<PAGE> 1
PROSPECTUS SUPPLEMENT
To Prospectus dated October 30, 1997
$100,000,000
Advanta Revolving Home Equity Loan Trust 1997-A
Advanta Revolving Home Equity Loan Asset Backed Notes, Series 1997-A
Class A Notes, Variable Rate Pass-Through Rate
Advanta Mortgage Conduit Services, Inc. Advanta Mortgage Corp. USA
Sponsor Master Servicer
The Advanta Revolving Home Equity Loan Asset Backed Notes, Series 1997-A (the
"Class A Notes") will be issued by the Advanta Revolving Home Equity Loan Trust
1997-A (the "Trust" or the "Issuer") to be formed pursuant to a Trust Agreement
(the "Trust Agreement"), dated as of November 1, 1997 between Advanta Mortgage
Conduit Services, Inc., in its capacity as the Sponsor (the "Sponsor") of the
Trust and Wilmington Trust Company, as Owner Trustee (the "Owner Trustee").
The Class A Notes will be issued pursuant to an Indenture, dated as of November
1, 1997 (the "Indenture") between the Trust and Bankers Trust Company of
California, N.A., as Indenture Trustee (the "Indenture Trustee"). The property
of the Trust will primarily consist of a pool of adjustable rate home equity
revolving credit line loans (the "Mortgage Loans"). The Mortgage Loans are
secured by first or junior mortgages or deeds of trust on residential
properties.
Certain mortgage loans (the "Subsequent Mortgage Loans"), in addition to those
held by the Trust initially, may be assigned to the Trust from time to time
during the period beginning on the Closing Date and ending on February 20, 1998
(the "Pre-Funding Period") from funds on deposit in an account (the "Pre-Funding
Account") established with the Indenture Trustee. On the Closing Date an
aggregate cash amount of $15,205,242.62 from the proceeds of the sale of the
Class A Notes (the "Original Pre-Funded Amount") will be deposited in the
Pre-Funding Account.
Distributions of principal and interest on the Class A Notes will be made on the
twenty-fifth day of each month or, if such date is not a Business Day, then on
the next succeeding Business Day (each such date, a "Payment Date"), commencing
on December 26, 1997. On each Payment Date, the holders of the Class A Notes
(the "Holders") will be entitled to receive, from and to the extent of available
funds, payments of interest, calculated as set forth herein and from and to the
extent of available funds, payments of principal, calculated as set forth
herein. The Class A Notes are not guaranteed by the Originators, the Sponsor,
the Master Servicer, the Indenture Trustee, the Owner Trustee or any affiliate
of any of them. Certain distributions on the Class A Notes, however, will be
unconditionally and irrevocably guaranteed as to the payment on each Payment
Date pursuant to the terms of a financial guaranty insurance policy (the
"Policy") to be issued by
[Ambac Logo]
FOR A DISCUSSION OF CERTAIN RISK FACTORS REGARDING AN INVESTMENT IN THE CLASS A
NOTES, SEE "RISK FACTORS" ON PAGE S-14 HEREIN AND ON PAGE 14 IN THE PROSPECTUS.
THE CLASS A NOTES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
ORIGINATORS, THE SPONSOR, THE MASTER SERVICER, THE INDENTURE TRUSTEE, THE OWNER
TRUSTEE OR ANY AFFILIATE THEREOF. NEITHER THE CLASS A NOTES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) the Sponsor(2)
--------------- --------------- ---------------
<S> <C> <C> <C>
Per Note .... 100.00% 0.25% 99.75%
--------------- --------------- ---------------
Total ....... $ 100,000,000 $ 250,000 $ 99,750,000
--------------- --------------- ---------------
</TABLE>
(1) The Sponsor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses, estimated to be $200,000.
The Class A Notes are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
delivery of the Class A Notes will be made in book-entry form only through the
facilities of The Depository Trust Company ("DTC"), CEDEL S.A. ("CEDEL") and the
Euroclear System ("Euroclear") on or about November 20, 1997 (the "Closing
Date"). The Class A Notes will be offered in Europe and in the United States of
America.
J.P. MORGAN & CO.
November 14, 1997
<PAGE> 2
There is currently no secondary market for the Class A Notes. The
Underwriter intends to make a secondary market in the Class A Notes, but has no
obligation to do so. There can be no assurance that such a market will develop
or if one does develop that it will continue until the Class A Notes are paid in
full.
The information in this Prospectus Supplement is qualified in its
entirety by the more detailed information appearing or incorporated by reference
in the accompanying Prospectus. Prior to making an investment decision with
respect to the Class A Notes offered hereby, prospective investors should
carefully consider the information contained in the Prospectus Supplement and
the Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
NOTES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE NOTES AND THE PURCHASE OF
NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING" HEREIN.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
ACTING AS UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act
of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") on behalf of the Trust with respect to the Class A
Notes offered pursuant to the Prospectus dated October 30, 1997 and this
Prospectus Supplement. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
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;
7 World Trade Center, 13th Floor, New York, New York 10048; and at The
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission maintains a site on the World Wide Web at
http://www.sec.gov containing reports, proxy materials, information statements
and other items. 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.
REPORTS TO THE HOLDERS
So long as the Class A Notes are in book-entry form, monthly and annual
reports concerning the Class A Notes and the Trust will be sent by the Indenture
Trustee to Cede & Co., as the nominee of DTC and as registered holder of the
Class A Notes pursuant to the Indenture. DTC will supply such reports to Holders
in accordance with its procedures. See "Risk Factors," "Description of the
Securities -- Form of Securities" and " -- Reports to Securityholders" in the
Prospectus. To the extent required by the Securities Exchange Act of 1934, as
amended, the Trust will provide financial information to the Holders which has
been examined and reported upon, with an opinion expressed by an independent
public accountant; to the extent not so required, such financial information
will be unaudited. The Sponsor has determined that the financial statements of
no entity other than the Insurer are material to the offering made hereby. The
Trust will be formed to hold the Mortgage Loans and certain other property, and
to issue the Class A Notes. The Trust will have no assets or obligations prior
to issuance of the Class A Notes and will engage in no activities other than
those described herein. Accordingly, no financial statements with respect to the
Trust are included in this Prospectus Supplement.
S-2
<PAGE> 3
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the Prospectus. Certain capitalized terms used
in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. Reference is made to the Index of Defined Terms herein and the Index
of Principal Definitions in the Prospectus for the definitions of certain
capitalized terms.
THE TRUST...........................The Trust will be a business trust
established under the laws of the State of
Delaware. The activities of the Trust are
limited by the terms of the Trust Agreement
and the Indenture. The Trust will issue the
Class A Notes in the aggregate original
principal amount of $100,000,000. The Trust
will also issue certain certificates which
represent the ownership interest on the
Trust Property (the "Certificates"). The
Certificates are not offered hereby but will
initially be retained by the Originators.
The Class A Notes will be issued pursuant to
the Indenture.
TRUST PROPERTY......................The property of the Trust (the "Trust
Property") will primarily consist of a pool
of adjustable rate home equity revolving
credit line loans made or to be made and
conveyed to the Trust (the "Mortgage Loans")
under certain home equity revolving credit
line loan agreements (the "Credit Line
Agreements"); the collections in respect of
the Mortgage Loans received after the
related Cut-Off Date; property that secured
a Mortgage Loan that has been acquired by
foreclosure or deed in lieu of foreclosure;
rights of the Sponsor under hazard insurance
policies covering the Mortgaged Properties;
the Policy; amounts on deposit in the
Certificate Account; amounts on deposit in
the Pre-Funding Account; amounts on deposit
in the Capitalized Interest Account; amounts
on deposit in the Principal and Interest
Account; certain rights of the Sponsor under
the Purchase Agreement; and certain other
property, as described more fully herein.
The Subsequent Mortgage Loans, may be
assigned to the Trust from time to time
during the period beginning on the Closing
Date and ending on February 20, 1998 (the
"Pre-Funding Period") from funds on deposit
in the Pre-Funding Account established with
the Indenture Trustee. On the Closing Date
an aggregate cash amount of $15,205,242.62
from the proceeds of the sale of the Class A
Notes (the "Original Pre-Funded Amount")
will be deposited in the Pre-Funding
Account.
Any additional balances arising as a result
of future borrowings ("Draws") under the
Credit Line Agreements by Mortgagors
subsequent to the related Cut-Off Date will
automatically be assigned to the Trust, and
will result in an immediate, corresponding
increase in the Originators' Interest, as
hereinafter described. Such additional
balances so assigned are "Additional
Balances." A "Mortgagor" is the obligor on a
Credit Line Agreement.
SECURITIES OFFERED..................The Class A Notes will be issued pursuant to
the Indenture and will represent debt
obligations issued by the Trust. Each Class
A Note represents the right of the related
Holder to receive payments of interest at
the variable rate described below (the
"Class A Interest Rate"), payable monthly,
and payments of principal at such times and
to the
S-3
<PAGE> 4
extent provided below. The Class A Notes
will be issued in an original principal
amount (the "Original Class A Principal
Balance") equal to 98% of the sum of (x) the
Cut-Off Date Pool Balance plus (y) the
Original Pre-Funded Amount.
The outstanding principal amount of the
Class A Notes (the "Class A Principal
Balance") on any date is equal to the
Original Class A Principal Balance minus the
aggregate of amounts theretofore actually
distributed as principal to the Holders of
the Class A Notes. See "Description of the
Class A Notes" herein.
ORIGINATORS.........................Advanta National Bank, a national banking
association and Advanta Finance Corp., a
Nevada corporation (the "Originators").
SPONSOR.............................Advanta Mortgage Conduit Services, Inc., a
Delaware corporation (the "Sponsor").
