610 2.5
------ -------------- ----- ------ -------------- ----- ------ -------------- -----
Total portfolio....... 16,596 $1,331,536,454 100.0% 34,759 $2,642,673,363 100.0% 35,043 $2,644,154,735 100.0%
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------------
% BY
NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE(2) BALANCE
------ -------------- ---------
<S> <C> <C> <C>
Current loans......... 23,283 $1,824,802,930 66.1
Period of delinquency
(3)
30-59 days.......... 2,769 183,429,311 6.6
60-89 days.......... 1,253 82,430,216 3.0
90 days or more..... 2,559 182,506,377 6.6
Total
delinquencies... 6,581 448,365,904
Foreclosure/
bankruptcies(4)..... 5,027 406,289,961 14.7
Real estate owned..... 950 82,756,796 3.0
------ -------------- -----
Total portfolio....... 35,841 $2,762,215,590 100.0%
</TABLE>
- ------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the Principal Balance is at the time
of foreclosure.
(3) No mortgage loan is included in this table as delinquent until it is 30 days
past due.
(4) Exclusive of the number of loans and Principal Balance shown in Period of
Delinquency.
S-58
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued in classes (each, a "Class") pursuant to
the Pooling and Servicing Agreement, dated as of December 20, 1998 (the "Pooling
and Servicing Agreement"), among the Depositor, the Initial Servicer, the
Substitute Servicer, the MS2 Trust and the Trustee. The Trustee will make
available for inspection a copy of the Pooling and Servicing Agreement (without
exhibits or schedules) to the Owners of the Certificates on written request. The
following summary, together with the information set forth in the Prospectus
under the caption "The Agreements" describes the material terms of the Pooling
and Servicing Agreement, but does not purport to describe all of the terms of
the Pooling and Servicing Agreement and is therefore qualified in its entirety
by reference to the Pooling and Servicing Agreement. Reference is made to the
Prospectus for important additional information regarding the terms of the
Pooling and Servicing Agreement and the Certificates.
PRE-FUNDING ACCOUNTS
On the Closing Date, the Trustee will establish and thereafter maintain
with itself a separate trust account with respect to each of Loan Group I and
Loan Group II (each, a "Pre-Funding Account"). On the Closing Date, the
applicable Pre-Funded Amount will be deposited in the Pre-Funding Account for
Loan Group I and Loan Group II, respectively. Each Pre-Funded Amount may be used
only to (i) acquire additional single family residential home equity and home
improvement loans (the "Subsequent Loans") for the related Loan Group and
(ii) make accelerated payments of principal of the Offered Certificates related
to such Loan Group. All Subsequent Loans added to Loan Group I will bear fixed
rates, and all Subsequent Loans added to Loan Group II will be ARMs. During the
period (the "Pre-Funding Period") from the Closing Date to the earliest to occur
of (a) the applicable Funding Termination Date (defined below), (b) an Event of
Default under the Pooling and Servicing Agreement and (c) March 15, 1999,
amounts on deposit in a Pre-Funding Account may be withdrawn from time to time
to acquire Subsequent Loans for the related Loan Group in accordance with the
Pooling and Servicing Agreement. The "Funding Termination Date" for a Loan Group
will be the date on which the related Pre-Funded Amount has been reduced to less
than $100,000. Any Pre-Funded Amount remaining in a Pre-Funding Account at the
end of the applicable Pre-Funding Period will be distributed on the Distribution
Date at or immediately following the end of such Pre-Funding Period. If the
Pre-Funded Amount so distributed is less than $100,000, it will be distributed
as a Prepayment and allocated to the Classes of Offered Certificates then
entitled to distributions of principal related to Loan Group I or Loan
Group II, as applicable, as provided herein; otherwise such amount will be
distributed as principal of the Classes of Offered Certificates related to Loan
Group I or Loan Group II, as applicable, pro rata on the basis of their
respective Class Principal Balances.
CAPITALIZED INTEREST ACCOUNTS
On the Closing Date, the Trustee will establish and thereafter maintain
with itself a separate trust account with respect to each of Loan Group I and
Loan Group II (each, a "Capitalized Interest Account"), into which amounts will
be deposited. The amounts so deposited will be used by the Trustee on the
Distribution Dates during the applicable Pre-Funding Period to fund the excess,
if any, of the amount of interest accrued on the Classes of Certificates related
to the applicable Loan Group at the applicable Pass-Through Rates, over the
related Interest Remittance Amount for such Distribution Dates.
COMPENSATING INTEREST
A full month's interest at the applicable Net Mortgage Rate with respect to
each Home Equity Loan, is due to the Trustee on the outstanding Loan Balance of
each Home Equity Loan as of the beginning of each Remittance Period. If a
Prepayment of a Home Equity Loan occurs during any calendar month, any
difference between the interest collected from the Mortgagor during such
calendar month and the full month's interest at the applicable Net Mortgage Rate
("Compensating Interest") that is due is required to be deposited by the
Servicer to the applicable Principal and Interest Account and will be included
in the related Monthly Remittance to be made available to the Trustee on the
next succeeding Remittance Date; provided, however, that the Servicer's
obligation in respect of Compensating Interest is limited to the aggregate
amount of its Servicing Fee for the related Remittance Period. The Net Mortgage
Rate of a Home Equity Loan is the Mortgage Rate thereof minus the related
Servicing Fee Rate.
S-59
<PAGE>
ASSIGNMENT OF HOME EQUITY LOANS
The Depositor will deliver or cause to be delivered to the Trustee on or
before the Closing Date Mortgage Notes duly endorsed to the order of the
Trustee. The other items described in clauses (a)(i)-(iv) under "The
Agreements--Assignment of Mortgage Assets" in the Prospectus are required to be
delivered within 30 days after the Closing Date (subject to certain extensions
as set forth therein). In lieu of delivering certified copies of mortgages and
intervening assignments, the originals of which are unavailable due to the
recording process and originals of title policies or binders, the Depositor will
deliver or cause to be delivered a computerized list of such documents.
DUE-ON-SALE CLAUSES; ASSUMPTION AND SUBSTITUTION AGREEMENTS
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer, to the extent it has knowledge of such conveyance or
prospective conveyance, is required to exercise its rights to accelerate the
maturity of the related Home Equity Loan under any "due on sale" clause
contained in the related Mortgage or Mortgage Note; provided, however, that the
Servicer will not be required to exercise any such right if the "due-on-sale"
clause, in the reasonable belief of the Servicer, is not enforceable under
applicable law. See "The Agreements--Enforcement of Due on Sale Clauses" in the
Prospectus.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
In accordance with the Pooling and Servicing Agreement, if the Servicer has
actual knowledge that a Mortgaged Property which the Servicer is contemplating
acquiring in foreclosure or by deed in lieu of foreclosure contains
environmental or hazardous waste risks known to the Servicer, the Servicer will
notify the Trustee prior to acquiring the Mortgaged Property.
The Servicer has the right and the option under the Pooling and Servicing
Agreement, but not the obligation, to purchase for its own account any Home
Equity Loan which becomes delinquent, in whole or in part, as to three
consecutive monthly installments or any Home Equity Loan as to which enforcement
proceedings have been brought by the Servicer. Any such Home Equity Loan so
purchased will be purchased by the Servicer on a Remittance Date at a purchase
price equal to the Loan Purchase Price thereof, which purchase price will be
deposited in the applicable Principal and Interest Account.
EVIDENCE OF COMPLIANCE
The accountant's report and officer's certificate referred to in the
Prospectus under "The Agreements--Evidence of Compliance" must be delivered on
or before the last day of April of each year, commencing in 2000.
ASSIGNMENT OF POOLING AND SERVICING AGREEMENT
Except for the transfer of servicing from the Initial Servicer to the
Substitute Servicer described above under "Transfer of Servicing," the Servicer
may not assign its obligations under the Pooling and Servicing Agreement, in
whole or in part, unless it shall have first obtained the written consent of the
Trustee and confirmation from each Rating Agency that such assignment will not
result in the withdrawal or downgrade of any ratings then assigned to the
Offered Certificates; provided, however, that any assignee must meet the
eligibility requirements set forth in the Pooling and Servicing Agreement for a
successor servicer.
REMOVAL AND RESIGNATION OF SERVICER
The Trustee (or the Owners acting on behalf of the Trustee) may remove the
Servicer upon the occurrence of any Event of Default, as defined in the
Prospectus under "The Agreements--Events of Default; Rights Upon Events of
Default--Pooling and Servicing Agreement; Sale and Servicing Agreement."
TERMINATION
The Pooling and Servicing Agreement provides that the Trust will terminate
upon the payment to the Owners of all Certificates all amounts required to be
paid to such Owners upon the final payment and other liquidation (or any advance
made with respect thereto) of the last Home Equity Loan in the Trust.
At its option, the Holder of the Residual Certificates may purchase all
(but not fewer than all) remaining Home Equity Loans and other property acquired
by foreclosure, deed in lieu of foreclosure or otherwise, and thereby effect
early retirement of the Certificates, on any Distribution Date when the
aggregate outstanding Loan
S-60
<PAGE>
Balances of the Home Equity Loans is 10% or less of an amount equal to the
aggregate principal balances of the Home Equity Loans on the Cut-Off Date
including, the aggregate balances of the Subsequent Loans as of the subsequent
cut-off date(s) added to the Trust.
The Owners of the Offered Certificates would receive from the proceeds of
such purchase any accrued interest thereon together with any principal not yet
paid, in the order set forth herein under "Description of the Certificates--Flow
of Funds and Distributions on Offered Certificates."
THE TRUSTEE
Pursuant to the Pooling and Servicing Agreement, Bankers Trust Company of
California, N.A. will serve as trustee of the Trust. See "The Agreements--The
Trustee" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Home Equity Loans and certain other
assets owned by the Trust as a real estate mortgage investment conduit ("REMIC")
for federal income tax purposes. The Offered Certificates will be designated as
regular interests in a REMIC (the "Regular Certificates" or the "REMIC Regular
Certificates"). See "Federal Income Tax Considerations" in the Prospectus.
Because the Offered Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
such Certificates, including original issue discount with respect to any such
Certificates issued with original issue discount, will be taxable to Owners in
accordance with the accrual method of accounting. It is anticipated that the
Regular Certificates will not be subject to the original issue discount
provisions. The Prepayment Scenario that will be used in determining the rate of
accrual of original issue discount is Prepayment Scenario III for the Group I
Certificates and Prepayment Scenario VIII for the Group II Certificates. No
representation is made as to the rate at which prepayments actually will occur.
In addition, certain Classes of Regular Certificates may be treated as having
been issued at a premium. See "Federal Income Tax Considerations--REMIC Regular
Certificates--Premium" in the Prospectus.
BACKUP WITHHOLDING
Certain Owners may be subject to backup withholding at the rate of 31% with
respect to interest paid on the Offered Certificates if the Owners, upon
issuance, fail to supply the Trustee or their broker with their taxpayer
indentification number, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as defined
in the Code) properly, or, under certain circumstances, fail to provide the
Trustee or their broker with a certified statement, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Holder of record, the amount of interest paid (and OID accrued, if any) on the
Offered Certificates (and the amount of interest withheld for federal income
taxes, if any) for each calendar year, except as to exempt Holders (generally,
Holders that are corporations, certain tax-exempt organizations or nonresident
aliens who provide certification as to their status as nonresidents). As long as
the only Holder of record is Cede, as nominee for DTC, Owners and the IRS will
receive tax and other information including the amount of interest paid on such
Certificates owned from Participants and Indirect Participants rather than from
the Trustee. (The Trustee, however, will respond to requests for necessary
information to enable Participants, Indirect Participants and certain other
persons to complete their reports.) Each non-exempt Owner will be required to
provide, under penalty of perjury, a certificate on IRS Form W-9 containing his
or her name, address, correct Federal taxpayer identification number and a
statement that he or she is not subject to backup withholding. Should a
nonexempt Owner fail to provide the required certification, the Participants or
Indirect Participants (or the Paying Agent) will be required to withhold 31% of
the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the Holder's federal income tax
liability. Such amounts will be deemed distributed to the affected Owner for all
purposes of the Certificates and the Pooling and Servicing Agreement.
S-61
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of Holders that are not United States persons ("Foreign Investors")
and whose income is not effectively connected to a United States trade or
business. The term "Foreign Investor" means any person other than (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity organized in or under the laws of the United States or any state or
political subdivision thereof or (iii) an estate the income of which is
includible in gross income for United States federal income tax purposes,
regardless of its source or a trust if a court within the United States is able
to exercise primary supervision of the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments generally include debt instruments issued
in registered form for which the United States payor receives a statement that
the beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form. Therefore, if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Owner an executed IRS Form W-8 signed under penalty of perjury
by the Owner stating that the Owner beneficially owns the certificate and is a
Foreign Investor and providing such Owner's name and address. The statement must
be received by the withholding agent in the calendar year in which the interest
payment is made, or in either of the two preceding calendar years.
An Owner that is a nonresident alien or foreign corporation will not be
subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Offered Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the Owner in
the United States, (ii) in the case of an Owner that is an individual, such
Owner is not present in the United States for 183 days or more during the
taxable year in which such sale, exchange or redemption occurs and (iii) in the
case of gain representing accrued interest, the conditions described in the
preceding paragraphs are satisfied.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain requirements on those employee benefit plans to which it applies
("ERISA Plans") and on those persons who are fiduciaries with respect to such
ERISA Plans. Certain employee benefit plans, such as governmental plans (as
defined in ERISA Section 3(32)) and certain church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA. In accordance with ERISA's general
fiduciary standards, before investing in an Offered Certificate, an ERISA Plan
fiduciary should determine whether such an investment is permitted under the
governing ERISA Plan instruments and is appropriate for the ERISA Plan in view
of its overall investment policy and the composition and diversification of its
portfolio.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Depositor, the Originators, the Underwriters and the Trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to the Plan. If so, the
S-62
<PAGE>
acquisition, holding or transfer of Offered Certificates by or on behalf of such
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include an interest in the Home Equity
Loans and any other assets of the Trust and not merely an interest in the
Offered Certificates, transactions occurring in the servicing of the Home Equity
Loans might constitute prohibited transactions unless an administrative
exemption applies. Certain such exemptions which may be applicable to the
acquisition and holding of the Certificates or to the servicing of the Home
Equity Loans are noted below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulations"), which provides that, as a general rule,
the underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. Thus, a Plan fiduciary considering an investment in the
Offered Certificates should also consider whether such an investment might
constitute or give rise to a prohibited transaction under ERISA or the Code.
DOL has granted to each of Prudential Securities Incorporated
("Prudential") and Morgan Stanley & Co. Incorporated ("Morgan Stanley") an
administrative exemption (Prohibited Transaction Exemption 90-32 and 90-24,
respectively, and together, the "Exemption") from certain of the prohibited
transaction rules of ERISA which may be applicable to the initial purchase, the
holding and the subsequent resale in the secondary market by Plans of
pass-through certificates representing a beneficial undivided ownership interest
in the assets of a trust that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption which may
be applicable to the Offered Certificates if Prudential or Morgan Stanley, as
applicable, or any of their respective affiliates is either the sole underwriter
or manager or co-manager of the underwriting syndicate, or a selling or
placement agent. The conditions which must be satisfied for the Exemption to
apply to the purchase, holding and transfer of the Offered Certificates are the
following:
(i) The acquisition of the Offered Certificates by a Plan is on terms
(including the price for the Offered Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party.
(ii) The rights and interest evidenced by a Class of Offered
Certificates acquired by the Plan are not subordinated to the rights and
interest evidenced by any other Certificates of the Trust.
(iii) The Offered Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from any of Moody's, Duff & Phelps Credit Rating
Co., S&P or Fitch ("Authorized Rating Agencies") and the investment pool
consists only of assets of the type enumerated in the Exemption, and which
have been included in other investment pools; certificates evidencing
interests in such other investment pools have been rated in one of the
three highest generic rating categories by an Authorized Rating Agency for
at least one year prior to a Plan's acquisition of certificates; and
certificates evidencing interests in such other investment pool have been
purchased by investors other than Plans for at least one year prior to a
Plan's acquisition of the Offered Certificates.
(iv) The sum of all payments made to the Underwriters in connection
with the distribution of the Offered Certificates represents not more than
reasonable compensation for distributing the Offered Certificates. The sum
of all payments made to and retained by the Depositor pursuant to the sale
of the Home Equity Loans to the Trust represents not more than the fair
market value for such Home Equity Loans. The sum of all payments made to
and retained by the Servicer or any other servicer represents not more than
reasonable compensation for such services under the Pooling and Servicing
Agreement and reimbursement of the servicer's reasonable expenses in
connection therewith.
(v) The Trustee must not be an affiliate of any member of the
Restricted Group as defined below.
In addition, it is a condition that the Plan investing in the Offered
Certificates be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D under the Securities Act of 1933, as amended.
The Exemption does not apply to Plans sponsored by the Originators, the
Depositor, the Underwriters, the Trustee, the Servicer, any other servicers or
any Mortgagor with respect to Home Equity Loans included in the
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Trust constituting more than 5% of the aggregate unamortized principal balance
of the assets in the Trust or any affiliate of such parties (the "Restricted
Group"). No exemption is provided from the restrictions of ERISA for the
acquisition or holding of Offered Certificates on behalf of an "Excluded Plan"
by any person who is a fiduciary with respect to the assets of such Excluded
Plan. For purposes of the Offered Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, no Plan's
investment in any Class of Offered Certificates may exceed 25% of all of the
Certificates of such Class outstanding at the time of the Plan's acquisition and
after the Plan's acquisition of such Class of Offered Certificates, no more than
25% of the assets over which the fiduciary has investment authority may be
invested in securities of a trust containing assets which are sold or serviced
by the same entity. Finally, in the case of initial issuance (but not secondary
market transactions), at least 50% of each Class of Offered Certificates, and at
least 50% of the aggregate interest in the Trust, must be acquired by persons
independent of the Restricted Group.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Offered Certificates, the
amendment generally allows a portion of the Home Equity Loans ("Loans")
supporting payments to Certificateholders and having a principal amount equal to
no more than 25% of the total principal amount of the Certificates to be
transferred to the Trust within a 90-day or three-month period following the
Closing Date ("Pre-Funding Period"), instead of requiring that all such Loans be
either identified or transferred on or before the Closing Date, provided that
the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by the Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Certificates receiving a lower
credit rating from the Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of
the Loans in the Trust at the end of the Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the
Loans which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is
independent of the Depositor; or (ii) an independent accountant retained by
the Depositor must provide the Depositor with a letter (with copies
provided to the Rating Agency, the Underwriters and the Trustee) stating
whether or not the characteristics of the Additional Loans conform to the
characteristics described in the Prospectus, Prospectus Supplement, Private
Placement Memorandum ("Offering Documents") and/or Pooling and Servicing
Agreement. In preparing such letter, the independent accountant must use
the same type of procedures as were applicable to the Loans which were
transferred as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Pooling Agreement or an event of default occurs
under the Pooling Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in investments which are permitted by the Rating Agency and (i) are
direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or
instrumentality thereof (provided that such obligations are backed by the
full faith and credit of the United States); or (ii) have been rated (or
the obligor has been rated) in one of the three highest generic rating
categories by the Rating Agency ("Permitted Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the Pre-Funding Period;
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<PAGE>
(iii) the percentage and/or dollar amount of the Pre-Funding Limit for the
Trust; and (iv) that the amounts remaining in the Pre-Funding Account at
the end of the Pre-Funding Period will be remitted to Certificateholders as
repayments of principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Class A Certificates and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single Mortgagor that is the obligor on five
percent (5%) of the Home Equity Loans included in the Trust by aggregate
unamortized principal balance of the assets of the Trust.
BECAUSE THE CHARACTERISTICS OF THE SUBORDINATED CERTIFICATES MAY NOT MEET
THE REQUIREMENTS OF THE EXEMPTION OR ANY OTHER ISSUED EXEMPTION UNDER ERISA, THE
PURCHASE AND HOLDING OF THE SUBORDINATED CERTIFICATES BY A PLAN OR BY INDIVIDUAL
RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY
RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL
PENALTIES. CONSEQUENTLY, TRANSFERS OF THE SUBORDINATED CERTIFICATES WILL NOT BE
REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES: (I) A REPRESENTATION FROM
THE TRANSFEREE OF SUCH CERTIFICATE, ACCEPTABLE TO AND IN FORM AND SUBSTANCE
SATISFACTORY TO THE TRUSTEE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN
EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT
SUBJECT TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH
PLAN OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO
EFFECT SUCH TRANSFER; (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A
REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING
SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN "INSURANCE COMPANY GENERAL ACCOUNT"
(AS SUCH TERM IS DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION CLASS
EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE PURCHASE AND HOLDING OF SUCH
CERTIFICATES ARE COVERED UNDER PTCE 95-60; OR (III) AN OPINION OF COUNSEL
SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR HOLDING OF SUCH CERTIFICATE BY
A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS, WILL
NOT RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION UNDER EITHER TITLE I OF ERISA
OR SECTION 4975 OF THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO ANY OBLIGATION
IN ADDITION TO THOSE UNDERTAKEN IN THE AGREEMENT. SUCH REPRESENTATION AS
DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE
TRANSFEREE'S ACCEPTANCE OF A SUBORDINATED CERTIFICATE. IN THE EVENT THAT SUCH
REPRESENTATION IS VIOLATED, OR ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON
ACTING ON BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH
OPINION OF COUNSEL, SUCH ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF
NO EFFECT.
Before purchasing an Offered Certificate in reliance on the Exemption or
any other exemption, a fiduciary of a Plan should confirm that the requirements
set forth in such exemption would be satisfied. Any Plan fiduciary considering
the purchase of an Offered Certificate should consult with its counsel with
respect to the potential applicability of ERISA and the Code to such investment.
S-65
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in two separate Underwriting
Agreements (each, an "Underwriting Agreement") among the Depositor and the
Underwriters named below (the "Underwriters") the Depositor has agreed to sell
to the Underwriters and each Underwriter has agreed to purchase from the
Depositor the principal amount of each Class of Offered Certificates (the
"Underwritten Certificates") set forth below under its name.
<TABLE>
<CAPTION>
MORGAN STANLEY
PRUDENTIAL SECURITIES BEAR, STEARNS & CO.
CLASS INCORPORATED & CO. INC. INCORPORATED
- ------------------------------------------------------------- --------------------- ------------- --------------
<S> <C> <C> <C>
AF-1......................................................... $64,000,000 $64,000,000 $ 0
AF-2......................................................... $29,500,000 $29,500,000 $ 0
AF-3......................................................... $ 9,000,000 $ 9,000,000 $ 0
AF-4......................................................... $ 5,000,000 $ 5,000,000 $ 0
AF-5......................................................... $ 5,000,000 $ 5,000,000 $ 0
AF-6......................................................... $ 6,637,000 $ 6,637,000 $ 0
AF-7......................................................... $13,237,500 $13,237,500 $ 0
AF-8......................................................... $75,000,000 $75,000,000 $ 0
MF-1......................................................... $19,819,000 $19,819,000 $ 0
MF-2......................................................... $16,931,500 $16,931,500 $ 0
BF-1......................................................... $13,125,000 $13,125,000 $ 0
AV-1......................................................... $ 0 $82,575,000 $ 82,575,000
MV-1......................................................... $ 0 $ 9,900,000 $ 9,900,000
MV-2......................................................... $ 0 $ 8,268,500 $ 8,268,500
</TABLE>
The Underwritten Certificates will be offered by the Underwriters from time
to time in negotiated transactions or otherwise, at varying prices to be
determined at the time of sale. Proceeds to the Depositor are expected to be
approximately 97.965857% of the aggregate principal balance of the Offered
Certificates plus accrued interest, before deducting expenses payable by the
Depositor in connection with the Offered Certificates, estimated to be $400,000.
In connection with the purchase and sale of the Underwritten Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
Certain of the proceeds of the sale of the Underwritten Certificates will
be used to purchase certain of the Home Equity Loans from the MS2 Trust and to
retire debt issued by the MS2 Trust that is held by an affiliate of Morgan
Stanley & Co. Incorporated. Additionally, certain of the proceeds of the sale of
the Offered Certificates will be used to repay an affiliate of Prudential
Securities Incorporated in connection with certain financings of the Home Equity
Loans.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Class BV-1 Certificates may be offered by the Depositor from time to
time directly or through underwriters or agents in one or more negotiated
transactions, or otherwise, at varying prices to be determined at the time of
sale, in one or more separate transactions at prices to be negotiated at the
time of each sale. Any underwriters or agents that participate in the
distribution of the Class BV-1 Certificates may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 and any profit on the sale of
such Certificates by them and any discounts, commissions, concessions or other
compensation received by any such underwriter or agent may be deemed to be
underwriting discounts and commissions under such Act.
CERTAIN LEGAL MATTERS
Certain tax matters concerning the issuance of the Certificates will be
passed upon by Stroock & Stroock & Lavan LLP, New York, New York. Certain legal
matters relating to the validity of the Certificates will be passed upon for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Stroock &
Stroock & Lavan LLP represents the Initial Servicer, the Substitute Servicer and
United Companies Financial Corporation, an affiliate of the Depositor and the
Initial Servicer, from time to time.
S-66
<PAGE>
RATINGS
It is a condition of the original issuance of the Offered Certificates that
they receive the respective ratings set forth below by Fitch IBCA, Inc.
("Fitch"), Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P').