MASTER SERVICER.....................Advanta Mortgage Corp. USA, a Delaware
corporation (the "Master Servicer").
INDENTURE TRUSTEE...................Bankers Trust Company of California, N.A., a
national banking association (the "Indenture
Trustee").
OWNER TRUSTEE.......................Wilmington Trust Company, a Delaware banking
corporation, acting not in its individual
capacity but solely as trustee under the
Trust Agreement (the "Owner Trustee").
THE INSURER.........................Ambac Assurance Corporation, a
Wisconsin-domiciled Stock insurance company
(the "Insurer").
CUT-OFF DATE........................With respect to each initial Mortgage Loan,
the Initial Cut-Off Date. With respect to
any Subsequent Mortgage Loan, the Subsequent
Cut-Off Date related to such Subsequent
Mortgage Loan.
INITIAL CUT-OFF DATE................The opening of business on November 1, 1997
(the "Initial Cut-Off Date").
SUBSEQUENT CUT-OFF DATE.............The opening of business on the first day of
the calendar month in which the related
Subsequent Transfer Date occurs (the
"Subsequent Cut-Off Date").
CLOSING DATE........................On or about November 20, 1997.
SALE OF MORTGAGE LOANS..............The Mortgage Loans will be purchased by the
Sponsor from the Originators pursuant to
purchase agreements (the "Purchase
Agreements") between the Sponsor and the
respective Originator on or prior to the
date of issuance of the Securities. The
Sponsor will then sell the Mortgage Loans to
the Trust pursuant to the Sale and Servicing
Agreement (the "Sale and Servicing
Agreement") dated as of November 1, 1997
among the Sponsor, the Master Servicer, the
Issuer and the Indenture Trustee.
THE INITIAL MORTGAGE LOANS..........Unless otherwise noted in this Prospectus,
all statistical information included herein
relating to the Mortgage Loan pool has been
calculated with respect to the Initial
Mortgage Loans as of the Initial Cut-Off
S-4
<PAGE> 5
Date. The Initial Mortgage Loans consist of
2,720 Mortgage Loans (the "Initial Mortgage
Loans"), which are secured by either a first
or a junior mortgage on Mortgaged Properties
located in approximately 32 states, and have
an aggregate Principal Balance as of the
Initial Cut-Off Date of $86,835,573.71 (the
"Cut-Off Date Pool Balance"). See
"Description of the Mortgage Loans" herein
for more statistical information relating to
the pool of Initial Mortgage Loans.
The Mortgage Loans arise pursuant to the
Credit Line Agreements. Interest on each
Mortgage Loan, excluding introductory rates
offered from time to time during promotional
periods, is computed and payable monthly on
the average daily outstanding principal
balance of such loan. From time to time
prior to the expiration of the related draw
period specified in the related Credit Line
Agreement, principal amounts on the related
Mortgage Loan may be drawn down, or may be
repaid. New Draws under the Mortgage Loans
will automatically become property of the
Trust. As a result, the aggregate Principal
Balance of the Mortgage Loans will fluctuate
from day to day as new Draws by Mortgagors
are added to the Trust and principal
payments received are applied in reduction
thereof. Under the Credit Line Agreements,
during the related draw period, the
Mortgagor is obligated to pay the amount of
interest which accrues on the loan during
the billing cycle, but may also pay all or a
portion of the principal. The interest only
payment obligation terminates at the end of
the related draw period, after which the
Mortgagor must begin paying at least a
minimum monthly portion of the average
outstanding principal balance of the loan.
The "Principal Balance" of a Mortgage Loan
(other than a Liquidated Mortgage Loan) on
any date is equal to its original Principal
Balance as of the related Cut-Off Date plus
(i) any Additional Balances in respect of
such Mortgage Loan minus (ii) all
collections credited against the Principal
Balance of such Mortgage Loan in accordance
with the related Credit Line Agreement prior
to such day. The "Principal Balance" of a
Liquidated Mortgage Loan shall be zero.
A "Liquidated Mortgage Loan" is a Mortgage
Loan in which the Master Servicer has
determined that it has recovered all amounts
it expects to recover from or on account of
such defaulted Mortgage Loan.
Following the Closing Date and until, at the
latest, February 20, 1998, the Trust may
acquire from the Sponsor the Subsequent
Mortgage Loans, in addition to those
transferred to the Trust on the Closing
Date. The Subsequent Mortgage Loans will
(subject to the availability thereof and to
certain limitations and conditions) be
assigned to the Trust and will be required
to meet certain criteria specified in the
Sale and Servicing Agreement as of their
respective Cut-Off Dates.
PRE-FUNDING ACCOUNT FEATURE.........On the Closing Date, approximately
$15,205,242.62 (the "Original Pre-Funded
Amount") will be deposited in the
Pre-Funding Account in the name of the
Indenture Trustee from the proceeds of the
sale of the Class A Notes. During the period
(the "Pre-Funding Period") from the Closing
Date until the earliest of (i) the date on
which the amount on deposit in the
Pre-Funding Account is less than $100,000,
(ii) the date on which a Rapid Amortization
Event occurs or (iii) February 20, 1998,
S-5
<PAGE> 6
the Sponsor may deliver the Subsequent
Mortgage Loans to the Indenture Trustee in
exchange for a corresponding release of
money from the Pre-Funding Account in an
amount equal to the Principal Balance of
such Subsequent Mortgage Loans as of the
related Subsequent Transfer Date. The
Sponsor expects that the Original Pre-Funded
Amount will be reduced to less than $100,000
by February 20, 1998. Any amount remaining
in the Pre-Funding Account on the Payment
Date which immediately follows the end of
the Pre-Funding Period will be used to
prepay the Class A Notes.
CAPITALIZED INTEREST ACCOUNT........On the Closing Date the Indenture Trustee
will be required to deposit a portion of the
proceeds of the sale of the Class A Notes in
an account (the "Capitalized Interest
Account") in the name of the Indenture
Trustee on behalf of the Trust. The amount
deposited therein will be used, as
necessary, by the Indenture Trustee during
the Pre-Funding Period. Any amounts
deposited to the Capitalized Interest
Account and not so used will be released to
the Originators.
THE ORIGINATORS' INTEREST...........The "Originators' Interest" is the
reversionary interest in the Trust Property,
to the extent that the proceeds of the Trust
Property are not applied to the payment of
the Class A Notes. The dollar amount of the
Originators' Interest, as of any Payment
Date, is the excess, if any, of (x) the
Trust Collateral Value as of such Payment
Date over (y) the Class A Principal Balance
as of such Payment Date (after taking into
account reductions thereof on such Payment
Date). The "Trust Collateral Value" as of
any Payment Date is the sum of (i) the Pool
Balance at the end of the prior calendar
month, (ii) the aggregate Principal Balances
as of the related Cut-Off Dates of all
Subsequent Mortgage Loans previously
assigned to the Trust during the calendar
month in which such Payment Date occurs and
(iii) the amounts, if any, on deposit in the
Pre-Funding Account at the close of business
on such Payment Date.
As of any date of determination, all or a
portion of the dollar amount of Originators'
Interest may be subordinated to the
interests of the Class A Notes; the dollar
amount of the Originators' Interest which is
so subordinated is the
"Overcollateralization Amount". Such portion
so subordinated as of any date will be equal
to the lesser of (x) the dollar amount of
the Originators' Interest as of such date
and (y) the Specified Overcollateralization
Amount (defined below) for such date. Any
portion of the dollar amount of the
Originators' Interest not represented by the
Overcollateralization Amount is the
"Non-Subordinated Originators' Interest" as
of such date.
The "Minimum Originators' Interest", as of
any date of determination, is a dollar
amount equal to 2% of the Trust Collateral
Value as of such date.
The "Floating Allocation Percentage", as of
any Payment Date, is the percentage
equivalent of a fraction, (i) the numerator
of which is the excess of (a) the Trust
Collateral Value as of such Payment Date
over (b) the dollar amount of the
Non-Subordinated Originators' Interest as of
such Payment Date and (ii) the denominator
of which is the Trust Collateral Value as of
such Payment Date.
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OVERCOLLATERALIZATION FEATURE.......The Insurer will require, based upon the
terms and conditions hereinafter described,
that the Overcollateralization Amount be
maintained at a certain specified level, the
"Specified Overcollateralization Amount."
The Overcollateralization Amount as of the
Closing Date will be less than the initial
Specified Overcollateralization Amount, thus
requiring an increase in the
Overcollateralization Amount on future
Payment Dates until the
Overcollateralization Amount equals the
Specified Overcollateralization Amount.
Certain excess cashflow (the "Excess
Cashflow"), generally consisting of the
Floating Allocation Percentage of the sum of
(i) excess interest (i.e., the excess of
interest collections on the Mortgage Loans
over Class A Note interest payable, plus
certain fees) together with (ii) Principal
Collections not required to be applied to
Class A Note principal amortization or to
Reimbursement Amounts, will be applied on
each Payment Date to maintain the
Overcollateralization Amount at, or to
increase it to, the Specified
Overcollateralization Amount for such
Payment Date. The requirement to maintain
the Overcollateralization Amount at the
Specified Overcollateralization Amount, or
to increase it to the Specified
Overcollateralization Amount, is not an
obligation of the Sponsor, the Originators,
the Master Servicer, the Indenture Trustee,
the Owner Trustee or any other person,
including the Insurer.
Since the Overcollateralization Amount will
equal the dollar amount of the subordinated
portion of the Originators' Interest, which
itself is equal to all or a portion of the
difference between the Trust Collateral
Value and the Class A Principal Balance, the
Overcollateralization Amount may be
increased to the Specified
Overcollateralization Amount by amortizing
the Class A Principal Balance with
Accelerated Principal Payments.