<TABLE>
<CAPTION>
CLASS FITCH MOODY'S S&P
- -------------- ----- ------- ----
<S> <C> <C> <C>
AF-1 - AF-8 AAA Aaa AAA
AV-1 AAA Aaa AAA
MF-1 and MV-1 AA Aa2 AA
MF-2 and MV-2 A A2 A
BF-1 and BV-1 BBB Baa2 BBB
</TABLE>
The ratings do not address the possibility that, as a result of principal
prepayments, Certificate Owners may receive a lower than anticipated yield. The
ratings will be the views only of such rating agencies. There is no assurance
that any such ratings will continue for any period of time or that such ratings
will not be revised or withdrawn. Any such revision or withdrawal of such
ratings may have an adverse effect on the market price of the Offered
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Certificates, Series 1998-D (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of 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 investors holding Global Securities through Cedel
and Euroclear will be conducted in the ordinary way in accordance with their
normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior home equity loan asset-backed
securities issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as Direct and
Indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices specified by the Underwriters. 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 using the procedures applicable to prior home
equity loan asset-backed securities issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedel or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global
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<PAGE>
Securities from and including the last coupon payment date to and excluding the
settlement date, on the basis of either the actual number of days in such
accrual period and a year assumed to consist of 360 days or a 360-day year of
twelve 30-day months, as applicable to the related class of Global Securities.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European 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 Participants 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 Participants or Euroclear Participants 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 Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in such accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months,
as applicable to the related class of Global Securities. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the Cedel Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail
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<PAGE>
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel 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 Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of 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 Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Owner 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 Owner 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 (or other entity treated as a
corporation or partnership for U.S. Federal income tax purposes) organized in or
under the laws of the United States or any political subdivision thereof,
(iii) an estate that is subject to U.S. Federal income tax regardless of the
source of its income, or (iv) a trust other than a "foreign trust" as defined in
Section 7701(a)(3L) of the Internal Revenue Code of 1986, as amended. 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 and does not
deal with the application of Treasury regulations relating to the documentation
requirements that are generally effective with respect to payments made after
December 31, 1999. 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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APPENDIX A
CERTAIN HISTORICAL PREPAYMENT INFORMATION
The following table provides life-to-date prepayment rates and pool factors
as of September 30, 1998, with respect to the home equity loans previously
securitized by the Depositor by year of securitization:
<TABLE>
<CAPTION>
FIXED ARM HYBRID
----------------------------------- --------------------------------- -----------------------------------
LIFE- LIFE- LIFE-
YEAR OF ORIGINAL TO-DATE POOL ORIGINAL TO-DATE POOL ORIGINAL TO-DATE POOL
SECURITIZATION BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1)
- ------------- ---------- ------- ---------- -------- ------- ---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $ 415,525 27% 16.98% $ 34,990 37% 9.96% $ -- -- --
1994 935,568 26% 26.56% 74,987 38% 14.85% -- -- --
1995 1,030,698 26% 35.87% 391,652 31% 32.63% -- -- --
1996 1,350,058 25% 52.31% 732,762 33% 44.83% 142,308 33% 41.29%
1997 1,224,998 23% 74.14% 479,294 36% 63.83% 1,020,707 21% 79.70%
1998(2) 699,984 14% 94.67% 71,474 24% 88.99% 228,525 17% 92.53%
</TABLE>
- ------------------
(1) Pool Factor--Percentage of the securitization remaining outstanding at
September 30, 1998.
(2) 1998 amounts relate only to the first and second quarter 1998
securitizations.
A-1
<PAGE>
[This page intentionally left blank]
<PAGE>
APPENDIX B
CERTAIN HISTORICAL INFORMATION
The following table provides certain contractual delinquency and default
data with respect to home equity loans serviced by the Initial Servicer, by year
of loan origination, as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL --------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+(1) TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ----------------------- ----------- ----- ----- ------ ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 & prior........... $ 84,247 4.06% 1.14% 1.52% 6.72% 5.68% 5.69% 11.37% 18.09%
1993................... 98,770 3.86% 1.25% 1.19% 6.30% 5.60% 6.14% 11.74% 18.04%
1994................... 222,672 3.30% 0.96% 1.53% 5.79% 7.05% 7.72% 14.77% 20.56%
1995................... 512,807 4.09% 1.76% 1.55% 7.40% 9.63% 7.18% 16.81% 24.21%
1996................... 1,047,924 4.12% 1.57% 1.49% 7.18% 8.97% 4.25% 13.22% 20.40%
1997................... 2,031,815 3.22% 1.21% 1.03% 5.46% 4.35% 1.36% 5.71% 11.17%
1998................... 2,433,642 0.95% 0.36% 0.21% 1.52% 0.51% 0.12% 0.63% 2.15%
-----------
Total................ $ 6,431,877 2.60% 0.98% 0.86% 4.44% 4.20% 2.18% 6.38% 10.82%
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL --------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+(1) TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ----------------------- ----------- ----- ----- ------ ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 & prior........... $ 75,114 4.79% 1.06% 1.56% 7.41% 4.92% 5.72% 10.64% 18.05%
1992................... 43,134 5.21% 1.72% 2.28% 9.21% 4.82% 5.23% 10.05% 19.26%
1993................... 135,399 4.59% 1.12% 1.01% 6.72% 4.79% 5.30% 10.09% 16.81%
1994................... 302,819 4.95% 1.54% 1.47% 7.96% 6.17% 6.79% 12.96% 20.92%
1995................... 710,685 5.04% 1.59% 1.46% 8.09% 7.80% 5.66% 13.46% 21.55%
1996................... 1,544,278 4.54% 1.50% 1.22% 7.26% 5.39% 2.28% 7.67% 14.93%
1997................... 2,717,494 1.62% 0.58% 0.35% 2.55% 0.74% 0.23% 0.97% 3.52%
-----------
Total................ $ 5,528,923 3.20% 1.05% 0.85% 5.10% 3.43% 2.10% 5.53% 10.63%
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL --------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+(1) TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ----------------------- ----------- ----- ----- ------ ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990 & prior........... $ 75,252 5.12% 1.20% 1.22% 7.54% 5.97% 4.85% 10.82% 18.36%
1991................... 38,114 5.26% 0.97% 0.83% 7.06% 5.45% 6.59% 12.04% 19.10%
1992................... 63,842 4.74% 1.74% 1.97% 8.45% 5.87% 5.40% 11.27% 19.72%
1993................... 199,037 4.39% 1.28% 1.07% 6.74% 4.94% 5.05% 9.99% 16.73%
1994................... 451,224 5.15% 1.58% 0.92% 7.65% 4.70% 6.37% 11.07% 18.72%
1995................... 1,069,818 4.75% 2.12% 1.17% 8.04% 2.64% 6.26% 8.90% 16.94%
1996................... 2,142,851 2.11% 0.86% 0.35% 3.32% 0.20% 0.95% 1.15% 4.47%
-----------
Total................ $ 4,040,138 3.39% 1.31% 0.71% 5.41% 3.36% 1.83% 5.19% 10.60%
-----------
-----------
</TABLE>
(1) Excludes foreclosures in process and bankruptcy.
B-1
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL ------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ------------------------- ----------- ----- ----- ---- ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 & prior............. $ 68,275 3.39% 0.95% 0.34% 4.68% 5.51% 4.83% 10.34% 15.02%
1990..................... 44,862 3.76% 0.47% 0.19% 4.42% 5.46% 5.56% 11.02% 15.44%
1991..................... 57,815 4.22% 0.74% 0.36% 5.32% 5.35% 5.84% 11.19% 16.51%
1992..................... 98,473 3.81% 0.90% 0.89% 5.60% 5.96% 6.22% 12.18% 17.78%
1993..................... 298,882 3.72% 0.58% 0.39% 4.69% 3.63% 4.55% 8.18% 12.87%
1994..................... 668,797 4.03% 0.90% 0.40% 5.33% 2.29% 4.45% 6.74% 12.07%
1995..................... 1,464,377 1.74% 0.45% 0.16% 2.35% 0.41% 1.12% 1.53% 3.88%
-----------
Total.................. $ 2,701,481 2.73% 0.61% 0.28% 3.62% 2.78% 1.75% 4.53% 8.15%
-----------
-----------
</TABLE>
The following table provides certain pool factors and cumulative losses
with respect to the home equity loans serviced by the Initial Servicer, by year
of production:
<TABLE>
<CAPTION>
CUMULATIVE
HOME-EQUITY NET LOSSES
LOAN POOL AS % OF
YEAR OF PRODUCTION PRODUCTION FACTOR(1) PRODUCTION
- ------------------------------------------ ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FIXED
1993...................................... $ 500,900 18.64% 2.30%
1994...................................... $ 837,901 25.59% 2.86%
1995...................................... $1,130,715 34.34% 2.11%
1996...................................... $1,383,714 49.23% 0.51%
1997...................................... $1,373,984 67.96% 0.02%
1998...................................... $1,358,089 93.87% 0.00%
ARM
1993...................................... $ 38,968 13.92% 1.73%
1994...................................... $ 70,920 11.58% 0.90%
1995...................................... $ 410,922 30.30% 1.35%
1996...................................... $ 860,744 42.61% 0.38%
1997...................................... $1,513,667 72.55% 0.02%
1998...................................... $1,237,995 93.60% 0.00%
</TABLE>
- ------------------
(1) Pool Factor--Percentage of the year's production remaining outstanding at
September 30, 1998.
B-2
<PAGE>
PROSPECTUS
$4,000,000,000
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
------------------------
UCFC ACCEPTANCE CORPORATION
(DEPOSITOR)
------------------------
The Asset-Backed Certificates (the "Certificates") and the Asset-Backed
Notes (the "Notes" and, collectively with the Certificates, the "Securities")
described herein may be sold from time to time in one or more series (each, a
"Series") in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). Each Series of Securities will include either one or more classes
of Certificates or, if Notes are issued as part of a Series, one or more Classes
of Notes and one or more Classes of Certificates, as set forth in the related
Prospectus Supplement. The locations of certain capitalized terms used herein
are set forth in "Index of Principal Terms" beginning on page 82.
The Certificates of a Series will evidence undivided interests in certain
assets deposited into a trust (each, a "Trust") by UCFC Acceptance Corporation
(the "Depositor") pursuant to a Pooling and Servicing Agreement or a Trust
Agreement, as described herein. The Notes of a Series will be issued and secured
pursuant to an Indenture and will represent indebtedness of the related Trust.
The Trust for a Series of Securities will include (a) Mortgage Assets, which may
include (i) one or more pools of closed-end home equity loans (the "Home Equity
Loans"), secured by mortgages on one- to four-family residential or mixed-use
properties, and (ii) securities ("Private Securities") backed or secured by Home
Equity Loans (the "Underlying Loans"), (b) certain monies received or due
thereunder on or after the date specified in the related Prospectus Supplement
(the "Cut-off Date"), (c) if specified in the related Prospectus Supplement,
funds on deposit in one or more pre-funding accounts and/or capitalized interest
accounts and (d) reserve funds, letters of credit, surety bonds, insurance
policies or other forms of credit support as described herein and in the related
Prospectus Supplement. Amounts on deposit in a pre-funding account for any
Series will be used to purchase additional Home Equity Loans during the funding
period specified in the related Prospectus Supplement in the manner specified
therein. The amount initially deposited in a pre-funding account for a Series of
Securities will not exceed twenty-five percent of the aggregate principal amount
of such Series of Securities.
Certain of the Mortgage Assets may have been originated or acquired by
affiliates of UCFC Acceptance Corporation (the "Depositor"), including United
Companies Lending Corporation(Registered) ("United Companies") UNICOR
Mortgage(Registered), Inc., GINGER MAE(Registered), Inc. and Southern Mortgage
Acquisition, Inc. d/b/a UC Acquisition. These affiliates, together with any
other affiliates of the Depositor which originate or purchase Mortgage Assets
from third parties, are collectively referred to herein as the "Originators."
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on the date or dates specified in the related Prospectus Supplement
(each, a "Distribution Date"), at the times, at the rates, in the amounts and in
the order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage (which may be 0%) and timing of distributions of
principal, interest or both and one or more Classes may be subordinated to other
Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. The Mortgage Assets
and other assets comprising the Trust may be divided into one or more Mortgage
Groups and each Class of the related Series will evidence beneficial ownership
of the corresponding Mortgage Group, as applicable.
The yield on each Class of Securities of a Series may be affected by the
rate of payment of principal (including prepayments) of the Mortgage Assets in
the related Trust and the timing of receipt of such payments as described 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.
If specified in a Prospectus Supplement, one or more elections may be made
to treat each Trust or specified portions thereof as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes. See "Federal
Income Tax Considerations."
------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND ARE NOT GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE TRUSTEE, THE MASTER
SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE
SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET
FORTH IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED
PROSPECTUS SUPPLEMENT.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION UNDER "RISK FACTORS"
BEGINNING ON PAGE 12.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters or by selling security holders, as more
fully described under "Method of Distribution" herein and in the related
Prospectus Supplement. Prior to issuance, there will have been no market for the
Securities of any Series, and there can be no assurance that a secondary market
for the Securities will develop, or if it does develop, that it will continue.
This Prospectus may not be used to consummate sales of a Series of Securities
unless accompanied by a Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 22, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder, among other things, will set forth with respect to such Series of
Securities: (i) a description of the Class or Classes of such Securities;
(ii) the rate of interest or other applicable rate (or the manner of determining
such rate) and authorized denominations of each Class of such Securities;
(iii) certain information concerning the Mortgage Assets and insurance policies,
cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees or other forms of credit enhancement, if any, relating to one
or more Pools or all or part of the related Securities; (iv) the specified
interest of each Class of Securities in, and manner and priority of, the
distributions on the Mortgage Assets; (v) information as to the nature and
extent of subordination with respect to such Series of Securities, if any;
(vi) the Distribution Dates; (vii) information regarding the Master Servicer;
(viii) the circumstances, if any, under which each Trust may be subject to early
termination; (ix) whether a REMIC election will be made and the designation of
the regular and residual interest therein; and (x) additional information with
respect to the plan of distribution of such Securities.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement under the Securities Act
of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Securities. The Registration
Statement and amendments thereof and the exhibits thereto are available for
inspection without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade
Center, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains an Internet Web site that
contains reports, proxy and information statements and other information
regarding the registrants that file electronically with the Commission,
including the Depositor. The address of such Internet Web site is
(http://www.sec.gov).
Each Trust will be required to file certain reports with the Commission
pursuant to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Depositor intends to cause each Trust to suspend
filing such reports if and when such reports are no longer required under the
Exchange Act.
REPORTS TO HOLDERS
Periodic and annual reports concerning the Securities and the related Trust
will be provided to the Holders. See "The Agreements--Reports to Holders." If
the Securities of a Series are to be issued in book-entry form, such reports
will be provided to the Holder of record and beneficial owners of such
Securities will have to rely on the procedures described herein under
"Description of the Securities--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of each Trust referred to
in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of any offering of the Certificates
issued by such Trust shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for all purposes of this Prospectus to the extent that a statement contained
herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or replaces 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 Depositor will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to UCFC Acceptance Corporation,
4041 Essen Lane, Baton Rouge, Louisiana 70809 Attention: Secretary, telephone
(504) 924-6007.
2
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Capitalized terms used but not defined in this Prospectus shall have
the meanings assigned to such terms elsewhere in this Prospectus. See "Index of
Principal Terms" beginning on page 83.
<TABLE>
<S> <C>
Title of Securities...... Asset-Backed Certificates (the "Certificates") and
Asset-Backed Notes (the "Notes," and collectively with
the Certificates, the "Securities"), issuable in
Series.
Depositor................ UCFC Acceptance Corporation, a Louisiana corporation.
The principal office of the Depositor is located in
Baton Rouge, Louisiana. See "The Depositor" and "The
Originators."
The Master Servicer...... The Prospectus Supplement relating to any Series of
Securities will name the entities (which may include
United Companies Lending Corporation(Registered)
("United Companies"), one of the other Originators or
an affiliate of the Originators and may additionally
include other unrelated entities) which will act,
directly or through one or more Sub-servicers (as
defined herein), as master servicer (each, in such
capacity, the "Master Servicer"). The principal office
of United Companies is located in Baton Rouge,
Louisiana. See "The Originators."
The Mortgage Assets...... The primary assets of each Trust will consist of one
or more pools (each, a "Pool") of mortgage loans and
certain other mortgage-related assets (collectively,
the "Mortgage Assets") specified in the related
Prospectus Supplements, which may include (i) first
and second lien mortgage loans, deeds of trust or
participations therein secured by detached or
semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses,
individual condominium units in condominium buildings,
individual units in planned unit developments, mobile
or manufactured homes treated as real estate under
applicable state law, and certain mixed use and other
dwelling units (collectively, "Single Family Loans"),
(ii) first and second lien mortgage loans, deeds of
trust or participations therein secured by multifamily
residential properties, such as rental apartment
buildings or projects containing five or more
residential units ("Multifamily Loans"), or
(iii) privately issued mortgage-backed securities
("Private Mortgage-Backed Securities" or "PMBS").
Single Family Loans and Multifamily Loans are
sometimes referred to herein collectively as "Mortgage
Loans."
A. Mortgage Loans........ Unless otherwise specified in the related Prospectus
Supplement, the Mortgage Loans will be
non-conventional loans (i.e., loans which are not
insured or guaranteed by any governmental agency). The
payment terms of the Mortgage Loans to be included in
any Pool will be described in the related Prospectus
Supplement and may include any of the following
features, combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate
(a "Fixed Rate") or may be payable at a rate that
is adjustable from time to time in relation to an
index, that may be fixed for a period of time or
under certain circumstances and is followed by an
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
adjustable rate, a rate that otherwise varies
from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate (each, an
"Adjustable Rate"). Changes to an Adjustable Rate
may be subject to periodic limitations, maximum
rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and
added to the principal of a Mortgage Loan for
such periods and under such circumstances as may
be specified in the related Prospectus
Supplement. Mortgage Loans may permit the payment
of interest at a rate lower than the Mortgage
Rate for a period of time or for the life of the
Mortgage Loan, and the amount of any difference
may be contributed from funds supplied by the
seller of the properties securing the related
Mortgage Loan (the "Mortgaged Properties") or
another source or may be treated as accrued
interest and added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level
debt service basis to fully amortize the Mortgage
Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is different
from the interest rate on the Mortgage Loan, or
may not be amortized during all or a portion of
the original term. Payment of all or a
substantial portion of the principal may be due
on maturity (a "balloon payment"). From time to
time, principal may include interest that has
been deferred and added to the principal balance
of the Mortgage Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of the
Mortgage Loan, may increase over a specified
period of time ("graduated payments"), or may
change from period to period. Mortgage Loans may
include limits on periodic increases or decreases
in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject
to a prepayment fee, which may be fixed for the
life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the
Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable
lockout period and may require the payment of a
prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may
permit prepayments without payment of a fee
unless the prepayment occurs during specified
time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to
demand payment of the entire Mortgage Loan in
connection with the sale or certain other
transfers of the related Mortgaged Properties.
Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting
standards of the applicable Originator.
The Mortgaged Properties may be located in any one of
the fifty states or the District of Columbia. Unless
otherwise specified in the
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
related Prospectus Supplement, all of the Mortgage
Loans will be covered by standard hazard insurance
policies ("Standard Hazard Insurance Policies")
insuring against losses due to fire and various other
causes. The Mortgage Loans with Loan-to-Value Ratios
(as defined below) in excess of 80% may be covered by
a primary mortgage guaranty insurance policy which
provides compensation to a mortgage noteholder in the
event of default by the obligor under such Mortgage
Note ("Primary Mortgage Insurance Policies"), as
described in the related Prospectus Supplement. It is
expected that the Mortgage Loans will have been
originated or purchased by the Originators, through
their retail offices, through their correspondent
(i.e., wholesale) loan programs or their bulk purchase
program.
The Prospectus Supplement for each Series of
Securities will specify with respect to all Mortgage
Loans included in each related Pool, among other
things, (i) the aggregate outstanding principal
balance and the average outstanding principal balance
of the Mortgage Loans in such Pool as of the date
specified in the Prospectus Supplement (the "Cut-off
Date"), (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage
Loans, (iii) the types of Mortgaged Properties
securing the Mortgage Loans, (iv) the original terms
to maturity of the Mortgage Loans, (v) the weighted
average term to maturity of the Mortgage Loans as of
the Cut-off Date and the range of the terms to
maturity, (vi) the earliest origination date and
latest maturity date of any of the Mortgage Loans,
(vii) the ranges of the Loan-to-Value Ratios at
origination, (viii) the weighted average Mortgage Rate
and ranges of Mortgage Rates borne by the Mortgage
Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the weighted average of the
Adjustable Rates as of the Cut-off Date and maximum
permitted Adjustable Rates, if any, and (x) the
geographic distribution of the Mortgaged Properties on
a state-by-state basis.
B. Private
Mortgage-Backed
Securities........... Private Mortgage-Backed Securities may include
(i) mortgage participations or pass-through
certificates representing beneficial interests in
certain mortgage loans or (ii) collateralized mortgage
obligations ("CMOs") secured by such mortgage loans.
Although individual mortgage loans underlying a
Private Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the
Private Mortgage-Backed Securities themselves will not
be, so insured or guaranteed. Payments on the Private
Mortgage-Backed Securities will be distributed
directly to the Trustee as registered owner of such
Private Mortgage-Backed Securities.
The Prospectus Supplement for each Series of
Securities will specify, with respect to any Private
Mortgage-Backed Securities owned by the related Trust:
(i) the aggregate approximate principal amount and
type of Private Mortgage-Backed Securities;
(ii) certain characteristics of the mortgage loans
underlying the Private Mortgage-Backed Securities,
including (A) the payment features of such mortgage
loans, (B) the approximate aggregate principal amount,
if known, of the underlying mortgage loans which are
insured or guaranteed by a governmental entity,
(C) the servicing fee
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
or range of servicing fees with respect to such
mortgage loans, and (D) the minimum and maximum stated
maturities of the mortgage loans at origination;
(iii) the maximum original term-to-stated maturity of
the Private Mortgage-Backed Securities; (iv) the
weighted average term-to-stated maturity of the
Private Mortgage-Backed Securities; (v) the
pass-through or certificate rate or ranges thereof for
the Private Mortgage-Backed Securities; (vi) the
weighted average pass-through or certificate rate of
the Private Mortgage-Backed Securities; (vii) the
issuer of the Private Mortgage-Backed Securities (the
"PMBS Issuer"), the servicer of the Private
Mortgage-Backed Securities (the "PMBS Servicer") and
the trustee of the Private Mortgage-Backed Securities
(the "PMBS Trustee"); (viii) certain characteristics
of credit support, if any, such as reserve funds,
insurance policies, letters of credit, financial
guaranty insurance policies or third party guarantees,
relating to the mortgage loans underlying the Private
Mortgage-Backed Securities, or to such Private
Mortgage-Backed Securities themselves; (ix) the terms
on which the underlying mortgage loans for such
Private Mortgage-Backed Securities may, or are
required to, be repurchased prior to stated maturity;
and (x) the terms on which substitute mortgage loans
may be delivered to replace those initially deposited
with the PMBS Trustee. See "The Trusts--Private
Mortgage-Backed Securities."
Description of the
Securities............. Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust
Agreement. Each Certificate of a Series will evidence
an interest in the Trust for such Series, or in a
Mortgage Group specified in the related Prospectus
Supplement. Notes are issuable from time to time in a
Series pursuant to an Indenture.
The Securities of any Series may be issued in one or
more Classes, as specified in the related Prospectus
Supplement. A Series of Securities may include one or
more Classes of senior Securities (collectively,
"Senior Securities") which receive certain
preferential treatment specified in the related
Prospectus Supplement with respect to one or more
Classes of subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or Classes
of Securities may be covered by Enhancement (as
defined below) in the related Prospectus Supplement.
Each Class of Securities within a Series will evidence
the interests specified in the related Prospectus
Supplement, which may (i) include the right to receive
distributions allocable only to principal, only to
interest or to any combination thereof; (ii) include
the right to receive distributions only of prepayments
of principal throughout the lives of the Securities or
during specified periods; (iii) be subordinated in the
right to receive distributions of scheduled payments
of principal, prepayments of principal, interest or
any combination thereof to one or more other Classes
of Securities of such Series throughout the lives of
the Securities or during specified periods or may be
subordinated with respect to certain losses or
delinquencies; (iv) include the right to receive such
distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include
the right to receive distributions in
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accordance with a schedule or formula or on the basis
of collections from designated portions of the assets
in the related Trust; (vi) include, as to Securities
entitled to distributions allocable to interest, the
right to receive interest at a fixed rate or an
adjustable rate; and (vii) include, as to Securities
entitled to distributions allocable to interest, the
right to distributions allocable to interest only
after the occurrence of events specified in the
related Prospectus Supplement, and in each case, may
accrue interest until such events occur, as specified
in such Prospectus Supplement. The timing and amounts
of such distributions may vary among Classes, over
time, or otherwise as specified in the related
Prospectus Supplement.
Pre-Funding and
Capitalized Interest
Accounts............... If specified in the related Prospectus Supplement, a
Trust will include one or more segregated trust
accounts (each, a "Pre-Funding Account") for the
related Series. If so specified, on the closing date
for such Series, a portion of the proceeds of the sale
of the Securities of such Series (such amount, the
"Pre-Funded Amount") will be deposited in the
Pre-Funding Account and may be used to purchase
additional Mortgage Assets during the period of time,
not to exceed six months, specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The
Mortgage Assets to be so purchased will be required to
have certain characteristics specified in the related
Prospectus Supplement. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the
end of the Pre-Funding Period, such amount will be
applied in the manner specified in the related
Prospectus Supplement to prepay the Classes of
Securities of the applicable Series specified in the
related Prospectus Supplement. The amount initially
deposited in a Pre-Funding Account for a Series of
Securities will not exceed twenty-five percent of the
aggregate principal amount of such Series of
Certificates.
If a Pre-Funding Account is established, one or more
segregated trust accounts (each, a "Capitalized
Interest Account") may be established for the related
Series. On the closing date for such Series, a portion
of the proceeds of the sale of the Securities of such
Series may be deposited in the Capitalized Interest
Account and used to fund the excess, if any, of the
sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the
related Prospectus Supplement, certain fees and
expenses during the Pre-Funding Period, such as
Trustee fees and credit enhancement fees, over the
amount of interest available therefor from the
Mortgage Assets in the Trust. If so specified in the
related Prospectus Supplement, amounts on deposit in
the Capitalized Interest Account may be released to
the person specified in the related Prospectus
Supplement prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified
in the related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the end
of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person
specified in the related Prospectus Supplement.
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Credit Enhancement....... Enhancement with respect to a Series or any Class of
Securities may include any one or more of the
following: a financial guaranty insurance policy,
overcollateralization, a letter of credit, a cash
reserve fund, insurance policies, one or more Classes
of Subordinated Securities , derivative products or
other forms of credit enhancement, or any combination
thereof (collectively, "Enhancement"). The Enhancement
with respect to any Series or any Class of Securities
may be structured to provide protection against
delinquencies and/or losses on the Mortgage Assets,
against changes in interest rates, or other risks, to
the extent and under the conditions specified in the
related Prospectus Supplement. Any form of Enhancement
will have certain limitations and exclusions from
coverage thereunder, which will be described in the
related Prospectus Supplement. Further information
regarding any provider of the Enhancement (the
"Enhancer"), including financial information when
material, will be included in the related Prospectus
Supplement. See "Credit Enhancement."
Advances................. The Master Servicer and, if applicable, each mortgage
servicing institution that services a Mortgage Loan in
a Pool on behalf of the Master Servicer (each, a
"Sub-servicer") generally will be obligated to advance
amounts corresponding to all or a portion of
delinquent interest payments on such Mortgage Loan
monthly (or at such other intervals specified in the
Prospectus Supplement) until the date on which the
related Mortgaged Property is sold at a foreclosure
sale or the related Mortgage Loan is otherwise
liquidated or charged off. Any such obligation to make
advances may be limited to amounts due to holders of
Senior Securities, to amounts deemed to be recoverable
from late payments or liquidation proceeds, for
specified periods or any combination thereof, in each
case as specified in the related Prospectus
Supplement. See "The Agreements--Delinquency Advances
and Compensating Interest."
Compensating Interest.... With respect to each Mortgage Loan as to which the
Master Servicer receives a principal payment in full
in advance of the final scheduled due date (a
"Principal Prepayment"), the Master Servicer generally
will be required to remit to the Trustee, from amounts
otherwise payable to the Master Servicer as servicing
compensation, an amount generally representing the
excess of interest on the principal balance of such
Mortgage Loan prior to such Principal Prepayment over
the amount of interest actually received on the
related Mortgage Loan during the applicable period.
See "The Agreements--Delinquency Advances and
Compensating Interest."
Optional Termination..... The Master Servicer, the holders of REMIC Residual
Certificates (as defined herein), or certain other
entities specified in the related Prospectus
Supplement may have the option to effect early
retirement of one or more Classes or a Series of
Securities through the purchase of the Mortgage Assets
in the related Trust, subject to the principal balance
of the related Mortgage Assets being less than the
percentage, not more than 25%, specified in the
related Prospectus Supplement of the aggregate
principal balance of the Mortgaged Assets at the
Cut-off Date for the related Class or Series. See "The
Agreements--Termination; Optional Termination."
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FEDERAL INCOME TAX
CONSEQUENCES
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES........ If (i) an election is made to treat all or a portion
of a Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") or (ii) so
provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes
of taxable debt obligations under the Internal Revenue
Code of 1986, as amended (the "Code"). Stated interest
with respect to such Classes of Securities will be
reported by a Holder in accordance with the Holder's
method of accounting except that, in the case of
Securities constituting "regular interests" in a REMIC
("Regular Interests"), such interest will be required
to be reported on the accrual method regardless of a
Holder's usual method of accounting. Certain Classes
of Securities may be issued with original issue
discount that is not de minimis. In such cases, the
Holder will be required to include original issue
discount in gross income as it accrues, which may be
prior to the receipt of cash attributable to such
income. If a Security is issued at a premium, the
Holder may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities
may be treated as REMIC "residual interests"
("Residual Interest"). A Holder of a Residual Interest
will be required to include in its income its pro rata
share of the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Interest may
have REMIC taxable income or tax liability
attributable to REMIC taxable income for a particular
period in excess of cash distributions for such period
or have an after-tax return that is less than the
after-tax return on comparable debt instruments. In
addition, a portion (or, in some cases, all) of the
income from a Residual Interest (i) may not be
subject to offset by losses from other activities or
investments, (ii) for a Holder that is subject to tax
under the Code on unrelated business taxable income,
may be treated as unrelated business taxable income
and (iii) for a foreign holder, may not qualify for
exemption from or reduction of withholding. In
addition, (x) Residual Interests are subject to
transfer restrictions and (y) certain transfers of
Residual Interests will not be recognized for federal
income tax purposes. Further, individual holders are
subject to limitations on the deductibility of
expenses of the REMIC.
B. NON-REMIC
PASS-THROUGH
SECURITIES........ If so specified in the related Prospectus Supplement,
the Trust Fund for a Series will be treated as a
grantor trust and will not be classified as an
association taxable as a corporation for federal
income tax purposes and Holders of Securities of such
Series ("Pass-Through Securities") will be treated as
owning directly rights to receive certain payments of
interest or principal, or both, on the Mortgage Assets
held in the Trust for such Series. All income with
respect to a Stripped Security (as defined herein)
will be accounted for as original issue discount and,
unless otherwise specified in the related Prospectus
Supplement, will be reported by the Trustee on an
accrual basis, which may be prior to the receipt of
cash associated with such income.
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C. OWNER TRUST
SECURITIES........ Each Noteholder, by the acceptance of a Note of a
given Series, will agree to treat such Note as
indebtedness, and each Certificateholder, if any, by
the acceptance of a Certificate of a given Series,
will agree to treat the related Trust as a partnership
in which such Certificateholder is a partner for
federal income and state tax purposes. Alternative
characterizations of such Trust and such Certificates
are possible, but would not result in materially
adverse tax consequences to Certificateholders. See
"Federal Income Tax Considerations."
ERISA Considerations..... Subject to the considerations discussed under "ERISA
Considerations" herein and in the related Prospectus
Supplement, the Notes may be eligible for purchase by
employee benefit plans. The related Prospectus
Supplement will provide further information with
respect to the eligibility of a Class of Certificates
for purchase by employee benefit plans.
Fiduciaries of employee benefit plans or other
retirement plans or arrangements, including individual
retirement accounts, certain Keogh plans, and
collective investment funds and separate accounts in
which such plans, accounts or arrangements are
invested, that are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with their legal
advisors whether an investment in Certificates will
cause the assets of the related Trust to be considered
plan assets under the Department of Labor ("DOL")
regulations set forth in 29 C.F.R.
Section 2510.3-101 (the "Plan Asset Regulations"),
thereby subjecting the Trustee and the Master Servicer
to the fiduciary investment standards of ERISA, and
whether the purchase, holding or transfer of
Certificates gives rise to a transaction that is
prohibited under ERISA or subject to the excise tax
provisions of Section 4975 of the Code, unless a DOL
administrative exemption applies. See "ERISA
Considerations."
Legal Investment......... A Trust may include Mortgage Loans which do not
represent first liens. Accordingly, as disclosed in
the related Prospectus Supplement, certain Classes of
Securities offered hereby and by the related
Prospectus Supplement may not constitute "mortgage-
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") and,
if so, will not be legal investments for certain types
of institutional investors under SMMEA.
Institutions whose investment activities are subject
to legal investment laws and regulations or to review
by certain regulatory authorities may be subject to
additional restrictions on investment in certain
Classes of Securities. Any such institution should
consult its own legal advisors in determining whether
and the extent to which a Class of Securities
constitutes legal investments for such investors. See
"Legal Investment" herein.
Registration of
Securities............. Securities may be represented by book-entry
certificates registered in the name of Cede & Co.
("Cede"), as nominee of The Depository Trust Company
("DTC"). Persons acquiring beneficial ownership
interests in such Securities will hold their interests
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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. So long as such
Securities are in book-entry form, such Securities
will be evidenced by one or more Securities registered
in the name of Cede, as the nominee of DTC, or one of
the relevant depositaries (collectively, the "European
Depositaries"). Cross-market transfers between persons
holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through Cedel or Euroclear, on the other,
will be effected in DTC through Citibank N.A.
("Citibank") or The Chase Manhattan Bank ("Chase"),
the relevant depositaries of Cedel and Euroclear,
respectively, and each a participating member of DTC.
The interests of such Holders will be represented by
book-entries on the records of DTC, participating
members thereof and other entities, such as banks,
brokers, dealers and trust companies that clear
through or maintain custodial relationships with a
participant, either directly or indirectly. In such
case, Holders will not be entitled to receive
definitive certificates representing such Holders'
interests, except in certain circumstances described
in the related Prospectus Supplement. References
herein to "Holders" or "Owners" reflect the rights of
owners of the Securities issued as book-entry
certificates only as they may indirectly exercise such
rights through DTC and participants, except as
otherwise specified in the related Prospectus
Supplement. See "Description of the
Securities--Book-Entry Registration" herein.
Ratings.................. It will be a requirement that each Class of Securities
offered by this Prospectus and the related Prospectus
Supplement be rated by at least one nationally
recognized statistical rating organization (each, a
"Rating Agency") in one of its four highest applicable
rating categories. The rating or ratings applicable to
Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in
the related Prospectus Supplement. There is no
assurance that the rating initially assigned to such
Securities will not be subsequently lowered or
withdrawn by the Rating Agency. In the event the
rating initially assigned to any Securities is
subsequently lowered for any reason, no person or
entity will be obligated to provide any credit
enhancement in addition to the Enhancement, if any,
specified in the related Prospectus Supplement.
A securities rating should be evaluated independently
of similar ratings on different types of securities. A
securities rating is not a recommendation to buy, hold
or sell securities and does not address the effect
that the rate of prepayments on the Mortgage Assets
for a Series may have on the yield to investors in the
Securities of such Series. See "Risk Factors--Ratings
Are Not Recommendations."
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RISK FACTORS
NO SECONDARY MARKET
Prior to issuance, there will have been no market for the Securities of any
Series. There can be no assurance that a secondary market for the Securities
will develop or, if a secondary market does develop, that it will provide
Holders of the Securities with liquidity of investment or that it will continue
for the lives of the Certificates. Certain Classes of the Securities may not
constitute "mortgage related securities" under the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Certain investors may be subject
to legal restrictions which could preclude them from purchasing such non-SMMEA
Securities and which may have a negative effect on the development of a
secondary market in the Securities.
TRUST ASSETS ARE ONLY SOURCE OF REPAYMENT
The assets of any Trust, including the Mortgage Loans and any Enhancement,
will be the sole source of funds for the payment of the required distributions
on the Securities of the related Series. The Certificates of a Series represent
beneficial ownership interests in, and the Notes of a Series represent
obligations of, the related Trust only and do not represent interests in or
other obligations of the Depositor or the Master Servicer. There will be no
recourse to the Depositor or any other person for any default on the Notes or
any failure to receive distributions on the Certificates. Neither the Securities
nor the Mortgage Assets are insured or guaranteed by any governmental agency.
Holders of Notes will be required under the Indenture to proceed only
against the Mortgage Assets and other assets constituting the related Trust in
the case of a default with respect to such Notes and may not proceed against any
assets of the Depositor or any affiliate. There is no assurance that the market
value of the Mortgage Assets or any other assets for a Series will at any time
be equal to or greater than the aggregate principal amount of the Securities of
such Series then outstanding, plus accrued interest thereon. Moreover, upon an
event of default under the Indenture for a Series of Notes and a sale of the
assets in the Trust or upon a sale of the assets of a Trust for a Series of
Certificates, the Trustee, the Master Servicer, if any, the Enhancer and any
other service provider specified in the related Prospectus Supplement generally
will be entitled to receive the proceeds of any such sale to the extent of
unpaid fees and other amounts owing to such persons under the related Agreement
prior to distributions to Holders of Securities. Upon any such sale, the
proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY
Issuance of the Securities in book-entry form may reduce the liquidity of
such Securities in the secondary trading market since some investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities will, in most cases, be able to
be effected only through Participants, Indirect Participants and certain banks,
the ability of a Holder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical certificate representing
the Securities. Holders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such a case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Class of Holders either directly or indirectly through Indirect
Participants. See "Description of the Securities--Book-Entry Registration."
PROPERTY VALUES MAY BE INSUFFICIENT
Potential Decline in Value of Mortgaged Property. An overall decline in
the market value of residential real estate, the general condition of a
Mortgaged Property, or other factors, could adversely affect the values of the
Mortgaged Properties such that the outstanding balances of the Mortgage Loans,
together with any other liens on the Mortgaged Properties, equal or exceed the
value of the Mortgaged Properties. Such a decline could extinguish the interest
of the related Trust in the Mortgaged Property before having any effect on the
interest of the related senior mortgagee. Certain areas of the country have
experienced, may continue to experience or may
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hereafter experience a significant decline in real estate values. The Depositor
will not be able to quantify the impact of any property value declines on the
Mortgage Loans or predict whether, to what extent or how long such declines may
continue. In periods of such decline, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
historically experienced in the mortgage lending industry in general.
Characteristics of Second Mortgages. Certain of the Mortgage Loans will be
home equity loans secured by junior liens subordinate to the rights of the
mortgagee under each related senior mortgage ("Second Mortgage Loans"). As a
result, the proceeds from any liquidation, insurance or condemnation proceedings
will be available to satisfy the principal balance of a Second Mortgage Loan
only to the extent that the claims, if any, of each such senior mortgagee are
satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the Mortgaged Property securing the Second
Mortgage Loan unless it forecloses subject to the related senior mortgage, in
which case it must either pay the entire amount of each senior mortgage to the
applicable mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on each senior mortgage in the event of a default
thereunder. Generally, a servicer will satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines that any
amounts so paid will be recoverable from future payments and collections on the
Second Mortgage Loans or otherwise. The Trusts will not have any source of funds
(and may not be permitted under the REMIC provisions of the Code) to satisfy any
such senior mortgage or make payments due to any senior mortgagee. See "Certain
Legal Aspects of the Mortgage Loans--Foreclosure/Repossession."
Balloon Loans. Certain of the Mortgage Loans may constitute "Balloon
Loans." Balloon Loans are originated with a stated maturity of less than the
period of time of the corresponding amortization schedule. As a result, upon the
maturity of a Balloon Loan, the Mortgagor will be required to make a "balloon
payment" which will be significantly larger than such Mortgagor's previous
monthly payments. The ability of such a Mortgagor to repay a Balloon Loan at
maturity frequently will depend on such Mortgagor's ability to refinance the
Mortgage Loan. The ability of a Mortgagor to refinance such a Mortgage Loan will
be affected by a number of factors, including the level of available mortgage
rates at the time, the value of the related Mortgaged Property, the Mortgagor's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor, the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Holders 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. None of the Depositor,
the Originators, the Master Servicer or the Trustee will be obligated to provide
funds to refinance any Mortgage Loan.
Risks Associated with Liquidation of Defaulted Mortgage Loans. General
economic conditions and other factors (which may not affect real property
values) have an impact on the ability of Mortgagors to repay Mortgage Loans.
Loss of earnings, illness, divorce and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust 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 or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
In the case of Multifamily Loans, such other factors could include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by Enhancement, such losses will be borne, at least in
part, by the Holders of the related Series.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding
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delays in the receipt of related proceeds by the Holders 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 Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
Liquidated Mortgage Loan and not yet repaid, including unreimbursed Delinquency
Advances and Servicing Advances, payments to prior lienholders, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans, insufficient funds are available from
any Enhancement, Holders could experience a loss on their investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Master 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 larger
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the smaller
Mortgage Loan than would be the case with a larger Mortgage Loan. Because the
average outstanding principal balances of the Mortgage Loans which are Second
Mortgage Loans are small relative to the size of the Mortgage Loans in a typical
pool composed entirely of first mortgages, realizations net of liquidation
expenses on defaulted Mortgage Loans which are Second Mortgage Loans may also be
smaller as a percentage of the principal amount of such Mortgage Loans than
would be the case with a typical pool of first mortgage loans.
Environmental Risks. Under environmental legislation and case law
applicable in various states, a secured party that takes a deed in lieu of
foreclosure, acquires a Mortgaged Property at a foreclosure sale or which, prior
to foreclosure, has been involved in decisions or actions which may lead to
contamination of a Mortgaged Property, may be liable for the costs of cleaning
up a contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a Mortgage Note (such as a Trust)
which, under the terms of the related Agreement, is not required to take an
active role in operating the Mortgaged Properties. See "Certain Legal Aspects of
the Mortgage Loans--Environmental Considerations."
Risks Associated with Non-Owner Occupied Properties. Certain of the
Mortgaged Properties relating to Mortgage Loans may not be owner occupied. It is
possible that the rate of delinquencies, foreclosures and losses on Mortgage
Loans secured by non-owner occupied properties could be higher than for Mortgage
Loans secured by the primary residence of the borrower.
CONSUMER PROTECTION LAWS MAY AFFECT MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Originators and the
Master 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 Master 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 Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; (iii) the Real Estate Settlement Procedures Act, which establishes
certain requirements for disclosure
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regarding mortgage transactions and originators of mortgage loans; and (iv) the
Fair Credit Reporting Act, which regulates the use and reporting of information
related to the borrower's credit experience.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Act") which amended the Truth in Lending Act as it
applies to mortgages subject to the Act. The Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
the inclusion of certain provisions in mortgages subject to the Act. The Act
also provides that any purchaser or assignee of a mortgage covered by the 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
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Mortgage Loan. Any Trust for
which the Mortgage Assets include Mortgage Loans subject to the Act would be
subject to all of the claims and defenses which the borrower could assert
against the applicable Originator. Any violation of the Act which would result
in such liability would be a breach of the Originator's representations and
warranties, and the Originator would be obligated to cure, repurchase or, if
permitted by the related Agreement, substitute for the Mortgage Loan in
question.
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), or similar state legislation, a
Mortgagor who enters military service after the origination of the related
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 affect, for an indeterminate period of time,
the ability of the Master Servicer to collect full amounts of interest on
certain of the Mortgage Loans. In addition, the Relief Act imposes limitations
which impair the ability of the Master Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
YIELD MAY VARY
The yields to maturity of the Classes of Securities of a Series will be
affected by the amount and timing of principal payments on the related Mortgage
Assets, the allocation of available funds and/or losses among such Classes, the
interest rates or amounts of interest payable on such Classes and the purchase
prices paid for such Classes. The interaction of the foregoing factors may have
different effects on, and create different risks for the various Classes of
Securities, and the effects and/or risks for any one Class may vary over the
life of such Class. Investors should carefully consider the different
consequences of such risks for different Classes of Securities of a Series as
described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social, and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Although published statistical data regarding the effects of interest rates
on prepayment rates for home equity loans of the type typically made or acquired
by the Originators ("Home Equity Loans") is limited, a number of factors suggest
that the prepayment behavior of a pool including Home Equity Loans may be
significantly different from that of a pool composed entirely of agency
conforming, non-conforming "jumbo" or government insured (i.e., "traditional")
first mortgage loans with equivalent interest rates and maturities. One such
factor is the typically smaller average principal balance of a Home Equity Loan
which may result in a higher prepayment rate than that of a traditional first
mortgage loan with a larger average balance, regardless of the interest rate
environment. A small principal balance, however, also may make refinancing a
Home Equity Loan at a lower interest rate less attractive to the borrower
relative to refinancing a larger balance first mortgage loan, as the perceived
impact to the borrower of lower interest rates on the size of the monthly
payment for a Home Equity Loan may be less than for a traditional first mortgage
loan with a larger balance. Other factors that might
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be expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying senior mortgage loans, if
any, and the use of first mortgage loans as long-term financing for home
purchase and home equity loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Mortgage Loans which are
Home Equity Loans may experience a higher rate of prepayment than traditional
first mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on Home Equity Loans for federal income
tax purposes may further increase the rate of prepayments of such home equity
loans. See "Maturity, Prepayment and Yield Considerations."
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from a Trust of Mortgage Loans required to be
made by the Originators or by the Master Servicer under the related Agreement
will have the same effect on the Holders as a prepayment of such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, all of the
Single Family Loans contain "due-on-sale" provisions, and the Master Servicer
will be required to enforce such provisions unless (i) such enforcement would
materially increase the risk of default or delinquency on, or materially
decrease the security for, such Mortgage Loan or (ii) such enforcement is not
permitted by applicable law, in which case the Master Servicer is authorized to
permit the purchaser of the related Mortgaged Property to assume the Mortgage
Loan. Additionally, the Originators' practice of soliciting refinancings from
existing borrowers may have the effect of increasing the rate of prepayments,
due to refinancings, on the Mortgage Loans. See "The Home Equity Loan
Program--Refinancing Policy" herein.
Prepayments on the Mortgage Loans comprising or underlying the Mortgage
Assets for a Series generally will result in a faster rate of distributions of
principal on the Securities. Thus, the prepayment experience on the Mortgage
Loans comprising or underlying the Mortgage Assets will affect the average life
and yield to investors of each Class and the extent to which each such Class is
paid prior to its final scheduled Distribution Date. A Series may include
Classes of Securities which pay "interest only" or are entitled to receive a
disproportionately high level of interest distributions as compared to the
amount of principal to which such Classes of Securities are entitled (each, an
"Interest Weighted Class") or Classes of Securities which pay "principal only"
or are entitled to receive a disproportionately high level of principal
distributions compared to the amount of interest to which such Classes of
Securities are entitled (each, a "Principal Weighted Class"). A Series may
include an Interest Weighted Class offered at a significant premium or a
Principal Weighted Class offered at a substantial discount. Yields on such
Classes of Securities will be extremely sensitive to prepayments on the Mortgage
Loans comprising or underlying the Mortgage Assets for such Series. In general
if a Security, including a Security of an Interest Weighted Class, is purchased
at a premium and principal distributions on the Mortgage Loans occur at a rate
faster than anticipated at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that assumed at the time of purchase.
Where the amount of interest allocated with respect to an Interest Weighted
Class is extremely disproportionate to principal, a Holder could, under some
such prepayment scenarios, fail to recoup its original investment. Conversely,
if a Security, including a Security of a Principal Weighted Class, is purchased
at a discount and principal distributions thereon occur at a rate slower than
assumed at the time of purchase, the investor's actual yield to maturity could
be significantly lower than that originally anticipated. Any rating assigned to
the Securities by a Rating Agency will reflect only such Rating Agency's
assessment of the likelihood that timely distributions will be made with respect
to such Securities in accordance with the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on the
Mortgage Loans underlying or comprising the Mortgage Assets will be made by
Mortgagors or of the degree to which the rate of such prepayments might differ
from that originally anticipated. As a result, such rating will not address the
possibility that prepayment rates higher or lower than anticipated by an
investor may cause such investor to experience a lower than anticipated yield,
or that an investor purchasing an Interest Weighted Class at a significant
premium might fail to recoup its initial investment. Depending on the prevailing
interest rate environment, prepayments may be more likely to occur with respect
to adjustable-rate mortgage loans which may be included in a Pool. Prepayment
and yield considerations related to adjustable-rate mortgage loans will be set
forth in the related Prospectus Supplement.
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Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of Mortgagors.
Prepayments on Private Mortgage-Backed Securities will be a function of the
prepayment, repurchase and default experience on the underlying Mortgage Loans
as described above as well as the allocation of such prepayments among the
various classes of the related series of Private Mortgage-Backed Securities and
the types and scope of credit enhancement, if any, supporting such securities.
If a Trust includes Private Mortgage-Backed Securities, the Prospectus
Supplement for the related Series of Securities will describe the various
factors affecting prepayments.
PRE-FUNDING AND ADDITIONAL MORTGAGE ASSETS MAY ADVERSELY AFFECT INVESTMENT
If a Trust includes a Pre-Funding Account and the principal balance of
additional Mortgage Assets delivered to the Trust during the Pre-Funding Period
is less than the Pre-Funded Amount, the Holders of the Securities of the related
Series will receive a prepayment of principal as and to the extent described in
the related Prospectus Supplement. Any such principal prepayment may adversely
affect the yield to maturity of the applicable Securities. Since prevailing
interest rates are subject to fluctuation, there can be no assurance that
investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yield on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
Each additional Mortgage Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and the related Agreement. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or Enhancer) prior to the issuance of the related Series and are designed
to ensure that if such additional Mortgage Assets were included as part of the
initial Mortgage Assets, the credit quality of such assets would be consistent
with the initial rating of each Class of Securities of such Series. The
Depositor will certify to the Trustee that all conditions precedent to transfer
of the additional Mortgage Assets, including the satisfaction of the eligibility
criteria, to the Trust have been satisfied. Following the transfer of additional
Mortgage Assets to the Trust, the aggregate characteristics of the Mortgage
Assets then held in the Trust may vary from those of the initial Mortgage Assets
of such Trust. As a result, the additional Mortgage Assets may adversely affect
the performance of the related Securities.