The Insurer may permit the Specified
Overcollateralization Amount to decrease
over time, subject to certain floors and
triggers. Since the Overcollateralization
Amount will equal the lesser of (x) the
dollar amount of the Originators' Interest
as of such date and (y) the Specified
Overcollateralization Amount for such date,
to the extent that clause (y) controls
(i.e., to the extent that the dollar amount
of the Originators' Interest is greater than
the Specified Overcollateralization Amount),
a reduction in the Specified
Overcollateralization Amount will result in
an automatic, corresponding increase in the
dollar amount of the Non-Subordinated
Originators' Interest (the dollar amount of
any such increase in the Non-Subordinated
Originators' Interest on any Payment Date,
the "Overcollateralization Release Amount").
Any such increases in the Non-Subordinated
Originators' Interest which result from such
step-downs in the Specified
Overcollateralization Amount may be released
to the Originators in cash as Step-Down
Amounts (net of any amounts due to the
Insurer and any unreimbursed draws on the
Policy, together with interest thereon, the
"Reimbursement Amounts"), or through the
removal of Mortgage Loans from the Trust on
Payment Dates occurring after such
step-downs take effect.
REMOVAL OF CERTAIN MORTGAGE LOANS...Subject to certain conditions, and upon
notice to the Rating Agencies and the
Insurer, on any Payment Date an Originator
may, but shall not be obligated to (except
upon a breach of a representation or
warranty),
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<PAGE> 8
remove from the Trust its respective
Mortgage Loans without notice to the Holders
of the Class A Notes. Each Originator is
permitted to designate the Mortgage Loans to
be removed. Mortgage Loans so designated
will only be removed upon satisfaction of
certain conditions specified in the Sale and
Servicing Agreement, including: (i) the
Overcollateralization Amount as of such
Payment Date (after giving effect to such
removal) equals or exceeds the then
Specified Overcollateralization Amount; (ii)
the dollar amount of the Originators'
Interest as of such Payment Date (after
giving effect to such removal) equals or
exceeds the Minimum Originators' Interest;
(iii) the related Originator shall have
delivered to the Indenture Trustee, the
Insurer and the Rating Agencies a "Mortgage
Loan Schedule" containing a list of all
Mortgage Loans remaining in the Trust after
such removal; (iv) the related Originator
shall represent and warrant that random
selection procedures were used in selecting
the Mortgage Loans and no other selection
procedures which are adverse to the
interests of the Holders of the Class A
Notes or the Insurer were used by such
Originator in selecting such Mortgage Loans;
(v) no Rapid Amortization Event shall have
theretofore occurred or will occur as a
result of such removal; and (vi) the related
Originator shall have delivered to the
Indenture Trustee and the Insurer an
officer's certificate confirming the
conditions set forth in clauses (i) through
(v) above.
COLLECTIONS.........................All collections on the Mortgage Loans will
generally be allocated in accordance with
the Credit Line Agreements between amounts
collected in respect of interest and amounts
collected in respect of principal.
As to any Payment Date, "Interest
Collections" will be equal to the amounts
collected during the related Remittance
Period, including the portion of Net
Liquidation Proceeds (as defined below)
allocated to interest pursuant to the terms
of the Credit Line Agreements, less the
Servicing Fee for the related Remittance
Period, together with certain investment
earnings.
As to any Payment Date, "Principal
Collections" will be equal to the amounts
collected during the related Remittance
Period, including the portion of Net
Liquidation Proceeds, allocated to principal
pursuant to the terms of the Credit Line
Agreements.
"Net Liquidation Proceeds" with respect to a
Mortgage Loan are the proceeds (excluding
amounts drawn on the Policy) received in
connection with the liquidation of any
Mortgage Loan, whether through trustee's
sale, foreclosure sale or otherwise, reduced
by related out-of-pocket expenses and
advances, but not including the portion, if
any, of such amount that exceeds the sum of
(i) the Principal Balance of the Mortgage
Loan and (ii) any accrued and unpaid
interest thereon to the end of the
Remittance Period during which such Mortgage
Loan became a Liquidated Mortgage Loan.
The Master Servicer will deposit Interest
Collections and Principal Collections in
respect of the Mortgage Loans in an account
(the "Principal and Interest Account")
established for such purpose under the Sale
and Servicing Agreement.
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<PAGE> 9
REMITTANCE PERIOD...................As to any Payment Date, the related
"Remittance Period" is the calendar month
preceding the month of such Payment Date.
INTEREST............................Interest on the Class A Notes will be
payable monthly on the twenty-fifth day of
each month or, if such day is not a Business
Day, then the next succeeding Business Day
(each, a "Payment Date"), commencing on
December 26, 1997, at the Class A Interest
Rate for the related Interest Accrual Period
(as defined below). The "Class A Interest
Rate" for an Interest Accrual Period will
generally equal the lesser of:
(i) (x) with respect to any Payment Date
which occurs on or prior to the Optional
Redemption Date (as defined herein), the sum
of (a) the London Interbank offered rate for
one-month Eurodollar deposits appearing on
the Telerate Screen Page 3750, as of the
second LIBOR Business Day (as defined
herein) prior to the first day of such
Interest Accrual Period ("LIBOR") (or as of
two LIBOR Business Days prior to the Closing
Date, in the case of the first Interest
Accrual Period) and (b) 0.20% and (y) for
any Payment Date thereafter, the sum of (a)
LIBOR and (b) 0.40% (the rate described in
the clause (i), the "Class A Formula Rate")
and
(ii)(x) the fraction, expressed as an annual
percentage rate, equal to twelve times the
interest due on the Mortgage Loans during
the prior Remittance Period, minus the
amount of Prepayment Interest Shortfalls and
Relief Act Shortfalls for the related
Remittance Period (net of the Servicing Fee,
the fee payable to the Indenture Trustee
(the "Indenture Trustee's Fee"), the fee
payable to the Owner Trustee (the "Owner
Trustee Fee") and the premium payable to the
Insurer (the "Premium Amount")) divided by
the Trust Collateral Value immediately prior
to the related Payment Date, less (y)
commencing on the tenth Payment Date, 0.50%
(the rate described in this clause (ii), the
"Net Funds Cap Rate").
In the event that, on any Payment Date, the
Net Funds Cap Rate is less than the Class A
Formula Rate (i.e., the Class A Interest
Rate equals the Net Funds Cap Rate), the
excess of the amount of interest due based
on the Class A Formula Rate, over the
interest due based on the Net Funds Cap
Rate, together with interest thereon at the
then-applicable Class A Formula Rate, will
be carried-forward (the "Net Funds Cap
Carry-Forward Amount") and due on future
Payment Dates. The Insurer does not
guarantee the payment of, nor do the ratings
assigned to the Class A Notes address the
likelihood of payment of, any Net Funds Cap
Carry-Forward Amount.
Interest on the Class A Notes in respect of
any Payment Date will accrue from the
preceding Payment Date (or in the case of
the first Payment Date, from the Closing
Date) through the day preceding such Payment
Date (each such period, an "Interest Accrual
Period") on the basis of the actual number
of days in the Interest Accrual Period and a
360-day year. For any Payment Date, the
interest then due on the Class A Notes
(calculated using the Class A Interest Rate
and exclusive of any Net Funds Cap
Carry-Forward Amount) is the "Class A
Interest Distribution Amount" for such
Payment Date.
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SCHEDULED PRINCIPAL PAYMENTS........On each Payment Date, the Holders of the
Class A Notes will be entitled to receive
the Scheduled Principal Distribution Amount
for such Payment Date.
The term of the Class A Notes has been
divided into two periods, the Managed
Amortization Period and the Rapid
Amortization Period. The "Managed
Amortization Period" is the period
commencing on December 26, 1997 (i.e., the
initial Payment Date), and ending on the
earlier to occur of (x) the December, 2000
Payment Date and (y) the Payment Date which
immediately precedes the occurrence of a
Rapid Amortization Event. The "Rapid
Amortization Period" is the period which
follows the end of the Managed Amortization
Period.
On any Payment Date during the Managed
Amortization Period, the "Scheduled
Principal Distribution Amount" shall equal
the excess (but in no event less than zero)
of (x) the lesser of (i) the Maximum
Principal Payment and (ii) the Net Principal
Collections over (y) the Step-Down Amount,
if any, with respect to such Payment Date.
With respect to any Payment Date, the
"Maximum Principal Payment" will equal 98%
(the "Fixed Allocation Percentage") of the
Principal Collections relating to such
Payment Date. With respect to any Payment
Date, the "Net Principal Collections" is the
excess of (x) Principal Collections with
respect to the related Remittance Period
over (y) the aggregate principal amount of
all Additional Balances arising during such
related Remittance Period, provided, that in
no event will Net Principal Collections be
less than zero with respect to any Payment
Date. The aggregate distributions of
principal to the Holders of Class A Notes
will not exceed the Original Class A
Principal Balance.
On any Payment Date during the Rapid
Amortization Period, the "Scheduled
Principal Distribution Amount" shall equal
the excess of (x) the Maximum Principal
Payment over (y) the Step-Down Amount, if
any, with respect to such Payment Date. See
"Description of the Class A Notes --
Distributions on the Class A Notes."