The ability of a Trust to invest in additional Mortgage Assets during the
related Pre-Funding Period will be dependent on the ability of the Originators
to originate or acquire Mortgage Assets that satisfy the requirements for
transfer to the Trust specified in the related Prospectus Supplement. The
ability of the Originators to originate or acquire such Mortgage Assets will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels, and consumer perceptions of
general economic conditions.
BANKRUPTCY OF THE DEPOSITOR MAY ADVERSELY AFFECT INVESTMENT
In the event of the bankruptcy of the Depositor, a trustee in bankruptcy of
the Depositor or its creditors could attempt to recharacterize the sale of the
Mortgage Assets to the related Trust as a borrowing by the Depositor. If such
recharacterization were to be upheld, the related Holders could be deemed to be
creditors of the Depositor, with the Mortgage Assets constituting security for
such debt, and thus, the Mortgage Assets may be subject to the automatic stay of
the bankruptcy court having jurisdiction over the Depositor's bankruptcy estate.
Even if such allegations are unsuccessful, Holders may be subject to substantial
delays in distributions due to the bankruptcy proceedings. If such an attempt
were successful, a trustee in bankruptcy could elect to accelerate payment of
the Securities and liquidate the Mortgage Assets, with the Holders entitled to
the then outstanding principal amount thereof together with accrued interest.
Thus, the Holders could lose the right to future payments of interest, and might
suffer reinvestment loss in a lower interest rate environment.
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RATINGS ARE NOT RECOMMENDATIONS
Each Class of Securities offered by this Prospectus and the related
Prospectus Supplement must be rated in one of the four highest rating categories
by the Rating Agency identified in the related Prospectus Supplement. Any such
rating would be based on, among other things, the adequacy of the value of the
Mortgage Assets and any Enhancement with respect to such Series. Such rating
should not be deemed a recommendation to purchase, hold or sell Securities,
inasmuch as it does not address market price or suitability for a particular
investor. There is also no assurance that any such rating will remain in effect
for any given period of time or may not be lowered or withdrawn entirely by the
Rating Agency if in its judgment circumstances in the future so warrant. In
addition to being lowered or withdrawn due to any erosion in the adequacy of the
value of the Mortgage Assets, such rating might also be lowered or withdrawn,
among other reasons, because of an adverse change in the financial or other
condition of an Enhancer or a change in the rating of such Enhancer's long term
debt.
THE TRUSTS
The Notes of each Series will be secured by the pledge of the assets of the
related Trust, and the Certificates of each Series will represent interests in
the assets of the related Trust. A Trust for any Series of Certificates will
include the Mortgage Assets consisting of (A) a Pool comprised of (i) Single
Family Loans or (ii) Multifamily Loans, (B) Private Mortgage-Backed Securities,
or (C) a combination of (A) and (B), in each case, as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust. The
assets of the Trust specified in the related Prospectus Supplement for a Series
of Securities, unless otherwise specified in the related Prospectus Supplement,
will serve as collateral only for that Series of Securities. Holders of a Series
of Notes may only proceed against such collateral securing such Series of Notes
in the case of a default with respect to such Series of Notes and may not
proceed against any assets of the Depositor or the related Trust not pledged to
secure such Notes.
The Mortgage Assets for a Series will be transferred by the Depositor to
the Trust. Mortgage Loans relating to a Series will be serviced by the Master
Servicer pursuant to a Pooling and Servicing Agreement, with respect to a Series
consisting of only Certificates or a Sale and Servicing Agreement (each, a "Sale
and Servicing Agreement") among the Depositor, the Trust and the Master
Servicer, with respect to a Series that includes Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series that includes Notes, the Indenture and the Sale and
Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust relating to a
Series of Securities may be a business trust formed under the laws of the state
specified in the related Prospectus Supplement pursuant to a trust agreement
(each, a "Trust Agreement") between the Depositor and the Trustee of such Trust
specified in the related Prospectus Supplement.
Certain of the Mortgage Assets may have been originated or purchased by the
Originators, through their retail branch offices or their correspondent (i.e.,
wholesale) loan programs. Other Mortgage Assets may have been acquired by the
Depositor, any Originator or an affiliate thereof in the open market or in
privately negotiated transactions. See "The Home Equity Loan
Program--Underwriting of Home Equity Loans."
THE MORTGAGE LOANS--GENERAL
The real property (including manufactured housing and mobile homes, to the
extent treated as real property under the laws of the applicable jurisdictions)
which secures repayment of the Mortgage Loans (the "Mortgaged Properties") may
be located in any one of the fifty states or the District of Columbia. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Loans
will be conventional loans (i.e., loans that are not insured or guaranteed by
any governmental agency). Mortgage Loans with Loan-to-Value Ratios and/or
certain principal balances may be covered wholly or partially by Primary
Mortgage Insurance Policies. Unless otherwise
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specified in the related Prospectus Supplement, all of the Mortgage Loans will
be covered by Standard Hazard Insurance Policies. The existence and extent of
any such coverage will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Pool will provide for payments to be made monthly ("monthly
pay"). Unless otherwise specified in the related Prospectus Supplement, the due
dates for payments on the monthly-pay Mortgage Loans in a Pool will occur
throughout the month.
The payment terms of the Mortgage Loans to be included in a Trust will be
described in the related Prospectus Supplement and may include any of the
following features or combination thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate that is
adjustable from time to time in relation to an index, a rate that is fixed
for period of time or under certain circumstances and is followed by an
adjustable rate, a rate that otherwise varies from time to time, or a rate
that is convertible from an adjustable rate to a fixed rate. The specified
rate of interest on a Mortgage Loan is its "Mortgage Rate." Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a Mortgage Loan for such periods and
under such circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at a
rate lower than the Mortgage Rate for a period of time or for the life of
the Mortgage Loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged Property securing the related
Mortgage Loan or another source or may be treated as accrued interest added
to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ("balloon payments"). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
("graduated payments") or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments. Mortgage Loans having graduated payment provisions may require
the monthly payments of principal and interest to increase for a specified
period, provide for deferred payment of a portion of the interest due
monthly during such period, and recoup the deferred interest through
negative amortization whereby the difference between the scheduled payment
of interest and the amount of interest actually accrued is added monthly to
the outstanding principal balance. Other Mortgage Loans sometimes referred
to as "growing equity" mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The Mortgage Loans may include due-on-sale clauses which permit
the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or
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* Whenever the terms "Pool" and "Securities" are used in this Prospectus, such
terms will be deemed to apply, unless the context indicates otherwise, to one
specific Pool and the "Securities" representing the debt of, or certain
beneficial ownership interests, as described below, in a single Trust
consisting primarily of the Mortgage Loans in such Pool. Similarly, the term
"Trust" will refer to one specific Trust.
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certain transfers of the related Mortgaged Property. Other Mortgage Loans
may be assumable by persons meeting the then applicable underwriting
standards of the applicable Originator.
The Prospectus Supplement for each Series of "Securities" will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Mortgage Loans
contained in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Properties securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, manufactured housing and mobile homes (to the
extent permanently affixed and treated as real property under the laws of the
applicable jurisdiction), multifamily apartments or other real property),
(iv) the original terms to maturity of the Mortgage Loans, (v) the weighted
average term to maturity of the Mortgage Loans as of the related Cut-off Date
and the range of the terms to maturity; (vi) the earliest origination date and
latest maturity date of any of the Mortgage Loans, (vii) the ranges of
Loan-to-Value Ratios at origination, (viii) the Mortgage Rate and ranges of
Mortgage Rates borne by the Mortgage Loans, (ix) in the case of Mortgage Loans
having Adjustable Rates, the weighted average of the Adjustable Rates, if any,
and (x) the geographical distribution of the Mortgaged Properties on a
state-by-state basis.
If specific information respecting the Mortgage Assets is not known at the
time the related Series of Securities initially is offered, more general
information of the nature described below will be provided in the Prospectus
Supplement, and specific information will be set forth in a report on Form 8-K
to be filed with the Commission within fifteen days after the initial issuance
of such Securities (the "Detailed Description"). A copy of the Agreement with
respect to each Series of Securities will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series will be
attached to, or incorporated by reference into, the Agreement delivered to the
Trustee upon delivery of the Securities.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the current
principal balance of the related Mortgage Loan at the date of determination and
the denominator of which is the Collateral Value of the related Mortgaged
Property. "Collateral Value" is the appraised value of a Mortgaged Property
based upon the lesser of (i) the appraisal (as reviewed and approved by the
applicable Originator) made at the time of the origination of the related
Mortgage Loan, or (ii) the sales price of such Mortgaged Property at such time
of origination, in either case, plus any financed improvements. With respect to
a Mortgage Loan the proceeds of which were used to refinance an existing
mortgage loan, the appraised (as reviewed and approved by the related
Originator) value of the Mortgaged Property will be based upon the appraisal (as
reviewed and approved by the related Originator) obtained at the time of
refinancing.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
on the same Mortgaged Properties), in a particular Pool become equal to or
greater than the value of such Mortgaged Properties or if the general condition
of a Mortgaged Property declines, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. Because a Pool may contain Mortgage Loans with
original Loan-to-Value Ratios of up to 100% at origination, any overall decline
in property values or of particular Mortgaged Properties will be likely to
result in the outstanding principal balance of such Mortgage Loans becoming
greater than the value of such Mortgaged Properties which may give rise to the
consequences discussed in the preceding sentence.
The only obligations of the Depositor with respect to a Series of
Securities will be to provide from the applicable Originator (or, where the
Depositor or any Originator acquired a Mortgage Loan from another originator,
obtain from such originator) certain representations and warranties concerning
the Mortgage Loans and to assign to the Trustee for such Series of Securities
the Depositor's rights with respect to such representations and warranties. See
"The Agreements--Assignment of Mortgage Loans." The obligations of the Master
Servicer with respect to the Mortgage Loans will consist principally of its
contractual servicing
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obligations under the related Agreement (including its obligations to make
Servicing Advances and to enforce the obligations of the Sub-servicers) and its
obligation to make certain Delinquency Advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under "The Agreements--Delinquency Advances and Compensating Interest."
The obligations of a Master Servicer to make Delinquency Advances may be subject
to limitations, to the extent provided herein and in the related Prospectus
Supplement.
SINGLE FAMILY LOANS
"Single Family Loans" will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first or second
liens on one- to four-family residential properties. Single Family Loans also
may include loans or participations therein secured by mortgages or deeds of
trust on condominium units in condominium buildings together with such
condominium units' appurtenant interests in the common elements of the
condominium buildings.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in
condominium buildings, individual units in planned unit developments, mobile or
manufactured homes treated as real estate under applicable state law, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first or second
liens on rental apartment buildings or projects containing five or more
residential units.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by cooperatives. In such cases, the cooperative
owns all the apartment units in the building and all common areas. The
cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or 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 mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the cooperative. The cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations ("CMOs") secured by Mortgage
Loans. Private Mortgage-Backed Securities will have been issued pursuant to a
private mortgage-backed securities agreement (the "PMBS Agreement"). The
seller/servicer of the underlying Mortgage Loans will have entered into the PMBS
Agreement with the PMBS Trustee under the PMBS Agreement. The PMBS Trustee or
its agent, or a custodian, will possess the Mortgage Loans underlying such
Private Mortgage-Backed Security. Mortgage Loans underlying a Private
Mortgage-Backed Security will be serviced by the PMBS Servicer directly or by
one or more sub-servicers who may be subject to the supervision of the PMBS
Servicer. Unless otherwise described in the Prospectus Supplement, the PMBS
Servicer will be a Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC") approved servicer and, if Federal
Housing Administration ("FHA") Loans underlie the Private Mortgage-
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Backed Securities, approved by the Department of Housing and Urban Development
("HUD") as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be the Depositor or
an affiliate thereof. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related underlying trust or any of the Private
Mortgage-Backed Securities issued under the PMBS Agreement. Additionally,
although the Mortgage Loans underlying the Private Mortgage-Backed Securities
may be guaranteed by an agency or instrumentality of the United States, the
Private Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
The Mortgage Loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
Single Family Loans or Multifamily Loans.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series of
Securities for which the related Trust includes Private Mortgage-Backed
Securities will specify (such disclosure may be on an approximate basis and will
be as of the date specified in the related Prospectus Supplement) to the extent
relevant and to the extent such information is reasonably available to the
Depositor and the Depositor reasonably believes such information to be reliable
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans underlying the Private Mortgage-Backed
Securities including (A) the payment features of such Mortgage Loans, (B) the
approximate aggregate principal balance, if known, of underlying Mortgage Loans
insured or guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the underlying Mortgage Loans, and (D) the
minimum and maximum stated maturities of the underlying Mortgage Loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the Mortgage Loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
Mortgage Loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which other Mortgage
Loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
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USE OF PROCEEDS
The Depositor intends to use the net proceeds to be received from the sale
of the Securities of each Series to acquire the Mortgage Assets to be deposited
in the related Trust, and to pay other expenses connected with pooling such
Mortgage Assets and issuing such Securities. Any amounts remaining after such
payments may be used for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time.
THE DEPOSITOR
UCFC Acceptance Corporation (the "Depositor") was incorporated in the State
of Louisiana on March 26, 1993, and is an indirect wholly-owned subsidiary of
United Companies Financial Corporation (the "Parent"). The Depositor maintains
its principal offices at 4041 Essen Lane, Baton Rouge, Louisiana 70809. Its
telephone number is (504) 924-6007.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
THE ORIGINATORS
It is anticipated that the Mortgage Loans will be purchased by the
Depositor from United Companies Lending Corporation(Registered) ("United
Companies"), UNICOR Mortgage(Registered), Inc. ("UNICOR"), GINGER
MAE(Registered), Inc. ("GINGER MAE") and Southern Mortgage Acquisition, Inc.
d/b/a UC Acquisition ("UC Acquisition") (collectively, the "Originators").
Each of the Originators is a Louisiana corporation and an indirect
wholly-owned subsidiary of the Parent. The Parent is a financial services
holding company having mortgage lending operations focused on the origination,
purchase, sale and servicing of first mortgage, non-conventional, home equity
loans. The Parent's principal offices are in Baton Rouge, Louisiana.
Because the nature of the business of the Originators involves the
collection of numerous accounts, the validity of liens and compliance with state
and federal lending laws, each is subject to numerous claims and legal actions
in the ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the management of United Companies believes, based on information
currently available, that the aggregate amount of such liabilities will not
result in monetary damage which in the aggregate would have a material adverse
effect on the financial condition of the Originators.
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THE HOME EQUITY LOAN PROGRAM
GENERAL
Each of the Originators engages in a different method of loan production:
United Companies originates loans through a branch network; UNICOR conducts a
wholesale operation which acquires loans primarily from brokers and
correspondents; GINGER MAE, which currently is operating as a division of United
Companies, conducts a wholesale operation which acquires loans from banks and
other depository institutions; and UC Acquisition acquires loans in bulk
purchases. Each of United Companies, UNICOR and GINGER MAE has its own staff of
underwriters in order to provide better service to its respective customers.
UC Acquisition applies the underwriting standards of United Companies to the
loans that it purchases. Regardless of the manner of origination, the
appropriate underwriters apply essentially similar underwriting standards.
UNDERWRITING OF HOME EQUITY LOANS
The underwriting function is centralized in Baton Rouge, Louisiana and in
two West Coast operation centers. The underwriting process is intended to assess
both the prospective borrower's ability to repay the loan and the adequacy of
the real property security as collateral for the loan granted. On a case by case
basis, after review and approval by the Originator's underwriters, home equity
loans may be made which vary from the underwriting guidelines.
The Originators originate fixed rate home equity loans with original terms
to maturity not to exceed: 360 months for single family, owner occupied first
mortgages; 360 months for single family, non-owner occupied first mortgages;
360 months for single family, combination owner occupied/rental property first
mortgages; and 180 months for single family, owner occupied second mortgages.
The fixed rate home equity loan amounts generally do not exceed $500,000, in the
case of loans secured by first liens, and $150,000, in the case of loans secured
by second liens, in each case unless a higher amount is specifically approved by
the applicable underwriters. Except for Balloon Loans, all of the Originators'
fixed rate home equity loans are fully amortizing. UNICOR originates and the
other Originators may originate a fixed rate loan with an original term to
maturity ranging from 60 to 240 months and a longer amortization schedule
ranging from 180 to 360 months ("Balloon Loans"). Balloon Loans must be secured
by first liens on single family, owner occupied residential properties. UNICOR
and GINGER MAE also originate fixed rate home equity loans which provide that
the interest rate may decrease by one percentage point if the borrower makes the
first 12 consecutive monthly payments without a delinquency. At that time, the
monthly payments will be recalculated to fully amortize the loan at the reduced
rate over the remaining term to maturity. Adjustable rate home equity loans
originated by the Originators generally fully amortize over a period not to
exceed 360 months. The maximum loan amount for adjustable rate home equity loans
is $500,000 unless a higher amount is specifically approved by the applicable
underwriters.
The homes used for collateral to secure the fixed rate home equity loans
may be owner occupied, non-owner occupied rental properties or a combination of
owner occupied/rental properties, which in any case are one- to four-family
residences (which may be a detached or semi-detached row house, townhouse, a
condominium unit or a unit in a planned unit development). In addition, such
loans may be secured by single-family owner occupied manufactured or mobile
homes with land if the manufactured or mobile homes are permanently affixed and
defined as real estate under applicable state law. Certain loans may be secured
by a leasehold interest and the improvements thereon. Second mortgages are
generally permitted only for fixed rate home equity loans and generally are
limited to one- to four-family owner occupied property. Such a loan secured by a
second mortgage typically will not be made if the first mortgage is a balloon or
an individual or owner financed mortgage. The homes used for collateral to
secure adjustable rate home equity loans may be owner occupied or non-owner
occupied rental properties, which in any case are one- to four-family residences
(which may be a detached or semi-detached, row house, townhouse, a condominium
unit or a unit in a planned unit development).
In general, the value of each property proposed as security for a home
equity loan is required to be determined by a current appraisal from an
independent appraiser who has been approved by United Companies. The Originators
select the appraiser and order the appraisal except for broker or correspondent
originated home
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equity loans for which the broker or the correspondent selects the appraiser
from a list of appraisers pre-approved by United Companies.
The Originators require that the appraisal provide an adequately supported
estimate of the value of the property proposed as security for the requested
home equity loan and a complete, accurate description of the property. In some
cases, the appraisal is subject to completion of improvements which are to be
made with the proceeds of the proposed home equity loan. The property is
analyzed by the Originators, based on the appraisal, to determine its
acceptability as security for the loan requested.
The total amount of a home equity loan generally includes origination fees,
credit life insurance premium, if any, prepaid interest and other closing costs
(such as the cost of an appraisal report and title insurance premiums).
Loan-to-value is the percentage equal to the note amount divided by the lesser
of appraised value or the purchase price of the real estate plus financed
improvements for the real estate. For fixed rate and adjustable rate home equity
loans originated through UNICOR or GINGER MAE, the maximum Loan-to-Value is
generally 90%, with the maximum for rural properties generally being 80%. For
home equity loans originated through United Companies, an Underwriting
Loan-to-Value Ratio, as described below, is utilized. The total amount of a home
equity loan, net of the origination fees, credit life insurance premium, if any,
prepaid tax and insurance escrow, real estate tax service fee, loan application
fee and prepaid interest, is defined as the "Cash Out". The "Underwriting
Loan-to-Value Ratio" for underwriting purposes is the Cash Out divided by the
appraised value or purchase price of the property plus financed improvements for
the real estate, whichever is less. The Cash Out with respect to fixed rate and
adjustable rate home equity loans originated through United Companies is limited
to 90% of the lesser of the applicable appraised value or purchase price of the
property. Because the Underwriting Loan-to-Value Ratio is based on the Cash Out
rather than the actual principal balance of the related loan, the Loan-to-Value
Ratio of such loan will be higher and could be substantially higher than the
Underwriting Loan-to-Value Ratio. However, the Loan-to-Value Ratio may not
exceed 100%.
Generally, the maximum Underwriting Loan-to-Value Ratio is 85% for a loan
with a second mortgage on the property. With respect to rural properties, the
maximum Underwriting Loan-to-Value Ratio (utilizing only up to ten acres and the
improvements thereon) is 80%. The maximum Underwriting Loan-to-Value Ratio
generally applicable to non-owner occupied homes and owner occupied
manufactured/mobile homes with land is generally 80%.
Verification of personal financial information for each applicant is
required by the Originators. The applicant's total monthly obligations
(including principal and interest on each mortgage, tax assessments, other
loans, charge accounts and all scheduled indebtedness) generally should not
exceed 50% of a borrower's gross monthly income. In the case of adjustable rate
home equity loans, the debt ratio calculation is based upon the principal and
interest payment amount utilizing the maximum rate on the second change date.
Generally, the borrowers are required to have two years of employment with their
current employer or two years of like experience. Applicants who are salaried
employees must provide current employment information in addition to recent
employment history. Originators verify this information for salaried borrowers
based on written confirmation from employers, or a combination of a telephone
confirmation from the employer and the most recent pay stub and the most recent
W-2 tax form. A self-employed applicant is generally required to provide copies
of complete federal income tax returns (including schedules) filed for the most
recent two years. Re-verification of the foregoing information generally is not
undertaken for home equity loans purchased through the bulk purchase program of
the Originators.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history is required. The credit report
should reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies and similar instances of adverse credit
that can be discovered by a search of public records. Verification is required
to be obtained of the first mortgage balance, if any, its status and whether
local taxes, interest, insurance and assessments are included in the applicant's
monthly payment. All taxes and assessments not included in the payment are
required to be verified as current. A borrower's mortgage payment history
generally should reflect no more than three payments over 30 days delinquent in
the last twelve months; however, in some cases, a borrower is permitted to have
no more than five
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payments over 30 days delinquent in the last twelve months and one payment over
60 days delinquent in the last twelve months. Credit analysis is subjective and
subject to interpretation in the underwriting process.
Certain laws protect loan applicants by offering them a timeframe after
loan documents are signed, called the "rescission period," during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
The Originators generally require title insurance coverage on each home
equity loan they originate. The Originators and their assignees are generally
named as the insured on the title insurance policies and the addressee of the
title opinion.
The borrower is required to obtain property insurance in an amount
sufficient to cover in the case of a first mortgage the new loan and in the case
of a fixed rate second mortgage, the new loan and any prior mortgage. If the sum
of an outstanding first mortgage, if any, and the fixed rate home equity loan
exceeds the lesser of replacement or insurable value, insurance equal to the
lesser of replacement or insurable value may be accepted. The Originator
requires that its name and address are properly added to the "mortgagee clause"
of the insurance policy. In the event the Originator's name is added to a "loss
payee clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required. The
borrower is required to obtain flood insurance to the extent such insurance is
available under the Flood Disaster Protection Act of 1973, as amended.
After a loan is underwritten, approved and funded, the mortgage loan
packages are reviewed and monitored by home office loan review personnel. A
random sample of the mortgage loan packages are subsequently subjected to a
quality control audit.
SERVICING OF HOME EQUITY LOANS
United Companies performs the following services for investors to whom it
has sold home equity loans and retained servicing: investor reporting;
collecting and remitting periodic principal and interest payments to investors
and performing other administrative services, including maintaining required
escrow accounts for payment of real estate taxes and standard hazard insurance;
determining the adequacy of standard hazard insurance; advising investors of
delinquent loans; conducting foreclosure proceedings, and inspecting and
reporting on the physical condition of the Mortgaged Properties securing the
Mortgage Loans; and disposing of foreclosed properties. United Companies is
generally obligated to advance interest on delinquent home equity loans to the
secondary market investors at the pass-through rate until satisfaction of the
note, liquidation of the Mortgaged Property or charge off of the home equity
loan. To the extent that the amount recovered through liquidation of collateral
is insufficient to cover the unpaid balance of the Home Equity Loan, United
Companies incurs a loss up to the limit specified in the related loan sale
agreement. In connection with its servicing activities, United Companies sends
to borrowers monthly statements that specify the fixed payment amount and due
date in the case of fixed rate home equity loans and the adjusted payment amount
and due date in the case of adjustable rate home equity loans and the late
payment amount, if any. Due dates for payments generally occur on the first day
of the calendar month. With respect to adjustable rate home equity loans, United
Companies provides written notices to borrowers of upcoming rate adjustments
along with new payment coupon books reflecting the adjusted payment amounts.
United Companies, as the Master Servicer, is required under each Agreement
to service the Mortgage Loans either directly or through Sub-servicers.
Servicing includes, but is not limited to, post-origination loan processing,
customer service, remittance handling, collections and liquidations.
United Companies centralizes all servicing activities at the home office
other than the disposal of foreclosed properties.
If payment is not received within the grace period as dictated by the
applicable state law in which the loan originated, a notice will be sent to the
customer. Most of the home equity loans allow a 10 day grace period. In
addition, follow-up correspondence is automatically generated on the 21st, 32nd
and 45th day of delinquency.
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Collection calls begin at or before the expiration of the grace period.
Calls at this stage are targeted towards loans with a history of slow payment.
In addition, newer loans are targeted for calls to help establish a satisfactory
payment record. Collection calls continue until corrective arrangements are
made, or foreclosure is initiated.
If an account becomes 30 days past due, a 30 day loan counselor analyzes
the account to determine the appropriate course of action. When an account
becomes 60 days past due, a property inspection and borrower interview may be
requested through a third party contractor. In addition the initial loan file is
reviewed and generally an up-to-date credit report is obtained. Also at 60 days
past due, if appropriate corrective arrangements have not been made with the
borrower, a recommendation for foreclosure, along with an accompanying package,
may be submitted to the collection supervisor. This package generally includes
the original appraisal, loan approval memorandum, the note and the mortgage. If
approved by the collection supervisor, the package is forwarded to the vice
president of collections for review. If approved the package is forwarded to the
litigation department for the initiation of foreclosure proceedings.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments, a repayment plan to return the account to an
up-to-date status, or (to the extent authorized by the related Agreement) an
extension/modification may be permitted.
The course of action followed for a delinquent account is dependent upon a
number of factors, including the borrower's payment history, the amount of
equity in the Mortgaged Property and the reason for the current inability to
make timely payments. If a borrower is experiencing difficulty in making
payments on time, the Master Servicer may modify the payment schedule (as
permitted by the related Agreement). In the event a loan is extended and thereby
removed from delinquency status, the Master Servicer may require the borrower to
pay an extension fee. Modifications to payment schedules are considered on a
case-by-case basis and are limited to revisions to the contract rate and/or term
only. A request for modification must be submitted by the borrower to the Master
Servicer. Prior to evaluating each modification request, the Master Servicer
obtains an updated credit report and, in some cases, a budget analysis worksheet
application. Provided that the review and analysis of the circumstances and
relevant documentation substantiates a favorable decision to modify the related
loan, the appropriate documentation is generated by the Master Servicer and
executed by the borrower to facilitate formal modification of the home equity
loan. Any extension fees collected by the Master Servicer are retained by the
Master Servicer as part of its servicing compensation.
Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received; or (iii) United Companies discovers circumstances indicating
potential loss exposure.
During the foreclosure process, any expenses incurred by United Companies
are added to the amount owed by the borrower, as permitted by applicable law.
Upon completion of the foreclosure, the property is sold to an outside bidder,
or passes to the mortgagee, in which case United Companies proceeds to liquidate
the asset.
United Companies may not foreclose on the property securing a Second
Mortgage Loan unless it forecloses subject to each senior mortgage, in which
case United Companies generally will pay the amount due on the senior mortgage
to the senior mortgagee, if United Companies determines that doing so will
minimize the loss. In the event that foreclosure proceedings have been
instituted on a senior mortgage prior to the initiation of United Companies'
foreclosure action, United Companies may either satisfy such mortgage at the
time of the foreclosure sale or take other appropriate action.
Servicing and charge-off policies and collection practices may change over
time in accordance with United Companies' business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the Mortgagor in default vary greatly from state
to state. Only if United Companies determines that a delinquency cannot
otherwise be cured will it decide that foreclosure is the appropriate course of
action. Many real estate properties owned by United Companies are ultimately
sold by United Companies to new borrowers to whom United Companies will provide
a mortgage. If, after determining that purchasing a property securing a home
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equity loan will minimize the loss associated with such defaulted loan, United
Companies may bid at the foreclosure sale for such property or accept a deed in
lieu of foreclosure.
Although the servicing practices and procedures of any Sub-servicer may
differ from those described above, such practices and procedures will be
required to be at least as stringent as those applied by United Companies. In
addition, United Companies, as Master Servicer, will remain responsible for the
servicing of the sub-serviced Mortgage Loans in accordance with the applicable
Agreement to the same extent as if it were servicing such Mortgage Loans
directly.
REFINANCING POLICY
When the Originators believe that borrowers with existing loans with the
Originators are likely to refinance such loans due to interest rate changes,
equity build-up or other reasons, the Originators actively attempt to retain
such borrowers through solicitations of such borrowers to refinance with the
Originators. Such refinancings generate fee income for the Originators and
servicing income for the Master Servicer. Solicitations by the Originators of
their borrowers is done universally in order to retain the borrowers and are not
targeted to affect loans which have been placed in securitized pools. Therefore,
since the solicited borrowers are not targeted and because they may refinance
their existing loans in any case, the Originators believe that this practice
will be unlikely to affect the prepayment experience of the home equity loans in
a material respect.
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Depositor, the Master Servicer, if
the Series relates to Mortgage Loans, and the Trustee. A form of Pooling and
Servicing Agreement and a form of Trust Agreement have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part. A Series may
consist of both Notes and Certificates.
The following summaries describe the material provisions which may appear
in each Agreement. The Prospectus Supplement for a Series of Securities will
describe any material provision of the Agreements relating to such Series that
materially differs from the descriptions thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of a Security of such Series addressed to UCFC Acceptance Corporation, 4041
Essen Lane, Baton Rouge, LA 70809, Attention: Secretary.
Unless otherwise specified in the Prospectus Supplement, the Securities of
each Series will be issued in fully registered form only in the denominations
specified in the related Prospectus Supplement, will represent obligations of,
or beneficial ownership interests in, a Trust created pursuant to the related
Agreement and will not be entitled to payments in respect of the Mortgage Assets
included in any other Trust. Definitive Securities will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, at the office of a Registrar appointed by the Trustee. No service
charge will be incurred for any registration of exchange or transfer, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. If provided in the related Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
Distributions on Securities will be made only from the assets of the
related Trust, and the Securities will not represent obligations of the
Depositor, the Master Servicer, the Trustee or any affiliate thereof. The assets
of each Trust will consist of one or more of the following, as set forth in the
related Prospectus Supplement: (a) the Mortgage Assets that from time to time
are subject to the related Agreement; (b) amounts on deposit in the related
Pre-Funding Account and/or Capitalized Interest Account, if any; (c) the assets
for the Trust that from time to time are required by the Agreement to be
deposited in the Distribution Account, the Principal and Interest Account and
any other accounts established pursuant to the related Agreement (collectively,
the "Accounts"), or to be invested in Eligible Investments (as defined in the
related Agreement); (d) property and any proceeds thereof acquired by
foreclosure, deed in lieu of foreclosure or a comparable conversion of the
Mortgage Loans in such Pool; and (e) all rights under any other insurance
policies, guarantees, surety bonds, letters of credit or other credit
enhancement covering any Securities, any Mortgage Loan in the related Pool or
any related Mortgaged Property which is required to be maintained pursuant to
the related Agreement.
Each Series of Securities will be issued in one or more Classes. A Series
of Securities may include one or more Classes of Senior Securities that receive
certain preferential treatment with respect to one or more Subordinated Classes
of Securities of such Series. Certain Series or Classes of Securities may be
covered by Enhancement as described in the related Prospectus Supplement.
Distributions on one or more Classes of a Series of Securities may be made prior
to one or more other Classes, after the occurrence of specified events, in
accordance with a schedule or formula, on the basis of collections from
designated portions of the Mortgage Assets in the related Trust or on a
different basis, in each case, as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among Classes
or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
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Distribution Date specified in the related Prospectus Supplement (each, a
"Distribution Date"), in the amounts specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the record dates specified
in the Prospectus Supplement. Distributions will be made by check mailed to the
persons entitled thereto at the address appearing in the register maintained for
holders of Securities (the "Register") or, to the extent described in the
related Prospectus Supplement, by wire transfer or by such other means as are
described therein, except that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the office or agency of the Trustee or other person specified in the final
distribution notice to Holders.
Each Class of Securities within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Securities or during
specified periods; (iii) be subordinated in its right to receive distributions
of scheduled payments of principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of Securities of such Series
throughout the lives of the Securities or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust;
(vi) include, as to Securities entitled to distributions allocable to interest,
the right to receive interest at a fixed rate or an adjustable rate; and
(vii) include, as to Securities entitled to distributions allocable to interest,
the right to distributions allocable to interest only after the occurrence of
events specified in the related Prospectus Supplement, and in each case, may
accrue interest until such events occur, as specified in such Prospectus
Supplement.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Distribution Account, including any funds transferred from any Reserve Account
and funds received as a result of credit enhancement. As between Securities of
different Classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as specified in the Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement, distributions to any Class of Securities will be made
pro rata to all Holders of that Class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, "Available Funds" for
each Distribution Date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including principal prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust received by the Master
Servicer after the Cut-off Date and on or prior to the day of the month of
the related Distribution Date specified in the Prospectus Supplement (the
"Determination Date") except:
(a) all payments which were due on or before the Cut-off Date;
(b) all cash amounts received in connection with the liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds"), all proceeds (net of
unreimbursed Servicing Advances) of title insurance, hazard insurance
and primary mortgage insurance, if any ("Insurance Proceeds"), all
Principal Prepayments (defined herein), all proceeds received in
connection with the condemnation of a Mortgaged Property or the release
of part of a Mortgaged Property ("Released Mortgage Property
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Proceeds") and all proceeds of any Mortgage Loan purchased by the
Depositor or any other entity pursuant to the Agreement that were
received after the prepayment period specified in the Prospectus
Supplement and all related payments of interest representing interest
for any period after such prepayment period;
(c) all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments
of principal or interest or other amounts required to be paid by the
mortgagors (the "Mortgagors"), and, unless otherwise specified in the
related Prospectus Supplement, which are to be retained by the Master
Servicer (including any Sub-servicer) as additional compensation;
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under "The Agreements--Delinquency
Advances and Compensating Interest" and "--Servicing and Other
Compensation and Payment of Expenses," for advances made by the Master
Servicer and advances made by any Sub-servicers that were deposited into
the Distribution Account, and amounts representing reimbursement for
certain other losses and expenses incurred by the Master Servicer or the
Depositor and described below or in the related Agreement;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust which represents servicing compensation
payable to the Master Servicer which is to be retained from such
collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement; and
(g) the Certificate Guaranty Insurance Policy premium and Trustee
Fees;
(ii) the amount of any Delinquency Advance or payment in respect of
Compensating Interest made by the Master Servicer (including any
Sub-servicer) as deposited by it in the Distribution Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account or
received in connection with other credit enhancement.
Distributions of Interest. Interest will accrue on the aggregate Security
Principal Balance (defined below)(or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional principal balance)
of each Class of Securities entitled to interest from the date, at the
Pass-Through Rate or Note Rate, for the periods and to the extent specified in
the Prospectus Supplement. To the extent funds are available therefor, interest
accrued during each such specified period on each Class of Securities entitled
to interest (other than a Class of Securities that provides for interest that
accrues, but is not currently payable, referred to hereafter as "Accrual
Securities") will be distributable on the Distribution Dates specified in the
Prospectus Supplement until the aggregate Security Principal Balance of the
Securities of such Class has been distributed in full or, in the case of
Securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of such Securities is reduced to zero or
for the period of time designated in the Prospectus Supplement.
The original Security Principal Balance of each Security will equal the
aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated on the basis
set forth in the related Prospectus Supplement. The notional principal balance
of a Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
With respect to any Class of Accrual Securities, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Security Principal Balance of
such Class of Securities on that Distribution Date. Distributions of interest on
each Class of Accrual Securities will commence only after the occurrence of the
events specified in the Prospectus Supplement. Any such Class of Accrual
Securities will thereafter accrue interest on its outstanding Security Principal
Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate "Security Principal Balance" of any Class of
Securities entitled to distributions of principal will be the aggregate original
Security Principal Balance of such Class of Securities specified in the
Prospectus Supplement, reduced
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by all distributions and losses reported to the holders of such Securities as
allocable to principal, and, in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities. The
Prospectus Supplement will specify the method by which the amount of principal
to be distributed on the Securities on each Distribution Date will be calculated
and the manner in which such amount will be allocated among the Classes of
Securities entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more Classes of Senior
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in the
Prospectus Supplement. Any such allocation of Principal Prepayments to such
Class or Classes of Securities will have the effect of accelerating the
amortization of such Senior Securities while increasing the interests evidenced
by the Subordinated Securities in the Trust. Increasing the interests of the
Subordinated Securities relative to that of the Senior Securities is intended to
preserve the availability of the subordination provided by the Subordinated
Securities. See "Credit Enhancement--Subordination." The timing and amounts of
distributions allocable to interest and principal and, if applicable, Principal
Prepayments and scheduled payments of principal, to be made on any Distribution
Date may vary among Classes, over time or otherwise as specified in the
Prospectus Supplement.
REPORTS TO HOLDERS
On or before each Distribution Date, the Master Servicer or the Trustee
will be required to forward to each Holder of record of the related Series a
statement setting forth the following to the extent applicable to such Series or
Class:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Delinquency Advance by the Master Servicer (or
any Sub-servicer);
(iv) the aggregate amount (a) otherwise allocable to the Holders of
Subordinated Securities on such Distribution Date, and (b) withdrawn from a
Reserve Account, if any, that is included in the amounts distributed to the
Holders of Senior Securities;
(v) the total amount of any Insured Payments included in the amount
distributed on such Distribution Date;
(vi) the outstanding principal balance of such Class after giving
effect to the distribution of principal on such Distribution Date;
(vii) if applicable, the percentage of principal payments on the
Mortgage Loans, if any, which such Class will be entitled to receive on the
following Distribution Date;
(viii) unless the Pass-Through Rate or Note Rate is a fixed rate, the
Pass-Through Rate or Note Rate applicable to the distribution on the
Distribution Date;
(ix) the number and aggregate principal balance of Mortgage Loans in
the related Pool delinquent (a) one month and (b) two or more months;
(x) the number and aggregate principal balance of all Mortgage Loans
in foreclosure or other similar proceedings, and the book value of any real
estate acquired through foreclosure or grant of a deed in lieu of
foreclosure; and
(xi) if applicable, the amount remaining in any Reserve Account or the
amount remaining of any other credit support, after giving effect to the
distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant Class having the denomination or
interest specified in the related Prospectus Supplement or the
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report to Holders. The report to Holders for any Class or Series of Securities
may include additional or other information of a similar nature to that
specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each person who
was a Holder of record at any time during such calendar year a report (a) as to
the aggregate of amounts reported pursuant to (i) and (ii) for such calendar
year or, in the event such person was a Holder of record during a portion of
such calendar year, for the applicable portion of such year and (b) such other
customary information as may be deemed necessary or desirable for Holders to
prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Securities will
be book-entry securities (the "Book-Entry Securities"). Persons acquiring
beneficial ownership interests in such Securities ("Beneficial Owners") will
hold their Securities through DTC in the United States, or Cedel or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry Securities
will be issued in one or more certificates which equal the aggregate principal
balance of the applicable Series of Securities and will initially be registered
in the name of Cede, the nominee of DTC. Cedel and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedel and Chase will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry
Security will be entitled to receive a physical certificate representing such
Security (a "Definitive Security"). Unless and until Definitive Securities are
issued, the only "Holder" of Book-Entry Securities will be Cede, as nominee of
DTC. Beneficial Owners will not be Holders as that term is used in the
applicable Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through participants in DTC ("DTC Participants").
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of DTC Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate).
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received on Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) 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.
Transfers between DTC Participants will occur in accordance with DTC Rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding securities directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Cedel Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC Rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however, such cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European International clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or
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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 European Depositaries.
DTC which is a New York-chartered limited purpose company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the Book-Entry Securities whether held
for its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Securities will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with 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 Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific 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.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the applicable Trustee to DTC. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payments to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
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Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to 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 the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Securities to persons or entities that do not participate in the depository
system, or otherwise take actions in respect of such Book-Entry Securities, may
be limited due to the lack of physical certificates for such Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such securities in the secondary market since
certain potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the Depositor that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the Beneficial
Owners of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Holder under the applicable Agreement on
behalf of a Cedel Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related DTC Participants, with respect to some
Book-Entry Securities of a Series which conflict with actions taken with respect
to other Book-Entry Securities of such Series.
Definitive Securities will be issued to beneficial owners of the Book-Entry
Securities, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the applicable Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as nominee
and depository with respect to the Book-Entry Securities and the Depositor or
such Trustee is unable to locate a qualified successor, (b) the Depositor, at
its sole option, elects to terminate the book-entry system through DTC or
(c) after the occurrence of an Event of Default (as defined herein), Beneficial
Owners having Percentage Interests aggregating not less than 51% advise the
Trustee and DTC through the Financial Intermediaries and the DTC Participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all
affected Beneficial Owners of the occurrence of such event and the availability
through DTC of Definitive Securities. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Securities and
instructions for re-registration, the applicable Trustee will issue Definitive
Securities, and thereafter such Trustee will recognize the holders of such
Definitive Securities as Holders under the applicable Agreement.
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.
Neither the Depositor, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider
thereof, if applicable, with respect to a Series or any Class of Securities will
be set forth in the related Prospectus Supplement. If and to the extent provided
in the related Prospectus Supplement, enhancement may be in the form of a
financial guaranty insurance policy, overcollateralization, a letter of credit,
cash reserve fund, insurance policies, one or more Classes of Subordinated
Securities, derivative products or other form of enhancement, or any combination
thereof, as may be described in the related Prospectus Supplement (collectively,
"Enhancement"). If specified in the applicable Prospectus Supplement,
Enhancement for any Series of Securities may cover one or more Classes of
Securities, and accordingly may be exhausted for the benefit of a particular
Class of Securities and thereafter may be unavailable to such other Classes of
Securities. Further information regarding any provider of credit enhancement
(the "Enhancer"), including financial information when material, will be
included in the related Prospectus Supplement.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Holders of the full amount of principal and interest due them and
to decrease the likelihood that the Holders will experience losses, or may be
structured to provided protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. The Enhancement for a Class of Securities may not provide
protection against all risks of loss and may not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any Enhancement or which are not covered by any Enhancement, Holders
will bear their allocable share of deficiencies. In addition, if a form of
Enhancement covers more than one Class of Securities of a Series, Holders of any
such Class will be subject to the risk that such Enhancement will be exhausted
by the claims of Holders of other Classes.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities will be affected by the amount and
timing of principal payments on or in respect of the Mortgage Assets included in
the related Trust, the allocation of available funds to various Classes of
Securities, the Pass-Through Rate or Note Rate for various Classes of Securities
and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Pool. Unless otherwise specified in the
related Prospectus Supplement, Single Family Loans may be prepaid without
penalty in full or in part at any time, although a prepayment fee or penalty may
be imposed in connection therewith. Multifamily Loans may prohibit prepayment
for a specified period after origination, may prohibit partial prepayments
entirely, and may require the payment of a prepayment fee or penalty upon
prepayment in full or in part.
The rate of prepayments with respect to non-conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
below the Mortgage Rates borne by the Mortgage Loans, such Mortgage Loans are
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Mortgage Rates. Conversely, if prevailing interest
rates rise appreciably above the Mortgage Rates borne by the Mortgage Loans,
such Mortgage Loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below such Mortgage Rates. However, there can be
no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayments on Single Family
Loans may be affected by changes in a mortgagor's housing needs, job transfers,
unemployment, a borrower's net equity in the mortgaged properties, the
enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans, graduated payment mortgage loans,
growing equity mortgage loans, reverse mortgage loans, buy-down mortgage loans
and mortgage loans with other characteristics may experience a rate of principal
prepayments which is different from that of fixed rate, monthly pay, fully
amortizing mortgage loans. The rate of prepayment on Multifamily Loans may be
affected by other factors, including Mortgage Loan terms (e.g., the existence of
lockout periods, due-on-sale and due-on-encumbrance clauses and prepayment
penalties), relative economic conditions in the area where
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the Mortgaged Properties are located, the quality of management of the Mortgaged
Properties and the relative tax benefits associated with the ownership of
income-producing real property.
Generally, second Mortgage Loans have smaller average principal balances
than senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, Mortgage Loans which are second Mortgage Loans may
experience a higher rate of prepayment than Mortgage Loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on second Mortgage Loans for Federal income tax purposes may
result in a higher rate of prepayment of such Mortgage Loans. The obligation of
the Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. The prepayment experience of the
Pools may be affected by a wide variety of factors, including general and local
economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Depositor is unaware of any
reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of United Companies and its affiliates'
portfolios of mortgage loans. However, the Originators' practice of soliciting
refinancings from existing borrowers may have the effect of increasing the rate
of prepayments, due to refinancings, on the Mortgage Loans. See "The Home Equity
Loan Program--Refinancing Policy" herein.
Unless otherwise provided in the related Prospectus Supplement, all of the
Single Family Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the Mortgage Loan upon sale or certain transfers
by the borrower of the underlying Mortgaged Property. Unless otherwise provided
in the related Prospectus Supplement, the Master Servicer generally will enforce
any due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of
the conveyance or further encumbrance or the proposed conveyance or proposed
further encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would materially increase the
risk of default or delinquency on, or materially decrease the security for, such
Mortgage Loan or if the applicable Enhancer, if any, gives its consent to such
non-enforcement. See "The Agreements--Enforcement of Due on Sale Clauses"
herein.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Holders. However, this
effect will be offset to the extent that lump sum recoveries on defaulted
Mortgage Loans and foreclosed Mortgaged Properties result in principal payments
on the Mortgage Loans faster than otherwise scheduled.
When a full prepayment occurs on a Single Family Loan, the Mortgagor will
be charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Interest shortfalls also could result
from the application of the Relief Act, as described under "Certain Legal
Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act" herein.
Unless otherwise specified in the related Prospectus Supplement, in the event
that less than 30 days' interest is collected on a Mortgage Loan during a
Remittance Period, the Master Servicer or a Sub-servicer will be obligated to
pay Compensating Interest with respect thereto, but only to the extent of the
aggregate Servicing Fee for the related Distribution Date. To the extent such
shortfalls exceed the amount of Compensating Interest that the Master Servicer
or such Sub-servicer is obligated to pay, the yield on the Securities could be
adversely affected. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Mortgage Loans so prepaid on the first day
of the month of receipt or the month following receipt. In the latter case,
partial prepayments will not reduce the amount of interest passed through in
such month.
Under certain circumstances, the Depositor, the Master Servicer, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Loans and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Securities, subject to the principal balance of the related
Mortgage Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
at the Cut-off Date for the related Series. See "The Agreements--Termination;
Purchase of Mortgage Loans."
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Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Holders will be slightly lower than the yield otherwise
produced by the applicable Pass-Through Rate or Note Rate and purchase price,
because while interest generally will accrue on the Securities from the first
day of each month, the distribution of such interest will not be made earlier
than a specified date in the month following the month of accrual.
The timing of payments on the Mortgage Assets may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal payments.
The Prospectus Supplement relating to a Series of Securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Securities, including the effect of prepayments and allocation of realized
losses on the Mortgage Loans as they relate to specific Classes of Securities.
Factors other than those identified herein and in the Prospectus Supplement
could significantly affect principal prepayments at any time and over the lives
of the Securities. The relative combination of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the Mortgage Assets at any time or over the
lives of the Securities.
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THE AGREEMENTS
Set forth below is a summary of the material provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to describe all provisions of each Agreement and is subject to, and
qualified in its entirety by reference to, the provisions of each Agreement.
Where particular provisions or terms used in the Agreements are referred to,
such provisions or terms are as specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Securities of a Series, the Depositor will cause the Mortgage Loans comprising
the related Trust to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Depositor on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date. The Trustee will, concurrently with
such assignment, deliver the Securities to the Depositor in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the related Agreement (a "Mortgage Loan Schedule"). Such schedule
will include information as to the outstanding principal balance of each
Mortgage Loan after application of payments due on the Cut-off Date, as well as
information regarding the Mortgage Rate, the current scheduled monthly payment
of principal and interest, the maturity of the loan, the Loan-to-Value Ratio at
origination and certain other information.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will be required:
(a) on or prior to the date of issuance of the related Securities (the
"Closing Date"), to deliver or cause the applicable Originator to deliver
to the Trustee the original Mortgage Notes or copies thereof certified by
the Depositor where the original Mortgage Note has been lost, endorsed
without recourse to the order of the Trustee;
(b) within 30 days after the Closing Date, to deliver or cause the
applicable Originator to deliver to the Trustee:
(i) either: (1) the original Mortgage, with evidence of recording
thereon, (2) where the original Mortgage has been transmitted for
recording, a computerized list of such Mortgages until such time as the
original or certified copy is returned by the public recording office or
(3) a copy of the Mortgage certified by the public recording office in
those instances where the original recorded Mortgage has been retained
by the public recording office or has been lost;
(ii) a computerized list of each title insurance policy or, if such
policy has not yet been issued, a commitment or binder therefor;
(iii) a copy of an assignment of the Mortgage to the Trustee;
(iv) originals of each intervening assignment with evidence of
recording thereon showing a complete chain of title from origination to
such Originator, or if the original of any such intervening assignment
is unavailable, a computerized list until such time as the original or a
copy certified by the public recording office is returned; and
(iv) originals of all assumptions and modification agreements, if
any.
(c) to cause assignments of the Mortgages from the applicable
Originator to the Trustee, promptly to be submitted for recording in the
appropriate jurisdictions; provided, however, that the applicable
Originator is not required to submit an assignment for any Mortgage with
respect to which the original recording information is lacking; and
(d) to deliver the original or certified copies of the Mortgages, as
the case may be, and such recorded assignments or certified copies thereof,
together with originals or duly certified copies of any and all prior
recorded assignments, to the Trustee within 30 days of receipt thereof by
the applicable Originator (but in any event within one year after the
Closing Date).