As of any Payment Date, the "Step-Down
Amount" is the lesser of (x) the Maximum
Step-Down Amount for such Payment Date and
(y) the Maximum Principal Payment or the Net
Principal Collections, as applicable to such
Payment Date. As of any Payment Date the
"Maximum Step-Down Amount" is the excess of
(i) the aggregate, cumulative amount of
Overcollateralization Release Amounts for
such current, and all prior, Payment Dates
over (ii) the aggregate, cumulative amount
of all payments made with respect to
Step-Down Amounts for all prior Payment
Dates; provided, that for any Payment Date
on which the Specified Overcollateralization
Amount exceeds the Overcollateralization
Amount, the Step-Down Amount will be reduced
(but not below zero) by the amount of any
such excess.
In addition, to the extent funds are
available therefor (including funds
available under the Policy), on the Payment
Date in February, 2024 (the "Final Scheduled
Payment Date"), the Holders of the Class A
Notes will be entitled to receive a payment
of principal in an amount equal to the
outstanding Class A Principal Balance. The
Final Scheduled Payment Date is the date
which is one year after the date which is
the latest possible maturity date of a
Mortgage Loan which amortizes according to
its terms.
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ACCELERATED PRINCIPAL PAYMENTS......The Holders of the Class A Notes may receive
a payment of Excess Cashflow on any Payment
Date, as a payment of principal (any such
payment, an "Accelerated Principal
Payment"), for the purpose of increasing the
Overcollateralization Amount to the
Specified Overcollateralization Amount
applicable to such Payment Date.
MANDATORY PREPAYMENT AT END
OF PRE-FUNDING PERIOD...............In addition to the foregoing, on the Payment
Date which immediately follows the end of
the Pre-Funding Period, if the Pre-Funding
Account amounts exceed $100,000, such monies
will be applied as a prepayment of the Class
A Principal Balance.
THE INSURER AND THE POLICY..........On the Closing Date, the Insurer will issue
the Policy to the Indenture Trustee for the
benefit of the Holders of the Class A Notes.
The Policy will irrevocably and
unconditionally guarantee payment on each
Payment Date to the Indenture Trustee, for
the benefit of the Holders of the Class A
Notes, the full and complete payment of (i)
the Overcollateralization Deficit, if any,
with respect to such Payment Date and (ii)
accrued and unpaid interest due on the Class
A Notes calculated at the Class A Interest
Rate, if any (together, the "Insured
Payment"), with such Insured Payment having
been calculated in accordance with the
original terms of the Class A Notes or the
Indenture except for amendments or
modifications to which the Insurer has given
its prior written consent. The Policy will
not cover the Net Funds Cap Carry-Forward
Amount, Prepayment Interest Shortfalls or
Relief Act Shortfalls, nor does the Policy
guarantee to the Holders of the Class A
Notes any particular rate of principal
payment. The effect of the Policy is to
guarantee the timely payment of interest on,
and the ultimate payment of the original
principal amount of, the Class A Notes.
The "Overcollateralization Deficit" for any
Payment Date shall be the amount by which
(i) the Class A Principal Balance (after
giving effect to all other amounts
distributable and allocable to principal on
the Class A Notes on such Payment Date)
exceeds (ii) the excess of (x) the Trust
Collateral Value as of such Payment Date
over (y) the Non-Subordinated Originators'
Interest as of such Payment Date. In
addition, the Policy will guarantee the
payment of the outstanding Class A Principal
Balance on the Payment Date in February,
2024 (after giving effect to all other
amounts distributable and allocable to
principal on such Payment Date).
"Prepayment Interest Shortfalls" are
shortfalls in interest collections that
result from the timing of prepayments.
"Relief Act Shortfalls" are interest
shortfalls resulting from the application of
the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended. See "Certain Legal
Aspects of Mortgage Loans and Related
Matters -- Soldiers' and Sailors' Civil
Relief Act of 1940" in the Prospectus.
DENOMINATIONS.......................The Class A Notes will be offered for
purchase in denominations of $1,000 and
multiples of $1 in excess thereof.
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REGISTRATION OF
CLASS A NOTES.......................The Class A Notes will initially be issued
in book-entry form ("Book-Entry
Securities"). Persons acquiring interests in
the Class A Notes may elect to hold their
Class A Notes interests through the DTC in
the United States, or CEDEL or Euroclear, in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be in
accordance with the usual rules and
operating procedures of the relevant system.
So long as the Class A Notes are Book-Entry
Securities, such Class A Notes will be
evidenced by one or more Class A Notes
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of
the relevant depositaries (collectively, the
"European Depositaries"). Cross-market
transfers between persons holding directly
or indirectly through DTC, on the one hand,
and counterparties holding directly or
indirectly through CEDEL or Euroclear, on
the other, will be effected in DTC through
Citibank N.A. ("Citibank") or Morgan
Guaranty Trust Company of New York
("Morgan"), the relevant depositaries of
CEDEL or Euroclear, respectively, and each a
participating member of DTC. The Class A
Notes will initially be registered in the
name of Cede. The interests of the Holders
will be represented by book entries on the
records of DTC and participating members
thereof. No Holder will be entitled to
receive a definitive certificate (a
"Physical Note") representing such person's
interest, except in the event that Physical
Notes are issued under the limited
circumstances described herein. All
references in this Prospectus Supplement to
any Class A Notes reflect the rights of
Holders only as such rights may be exercised
through DTC and its participating
organizations for so long as such Class A
Notes are held by DTC. See "Risk Factors -
Book-Entry Securities", "Description of the
Class A Notes - Distributions on the Class A
Notes" and "Annex I" hereto.
RECORD DATE.........................With respect to each Payment Date, the last
Business Day of the calendar month
immediately preceding the calendar month in
which such Payment Date occurs.
SERVICING...........................The Master Servicer will be responsible for
servicing, managing and making collections
on the Mortgage Loans. The Master Servicer
will deposit all collections in respect of
the Mortgage Loans into the Principal and
Interest Account as described herein. On the
18th day, or, if such day is not a Business
Day, the next preceding Business Day, of
each month (the "Remittance Date"), the
Master Servicer will remit the related
Interest Collections (net of the Servicing
Fee) and Principal Collections to the
Indenture Trustee. See "Description of the
Class A Notes - Distributions on the Class A
Notes." With respect to each Remittance
Period, the Master Servicer will receive a
monthly servicing fee (the "Servicing Fee")
in the amount of 0.50% per annum (the
"Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as
of the first day of such Remittance Period.
See "Description of the Class A Notes -
Servicing Compensation and Payment of
Expenses." In certain limited circumstances,
the Master Servicer may resign or be
removed, in which event either the Indenture
Trustee or a third-party Master Servicer
acceptable to the Insurer will be appointed
as a successor Master Servicer. See
"Description of the Class A Notes -- Certain
Matters Regarding the Master Servicer."
OPTIONAL REDEMPTION.................The Class A Notes will be subject to
optional redemption on any Payment Date
after the Class A Principal Balance is
reduced to an
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amount less than or equal to $10,000,000
(10% of the Original Class A Principal
Balance) (such date, the "Optional
Redemption Date") and all amounts due and
owing to the Insurer and unreimbursed draws
on the Policy, together with interest
thereon, have been paid. Such redemption
will only occur if the Trust Property is
purchased for a price at least equal to
equal to the sum of the outstanding Class A
Principal Balance and accrued and unpaid
interest thereon at the Class A Interest
Rate through the day preceding the final
Payment Date, plus any Reimbursement
Amounts. See "The Pooling and Servicing
Agreement -- Redemption; Retirement of
Securities" in the Prospectus.
MANDATORY RETRANSFER OF
CERTAIN MORTGAGE LOANS..............The Sponsor will make certain
representations and warranties in the Sale
and Servicing Agreement with respect to
their respective Mortgage Loans. If the
Sponsor breaches certain of its
representations and warranties with respect
to any Mortgage Loan and such breach
materially and adversely affects the
interests of the Holders of the Class A
Notes or the Insurer and such breach is not
cured within the specified period, the
Mortgage Loan will be removed from the Trust
upon the expiration of a specified period
from the date on which the Sponsor becomes
aware or receives notice of such breach and
will be reassigned to the Sponsor. See
"Description of the related Securities --
Assignment of Mortgage Loans" in the
Prospectus.
FEDERAL TAX
CONSIDERATIONS......................Subject to the qualifications set forth in
"Certain Federal Income Tax Consequences"
herein, Dewey Ballantine LLP, special tax
counsel to the Sponsor is of the opinion
that, for federal income tax purposes, the
Class A Notes will be characterized as debt,
consequently the Trust will not be treated
as an association taxable as a corporation,
taxable mortgage pool or a publicly traded
partnership. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus
for additional information concerning the
application of federal income tax laws.
ERISA CONSIDERATIONS................Subject to the conditions and considerations
discussed under "ERISA Considerations", the
Class A Notes are eligible for purchase by
pension, profit-sharing or other employee
benefit plan as well as individual
retirement accounts and certain types of
Keogh Plans (each, a "Benefit Plan"). See
"ERISA Considerations" herein and in the
Prospectus.
LEGAL INVESTMENT
CONSIDERATIONS......................The Class A Notes will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"), because not all of
the Mortgage Loans are secured by first
mortgages. Accordingly, many institutions
with legal authority to invest in comparably
rated securities based solely on first
mortgages may not be legally authorized to
invest in the Class A Notes. See "Legal
Investment Considerations" herein and "Legal
Investment Matters" in the Prospectus.
NOTE RATING.........................It is a condition to the issuance of the
Class A Notes that they be rated "AAA" by
Standard & Poor's Ratings Group, a division
of the McGraw Hill Companies ("Standard &
Poor's") and "Aaa" by Moody's Investors
Services ("Moody's", and together with
Standard & Poor's, the "Rating Agencies" or
each, a "Rating Agency"). In general,
ratings
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address credit risk and do not address the
likelihood of prepayments or the likelihood
of the payment of any Net Funds Cap
Carry-Forward Amount. See "Ratings" herein
and "Risk Factors -- Security Rating" in the
Prospectus.