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With respect to each Mortgage Loan for which (i) all or a portion of the
proceeds thereof were originally paid into an escrow account pending completion
of improvements to be made to the related property and (ii) the appraised value
of such property was specifically subject to the completion of such improvements
(an "Escrow Loan"), the Depositor is required to deliver or cause the applicable
Originator to deliver to the Trustee by the thirteenth month after the Closing
Date, the third party inspector's certificate of final completion pursuant to
which the inspector confirms that, upon inspection of the completed improvements
to the Mortgaged Property, all items listed by the appraiser have been performed
or completed.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The
Trusts--Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
Reviews; Repurchases. In the event that any required appraiser's
certification or any such item with respect to title has not been delivered to
the Trustee by the thirteenth month after the Closing Date, then the applicable
Originator is required, on the next succeeding Distribution Date, at its option,
to (i) substitute in lieu of the related Mortgage Loan a qualified replacement
mortgage (each, a "Qualified Replacement Mortgage") and, if the outstanding
principal amount of such Qualified Replacement Mortgage as of the first day of
the calendar month in which such Qualified Replacement Mortgage is conveyed to
the Trustee (each, a "Replacement Cut-off Date") is less than the Loan Balance
of the replaced Mortgage Loan as of such Replacement Cut-off Date, deliver an
amount equal to such difference (the "Substitution Amount") to the Master
Servicer for deposit in the Principal and Interest Account or (ii) purchase such
Mortgage Loan from the Trustee at a purchase price equal to the Loan Purchase
Price thereof. The "Loan Purchase Price" means, with respect to any Mortgage
Loan, an amount equal to the Loan Balance of such Mortgage Loan as of the date
of purchase, plus accrued interest on the outstanding Loan Balance thereof,
together with the aggregate amounts of (i) all Delinquency Advances and
Servicing Advances theretofore made with respect to such Mortgage Loan and
(ii) all Delinquency Advances which the Master Servicer has theretofore failed
to remit with respect to such Mortgage Loan. The "Loan Balance" of a Mortgage
Loan is the outstanding principal balance thereof on the Cut-off Date, less any
principal amounts relating to such Mortgage Loan previously distributed to
Certificateholders.
The Trustee will agree to review the items delivered by or on behalf of the
Depositor within 45 days after the Closing Date (or, with respect to any
document delivered after the Closing Date, within 45 days of receipt and with
respect to any Qualified Replacement Mortgage, within 45 days after the
assignment thereof) and to deliver to the Depositor a certification to the
effect that, as to each Mortgage Loan (other than any Mortgage Loan paid in full
or any Mortgage Loan specifically identified in such certification as not
covered by such certification), (i) all documents required to be delivered to it
pursuant to the applicable Agreement are in its possession, (ii) such documents
have been reviewed by it and have not been mutilated, damaged, torn or otherwise
physically altered and relate to such Mortgage Loan and (iii) based on its
examination and only as to the foregoing documents, the information set forth on
the applicable Mortgage Loan Schedule delivered by the Depositor as to loan
number and address, accurately reflects the information set forth in the
documents delivered to the Trustee (collectively referred to as the "File"). The
Trustee is under no duty or obligation to inspect, review or examine any such
documents, instruments, certificates or other papers to determine that they are
genuine, enforceable, or appropriate for the represented purpose or that they
are other than what they purport to be on their face, nor is the Trustee under
any duty to determine independently whether there are any intervening
assignments or assumption or modification agreements with respect to any
Mortgage Loan.
If the Trustee during such 45-day period finds any document constituting a
part of a File which is not properly executed, has not been received, or is
unrelated to the Mortgage Loans identified in the related Mortgage
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Loan Schedule, or that any Mortgage Loan does not conform in a material respect
to the description thereof as set forth in the related Mortgage Loan Schedule,
the Trustee is required to promptly so notify the Depositor. The Depositor will
use or cause the applicable Originator to use reasonable efforts to remedy a
material defect in a document constituting part of a File of which it is so
notified by the Trustee. If, however, within 60 days after the Trustee's notice
to it respecting such defect the applicable Originator has not remedied the
defect and the defect materially and adversely affects the interest of the
Certificateholders in the related Mortgage Loan, such Originator is required, on
the next succeeding Distribution Date, to, at its option, (i) substitute in lieu
of such Mortgage Loan a Qualified Replacement Mortgage and deliver the
Substitution Amount applicable thereto to the Master Servicer for deposit in the
Principal and Interest Account, or (ii) purchase such Mortgage Loan at a
purchase price equal to the Loan Purchase Price thereof, provided a favorable
opinion of tax counsel is delivered in connection therewith.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will have assigned to the Trustee representations and warranties made
by the Originators in respect of the Mortgage Loans sold by the Depositor and
evidenced by a Series of Certificates. Such representations and warranties
generally include, among other things: (i) that title insurance (or in the case
of Mortgaged Properties located in areas where such policies are generally not
available, an attorney's certificate of title) was in effect on the Closing
Date; (ii) that the Depositor had title to each such Mortgage Loan and such
Mortgage Loan was subject to no offsets, defenses or counterclaims; (iii) that
each Mortgage Loan constituted a valid first or second lien on the Mortgaged
Property (subject only to permissible title insurance exceptions, if applicable,
and certain other exceptions described in the Agreement) and that the Mortgaged
Property was free from damage and was in good repair; (iv) that there were no
delinquent tax or assessment liens against the Mortgaged Property; (v) that no
required payment on a Mortgage Loan was more than thirty days delinquent as of
the related Cut-off Date; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable state and federal laws
and regulations in all material respects.
Upon the discovery by the Depositor, the Master Servicer or the Trustee
that the representations in the applicable Agreement are untrue in any material
respect as of the dates specified therein, with the result that the interests of
the Certificateholders in the related Mortgage Loan are materially and adversely
affected, the party discovering such breach is required to give prompt written
notice to the other parties. Upon the earliest to occur of the Depositor's
discovery, its receipt of notice of breach from any of the other parties or such
time as a situation resulting from a representation which is untrue materially
and adversely affects the interests of the Certificateholders, the Depositor is
required promptly to cause the applicable Originator to cure such breach in all
material respects or the Depositor will cause the applicable Originator to on
the second Distribution Date next succeeding such discovery, receipt of notice
or such other time, at its option (i) substitute in lieu of such affected
Mortgage Loan, a Qualified Substitute Mortgage and deliver an amount equal to
the applicable Substitution Amount to the Master Servicer for deposit in the
Principal and Interest Account or (ii) purchase such Mortgage Loan from the
Trustee at the Loan Purchase Price thereof. The obligation of the Originators so
to cure, substitute or purchase any Mortgage Loan as to which such a breach has
not been remedied constitutes the sole remedy available to the
Certificateholders or the Trustee respecting a discovery of any such statement
which is untrue in any material respect.
The purchase agreements pursuant to which the Depositor acquires the
Mortgage Assets to be deposited in a Trust will contain similar representations
and obligations pursuant to which the seller of such Mortgage Assets will be
obligated to take the actions required of the Depositor as described above. The
Trustee will have the ability to enforce such obligations directly against such
sellers in the event that the Depositor fails to do so.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require the Master Servicer to establish and maintain one or more
principal and interest accounts (each a "Principal and Interest Account") at one
or more institutions meeting the requirements set forth in the related
Agreement. Pursuant to the related Agreement, the Master Servicer will be
required to deposit all collections (other than amounts escrowed for taxes and
insurance) related to the Mortgage Loans into the Principal and Interest Account
no later than the business day after receipt. All funds in the Principal and
Interest Accounts will be required to be invested
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in instruments designated as "Eligible Investments" in the Agreement. Any
investment earnings on funds held in the Principal and Interest Accounts are for
the account of the Master Servicer.
The Master Servicer may make withdrawals from the Principal and Interest
Account only for the following purposes: (a) to effect the timely remittance to
the Trustee of the Monthly Remittance and the Excess Interest due on the
Remittance Date; (b) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account; (c) to withdraw amounts that have been
deposited to the Principal and Interest Account in error; and (d) to clear and
terminate the Principal and Interest Account.
At any time and in lieu of the requirement of depositing collections on the
Mortgage Loans into the Principal and Interest Account, the Master Servicer may
deliver to the Trustee a letter of credit (a "Servicer LOC") meeting the
requirements set forth in the Agreement.
Not later than the day of each month specified in the Agreement (the
"Remittance Date"), the Master Servicer will be required to wire transfer to the
Trustee for deposit in the segregated trust accounts to be maintained with the
Trustee for such purpose (each a "Distribution Account") the sum (without
duplication) of the following amounts:
(i) an amount equal to the sum of (x) the aggregate portions of the
interest payments (whether or not collected) becoming due on the Mortgage
Loans during the immediately preceding calendar month (the "Remittance
Period"), calculated at a per annum rate set forth in the Agreement (the
"Adjusted Pass-Through Rate") and (y) any Compensating Interest (calculated
at the Adjusted Pass-Through Rate) due with respect to the Mortgage Loans
with respect to the immediately preceding Remittance Period (the amount
described in this clause (i) being the "Interest Remittance Amount");
(ii) an amount equal to the sum of (x) all principal collected by the
Master Servicer on the Mortgage Loans during the immediately preceding
Remittance Period and (y) any prepayments and Liquidation Proceeds, net of
unreimbursed Servicing Advances and Delinquency Advances ("Net Liquidation
Proceeds") (but only to the extent that such Net Liquidation Proceeds do
not exceed the Loan Balance of the related Mortgage Loan) and Released
Mortgaged Property Proceeds, in each case and only to the extent collected
on the Mortgage Loans during the preceding Remittance Period (the amount
described in this clause (ii) being the "Principal Remittance Amount");
(iii) all Loan Purchase Prices and Substitution Amounts with respect
to such Distribution Date; and
(iv) an amount equal to the Excess Interest.
Unless otherwise specified in the related Prospectus Supplement, the "Excess
Interest" for any Distribution Date is the product of (x) one-twelfth of the
difference between (i) the weighted average annual Mortgage Rate on the Mortgage
Loans as of the last day of the related Remittance Period and (ii) the Adjusted
Pass-Through Rate and (y) the Pool Principal Balance as of the last day of the
related Remittance Period to the extent such amount is received or advanced.
PRE-FUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related Prospectus Supplement, a Trust will include one
or more segregated trust accounts (each, a "Pre-Funding Account") established
and maintained with the Trustee for the related Series. If so specified, on the
closing date for such Series, a portion of the proceeds of the sale of the
Securities of such Series not to exceed fifty percent of the aggregate principal
amount of such Series (such amount, the "Pre-Funded Amount") may be deposited in
the Pre-Funding Account and may be used to purchase additional Mortgage Assets
during the period of time not to exceed six months specified in the related
Prospectus Supplement (the "Pre-Funding Period"). If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Securities of the applicable Series.
Each additional Mortgage Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreement. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Mortgage Assets were included as part
of the initial Mortgage Assets, the credit quality of such assets
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would be consistent with the initial rating of the Securities of such Series.
The Depositor will certify to the Trustee that all conditions precedent to the
transfer of the additional Mortgage Assets to the Trust, including the
satisfaction of the eligibility criteria, have been satisfied. Following the
transfer of additional Mortgage Assets to the Trust, the aggregate
characteristics of the Mortgage Assets then held in the Trust may vary from
those of the initial Mortgage Assets of such Trust. As a result, the additional
Mortgage Assets may adversely affect the performance of the related Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period such as
Trustee fees and credit enhancement fees, over the amount of interest available
therefor from the Mortgage Assets in the Trust. If so specified in the related
Prospectus Supplement, amounts on deposit in the Capitalized Interest Account
may be released to the person specified in the related Prospectus Supplement
prior to the end of the Pre-Funding Period subject to the satisfaction of
certain tests specified in the related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the end of the Pre-Funding Period
that are not necessary for such purposes will be distributed to the person
specified in the related Prospectus Supplement.
INVESTMENT OF ACCOUNTS
All or a portion of any Account, including the Principal and Interest
Account, may be invested and reinvested, in one or more Eligible Investments
bearing interest or sold at a discount. The bank serving as Trustee or any
affiliate thereof, may be the obligor on any investment in any Account which
otherwise qualifies as an Eligible Investment. No investment in any Account held
by the Trustee may mature later than the business day immediately preceding the
next succeeding Distribution Date; provided, however, that if the investment is
an investment of the bank serving as Trustee, then it may mature on the
Distribution Date.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Eligible Investment
included therein (except to the extent that the bank serving as Trustee is the
obligor thereon).
All income or other gain from investments in any Account will be required
to be deposited in such Account immediately upon receipt, and any loss resulting
from such investments will be required to be charged to such Account.
ELIGIBLE INVESTMENTS
Each Agreement generally will define the following as Eligible Investments:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States.
(b) Federal Housing Administration debentures but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(c) FHLMC senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption.
(d) Federal Home Loan Banks' consolidated senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(e) FNMA senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption.
(f) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than
365 days) of any domestic bank, the short-term debt obligations of
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which have been rated A-1 or better by Standard & Poor's Corporation
("S&P") and P1 by Moody's Investors Service ("Moody's").
(g) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $3,000,000
which deposits are not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC,
provided that the long-term deposits of such bank or savings and loan
association are rated at least "BBB" by S&P and "Baa3" by Moody's.
(h) Commercial paper (having original maturities of not more than
270 days) rated A-1 or better by S&P and P1 or better by Moody's.
(i) Investments in money market funds rated AAAm or AAAm-G by S&P and
P-1 by Moody's.
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
DELINQUENCY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest and principal
payments to Holders (rather than to guarantee or insure against losses) unless
otherwise provided in the related Prospectus Supplement, each Agreement will
require that if, on any Distribution Date, the amount then on deposit in the
Principal and Interest Account from Mortgage Loan collections with respect to
the preceding Remittance Period is less than the sum of the Interest Remittance
Amount, the Principal Remittance Amount and the aggregate amount of Excess
Interest with respect to the immediately preceding Remittance Period, the Master
Servicer is required to deposit in the Principal and Interest Account a
sufficient amount of its own funds ("Delinquency Advances") to make such amount
equal to the sum of the Interest Remittance Amount, the Principal Remittance
Amount and the aggregate amount of Excess Interest (unless a Subordinate Class
of Certificates is outstanding).
The Master Servicer is permitted to fund its payment of Delinquency
Advances on any Distribution Date from collections on the Mortgage Loans
deposited into the Principal and Interest Account subsequent to the related
Remittance Period, but must reimburse the Principal and Interest Account for any
such amounts. In the event that the Master Servicer makes such Delinquency
Advances from its own funds, such Delinquency Advances will be reimbursable to
the Master Servicer from late collections of interest, Liquidation Proceeds,
Insurance Proceeds and Released Mortgaged Property Proceeds collected with
respect to the related Mortgage Loan as to which the Delinquency Advances were
made. Delinquency Advances by the Master Servicer also will be reimbursable to
the Master Servicer from cash otherwise distributable to Holders at such time as
the Master Servicer determines that any such Delinquency Advances previously
made are not ultimately recoverable from the proceeds of the related Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a related Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, a full
month's interest at the Adjusted Pass-Through Rate plus a full month's Excess
Interest with respect to such Mortgage Loan, is due to the Trustee on the
outstanding Loan Balance of each Mortgage Loan as of the beginning of each
Remittance Period. If a prepayment of a Mortgage Loan occurs during any calendar
month, any difference between the interest collected from the Mortgagor during
such calendar month and the full month's interest at the applicable Adjusted
Pass-Through Rate plus a full month's Excess Interest with respect to such
Mortgage Loan ("Compensating Interest") that is due is required to be deposited
by the Master Servicer in the Principal and Interest Account; provided, however,
that the Master Servicer's obligation in respect of the payment of Compensating
Interest is limited to the amount of the Servicing Fee for the related
Distribution Date.
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GENERAL SERVICING PROCEDURES
Acting directly or through one or more Sub-servicers, the Master Servicer,
as an independent contract servicer, is required to service and administer the
Mortgage Loans in accordance with the Sale and Servicing Agreement or the
Pooling and Servicing Agreement, as applicable.
The Master Servicer in its own name or in the name of any Sub-servicer is
authorized and empowered pursuant to the Agreement (i) to execute and deliver
any and all instruments of satisfaction or cancellation or of partial or full
release or discharge and all other comparable instruments with respect to the
Mortgage Loans and with respect to the Mortgaged Properties, (ii) to institute
foreclosure proceedings or obtain a deed in lieu of foreclosure so as to effect
ownership of any Mortgaged Property in its own name on behalf of the Trustee,
and (iii) to hold title in its own name to any Mortgaged Property upon such
foreclosure or deed in lieu of foreclosure on behalf of the Trustee; provided,
however, that to the extent any instrument described in clause (i) would be
delivered by the Master Servicer outside of its ordinary procedures for mortgage
loans held for its own account, the Master Servicer may be required, prior to
executing and delivering such instrument, to obtain the prior written consent of
the Enhancer, if any.
The Master Servicer has the right to approve requests of Mortgagors for
consent to (i) partial releases of Mortgages, (ii) alterations, and
(iii) removal, demolition or division of Mortgaged Properties subject to
Mortgages. The Agreement generally will provide that no such request may be
approved by the Master Servicer unless: (i) (x) provisions of the related Note
and Mortgage have been complied with, (y) the Loan-to-Value Ratio after any
release does not exceed the Loan-to-Value Ratio set forth for such Mortgage Loan
in the applicable Mortgage Loan Schedule, and (z) the lien priority of the
related Mortgage is not affected; or (ii) if applicable, the Certificate Insurer
has approved the granting of such request.
The Master Servicer and any affiliate may make loans to and generally
engage in any kind of business with the Mortgagors and/or any other obligors
under the Mortgage Loans as though the Master Servicer were not a party to the
Agreement. The Master Servicer may have other existing loans and in the future
may make additional loans to any of the Mortgagors and/or to other obligors
under the Mortgage Loans, which other and/or additional loans may not be sold,
or a loan participation therein granted, to the Trustee. The Master Servicer has
no obligation to attempt to collect payment under the Mortgage Loans in
preference and priority over the collection and/or enforcement of any other
and/or additional loans by the Master Servicer or any other affiliate.
The Master Servicer is required generally to service the Mortgage Loans in
a Pool in a prudent manner consistent with its general servicing standards and
to make reasonable efforts to collect all payments called for under the terms
and provisions of such Mortgage Loans, and will agree, to the extent such
procedures are consistent with the provisions of the Agreement, to follow
collection procedures for all Mortgage Loans at least as rigorous as those the
Master Servicer would ordinarily take in servicing loans and in collecting
payments thereunder for its own account.
Consistent with the foregoing, the Master Servicer may (i) in its
discretion waive or permit to be waived any late payment charge, prepayment
charge, assumption fee or any penalty interest in connection with the prepayment
of a Mortgage Loan or any other fee or charge which the Master Servicer would be
entitled to retain as servicing compensation, (ii) extend the due date for
payments due on a Mortgage Note for a period (with respect to each payment date
as to which the due date is extended) not greater than 125 days after the
initially scheduled due date for such payment, (iii) amend any Mortgage Note to
reduce the Mortgage Rate applicable thereto, subject to any applicable
limitations set forth in the related Agreement and (iv) amend any Mortgage Note
to extend the maturity thereof, subject to any applicable limitations set forth
in the related Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will be nonetheless required to make payment of any required
Delinquency Advance with respect to the payments so extended to the same extent
as if such installment were due, owing and delinquent and had not been deferred.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing activities under an Agreement, the Master
Servicer will be entitled to retain the amount of the Servicing Fee (as defined
in the related Agreement) with respect to each Mortgage Loan. Additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, extension fees, late payment charges, and any
other servicing-related fees, Net Liquidation Proceeds not required to be
deposited in the Principal and Interest Account and similar items may, to the
extent collected from Mortgagors, be retained by the Master Servicer.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Property, (ii) any enforcement or
judicial proceedings, including foreclosures, and (iii) the management and
liquidation of Mortgaged Property acquired in satisfaction of the related
Mortgage. Such expenditures may include costs of collection efforts,
reappraisals, forced placement of hazard insurance if a borrower allows his
hazard policy to lapse, legal fees in connection with foreclosure actions,
advancing payments on the related senior mortgage, if any, advancing delinquent
property taxes, and upkeep and maintenance of the Mortgaged Property if it is
acquired through foreclosure and similar types of expenses. Each such
expenditure constitutes a "Servicing Advance." The Master Servicer will be
obligated to make the Servicing Advances incurred in the performance of its
servicing obligations. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be entitled to 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
Liquidation Proceeds, relating to the affected Mortgage Loan. Servicing Advances
will be reimbursable to the Master Servicer from the sources described above out
of the funds on deposit in the Principal and Interest Account.
MAINTENANCE OF HAZARD INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be required to cause to be maintained fire and hazard insurance
with extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the least of (i) the
outstanding principal balance owing on the Mortgage Loan and the related senior
mortgage, if any, (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. If the Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available),
the Master 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 and the senior mortgage, if any, (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 Master Servicer will
also be required to maintain, to the extent such insurance is available, on REO
Property, 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, flood insurance in an amount equal to
that required above. Any amounts collected by the Master 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 or second mortgage servicing procedures) are required to be
deposited by the Master Servicer in the Principal and Interest Account.
In the event that the Master 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 Trustee as loss payee
and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance, and otherwise complies with
the requirements of the preceding paragraph, the Master Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage. If such blanket policy contains a deductible clause, the
Master Servicer will be required to pay to the Trustee the difference between
the amount that would have been payable under a policy described in the
preceding paragraph and the amount paid under the blanket policy.
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ENFORCEMENT OF DUE ON SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when a
Mortgaged Property has been or is about to be conveyed by the Mortgagor, the
Master Servicer, on behalf of the Trustee, will, to the extent it has knowledge
of such conveyance or prospective conveyance, be required 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 Master Servicer will not
be required to exercise any such right if the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law, if such enforcement would materially increase the risk of default or
delinquency on, or materially decrease the security for, such Mortgage Loan or
if the applicable Enhancer, if any, gives its consent to such non-enforcement.
In such event, the Master Servicer will attempt 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, to the extent permitted by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Enhancer, if any, 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. The Master Servicer will
not enter into an assumption agreement unless permitted by applicable law and
unless such assumption agreement would not materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Master Servicer on behalf of the Trustee of
Mortgaged Properties relating to defaulted Mortgage Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments and
which the Master Servicer has not purchased pursuant to its purchase option
described below, unless the Master Servicer reasonably believes that Net
Liquidation Proceeds with respect to such Mortgage Loan would not be increased
as a result of such foreclosure or other action, in which case such Mortgage
Loan will be charged off and will become a Liquidated Mortgage Loan. In
connection with such foreclosure or other conversion, the Master Servicer is
required to exercise or use foreclosure procedures with the same degree of care
and skill as it would ordinarily exercise or use under the circumstances in the
conduct of its own affairs. Any amounts advanced in connection with such
foreclosure or other action will constitute Servicing Advances. In accordance
with the Agreement, if the Master Servicer has actual knowledge that a Mortgaged
Property which the Master Servicer is contemplating acquiring in foreclosure or
by deed in lieu of foreclosure contains environmental or hazardous waste risks
known to the Master Servicer, the Master Servicer will notify the Enhancer, if
any, and the Trustee prior to acquiring the Mortgaged Property. The Master
Servicer will not be permitted to take any action with respect to such a
Mortgaged Property without the prior written approval of the Enhancer, if any.
Unless otherwise specified in the related Prospectus Supplement, if a REMIC
election has been made, the Master Servicer will be required to sell any
Mortgaged Property acquired by foreclosure or deed in lieu of foreclosure ("REO
Property") within 23 months of its acquisition by the Trustee, unless the Master
Servicer obtains for the Trustee an opinion of counsel experienced in federal
income tax matters, addressed to the Trustee and the Master Servicer, to the
effect that the holding by the Trust of such REO Property for a greater
specified period will not result in the imposition of taxes on "prohibited
transactions" of the Trust as defined in Section 860F of the Code or cause the
Trust to fail to qualify as a REMIC.
The Master Servicer is required to determine, with respect to each
defaulted Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts, if any, it expects to recover from
or on account of such defaulted Mortgage Loan, whereupon such Mortgage Loan
shall become a "Liquidated Mortgage Loan."
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will have the right and the option under the related Agreement, but not
the obligation, to purchase for its own account any Mortgage Loan (i) which
becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any
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Mortgage Loan as to which enforcement proceedings have been brought by the
Master Servicer or (ii) with respect to which the applicable Enhancer, if any,
has refused to consent to the Master Servicer's non-enforcement of the
"due-on-sale" clause and such Mortgage Loan is in default or such a default is
imminent. Any such Mortgage Loan so purchased will be purchased by the Master
Servicer on a Distribution Date at the Loan Purchase Price thereof.