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RISK FACTORS
EFFECT OF MORTGAGE LOAN YIELD ON CLASS A INTEREST RATE
The Class A Formula Rate is based upon the value of an index ("LIBOR")
which may be different from the value of the index ("Prime") applicable to the
Mortgage Loans (either as a result of the use of a different index, rate
determination date, rate adjustment date or rate cap or floor) and is subject to
the Net Funds Cap Rate. See "Interest" in the Summary. In addition, LIBOR and
Prime may respond to different economic and market factors, and there is no
necessary correspondence between them. Thus, it is possible, for example, that
LIBOR may rise during a period in which Prime is stable or falling or that, even
if both LIBOR and Prime rise during the same period, LIBOR may rise much more
rapidly than Prime. Such disintermediation may result in the amount of interest
accrued on the Mortgage Loans during any calendar month being less than the
amount of interest payable to the Holders of the Class A Notes with respect to
the related Interest Accrual Period. The Net Funds Cap Rate effectively limits
the amount of interest accrued on the Class A Notes to the fraction, expressed
as an annual percentage rate, equal to twelve times the interest due on the
Mortgage Loans during the prior Remittance Period, minus the amount of
Prepayment Interest Shortfalls and Relief Act Shortfalls for the related
Remittance Period (net of the Servicing Fee, the Indenture Trustee's Fee, the
Owner Trustee's Fee and the Premium Amount) divided by the Trust Collateral
Value immediately prior to the related Payment Date, less, commencing on the
tenth Payment Date, 0.50%.
SOCIAL, ECONOMIC AND OTHER FACTORS
The ability of the Trust to invest in Subsequent Mortgage Loans is
dependent in part upon whether the Mortgagors thereunder perform their payment
and other obligations required by such Subsequent Mortgage Loans in order that
such Subsequent Mortgage Loans meet the specified requirements for transfer on a
Subsequent Cut-Off Date. The performance by such Mortgagors may be affected as a
result of a variety of social and economic factors. Economic factors include
interest rates, unemployment levels, the rate of inflation and consumers'
general perception of economic conditions. However, the Originators are unable
to determine and have no basis to predict whether or to what extent economic or
social factors will affect the performance by such Mortgagors and the
availability of Subsequent Mortgage Loans.
DEVELOPMENTS RELATING TO ADVANTA CORP. DURING 1997
Certain developments have occurred during 1997 with respect to Advanta
Corp. ("Advanta Parent"), the ultimate corporate parent of the Sponsor, the
Originators and the Master Servicer, including the announcement of certain
losses, the filing of certain lawsuits and the reaching of a definitive
agreement under which Fleet Financial Group ("Fleet") will acquire Advanta
Parent's consumer credit card business and will combine it with Fleet's consumer
credit card business. Advanta Parent will continue to operate its mortgage and
business services companies, including the Sponsor, the Originators and the
Master Servicer. The consequences, if any, of such developments may positively,
or may adversely, affect the financial ability of the Sponsor and/or the Master
Servicer to perform their financial obligations, or to service the Mortgage Loan
pool. See "The Sponsor and the Master Servicer - Recent Developments Related to
Advanta Parent".
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in full or in part at any
time. However, Mortgage Loans secured by Mortgaged Properties in certain
jurisdictions may be subject to account termination fees to the extent permitted
by law (the "Termination Fees"). In general, such Termination Fees do not exceed
$500 and do not apply to accounts terminated subsequent to a date designated in
the related Credit Line Agreement which, depending on the jurisdiction may be
during the Draw Period. Any such Termination Fees shall be retained by the
Master Servicer. The prepayment experience with respect to the Mortgage Loans
will affect the weighted average life of the Class A Notes. Home equity
revolving credit line loans, such as the Mortgage Loans, have been originated in
significant volume only during the past few years and neither the Sponsor nor
the Master Servicer is aware of any publicly available studies or statistics on
the rate of prepayment of such loans. Generally, home equity revolving credit
line loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including general economic conditions, interest rates, the availability
of alternative financing and
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<PAGE> 16
homeowner mobility. In addition, substantially all of the Mortgage Loans contain
"due-on-sale" provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with accepted servicing
practices, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such Mortgage
Loan. See "Description of the Class A Notes" and "Maturity and Prepayment
Considerations" herein and "Risk Factors -- Yield and Prepayment Considerations"
and "Maturity and Prepayment Considerations" in the Prospectus for a description
of certain provisions of the Credit Line Agreements that may affect the
prepayment experience on the Mortgage Loans.
BOOK-ENTRY SECURITIES
Issuance of the Class A Notes in book-entry form may reduce the
liquidity of such Notes in the secondary trading market since investors may be
unwilling to purchase Class A Notes since they cannot obtain Physical Notes. See
"Annex I" herein.
Since transactions in the Class A Notes can be effected only through
DTC, CEDEL, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Beneficial Owner to pledge a Note to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system or
otherwise to take actions in respect of such Note, may be limited due to lack of
a physical certificate representing the Class A Notes. See "Annex I" herein and
"Description of the Securities -- Form of Securities" in the Prospectus.
Beneficial Holders may experience some delay in their receipt of
distributions of interest and principal on the Class A Notes since such
distributions will be forwarded by the Indenture Trustee to DTC and DTC will
credit such distributions to the accounts of its participants which will
thereafter credit them to the accounts of Holders either directly or indirectly
through indirect participants. See "Description of the Class A Notes
- --Distributions on the Class A Notes" herein.
CASH FLOW CONSIDERATIONS
Generally, minimum monthly payments on the Mortgage Loans will at least
equal or may exceed accrued interest. Even assuming that the Mortgaged
Properties provide adequate security for the Mortgage Loans, substantial delays
could be encountered in connection with the liquidation of Mortgage Loans that
are delinquent and resulting shortfalls in distributions to Holders could occur
if the Insurer were unable to perform its obligations under the Policy. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to the Holders of the
Class A Notes and thereby reduce the security for the Mortgage Loans. In the
event any of the Mortgaged Properties fail to provide adequate security for the
related Mortgage Loans, the Holders of the Class A Notes could experience a loss
if the Insurer were unable to perform its obligations under the Policy.
NOTE RATING
The rating of the Class A Notes will depend primarily on an assessment
by the Rating Agencies of the claims-paying ability of the Insurer. Any
reduction in a rating assigned to the claims-paying ability of the Insurer below
the rating initially given to the Class A Notes may result in a reduction in the
rating of the Class A Notes. The rating by the Rating Agencies of the Class A
Notes is not a recommendation to purchase, hold or sell the Class A Notes,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the Class A
Notes do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons or the likelihood of payment of
any Net Funds Cap Carry-Forward Amount.
LEGAL CONSIDERATIONS
If a conservator, receiver or trustee were appointed for the
Originators, or if certain other events relating to the bankruptcy or insolvency
of the Originators were to occur, the Rapid Amortization Period would commence
and the Indenture Trustee would attempt to sell the Mortgage Loans (unless the
Insurer instructs, or, with the consent of the Insurer, the Holders holding
Class A Notes evidencing at least 51% of the Class A Principal Balance instruct
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otherwise), thereby causing early payment of the Class A Principal Balance. Any
such sale will be "servicing retained" by the Master Servicer. The net proceeds
of such sale will first be paid to the Insurer to the extent of unreimbursed
draws under the Policy and other amounts owing to the Insurer. The lesser of (i)
the amount required to reduce the Class A Principal Balance, together with all
accrued and unpaid interest due thereon, to zero and (ii) the Floating
Allocation Percentage times such remaining amounts will be distributed to the
Holders and the Policy will cover any amounts by which such remaining net
proceeds are insufficient to pay the Class A Principal Balance, together with
all accrued and unpaid interest due thereon, in full.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Indenture
Trustee or the Holders from appointing a successor Master Servicer.
MASTER SERVICER'S AND/OR ORIGINATORS' ABILITY TO CHANGE THE TERMS OF THE
MORTGAGE LOANS
The Master Servicer and/or each Originator may agree to changes in the
terms of a Credit Line Agreement, provided that such changes do not adversely
affect the interest of the Holders or the Insurer, and, in the case of the
Master Servicer only, are consistent with accepted servicing practices. There
can be no assurance that changes in applicable law or the marketplace for home
equity revolving credit line loans or prudent business practice will not result
in changes in the terms of the Mortgage Loans.
DELINQUENT MORTGAGE LOANS
The Trust will include Mortgage Loans which are 59 or fewer days
delinquent as of the related Cut-Off Date. The aggregate Principal Balance, as
of the Initial Cut-Off Date, of the Initial Mortgage Loans which are between 30
days and 59 days delinquent was $1,161,017.99.
MORTGAGE LOANS HAVE AN INTEREST-ONLY FEATURE DURING THE DRAW PERIOD
In general, the Mortgage Loans may be drawn upon for a period of three
years, which period may be extended at the related Originator's sole discretion
(the "Draw Period"). An Originator's decision to extend the Draw Period may
include a review of specific credit criteria. The minimum payment due during the
Draw Period will be the greater of $50.00 or the finance charges accrued on the
outstanding Principal Balance of the Mortgage Loan during the related billing
period. The minimum payment due during the period beginning after the Draw
Period (the "Repayment Period") will be an amount necessary to amortize the
balance due, plus interest and fees.
The Mortgage Loans may have an interest-only feature during the Draw
Period. As a result, scheduled principal amortization (but not necessarily
principal from other sources, including prepayments) may be de minimus during
the related Draw Periods such that little, if any, principal payments based on
scheduled principal amortization may be paid to the Holders of the Class A Notes
during such Draw Periods.