SUBSERVICERS
The Master Servicer will be permitted under the Agreement to enter into
subservicing arrangements with sub-servicers meeting the requirements of the
Agreement (each, a "Sub-servicer"). Any material subservicing arrangements, if
any, will be described in the related Prospectus Supplement, and in any case,
will not relieve the Master Servicer of any liability it might otherwise have,
had the subservicing arrangement not been entered into.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Sale and Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement the Trustee may remove
the Master Servicer upon the occurrence of any of the following events (each, an
"Event of Default"):
(i) The Master Servicer shall (a) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian or similar
entity with respect to itself or its property, (b) admit in writing its
inability to pay its debts generally as they become due, (c) make a general
assignment for the benefit of creditors, (d) be adjudicated a bankrupt or
insolvent, (e) commence a voluntary case under the federal bankruptcy laws
of the United States of America or file a voluntary petition or answer
seeking reorganization, an arrangement with creditors or an order for
relief or seeking to take advantage of any insolvency law or file an answer
admitting the material allegations of a petition filed against it in any
bankruptcy, reorganization or insolvency proceeding or (f) cause corporate
action to be taken by it for the purpose of effecting any of the foregoing;
or
(ii) If without the application, approval or consent of the Master
Servicer, a proceeding shall be instituted in any court of competent
jurisdiction, under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking in respect of the Master
Servicer an order for relief or an adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a composition or
arrangement with creditors, of a readjustment of debts, the appointment of
a trustee, receiver, liquidator or custodian or similar entity with respect
to the Master Servicer or of all or any substantial part of its assets, or
other like relief in respect thereof under any bankruptcy or insolvency
law, and, if such proceeding is being contested by the Master Servicer in
good faith, the same shall (a) result in the entry of an order for relief
or any such adjudication or appointment or (b) continue undismissed or
pending and unstayed for any period of seventy-five (75) consecutive days;
or
(iii) The Master Servicer shall fail to perform any one or more of its
obligations under the related Agreement (other than its obligations
referenced in clauses (vi) and (vii) below) and shall continue in default
thereof for a period of thirty (30) days after the earlier to occur of
(x) the date on which an authorized officer of the Master Servicer knows or
reasonably should know of such failure or (y) receipt by the Master
Servicer of a written notice from the Trustee, any Holder, the Depositor or
the Enhancer, if any, of said failure; provided, however, that if the
Master Servicer demonstrates to the reasonable satisfaction of the
Enhancer, if any, that it is diligently pursuing corrective action, the
cure period may be extended for up to an additional 60 days; or
(iv) The Master Servicer shall fail to cure any breach of any of its
representations and warranties set forth in the related Agreement which
materially and adversely affects the interests of the Holders or the
Enhancer, if any, for a period of thirty (30) days after the earlier of
(x) the date on which an authorized officer of the Master Servicer knows or
reasonably should know of such breach or (y) receipt by the Master Servicer
of a written notice from the Trustee, any Holder, the Depositor or the
Enhancer, if any, of such breach; provided, however, that if the Master
Servicer demonstrates to the reasonable satisfaction of the Enhancer, if
any, that it is diligently pursuing corrective action, the cure period
shall be extended for up to an additional 30 days; or
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(v) If the Enhancement consists of a certificate guaranty insurance
policy and the Enhancer pays out any money under such policy, or if the
Enhancer otherwise funds any shortfall with its own money, because the
amounts available to the Trustee (other than from the Enhancer) are
insufficient to make required distributions on the Securities; provided,
however, that the Master Servicer may not be removed under this clause
(v) if the Master Servicer can demonstrate to the reasonable satisfaction
of the Trustee and the Enhancer that such event was due to circumstances
beyond the control of the Master Servicer; or
(vi) The failure by the Master Servicer to make any required Servicing
Advance for a period of 30 days following the earlier of (x) the date on
which an authorized officer of the Master Servicer knows or reasonably
should know of such failure or (y) receipt by the Master Servicer of a
written notice from the Trustee, any Holder, the Depositor or the Enhancer,
if any, of such failure; or
(vii) The failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest or to pay over the
Monthly Remittance, Loan Purchase Prices and Substitution Amounts;
provided, however, that (x) prior to any removal of the Master Servicer pursuant
to clauses (i) through (vi) above, any applicable grace period granted by any
such clause shall have expired prior to the time such occurrence shall have been
remedied and (y) in the event of the refusal or inability of the Master Servicer
to comply with its obligations described in clause (vii) above, such removal
shall be effective (without the requirement of any action on the part of the
Depositor, the Trustee or the Enhancer, if any) at 4 p.m. on the second business
day following the day on which the Trustee notifies the Master Servicer that a
required amount described in clause (vii) above has not been received by the
Trustee, unless the required amount described in clause (vii) above is paid by
the Master Servicer prior to such time. Upon the Trustee's determination that a
required amount described in clause (vii) above has not been made by the Master
Servicer, the Trustee will so notify the Master Servicer, the Depositor and the
Enhancer, if any, as soon as is reasonably practical.
The Master Servicer may not resign from the obligations and duties imposed
on it under the related Agreement, except upon determination that its duties
thereunder are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities carried on by it,
the other activities of the Master Servicer so causing such a conflict being of
a type and nature carried on by the Master Servicer at the date of the related
Agreement. Any such determination permitting the resignation of the Master
Servicer shall be evidenced by an opinion of counsel to such effect which shall
be delivered to the Trustee, the Depositor and the Enhancer, if any. The Master
Servicer may not assign its obligations under an Agreement, in whole or in part,
unless it shall have first obtained the written consent of the Trustee and the
Enhancer, if any; provided, however, that any assignee must meet the eligibility
requirements set forth in the Agreement for a successor servicer.
No removal or resignation of the Master Servicer will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
responsibilities and obligations in accordance with the related Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the Class or Classes of Certificates of such Series that
have been rated.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for 30 days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Depositor or the Trust in the Indenture which continues for a period of
60 days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Depositor or the Trust in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within
60 days after notice thereof is given in accordance with the procedures
described in the
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related Prospectus Supplement; (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the Depositor or the Trust; or (v) any other
Event of Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, may declare the principal amount of all the Notes of such Series to be
due and payable immediately. Such declaration may, under certain circumstances,
be rescinded and annulled by the Holders of a majority in aggregate outstanding
amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, unless
otherwise specified in the related Prospectus Supplement, the Trustee may not
sell or otherwise liquidate the collateral securing the Notes of a Series
following an Event of Default other than a default in the payment of any
principal or interest on any Note of such Series for 30 days or more, unless
(a) the Holders of 100% of the then aggregate outstanding amount of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or liquidation
are sufficient to pay in full the principal of and accrued interest due and
unpaid on the outstanding Notes of such Series at the date of such sale or
(c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for 30 days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders may be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offer to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
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TRUSTEE TO ACT AS SUCCESSOR MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, upon
removal or resignation of the Master Servicer, the Trustee (x) may solicit bids
for a successor master servicer, and (y) pending the appointment of a successor
master servicer as a result of soliciting such bids, will be required to serve
as Master Servicer. The Trustee, if it is unable to obtain a qualifying bid and
is prevented by law from acting as Master Servicer, may appoint, or petition a
court of competent jurisdiction to appoint, any housing and home finance
institution, bank or mortgage servicing institution which has been designated as
an approved seller-servicer by FNMA or FHLMC for first and second mortgage loans
and has equity of not less than $15,000,000, as determined in accordance with
generally accepted accounting principles, and acceptable to the Certificate
Insurer, if any.
The Trustee or any other successor Master Servicer, upon assuming the
duties of the Master Servicer is required to immediately make payment of all
Compensating Interest and all Delinquency Advances which the Master Servicer has
theretofore failed to remit with respect to the Mortgage Loans; provided,
however, that if the Trustee is acting as successor Master Servicer, the Trustee
is only required to make Delinquency Advances (including the Delinquency
Advances described in this sentence) if, in the Trustee's reasonable good faith
judgment, such Delinquency Advances will ultimately be recoverable from the
related Mortgage Loans.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees, the servicing by or on behalf of the Master Servicer
of mortgage loans or private mortgage-backed securities under pooling and
servicing agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Guide
for Audits of HUD Approved Nonsupervised Mortgagees requires it to report.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an authorized
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the officer's statement may
be obtained by Holders of the related Series without charge upon written request
to the Master Servicer at the address set forth in the related Prospectus
Supplement.
AMENDMENTS
The Trustee, the Depositor and the Master Servicer may at any time and from
time to time, with the consent of the Enhancer, if any, but without the consent
of the Holders, amend the related Agreement, for the purposes of (a) curing any
ambiguity, or correcting or supplementing any provision of such agreement which
may be inconsistent with any other provision of such agreement, (b) if a REMIC
election has been made and if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a Residual Certificate to a Disqualified Organization (as such term
is defined in the Code) or (c) complying with the requirements of the Code;
provided, however, that such action shall not, as evidenced by an opinion of
counsel delivered to the Trustee, materially and adversely affect the interests
of any Holder or materially and adversely affect (without its written consent)
the rights and interests of the Enhancer, if any.
The related Agreement may also be amended by the Trustee, the Depositor and
the Master Servicer at any time and from time to time, with the prior written
approval of the Enhancer, if any, and of not less than a majority of the
Percentage Interests (as defined in the Agreement) represented by each affected
Class of Securities then outstanding, for the purpose of adding any provisions
or changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the Holders thereunder; provided, however,
that no such amendment shall (a) change in any manner the amount of, or delay
the timing of, payments which are
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required to be distributed to any Holder without the consent of such Holder or
(b) change the aforesaid percentages of Percentage Interests which are required
to consent to any such amendments, without the consent of the Holders of all
Securities of the Class or Classes affected then outstanding. If a REMIC
election has been made with respect to the related Trust, any such amendment
must be accompanied by an opinion of tax counsel as to REMIC matters.
TERMINATION; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or the Trust Agreement for each Series
will terminate upon the payment to the related Holders of all amounts held in
any Accounts or by the Master Servicer and required to be paid to them pursuant
to such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any such Mortgage Assets remaining in the Trust and (ii) the
purchase by the Master Servicer or other entity specified in the related
Prospectus Supplement including, if REMIC treatment has been elected, by the
holder of the residual interest in the REMIC from the related Trust of all of
the remaining Mortgage Assets and all property acquired in respect of such
Mortgage Assets.
Any such purchase of Mortgage Assets and property acquired in respect of
Mortgage Assets will be made at the option of the Master Servicer or other
entity at a price, and in accordance with the procedures, specified in the
Prospectus Supplement. The exercise of such right will effect early retirement
of the Securities of that Series, but the right of the Master Servicer or other
entity to so purchase is subject to the principal balance of the related
Mortgage Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
at the Cut-off Date for the Series. The foregoing is subject to the provisions
that if a REMIC election is made with respect to a Trust, any repurchase
pursuant to clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust will be discharged from any and all obligations in respect of the
Notes of such Series (except for certain obligations relating to temporary Notes
and exchange of Notes, to register the transfer of or exchange Notes of such
Series, to replace stolen, lost or mutilated Notes of such Series, to maintain
paying agencies and to hold monies for payment in trust) upon the deposit with
the Trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America which, through the payment of
interest and principal in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, Holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Depositor will be obligated to appoint a successor Trustee.
The Depositor may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
Each Agreement will provide that the Trustee is under no obligation to
exercise any of the rights or powers vested in it by the Agreement at the
request or direction of any of the Holders, unless such Holders shall have
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offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. The Trustee may execute any of the rights or powers
granted by the Agreement or perform any duties thereunder either directly or by
or through agents or attorneys, and the Trustee is responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder.
Pursuant to the Agreement, the Trustee is not liable for any action it
takes or omits to take in good faith which it reasonably believes to be
authorized by an authorized officer of any person or within its rights or powers
under the Agreement.
Each Agreement will provide that no Holder has any right to institute any
proceeding, judicial or otherwise, with respect to the Agreement or any credit
enhancement, unless:
(1) such Holder has previously given written notice to the Depositor
and the Trustee of such Holder's intention to institute such proceeding;
(2) the Holders of not less than 25% of the Percentage Interests
represented by any Class of Securities then outstanding shall have made
written request to the Trustee to institute such proceeding in its own name
as representative of the Holders;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 30 days after its receipt of such notice, request
and offer of indemnity, has failed to institute such proceeding; and
(5) no direction inconsistent with such written consent has been given
to the Trustee during such 30-day period by the Holders of a majority of
the Percentage Interests represented by each Class of Securities then
outstanding.
Each Agreement will provide that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing themselves of, any
provision of the Agreement to affect, disturb or prejudice the rights of any
Holder or to obtain or to seek to obtain priority or preference over any other
Holder or to enforce any right under the Agreement, except in the manner herein
provided and for the equal and ratable benefit of all of the Holders.
In the event the Trustee receives conflicting or inconsistent requests and
indemnity from two or more groups of Holders, each representing less than a
majority of the applicable Class of Securities, the Trustee in its sole
discretion may determine what action, if any, shall be taken.
The Trustee, prior to the occurrence of an Event of Default and after the
curing of all Events of Default which may have occurred, undertakes to perform
such duties and only such duties as are specifically set forth in the Agreement.
If an Event of Default has occurred and has not been cured or waived, each
Agreement requires the Trustee to exercise such of the rights and powers vested
in it by the Agreement, and use the same degree of care and skill in its
exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs. Prior to the occurrence of an Event of
Default, and after the curing of all such Events of Default which may have
occurred, the Trustee (i) undertakes to perform such duties and only such duties
as are specifically set forth in the Agreement, and no implied covenants or
obligations shall be read into the Agreement against the Trustee and (ii) in the
absence of bad faith on its part, may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished pursuant to and conforming to the
requirements of the Agreement; provided, however, that such provisions do not
protect the Trustee or any such person against any liability which would
otherwise be imposed by reason of negligent actions, negligent failure to act or
willful misconduct in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder.
The Trustee and any director, officer, employee or agent of the Trustee may
rely and will be protected in acting or refraining from acting in good faith in
reliance on any certificate, notice or other document of any kind prima facie
properly executed and submitted by the authorized officer of any person
respecting any matters arising under the Agreement.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of material legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the security for the Mortgage Loans is situated.
NATURE OF THE MORTGAGE LOANS
The Single Family Loans and Multifamily Loans will be secured by mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the property subject to the loan is
located. A mortgage creates a lien upon the real property encumbered by the
mortgage, which lien is generally not prior to the lien for real estate taxes
and assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two parties
to a mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. The mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, 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. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid. The
mortgagee's authority under a mortgage, the trustee's authority under a deed of
trust and the grantee's authority under a security deed or deed to secure debt
are governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
Certain of the Mortgage Loans may be loans secured by condominium units.
The condominium building may be a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to condominium ownership. Condominium ownership is a form of ownership of a real
property wherein each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit and also owns a
proportionate undivided interest in all parts of the condominium building (other
than the individual condominium units) and all areas or facilities, if any, for
the common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In some states, the trustee must
record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. Before
such non-judicial sale takes place, typically a notice of sale must be posted in
a public place and published during a specific period of time in one or more
newspapers, posted on the property, and sent to parties having an interest of
record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real-property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary
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default by paying the entire amount in arrears plus other designated costs and
expenses incurred in enforcing the obligation. Generally, state law controls the
amount of foreclosure expenses and costs, including attorney's fees, which may
be recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the mortgage is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender may purchase the property from the trustee or
referee for an amount equal to the principal amount outstanding under the loan,
accrued and unpaid interest and the expenses of foreclosure. Thereafter, the
lender will assume the burden of ownership, including obtaining hazard insurance
and making 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.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right of
the beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the Master Servicer will not seek deficiency
judgments against defaulting Mortgagors.
In addition to 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 the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on the mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly
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payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including but not limited to any automatic stay, could
result in delays in receiving payments on the Mortgage Loans underlying a Series
of Securities and possible reductions in the aggregate amount of such payments.
Some states also have homestead exemption laws which would protect a principal
residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of such loans. 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 and
regulations. These federal and state laws impose specific statutory liabilities
upon lenders who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the Mortgagor sells, transfers or conveys the
Mortgaged Property, the Mortgage Loan may be accelerated by the mortgagee. The
Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"),
subject to certain exceptions, preempts state constitutional, statutory and case
law prohibiting the enforcement of due-on-sale clauses. As to loans secured by
an owner-occupied residence (which could include a manufactured home), the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
mortgaged property to an uncreditworthy person, which could increase the
likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of the mortgage loans with respect
to prepayments on mortgage loans secured by liens encumbering owner-occupied
residential properties. Since many of the Mortgaged Properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Single Family Loans having
higher Mortgage Rates, may increase the likelihood of refinancing or other early
retirement of such Mortgage Loans. Legal restrictions, if any, on prepayment of
Multifamily Loans will be described in the related Prospectus Supplement.
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. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an 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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a Mortgagor who enters
military service after the origination of the related 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 above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders
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otherwise upon application of the lender. It is possible that such interest rate
limitation could have an effect, for an indeterminate period of time, on the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Unless otherwise provided in the applicable Prospectus
Supplement, any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the holders of the Securities. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Loans and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Loans. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a 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. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Holders if a Mortgaged Property securing a Mortgage Loan
became the property of such Trust in certain circumstances and if such Cleanup
Costs were incurred. Moreover, certain states by statute impose a superpriority
lien for any Cleanup Costs incurred by such state on the property that is the
subject of such Cleanup Costs (a "Superlien"). All subsequent liens on such
property are subordinated to such Superlien and, in some states, even prior
recorded liens are subordinated to such 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.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
This section sets forth (i) certain federal income tax opinions of Stroock
& Stroock & Lavan LLP, special counsel to the Seller ("Federal Tax Counsel"),
and (ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. The summary focuses primarily upon
investors who will hold Securities as "capital assets" (generally, property held
for investment) within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"), but much of the discussion is applicable to
other investors as well. Because tax consequences may vary based on the status
or tax attributes of the owner of a Security, prospective investors are advised
to consult their own tax advisers concerning the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Securities. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), any reference
to the "Holder" means the beneficial owner of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this summary is based are
subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat the Trust (or
certain assets of the Trust) relating to a particular Series of Securities as a
real estate mortgage investment conduit ("REMIC") under the Code; (iii) the
Securities represent an ownership interest for federal income tax purposes in
some or all of the assets included in the Trust for a Series; or (iv) for
federal income tax purposes the Trust relating to a particular Series of
Certificates is classified as a partnership. The Prospectus Supplement for each
Series of Securities will specify how the Securities will be treated for federal
income tax purposes and will discuss whether a REMIC election, if any, will be
made with respect to such Series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) If a Prospectus Supplement indicates that one or more Classes of
Securities of the related Series are to be treated as indebtedness for
federal income tax purposes, assuming that all of the provisions of the
applicable Agreement are complied with, the Securities so designated will
be considered indebtedness of the Trust for federal income tax purposes;
(ii) If a Prospectus Supplement indicates that one or more REMIC
elections will be made with respect to the related Trust, assuming that
such elections are timely made and all of the provisions of the applicable
Agreement are complied with (a) each segregated pool of assets specified in
such Agreement will constitute a REMIC for federal income tax purposes,
(b) the Class or Classes of Securities of the related Series which are
designated as "regular interests" in such Prospectus Supplement will be
considered "regular interests" in a REMIC for federal income tax purposes
and (c) the Class of Securities of the related Series which is designated
as the "residual interest" in such Prospectus Supplement will be considered
the sole class of "residual interests" in the applicable REMIC for federal
income tax purposes;
(iii) If a Prospectus Supplement indicates that a Trust will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable Agreement, (a) the
Trust will be considered to be a grantor trust under Subpart E, Part I of
Subchapter J of the Code and will not be considered to be an association
taxable as a corporation and (b) a Holder of the related Securities will be
treated for federal income tax purposes as the owner of an undivided
interest in the Mortgage Assets included in the Trust; and
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(iv) If a Prospectus Supplement indicates that a Trust is to be
treated as a partnership (or a division) for federal income tax purposes,
assuming that all of the provisions of the applicable Agreements are
complied with, such Trust will be considered to be a partnership (or
division of the equity owner) for federal income tax purposes and will not
be considered to be a publicly traded partnership taxable as a corporation.
Each such opinion is an expression of an opinion only, is not a guarantee
of results and is not binding on the Internal Revenue Service or any
third-party.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
Holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by Holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities." For Certificates treated as debt for federal income tax
purposes, see "Certain Certificates Treated as Indebtedness."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder (the "OID Regulations"). A Holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the excess of the stated redemption
price at maturity of a Debt Security over its issue price. A Holder of a Debt
Security must include such OID in gross income as ordinary interest income as it
accrues under a prescribed method which takes into account an economic accrual
of the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest is remote or reasonable remedies exist to compel
payment. Interest payments on Debt Securities which do not have reasonable
remedies to compel timely payment of interest may not be qualified stated
interest, and such Debt Securities may have original issue discount.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
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Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying (i) the number
of full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by (ii) a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Seller may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Seller does adjust
the accrual of OID in that manner and the Internal Revenue Service were to
require that OID be accrued without such adjustments, the rate of accrual of OID
for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as
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will an initial Holder who pays more than a Debt Security's issue price) to
offset such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Mortgage Loans, except possibly to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a Holder of such a Security in any
period could significantly exceed the amount of cash distributed to such Holder
in that period. The Holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Mortgage Loan
default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, Holders of Securities should consult
their own tax advisors on this point.
Interest-Only Debt Securities. The Trust intends to report income from
interest-only classes of Debt Securities to the Internal Revenue Service and to
Holders of interest-only Debt Securities based on the assumption that the stated
redemption price at maturity is equal to the sum of all payments determined
under the applicable prepayment assumption. As a result, such interest-only Debt
Securities Certificates will be treated as having original issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount; (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates,
(b) a single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate; and (iii) it does not provide for any principal
payments that are contingent.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. Although the issue is not free from
doubt, an interest rate on a REMIC Regular Certificate will not constitute an
objective rate if it is reasonably expected that the average value of such rate
during the first half of the Variable Rate REMIC Regular Certificate's term will
be either significantly less than or significantly greater than the average
value of the rate during the final half of the Variable Rate REMIC Regular
Certificate's term. Further, an objective rate that does not include a rate that
is based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer (or
a party related to the issuer). An objective rate will qualify as a "qualified
inverse floating rate" if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect
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contemporaneous variations in the qualified floating rate. The OID Regulations
also provide that if a Variable Rate REMIC Regular Certificate provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "Presumed
Single Variable Rate"). If the value of the variable rate and the initial fixed
rate are within 25 basis points of each other as determined on the Variable Rate
REMIC Regular Certificate's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates--Current Income
on REMIC Regular Certificates--Original Issue Discount") based on the following:
(i) stated interest on the Single Variable Rate REMIC Regular Certificate which
is unconditionally payable in cash or property (other than debt instruments of
the issuer) at least annually will constitute qualified stated interest;
(ii) by assuming that the variable rate on the Single Variable Rate REMIC
Regular Certificate is a fixed rate equal to: (a) in the case of a Single
Variable Rate REMIC Regular Certificate with a qualified floating rate or a
qualified inverse floating rate, the value of, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate REMIC Regular Certificate with an objective rate
(other than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Rate Regular Certificate; and
(iii) the qualified stated interest allocable to an accrual period is increased
(or decreased) if the interest actually paid during an accrual period exceeds
(or is less than) the interest assumed to be paid under the assumed fixed rate
described in (ii) above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted into
an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A Holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified
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stated interest as if the Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Multiple Variable Rate REMIC Regular Certificate during such
accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. Federal Tax Counsel is unable to opine how a Variable Rate REMIC
Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either
(i) on the basis of a constant yield (in the case of a Pay-Through Security,
taking into account a prepayment assumption) or (ii) in the ratio of (a) in the
case of Securities (or in the case of a Pass-Through Security, as set forth
below, the Loans underlying such Security) not originally issued with original
issue discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a Holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4,
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1994. If such an election were to be made with respect to a Debt Security with
market discount, the Holder of the Debt Security would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such Holder of the Debt
Security acquires during the year of the election or thereafter. Similarly, a
Holder of a Debt Security that makes this election for a Debt Security that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
Sale or Exchange. A Holder's tax basis in its Debt Security is the price
such Holder pays for the Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includible in the
Holder's income if the yield on such Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of such Holder' s holding
period, over the amount of ordinary income actually recognized by the Holder
with respect to such Regular Interest Security. Currently, the maximum tax rate
on ordinary income for individual taxpayers is 39.6% and the maximum tax rate on
long-term capital gains for such taxpayers is 20%. The maximum tax rate on both
ordinary income and long-term capital gains of corporate taxpayers is 35%.
TAXATION OF THE REMIC AND ITS HOLDERS
Status of Regular Interest Securities as Real Property Loans. Regular
Interest Securities and Securities representing a residual interest in a REMIC
(both types of securities collectively referred to as "REMIC Securities") will
be "real estate assets" for purposes of Section 856(c)(4)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code (assets qualifying under
one or more of those sections, applying each section separately, "qualifying
assets") to the extent that the REMIC's assets are qualifying assets. However,
if at least 95 percent of the REMIC's assets are qualifying assets, then 100
percent of the REMIC Securities will be qualifying assets. Similarly, income on
the REMIC Securities will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Mortgage Loans, the REMIC's assets will include payments on Mortgage Loans held
pending distribution to Holders of REMIC Securities, amounts in reserve accounts
(if any), other credit enhancements (if any) and possibly buydown funds
("Buydown Funds"). The Mortgage Loans generally will be qualifying assets under
all three of the foregoing sections of the Code. However, Mortgage Loans that
are not secured by residential real property or real property used primarily for
church purposes may not constitute qualifying assets under
Section 7701(a)(19)(C)(v) of the Code. In addition, to the extent that the
principal amount of a Mortgage Loan exceeds the value of the property securing
the Mortgage Loan, it is unclear and Federal Tax Counsel is unable to opine
whether the Mortgage Loans will be qualifying assets. The regulations under
Sections 860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Mortgage Loans and held pending distribution to Holders of
Regular Interest Securities ("cash flow investments") will be treated as
qualifying assets. It is unclear whether reserve funds or Buydown Funds would
also constitute qualifying assets under any of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual
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Interest Securities on a daily basis in proportion to the relative amounts of
income accruing to each Holder on that day. In the case of a Holder of a Regular
Interest Security who is an individual or a "pass-through interest Holder"
(including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the Holder,
exceed 2% of such Holder's adjusted gross income and such Holder may not be able
to deduct such fees and expenses to any extent in computing such Holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds an applicable amount will be reduced by the lesser
of (i) 3% of the excess of adjusted gross income over the applicable amount, or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. The reduction or disallowance of this deduction may have a
significant impact on the yield of the Regular Interest Security to such a
Holder. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise stated in the applicable Prospectus
Supplement, the expenses of the REMIC will be allocated to Holders of the
related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, 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. Solely for purposes
of determining whether the REMIC Securities will be "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code, and "loans secured by an
interest in real property" under Section 7701(a)(19)(C) of the Code, and whether
the income on such Securities is interest described in Section 856(c)(3)(B) of
the Code, the Tiered REMICs will be treated as one REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Mortgage Loans, and
servicing fees and other expenses of the REMIC. A Holder of a Residual Interest
Security that is an individual or a "pass-through interest Holder" (including
certain pass-through entities, but not including real estate investment trusts)
will be unable to deduct servicing fees payable on the Loans or other
administrative expenses of the REMIC for a given taxable year, to the extent
that such expenses, when aggregated with such Holder's other miscellaneous
itemized deductions for that year, do not exceed two percent of such Holder's
adjusted gross income and such Holder may not be able to deduct such fees and
expenses to any extent in computing such holders alternative minimum tax
liability.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of OID income on such loans will be equivalent to the
method under which Holders of Pay-Through Securities accrue original issue
discount (i.e., under the constant yield method taking into account the
Prepayment Assumption). The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the Holders of the Regular Interest
Securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities (Including Regular Interest Securities)"
above. However, a REMIC that acquires loans at a market discount must include
such market discount in income currently, as it accrues, on a constant interest
basis.