For a discussion of additional risks pertaining to the Class A Notes,
see "Risk Factors" in the Prospectus.
FORMATION OF THE TRUST
GENERAL
Advanta Home Equity Loan Trust 1997-A, is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement. Prior to such
formation, the Trust will have no assets or obligations or any operating
history. The Trust will not engage in any business other than (i) acquiring,
holding and managing the Mortgage Loans, the other assets of the Trust and any
proceeds therefrom, (ii) issuing the Notes and the Certificates, (iii) making
payments on the Notes and the Certificates and (iv) engaging in other activities
that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto.
The Trust will not acquire any assets other than the Trust Property,
and it is not anticipated that the Trust will have any need for additional
capital resources. Because the Trust will have no operating history upon its
establishment and will not engage in any business other than the duties
discussed above, no historical or pro forma financial statements or ratios of
earnings to fixed charges with respect to the Trust have been included herein.
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CERTAIN ACTIVITIES
The Trust will not, except as expressly provided in the Trust Agreement
and the Indenture: (i) borrow money (other than through the issuance of the
Class A Notes); (ii) make loans; (iii) invest in securities for the purpose of
exercising control; (iv) underwrite securities; (v) engage in the purchase and
sale (or turnover) of investments; (vi) offer securities in exchange for
property; or (vii) repurchase or otherwise reacquire its securities.
THE OWNER TRUSTEE
Wilmington Trust Company, the Owner Trustee under the Trust Agreement,
is a Delaware banking corporation and its principal offices are located at
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration. The Owner Trustee will perform
limited administrative functions under the Trust Agreement. The Owner Trustee's
duties in connection with the issuance and sale of the Notes and the
Certificates are limited solely to the express obligations of the Owner Trustee
set forth in the Trust Agreement, the Indenture and the Sale and Servicing
Agreement.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A. is the Indenture Trustee
under the Indenture. Bankers Trust Company of California, N.A. is a national
banking association and the principal offices of which are located at 3 Park
Plaza, 16th Floor, Irvine, California 92614. The Indenture Trustee's duties in
connection with the Notes are limited solely to its express obligations under
the Indenture and the Sale and Servicing Agreement.
THE TRUST PROPERTY
The Trust Property will primarily consist of a pool of adjustable rate
home equity revolving credit line loans made or to be made and conveyed to the
Trust under certain Credit Line Agreements; the collections in respect of the
Mortgage Loans received after the related Cut-Off Date; property that secured a
Mortgage Loan that has been acquired by foreclosure or deed in lieu of
foreclosure; rights of the Sponsor under hazard insurance policies covering the
Mortgaged Properties; the Policy; amounts on deposit in the Certificate Account;
amounts on deposit in the Pre-Funding Account; amounts on deposit in the
Capitalized Interest Account; amounts on deposit in the Principal and Interest
Account; certain rights of the Sponsor under the Purchase Agreement; and certain
other property. The Mortgage Loans are secured by first or second mortgages or
deeds of trust on residential properties that are primarily one-to-four family
properties and also include planned unit developments and condominiums. During
the Pre-Funding Period, the Trust shall have the right to purchase Subsequent
Mortgage Loans using amounts on deposit in the Pre-Funding Account.
THE MASTER SERVICER
GENERAL
The Master Servicer will service the Mortgage Loans in accordance with
the terms set forth in the Sale and Servicing Agreement. The Master Servicer may
perform any of its obligations under the Sale and Servicing Agreement through
one or more subservicers. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Sale and Servicing Agreement as if the Master Servicer alone were
servicing the Mortgage Loans.
THE SPONSOR AND THE MASTER SERVICER
The Sponsor, Advanta Mortgage Conduit Services, Inc., is a direct
subsidiary of Advanta Mortgage Corp. USA, the Master Servicer, and is an
indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta Parent"),
a publicly-traded company based in Springhouse, Pennsylvania with assets as of
September 30, 1997, in excess of $6.7 billion. Advanta Parent, through its
subsidiaries (including the Master Servicer), managed assets (including mortgage
loans) of approximately $20.8 billion as of September 30, 1997. See "The Sponsor
and the Transferor" and "The Master Servicer" in the Prospectus.
S-18
<PAGE> 19
As of September 30, 1997, the Master Servicer was servicing
approximately 66,000 mortgage loans in the Owned and Managed Servicing
Portfolio, representing an aggregate outstanding principal balance of
approximately $4.3 billion, and approximately 132,000 mortgage loans in the
Third-Party Servicing Portfolio representing an aggregate outstanding principal
balance of approximately $9.0 billion. See "The Master Servicer" in the
Prospectus.
As of September 30, 1997, the Sponsor or its affiliates have issued 33
issues of mortgage pass-through securities with an original balance of
approximately $6.2 billion.
The Indenture Trustee and the Insurer may remove the Master Servicer,
and the Master Servicer may resign, only in accordance with the terms of the
Sale and Servicing Agreement. No removal or resignation shall become effective
until the Indenture Trustee or a successor Master Servicer acceptable to the
Insurer and the Rating Agencies shall have assumed the Master Servicer's
responsibilities and obligations in accordance therewith. See "Description of
the Class A Notes -- Certain Matters Regarding the Master Servicer" herein and
"The Sale and Servicing Agreement -- Removal and Resignation of the Master
Servicer" in the Prospectus.
The Master Servicer may not assign its obligations under the Sale and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Indenture Trustee and the Insurer, which consent
shall not be unreasonably withheld; provided, that any assignee must meet the
eligibility requirements for a successor Master Servicer set forth in the Sale
and Servicing Agreement. See "Description of the Class A Notes-Certain Matters
Regarding the Master Servicer" and "The Sale and Servicing Agreement-Removal and
Resignation of the Master Servicer" in the Prospectus.
Upon removal or resignation of the Master Servicer, the Indenture
Trustee may solicit bids for a successor Master Servicer and, pending the
appointment of a successor Master Servicer, the Indenture Trustee will be
required to serve as Master Servicer. If the Indenture Trustee is unable to
obtain a qualifying bid and is prevented by law from acting as Master Servicer,
the Indenture Trustee will be required to appoint, or petition a court of
competent jurisdiction to appoint, an eligible successor. Any successor is
required to be acceptable to the Insurer.
The Class A Notes will not represent an interest in or obligation of,
nor are the Mortgage Loans guaranteed by, the Originator, the Sponsor, the
Master Servicer, the Indenture Trustee or any of their affiliates, nor will they
be insured or guaranteed by the Federal Deposit Insurance Corporation (the
"FDIC") or any other governmental agency or instrumentality.
RECENT DEVELOPMENTS RELATED TO ADVANTA PARENT
On March 17, 1997, Advanta Parent announced that it expected to report
1997 results well below previous expectations. Advanta Parent reported a loss of
$19.8 million for the first quarter of 1997. The losses are attributed to a
number of factors, including increases in consumer bankruptcies and charge-offs
and lower receivables balances than originally anticipated in its credit card
business.
On July 16, 1997, Advanta Parent reported net income of $5.4 million
for the second quarter of 1997, compared to net income of $45.1 million for the
second quarter of 1996. On October 15, 1997, Advanta Parent reported net income
of $42.4 million for the third quarter of 1997, compared to net income of $44.4
million for the third quarter of 1996.
Advanta Parent has reported that its overall charge-off rate on all
managed receivables (for which the mortgage loan portfolio represented
approximately 22% at September 30, 1997), for the nine months ended at September
30, 1997, was 5.4%, compared to 3.0% for the same period of 1996. Advanta Parent
has further reported that its overall delinquency ratio (30 days or more) for
all managed receivables at September 30, 1997 was 5.7%, compared to 4.2% at
September 30, 1996.
On June 30, 1997, purported shareholders of Advanta Parent, the
ultimate corporate parent of the Sponsor, the Originators and the Master
Servicer, who are represented by a group of law firms filed a putative class
action complaint against Advanta Parent and several of its current and former
officers and directors in the United States District Court for the Eastern
District of Pennsylvania. A second, similar complaint was filed in the same
court a few days later by a different group of purported Advanta Parent
shareholders and a different group of law firms. Both complaints allege that
Advanta Parent made misrepresentations in certain of its public filings and
statements in violation of the Securities Exchange Act of 1934. The complaints
seek damages of an unspecified amount. Advanta Parent believes the complaints
are without merit and will vigorously defend itself against the actions. On
August
S-19
<PAGE> 20
25, 1997, a cardholder of Advanta Parent instituted a putative class action
complaint against Advanta Parent and certain of its subsidiaries, including
Advanta National Bank, one of the Originators, in the Delaware Superior Court
for New Castle County. Subsequently, on September 8, 10, and 12 and on October
2, 1997, similar actions were filed in the Orange County California Superior
Court, the United States District Court for the Eastern District of Tennessee,
Delaware Superior Court and the Circuit Court of Covington County, Alabama,
respectively. The complaints allege that cardholder accounts in a specific
program were improperly repriced to a higher percentage rate of interest. The
complaints assert various violations of federal and state law with respect to
such repricings, and each seeks damages of an unspecified amount. Advanta Parent
believes that the complaints are without merit and will vigorously defend
against the actions. The program at issue comprises a very small portion of
Advanta Parent's consumer credit card receivables.
On October 28, 1997, Advanta Parent announced that it has reached a
definitive agreement under which Fleet will acquire Advanta Parent's consumer
credit card business (including certain assets and liabilities of Advanta
National Bank, one of the Originators, relating to the consumer credit card
business) and will combine it with Fleet's consumer credit card business (the
"Transaction"). Advanta Parent will continue to operate its mortgage and
business services companies, including the Sponsor, the Originators and the
Master Servicer.
Advanta Parent intends to seek shareholder approval and the Transaction
is subject to regulatory approval. The Transaction, which is expected to close
by late 1997 or early 1998, is anticipated to have a total value to Advanta
Parent of approximately $1.3 billion, including an after tax gain of
approximately $500 million.
Advanta Parent also announced that it intends to make a tender offer to
repurchase between $750 to $850 million of its common stock in 1998, following
the closing of the Transaction. Following the tender offer, it is expected that
Advanta Parent will have a book value of approximately $650 million.
This Prospectus Supplement contains forward-looking statements,
including but not limited to projections of future earnings, that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The most significant among these risks and
uncertainties are: (1) Advanta Parent's managed net interest margin, which in
turn is affected by its success in originating new credit card accounts, the
receivables volume and initial pricing of new accounts, the impact of repricing
existing accounts and account attrition, the mix of account types and interest
rate fluctuations; (2) the level of delinquencies and charge-offs; and (3) the
level of expenses. Earnings also may be affected by factors that affect consumer
debt, competitive pressures and the ratings on debt of Advanta Parent and its
subsidiaries. The Transaction described herein also may be affected by factors
which include the time of closing as well as contingencies. The proposed tender
offer also may be affected by factors which include the closing of the
Transaction and the price at which Advanta Parent's stock is trading at the time
of the proposed tender offer. Additional risks that may affect the Advanta
Parent's future performance are detailed in its filings with the Securities and
Exchange Commission, including its most recent Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q.
The ability of Advanta Parent's subsidiaries to honor their financial
and other obligations is to some extent influenced by the financial condition of
Advanta Parent. Such obligations of the Sponsor and the Master Servicer, insofar
as they relate to the Trust and the Class A Notes, primarily consist of the
Sponsor's obligation to repurchase defective Mortgage Loans and the Master
Servicer's obligation to service the Mortgage Loan pool. To the extent that the
Sponsor and/or the Master Servicer's ability to perform such obligations is
adversely affected, the Mortgage Loan pool may experience an increased level of
delinquencies and losses. The credit enhancement available to the Trust,
however, will be available, under the circumstances described herein.
THE ORIGINATORS
ADVANTA NATIONAL BANK
Advanta National Bank, an indirect wholly owned subsidiary of Advanta
Corp., was chartered as a national bank in December 1962. From 1926 to 1962,
Advanta National Bank was a Delaware trust company. Advanta National Bank was
acquired by Advanta Corp. in 1982. Prior to the enactment of the Competitive
Equality Bank Act of 1987 ("CEBA"), Advanta National Bank was a "non-bank" bank
which did not, and currently does not, make commercial loans.
S-20
<PAGE> 21
Advanta National Bank operates under the National Banking Act and is
subject to examination, supervision and regulation by the Office of the
Comptroller of the Currency. Advanta National Bank's deposits are insured by the
FDIC, and the Advanta National Bank is a member of the Federal Reserve Bank of
Philadelphia and a member of the Federal Home Loan Bank of Pittsburgh.
Under certain grandfathering provisions of CEBA, Advanta National Bank
is not required to register as a bank holding company, because Advanta National
Bank was a "non-bank" bank prior to the enactment of CEBA and complies with
certain restrictions set forth in CEBA. Consequently, Advanta Corp. is not
subject to Federal Reserve Board examination.
The principal executive office of Advanta National Bank is located at
Delaware Corporate Center 1, One Righter Parkway, Wilmington, Delaware 19803
(telephone: (302) 266-5600).
In connection with the Transaction, Advanta National Bank will transfer
certain assets and liabilities related to the consumer credit card business to
Fleet. See "The Sponsor and the Master Servicer - Recent Developments Related to
Advanta Parent."
ADVANTA FINANCE CORP.
Advanta Finance Corp., an indirect wholly owned subsidiary of Advanta
Corp., was incorporated as a Nevada corporation on September 13, 1994. The
principal executive office of Advanta Finance Corp. is located at 16875 West
Bernardo Drive, San Diego, California 92127 (telephone: (619) 674-5626).
THE ORIGINATORS' HOME EQUITY REVOLVING LINE OF CREDIT PROGRAM
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY REVOLVING CREDIT LINE LOANS
The following is a description of the underwriting procedures
customarily employed by the Originators with respect to home equity revolving
credit line loans. The underwriting process is intended to assess the
applicant's credit standing and repayment ability, the value and adequacy of the
real property as collateral and the characteristics of any current existing
mortgages. Such factors include the quality and location of the property, the
length of time the borrower has owned the property, amount of disposable income,
type of employment, length of employment, credit history, current and pending
debt obligations, payment habits and status of past and currently existing
mortgages.
Each applicant for a home equity revolving credit line loan is required
to complete an application which lists the applicant's liabilities, income,
credit and employment history and other demographic and personal information. If
information in the loan application demonstrates that there is sufficient income
and equity in the real property to justify making a home equity revolving credit
line loan, the Originators will conduct a further credit investigation of the
applicant. This investigation may include obtaining and reviewing an independent
credit bureau report on the credit history of the applicant in order to evaluate
the applicant's ability to repay. The credit report typically contains
information relating to such matters as credit history with local merchants and
lenders, installment debt payments and any record of delinquencies, defaults,
bankruptcy, collateral repossessions, suits or judgments.
Full and/or drive-by appraisals are generally performed on all home
equity revolving credit line loans. Such appraisals are determined on the basis
of an Originator-approved independent third-party, fee-based appraisal completed
on forms approved by Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC"). To become approved as an appraiser by
the Originator, an appraiser must also submit a copy of their license and
demonstrate proof of an E&O Policy. Any drive-by evaluation is an exterior
examination of the premises by the appraiser to determine that the property is
in good condition. The appraisal is based on various factors, including the
market value of comparable homes and the cost of replacing the improvement and
generally is required to have been made not earlier than 120 days prior to the
date of origination of the Mortgage Loan.
After obtaining all applicable employment, credit and property
information, the Originators may use a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the home equity
revolving credit line loan in addition to any senior mortgage loan payments
(including any escrows for property taxes and hazard insurance premiums) and
other
S-21
<PAGE> 22
monthly credit obligations. The debt-to-income ratio is the ratio of the
borrower's total monthly payments (assumed to be based on the applicable fully
indexed interest rate plus a margin) to the borrower's gross monthly income.
Based on the foregoing, the maximum monthly debt-to-income ratio is 50%.
Variations in the monthly debt-to-income ratios limits are permitted based on
compensating factors.
It is generally each Originator's policy to obtain an insured property
report before an Originator makes a home equity revolving credit line loan for
amounts less than or equal to $50,000; for loans in amounts greater than
$50,000, the Originators require a full title policy. In addition, each
Originator requires proof of hazard insurance. Flood insurance is generally
required in certain jurisdictions.
SERVICING OF THE MORTGAGE LOANS
The Master Servicer has established standard policies for the servicing
and collection of the Mortgage Loans, substantially similar to the procedures
used by the Master Servicer to service its closed-end home-equity product.
Servicing includes, but is not limited to, (i) the collection and aggregation of
payments relating to the Mortgage Loans; (ii) the supervision of delinquent
Mortgage Loans, loss mitigation efforts, foreclosure proceedings and, if
applicable, the disposition of Mortgaged Properties; and (iii) the preparation
of tax related information in connection with the Mortgage Loans.
Billing statements are mailed monthly to the Mortgagors. The statement
details all debits and credits and specifies the minimum payment due and the
available credit line. Notice of changes in the applicable loan rate are
provided to the Mortgagor with such statements. Payments are due on varying days
of the month.
With respect to the Mortgage Loans, the general policy of the Master
Servicer is to initiate foreclosure on the underlying property (i) after a loan
has become delinquent and, in the judgement of the Master Servicer, satisfactory
arrangements cannot be made with the Mortgagor; (ii) if a notice of default on a
senior lien is received by the Master Servicer; or (iii) if circumstances are
discovered by the Master Servicer which would indicate that a potential for loss
exists. Foreclosure proceedings may be terminated if the delinquency is cured.
Mortgage Loans to borrowers in bankruptcy proceedings may be restructured in
accordance with law and with a view to maximizing recovery of such loans,
including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the property is
located. During the foreclosure proceeding, the Master Servicer determines the
amount of the foreclosure bid and whether to liquidate the loan.
After foreclosure, if the Mortgage Loan is secured by a first mortgage
lien, the Master Servicer may liquidate the Mortgaged Property and charge off
the home equity revolving credit line loan balance which was not recovered
through liquidation proceeds. If the Mortgaged Property was subject to a senior
lien, the Master Servicer will either directly manage the foreclosure sale of
the property and satisfy such lien at the time of sale or take other action as
deemed necessary to protect the interest in the Mortgaged Property. If in the
judgment of the Master Servicer, the cost of maintaining or purchasing the
senior lien position exceeds the economic benefit of such action, the Master
Servicer will generally charge off the entire home equity revolving credit line
loan, not pursue any recovery against the related Mortgaged Property, but may
seek a money judgement against the borrower if allowed by law.
Servicing and charge-off policies and collection practices may change
over time in accordance with, among other things, the Master Servicer's business
judgment, changes in the portfolio and applicable laws and regulations.
DELINQUENCIES AND LOSSES
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Master Servicer for its servicing portfolio of adjustable rate home equity
revolving credit line loans (the "Owned and Managed HELOC Portfolio"), as of
October 31, 1997, and for the prior year ended December 31. The Owned and
Managed HELOC Portfolio includes, but is not limited to, the Mortgage Loans
acquired on or prior to October 31, 1997.