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To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium will be amortized over
the life of the loans (presumably taking into account the Prepayment Assumption)
on a constant yield method.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
Startup Day. The Holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such Holders or otherwise, however, such taxes will be paid
out of the Trust and will be allocated pro rata to all outstanding Classes of
Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Mortgage Loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. Taxable income may
also be greater in earlier years of certain REMIC issues as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. The after-tax yield on the
Residual Interest Security may be less than that of such a bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the Residual Interest Security. The ability of Holders
of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest
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Security, however, the Holder will recognize gain (treated as gain from the sale
of the Residual Interest Security) to the extent of such excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced monthly
by the Treasury Department, is an interest rate that is based on the average
market yield of outstanding marketable obligations of the United States
government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from
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owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed (generally on the transferor of such Residual Interest
Security) at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity (including, among
others, a partnership, trust, real estate investment trust, regulated investment
company, or any person holding as nominee an interest in a pass-through entity),
that owns a Residual Interest Security, the pass-through entity will be required
to pay an annual tax on its allocable share of the excess inclusion income of
the REMIC.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. 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. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, 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 finds that the transferee has
historically paid its debts as they came due and finds 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
(A) the transferee understands that it might incur tax liabilities in excess of
any cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of a
Residual Interest Security by or to foreign transferees. See "Tax Treatment to
Foreign Investors".
Mark to Market Rules. The Mark-to-Market Regulations Under Code
Section 475 provide that REMIC Residual Interests cannot be marked to market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be 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.
TAX STATUS AS A GRANTOR TRUST
General. As further described below, each Holder of a Security issued by a
grantor trust (a "Pass-Through Security") must report on its federal income tax
return the gross income from the portion of the Mortgage Loans that is allocable
to such Pass-Through Security and may deduct the portion of the expenses
incurred or accrued by the Trust that is allocable to such Pass-Through
Security, at the same time and to the same extent as such items would be
reported by such Holder if it had purchased and held directly such interest in
the Mortgage Loans and received or accrued directly its share of the payments on
the Mortgage Loans and incurred or accrued directly its share of expenses
incurred or accrued by the Trust when those amounts are received, incurred or
accrued by the Trust.
A Holder of a Pass-Through Security that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the Holder's other miscellaneous itemized deductions exceeds
two percent of such Holder's adjusted gross income. Moreover, a Holder of a
Pass-Through Security that is not a corporation cannot deduct such expenses for
purposes of the alternative minimum tax (if
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applicable). Such deductions will include servicing, guarantee and
administrative fees paid to the servicer of the Mortgage Loans. As a result, the
Trust will report additional taxable income to Holders of Pass-Through
Securities in an amount equal to their allocable share of such deductions, and
individuals, estates, or trusts holding Pass-Through Securities may have taxable
income in excess of the cash received. There are also additional limitations on
certain itemized deductions in Code Section 68.
Status of the Pass-Through Securities as Real Property Loans. The
Pass-Through Securities will be "real estate assets" for purposes of Section
856(4)(A) of the Code and "loans..................secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code (assets
qualifying under one or more of those sections, applying each section
separately, "qualifying assets") to the extent that the Trust's assets are
qualifying assets. The Pass-Through Securities may not be qualifying assets
under any of the foregoing sections of the Code to the extent that the Trust's
assets include Buydown Funds, reserve funds, or payments on Mortgage Loans held
pending distribution to Holders. Further, the Pass-Through Securities may not be
"real estate assets" to the extent loans held by the trust are not secured by
real property, and may not be "loans secured by an interest in real property" to
the extent loans held by the trust are not secured by residential real property
or real property used primarily for church purposes. In addition, to the extent
that the principal amount of a loan exceeds the value of the property securing
the loan, it is unclear and Federal Tax Counsel is unable to opine whether the
loans will be qualifying assets.
Taxation of Pass-Through Securities. The federal income tax treatment of
the Pass-Through Securities will depend on whether they are subject to the rules
of Section 1286 of the Code (the "stripped bond rules"). The Pass-Through
Securities will be subject to those rules if stripped interest-only Securities
are issued. In addition, whether or not stripped interest-only Securities are
issued, the IRS may contend that the stripped bond rules apply on the ground
that the Servicer's servicing fee, or other amounts, if any, paid to (or
retained by) the Servicer or its affiliates, as specified in the applicable
Prospectus Supplement, represent greater than an arm's length consideration for
servicing the Mortgage Loans and should be characterized for federal income tax
purposes as an ownership interest in the Mortgage Loans. The IRS has taken the
position in Revenue Ruling 91-46 that a retained interest in excess of
reasonable compensation for servicing is treated as a "stripped coupon" under
the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A Holder of a Pass-
Through Security will account for any discount on the Pass-Through Security as
market discount rather than OID if either (i) the amount of OID with respect to
the Pass-Through Security was treated as zero under the OID de minimis rule when
the Pass-Through Security was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Mortgage Loans. If neither of the above exceptions
applies, the OID rules will apply to the Pass-Through Securities.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each Mortgage Loan underlying such Pass-Through Security) to such Holder.
Such yield would be computed at the rate (assuming monthly compounding) that, if
used in discounting the Holder's share of the payments on the Mortgage Loans,
would cause the present value of those payments to equal the price at which the
Holder purchased the Pass-Through Security. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that OID be accrued
based on a prepayment assumption determined in a manner prescribed by
forthcoming regulations. Section 1272(a)(6) will apply to the Pass-Through
Securities pursuant to recently enacted legislation. If required to report
interest income on the Pass-Through Securities to the IRS under the stripped
bond rules, it is anticipated that the Trustee will calculate the yield of the
Pass-Through Securities based on a representative initial offering price of the
Pass-Through Securities and a reasonable assumed rate of prepayment of the
Mortgage Loans (although such yield may differ from the yield to any particular
Holder that would be used in calculating the interest income of such Holder).
The Prospectus Supplement for each series of Pass-Through Securities will
describe the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate.
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In the case of a Pass-Through Security acquired at a price equal to the
principal amount of the Mortgages allocable to the Pass-Through Security, the
use of a reasonable prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Pass-Through Security acquired at a discount or
premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
"Sales of Pass-Through Securities" below) that is allocable to the Mortgage
Loan. The method of allocating such basis among the Mortgage Loans may differ
depending on whether a reasonable prepayment assumption is used in calculating
the yield of the Pass-Through Securities for purposes of accruing OID.
If the stripped bond rules do not apply to a Pass-Through Security, then
the Holder will be required to include in income its share of the interest
payments on the Mortgage Loans in accordance with its tax accounting method. In
addition, if the Holder purchased the Pass-Through Security at a discount or
premium, the Holder will be required to account for such discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is OID as defined in the Code and, in the case of discount other
than OID, whether such other discount exceeds a de minimis amount. In the case
of OID, the Holder (whether a cash or accrual method taxpayer) will be required
to report as additional interest income in each month the portion of such
discount that accrues in that month, calculated based on a constant yield
method. In general it is not anticipated that the amount of OID to be accrued in
each month, if any, will be significant relative to the interest paid currently
on the Mortgage Loans. However, OID could arise with respect to a Mortgage Loan
that provides for interest at a rate equal to the sum of an index of market
interest rates and a fixed number ("ARM"). The OID for ARMs generally will be
determined under the principles discussed in "Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities."
If discount other than OID exceeds a de minimis amount (described below),
the Holder will also generally be required to include in income in each month
the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Mortgage Loan, to the amount of principal on such Mortgage Loan
received by the Trust in that month. Because the Mortgage Loans will provide for
monthly principal payments, such discount may be required to be included in
income at a rate that is not significantly slower than the rate at which such
discount accrues (and therefore at a rate not significantly slower than the rate
at which such discount would be included in income if it were OID). The Holder
may elect to accrue such discount under a constant yield method based on the
yield of the Pass-Through Security to such Holder (or possibly based on the
yields of each Mortgage Loan). In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method. Under
the de minimis rule, market discount with respect to a Pass-Through Security
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Loans allocable to the Pass-Through Security
and (ii) the weighted average life (in complete years) of the Mortgage Loans
remaining at the time of purchase of the Pass-Through Security, presumably
taking into account a prepayment assumption.
If a Holder purchases a Pass-Through Security at a premium, such Holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Mortgage Loan under a constant yield method based on the yield
of the Mortgage Loan to such Holder.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original issue
discount on the Securities. This withholding generally applies if the Holder of
a Security (i) fails to furnish the Trustee with its taxpayer identification
number ("TIN"); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other "reportable payments" as defined in
the Code; or (iv) under certain circumstances, fails to
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provide the Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the Holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trusts which are treated as
partnerships for federal income tax purposes and with respect to Securities
treated as debt for federal income tax purposes, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("foreign investors"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a Holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. See "--Tax Consequences to Holders of
the Certificates Issued by a Partnership--Tax Consequences to Foreign
Certificateholders" and "--Certain Certificates Treated as Indebtedness--Foreign
Investors". Upon receipt of appropriate ownership statements, the issuer
normally will be relieved of obligations to withhold tax from such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless such rate were reduced or eliminated by an applicable tax treaty)
on, among other things, interest and other fixed or determinable, annual or
periodic income paid to Nonresidents.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder and timely provide an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States 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 Interest Security for purposes of the withholding tax provisions
of the Code. See "Taxation of Holders of Residual Interest Securities--Excess
Inclusions."
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States
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federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a Trust is intended to be a partnership for federal income tax purposes,
the applicable Agreements will provide that the nature of the income of the
Trust will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or the issuance of the Certificates will be structured
as a private placement under an IRS safe harbor, so that the Trust will not be
characterized as a publicly traded partnership taxable as a corporation.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the Notes as Indebtedness. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Seller that the Notes
will be classified as debt for federal income tax purposes. Consequently,
Holders of Notes will be subject to taxation as described in "Taxation of Debt
Securities (Including Regular Interest Securities)" above for Debt Securities
which are not Regular Interest Securities.
Possible Alternative Treatment of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust. If so treated, the Trust would likely
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain Holders. For example, income to
foreign Holders generally would be subject to U.S. federal income tax and U.S.
federal income tax return filing and withholding requirements, and individual
Holders might be subject to certain limitations on their ability to deduct their
share of the Trust's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Trust as a Partnership. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Seller will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders, and the
Notes, if any, being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the Trust and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership. The following
discussion also assumes that all payments on the Certificates are denominated in
U.S. dollars, none of the Certificates have interest rates which would qualify
as contingent interest under the OID regulations, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, eachn Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust's deductions will consist
primarily of interest and
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OID accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of 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 Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loans that corresponds to any excess of
the principal amount of the Certificates over their initial issue price;
(iii) prepayment premium payable to the Certificateholders for such month; and
(iv) any other amounts of income payable to the Certificateholders for such
month. Such allocation will be reduced by any amortization by the Trust of
premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Seller. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
If Notes are also issued, 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's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part 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.
Discount and Premium. It is believed that the Mortgage Loans will not have
been issued with OID and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Loans may be greater or
less than the remaining principal balance of the Loans at the time of purchase.
If so, the Mortgage Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage Loan by
Mortgage Loan basis.)
If the Trust acquires the Mortgage Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage Loans. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a
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result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates 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 on the 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 Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Sellers 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 owned by them as of the close
of the last day of such 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
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 Trust's
method of allocation between transferors and transferees may be revised to
conform to a method permitted by future regulations.
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 currently does not intend to 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.
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 be the calendar year. The Trustee 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.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer
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identification number of the nominee and (ii) as to each beneficial owner
(x) the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly owned agency or instrumentality of
either of the foregoing, and (z) certain information on Certificates that were
held, bought or sold on behalf of such person throughout the year. In addition,
brokers and financial institutions that hold Certificates through a nominee are
required to furnish directly to the Trust information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any such information statement to the
Trust. The information referred to above for any calendar year must be furnished
to the Trust on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust with the information
described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, 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, and, 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.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is 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 foreign Certificateholders 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 foreign Holders that are taxable as corporations and 39.6% for all
other foreign Holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures.
Each foreign 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 foreign 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 foreign 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 or
business. However, interest payments made (or accrued) to a Certificateholder
who is a foreign 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 probably will not be considered "portfolio interest." As a
result, Certificateholders will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a foreign Holder would only be entitled to
claim a refund for that portion of the taxes, if any, 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.
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ERISA CONSIDERATIONS
GENERAL
ERISA imposes certain requirements on employee benefit plans and collective
investment funds and separate accounts in which such plans or arrangements are
invested to which it applies and on those persons who are fiduciaries with
respect to such benefit plans. Certain employee benefit plans, such as
governmental plans (as defined in Section 3(32) of ERISA) and certain church
plans (as defined in Section 3(33) of ERISA), are not subject to ERISA. In
accordance with ERISA's general fiduciary standards, before investing in a
Security a benefit plan fiduciary should determine whether such an investment is
permitted under the governing benefit plan instruments and is appropriate for
the benefit plan in view of its overall investment policy and the composition
and diversification of its portfolio and is prudent.
CERTIFICATES
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Depositor, the Originators, the Enhancer, the Underwriter and the
Trustee and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition or holding or transfer of Certificates by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
Department of Labor ("DOL") has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulations"), which provides that, as a general rule,
the underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the Mortgage Loans and any other assets of the Trust and not merely
an interest in the Certificates, transactions occurring between the Depositor,
the Trustee, the Master Servicer, Sub-servicers, if any, the Enhancer or any of
their affiliates might constitute prohibited transactions, and the assets of the
Trust would become subject to the fiduciary investment standards of ERISA,
unless an administrative exemption applies. Certain such exemptions which may be
applicable to the acquisition and holding of the Certificates or to the
servicing of the Mortgage Loans are noted below.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Depositor and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Depositor; and (iii) the payments made to
and retained by the Depositor in connection with the Trust, together with all
funds inuring to its benefit for administering the Trust, represent no more than
"adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust.
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In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Depositor, the Enhancer, the Master Servicer or the
Trustee is a party in interest if the Plan does not pay more than fair market
value for such Certificates and the rights and interests evidenced by such
Certificates are not subordinated to the rights and interests evidenced by other
Certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules and transactions in connection with the servicing and
operation of the Pool, provided that any payments made to the Master Servicer in
connection with the servicing of the Trust are made in accordance with a binding
agreement, copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Depositor, the Master
Servicer, the Enhancer or the Trustee is a fiduciary, PTCE 83-1 will only apply
if, in addition to the other requirements: (i) the initial sale, exchange or
transfer of Certificates is expressly approved by an independent fiduciary who
has authority to manage and control those plan assets being invested in
Certificates; (ii) the Plan pays no more for the Certificates than would be paid
in an arm's length transaction; (iii) no investment management, advisory or
underwriting fee, sale commission, or similar compensation is paid to the
Depositor with regard to the sale, exchange or transfer of Certificates to the
Plan; (iv) the total value of the Certificates purchased by such Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Certificates is acquired by persons independent of the Depositor, the Trustee,
the Master Servicer and the Certificate Insurer, if any.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Certificates constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire Certificates and the
circumstances under which such decision is made, including but not limited to:
PTCE 90-1 (regarding investments by insurance company pooled separate accounts),
PTCE 91-38 (regarding investments by bank collective investment funds) PTCE
95-60 (regarding investments by insurance company general accounts), PTCE 84-14
(regarding investments by qualified professional asset managers) or PTCE 96-23
(regarding investment by in-house asset managers). However, even if the
conditions specified in the Exemption or one or more of these other exemptions
are met, the scope of the relief provided might or might not cover all acts
which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Certificate should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Special caution ought to be
exercised before a Plan purchases a Certificate in such circumstances.
NOTES
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Plan. Under the Plan
Assets Regulation, the assets of the Trust would be treated as plan assets of a
Plan for the purposes of ERISA and the Code only if the Plan acquires an "Equity
Interest" in the Trust and none of the exceptions contained in the Plan Assets
Regulation is applicable. An Equity Interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local
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law and which has no substantial equity features. It is believed that the Notes
should be treated as indebtedness without substantial equity features for
puposes of the Plan Assets Regulation. However, without regard to whether the
Notes are treated as an Equity Interest for such purposes, the acquisition or
holding of Notes by or on behalf of a Plan could be considered to give rise to a
prohibited transaction if the Trust, the Trustee or any of their respective
affiliates is or becomes a party in interest or a disqualified person with
respect to such Plan. In such case, certain exemptions from the prohibited
transaction rules could be applicable depending on the type and circumstances of
the plan fiduciary making the decision to acquire a Note. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts: PTCE 91-38 regarding
investments by bank collective investment funds; and PTCE 84-14, regarding
transactions effected by "qualified professional asset managers."
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT
SMMEA
The related Prospectus Supplement will indicate whether the related
Securities will constitute "mortgage related securities" for purposes of SMMEA.
If the Securities so qualify, absent state legislation described below, such
Securities will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that under
applicable law obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Under SMMEA, if a state enacted legislation prior
to October 4, 1991 specifically limiting the legal investment authority of any
such entities with respect to "mortgage related securities," the Securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain states adopted legislation which limits the
ability of insurance companies domiciled in these states to purchase
mortgage-related securities, such as the Securities.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with Securities
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Securities, and national banks may purchase
Securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject
in each case to such regulations as the applicable federal regulatory authority
may prescribe.
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their
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own legal advisors prior to making any determinations with respect to the Policy
Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
A depository institution must ascertain and document prior to purchase and
no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative product
possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product are
such that the first two tests cannot be applied (such as interest-only strips),
the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: (a) extends by more than 4.0 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (b) shortens by
more than 6.0 years, assuming an immediate and sustained parallel shift in the
yield curve of minus 300 basis points; and (iii) the estimated change in the
price of the mortgage derivative product is more than 17%, due to an immediate
and sustained parallel shift in the yield curve of plus or minus 300 basis
points.
When performing the price sensitivity test, the same prepayment assumptions
and same cash flows that were used to estimate average life sensitivity must be
used. The discount rate assumptions should be determined by (i) assuming that
the discount rate for the security equals the yield on a comparable average life
U.S. Treasury security plus a constant spread, (ii) calculating the spread over
Treasury rates from the bid side of the market for the mortgage derivative
product, and (iii) assuming the spread remains constant when the Treasury curve
shifts up or down 300 basis points. Discounting the cash flows by their
respective discount rates estimates a price in the plus or minus 300 basis point
environments. The initial price must be determined by the offer side of the
market and used as the base price from which the 17% price sensitivity test will
be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate that,
at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate (LIBOR). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding
10 years.
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GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series, either directly by the Depositor or through one or more
underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series will set forth the terms of the offering of such
Series and of each Class within such Series, including the name or names of the
Underwriters, the proceeds to and their use by the Depositor, and either the
initial public offering price, the discounts and commissions to the Underwriters
and any discounts or concessions allowed or reallowed to certain dealers, or the
method by which the price at which the Underwriters will sell the Securities
will be determined.
The Securities in a Series may be acquired by Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
Underwriters will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all of a Series of
Securities described in the related Prospectus Supplement, if they are
purchased. If Securities of a Series are offered other than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Securities of such Series.
If any of the Securities are to be offered for the account of security
holders, the related Prospectus Supplement will specify the name of such holder,
the nature of any position, office or other material relationship which such
holder has had within the past three years with the Depositor or any of its
affiliates, and the amount and Percentage Interest of the applicable Class or
Series of Securities (i) held by such Holder prior to the offering, (ii) being
offered and (iii) to be held by such Holder following completion of the
offering.
The Depositor will indemnify any Underwriters against certain civil
liabilities, including liabilities under the 1933 Act, or will contribute to
payments any Underwriters may be required to make in respect thereof.
In the ordinary course of business, the Depositor, its affiliates and any
Underwriters may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
Mortgage Assets pending the sale of such Mortgage Assets or interests therein,
including the Certificates.
The Depositor anticipates 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 1933 Act 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.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Securities of each
Series, including certain federal income tax consequences with respect thereto,
will be passed upon by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York,
New York 10038.
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FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A new Trust will be formed to own the Mortgage Assets and to issue each
Series of Securities. Each such Trust will have no assets or obligations prior
to the issuance of the Securities and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts will be included in this Prospectus or any Prospectus Supplement.
RATING
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Securities of each Series offered hereby that
they shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related Prospectus Supplement (each, a "Rating Agency").
Ratings on asset backed notes and asset backed certificates address the
likelihood of receipt by holders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on asset backed notes and
asset backed certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, holders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through certificates in extreme cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
<TABLE>
<S> <C>
Accounts.......................................... 29
Accrual Certificates.............................. 31
Agreement......................................... 18
Available Funds................................... 30
Balloon Loans..................................... 13
Bankruptcy Bond................................... 10
Cede.............................................. 11
Certificateholders................................ 30
Certificates...................................... 1
Class............................................. 1
Cleanup Costs..................................... 57
CMOs.............................................. 5
Code.............................................. 9
Commission........................................ 2
Cut-off Date...................................... 1
Definitive Security............................... 33
Delinquency Advances.............................. 44
Depositor......................................... 3
Detailed Description.............................. 20
Determination Date................................ 30
Distribution Date................................. 1
DTC............................................... 11
Eligible Investments.............................. 43
Enhancer.......................................... 36
Enhancement....................................... 36
ERISA............................................. 10
Event of Default.................................. 48
Excess Interest................................... 42
Exchange Act...................................... 2
Garn-St Germain Act............................... 56
Home Equity Loans................................. 1
HUD............................................... 22
Insurance Proceeds................................ 30
Interest Weighted Class........................... 16
Liquidation Proceeds.............................. 30
Loan Balance...................................... 40
Loan Purchase Price............................... 40
Loan-to-Value Ratio............................... 20
Master Servicer................................... 3
Mortgage Assets................................... 3
Mortgage Loans.................................... 3
Mortgage Loan Schedule............................ 39
Mortgage Rate..................................... 19
Mortgaged Properties.............................. 4
Mortgagors........................................ 31
Multifamily Loans................................. 3
1933 Act.......................................... 2
Non-REMIC Pass-Through Securities................. 9
Notes............................................. 1
Pass-Through Securities........................... 9
</TABLE>
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<TABLE>
<S> <C>
Plan.............................................. 77
Plan Asset Regulations............................ 10
PMBS.............................................. 3
PMBS Issuer....................................... 6
PMBS Servicer..................................... 6
PMBS Trustee...................................... 6
Pool.............................................. 3
Prepayment Assumption............................. 60
Primary Mortgage Insurance Policies............... 5
Principal Prepayment.............................. 8
Private Mortgage-Backed Securities................ 3
Proposed OID Regulations.......................... 77
PTCE 83-1......................................... 78
Rating Agency..................................... 11
Register.......................................... 30
Regular Interest.................................. 9
REIT.............................................. 69
Relief Act........................................ 15
REMIC............................................. 1
REMIC Regulations................................. 65
REMIC Residual Securities......................... 9
Second Mortgage Loans............................. 13
Security Principal Balance........................ 31
Senior Securities................................. 6
Single Family Loans............................... 3
SMMEA............................................. 10
Standard Hazard Insurance Policies................ 5
Subordinated Securities........................... 6
Sub-servicer...................................... 8
Tiered REMICs..................................... 65
Title V........................................... 56
Trust............................................. 1
Trustee........................................... 29
UCC............................................... 34
United Companies.................................. 3
Variable Rate Non-REMIC Certificates.............. 75
Variable Rate REMIC Regular Certificate........... 63
</TABLE>
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UCFC ACCEPTANCE CORPORATION
(DEPOSITOR)
UNITED COMPANIES LENDING CORPORATION(REGISTERED)
(INITIAL SERVICER)
[LOGO]
$728,250,000
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES,
SERIES 1998-D
---------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------
CERTIFICATE GROUP I UNDERWRITERS
PRUDENTIAL SECURITIES INCORPORATED BEAR, STEARNS & CO. INC.
CERTIFICATE GROUP II UNDERWRITERS
MORGAN STANLEY DEAN WITTER BEAR, STEARNS & CO. INC.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset-Backed Certificates, Series
1998-D in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Home Equity Loan Asset-Backed Certificates, Series 1998-D
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Home Equity Loan Asset-Backed Certificates, Series 1998-D
will be required to deliver a prospectus supplement and prospectus until
March 28, 1999.
DECEMBER 28, 1998
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