S-22
<PAGE> 23
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED HELOC PORTFOLIO
<TABLE>
<CAPTION>
TEN MONTHS ENDING YEAR ENDING
--------------------------- --------------------------
OCTOBER 31, 1997 DECEMBER 31, 1996
--------------------------- --------------------------
NUMBER DOLLAR NUMBER DOLLAR
OF AMOUNT OF AMOUNT
LOANS (000) LOANS (000)
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Portfolio 5,799 $ 143,814 2,252 $ 59,675
Delinquency percentage (1)
30-59 days 2.57% 4.71% 2.44% 2.70%
60-89 days .74% 2.02% .71% 1.43%
90 days of more 1.90% 1.28% .31% .44%
-------- ----------- -------- ----------
Total 5.21% 8.01% 3.46% 4.57%
Foreclosure rate (2) -- -- -- --
REO properties (3) -- -- -- --
</TABLE>
- --------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period
exclude loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount
of mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may
be, as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties
relating to mortgages foreclosed or for which deeds in lieu of
foreclosure have been accepted, and held by the Master Servicer pending
disposition) percentages are calculated using the number of loans, not
the dollar amount.
S-23
<PAGE> 24
LOAN LOSS EXPERIENCE
OF THE MASTER SERVICER'S OWNED AND MANAGED HELOC PORTFOLIO
<TABLE>
<CAPTION>
TEN MONTHS ENDING YEAR ENDING
----------------- -----------
OCTOBER 31, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Average amount outstanding (1) $99,011 $23,236
Gross losses (2) 102 45
Recoveries (3) 1 --
Net losses (4) 101 45
Net losses as a percentage of average amount .10% .19%
outstanding (5)
</TABLE>
- --------------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the mortgage loans outstanding on
the last business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be
uncollectible relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) October 31, 1997 percentage has been based on annualized net losses.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are either first or junior mortgages or deeds
of trust, on Mortgaged Properties. The "Mortgaged Properties" are the properties
securing the Mortgage Loans and consist primarily of residential properties that
are one- to four-family properties.
The aggregate Principal Balances of the Initial Mortgage Loans as of
the Initial Cut-Off Date is $86,835,573.71. As of the Initial Cut-Off Date, none
of the Initial Mortgage Loans were more than 59 days delinquent. For the Initial
Mortgage Loans, the average Principal Balance was $31,924.84, the minimum
Principal Balance was $34.17, the maximum Principal Balance was $279,000.00, the
minimum Coupon Rate and the maximum Coupon Rate were 8.5% and 16.25% per annum,
respectively, and the weighted average Coupon Rate was approximately 11.82% per
annum. As of the Initial Cut-Off Date, the weighted average Credit Limit
Utilization Rate (weighted by the Credit Limit total amount) was approximately
95.12%, the minimum Credit Limit Utilization Rate was 0.10 and the maximum
Credit Limit Utilization Rate was 102.0%. The "Credit Limit Utilization Rate" is
determined by dividing the Principal Balance of a Mortgage Loan by the Credit
Limit of the related Credit Line Agreement. The "Credit Limit" with respect to a
Mortgage Loan is the maximum dollar amount of draws permitted to be made
thereunder at any one time by the Mortgagor. The remaining term to scheduled
maturity for the Initial Mortgage Loans ranged from 62 months to 299 months and
the weighted average remaining term to scheduled maturity was approximately 253
months. Loans originated by Advanta Finance Corp. have no stated maturity date.
The minimum payment due during the repayment period will be 2.0% of the
outstanding principal balance at the end of the draw period, plus interest and
fees. The Combined Loan-to-Value Ratio of the Initial Mortgage Loans ranged from
8.56% to 100% and the weighted average Combined Loan-to-Value Ratio of the
Initial Mortgage Loans was approximately 77.35%. The "Combined Loan-to-Value
Ratio" for a Mortgage Loan is the ratio (expressed as a percentage) of (A) the
sum of (i) the Credit Limit of the Mortgage Loan and (ii) any outstanding
principal balances of mortgage loans senior to such Mortgage Loan (calculated at
the date of origination of the Mortgage Loan) to (B) the lesser of (i) the
appraised value of the related Mortgaged Property as set forth in the loan files
at such date of origination or (ii) in the case of a Mortgaged Property
purchased within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property. Credit Limits under the Initial
Mortgage Loans ranged from $10,000 to $300,000 and averaged approximately
$33,562. The weighted average second mortgage ratio (which is the Credit Limit
for the related Mortgage Loan, provided such Mortgage Loan was in the second
lien position, divided by the sum of such Credit Limit and the outstanding
principal balance of any mortgage loan senior to the related Mortgage Loan) for
the Initial Mortgage Loans was approximately 37.04%. 30.84% by Principal Balance
of the Initial Mortgage Loans represented first liens on the related Mortgaged
Properties, while 69.16% by
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<PAGE> 25
Principal Balance of the Initial Mortgage Loans represented junior liens on the
related Mortgaged Properties. As of the Initial Cut-Off Date, 95.47% of the
Initial Mortgage Loans are secured by Mortgaged Properties which are
single-family residences and 98.0% thereof are owner-occupied. As of the Initial
Cut-Off Date, 13.62%, 8.80%, 7.85%, 7.17%, and 5.35%, by Principal Balance of
the Initial Mortgage Loans are secured by Mortgaged Properties which are located
in New York, Pennsylvania, New Jersey, Michigan and Illinois, respectively.
MORTGAGE LOAN TERMS
The Mortgage Loans bear interest at the "Index Rate" which is a
variable rate based on the prime rate or base rate published in the Money Rates
table of The Wall Street Journal. The Index Rate with respect to each Mortgage
Loan changes monthly. Each Mortgage Loan originated by Advanta National Bank is
subject to a one percent periodic cap, a two percent annual cap and a lifetime
cap equal to eight percent over the prime rate plus the spread (the "Margin").
Each Mortgage Loan originated by Advanta Finance Corp. is not subject to a
periodic cap, but is subject to either a 3% annual cap or no annual cap and
lifetime caps ranging from 2.25% to 9.75%. The Mortgage Loans will be subject to
a maximum per annum interest rate (the "Maximum Rate"). The Maximum Rate for the
Initial Mortgage Loans ranged from 16.0% to 24.25% per annum and are subject to
applicable usury limitations. The weighted average Maximum Rate of the Initial
Mortgage Loans was approximately 19.84%. See "Certain Legal Aspects of Mortgage
Loans and Related Matters-Applicability of Usury Laws" in the Prospectus. The
daily periodic rate on the Mortgage Loans (the "Coupon Rate") is the sum of the
Index Rate plus the Margin divided by 360 days. The Margin for the Initial
Mortgage Loans ranged between 0.0% and 7.75% and had a weighted average as of
the Initial Cut-Off Date of 3.32%.
In general, the Mortgage Loans may be drawn upon for a period of three
years, which period may be extended at an Originator's sole discretion (the
"Draw Period"). An Originator's decision to extend the Draw Period may include a
review of specific credit criteria. The minimum payment due during the Draw
Period will be the greater of $50.00 or the finance charges accrued on the
outstanding Principal Balance of the Mortgage Loan during the related billing
period. The minimum payment due during the period beginning after the Draw
Period (the "Repayment Period") will be an amount necessary to amortize the
balance due, plus interest and fees.
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<PAGE> 26
Set forth below is a description of certain characteristics of the
initial Mortgage Loans as of the Initial Cut-Off Date:
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PRINCIPAL BALANCES NUMBER OF INITIAL PRINCIPAL BALANCE PERCENT OF POOL BY
MORTGAGE LOANS PRINCIPAL BALANCE
<S> <C> <C> <C>
$ 0.01 - 25,000.00 ...... 1,324 $22,497,877.11 25.91%
$ 25,000.01 - 50,000.00 . 1,048 35,855,577.50 41.29
$ 50,000.01 - 75,000.00 . 207 12,809,655.62 14.75
$ 75,000.01 - 100,000.00 75 6,538,457.16 7.53
$ 100,000.01 - 125,000.00 35 3,929,726.24 4.53
$ 125,000.01 - 150,000.00 14 1,907,371.37 2.20
$ 150,000.01 - 175,000.00 10 1,625,254.16 1.87
$ 175,000.01 - 200,000.00 1 177,585.78 0.20
$ 200,000.01 - 225,000.00 1 210,000.00 0.24
$ 225,000.01 - 250,000.00 3 737,428.68 0.85
$ 250,000.01 - 275,000.00 1 267,640.09 0.31
$ 275,000.01 - 300,000.00 1 279,000.00 0.32
----- -------------- ------
TOTAL .......... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
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<PAGE> 27
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
STATE NUMBER OF INITIAL PRINCIPAL BALANCE PERCENT OF POOL BY
MORTGAGE LOANS PRINCIPAL BALANCE
- ------------------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
Arkansas ..................... 1 $ 17,810.85 0.02%
Arizona ...................... 137 4,493,345.59 5.17
California ................... 105 3,940,340.52 4.54
Colorado ..................... 41 1,391,536.12 1.60
Connecticut .................. 73 2,602,353.42 3.00
Delaware ..................... 15 541,621.75 0.62
Florida ...................... 87 2,624,047.51 3.02
Georgia ...................... 66 1,648,035.41 1.90
Iowa ......................... 1 9,882.91 0.01
Illinois ..................... 140 4,642,047.45 5.35
Indiana ...................... 77 2,430,913.24 2.80
Kansas ....................... 36 944,650.49 1.09
Kentucky ..................... 18 466,748.17 0.54
Louisiana .................... 1 41,800.00 0.05
Maryland ..................... 75 2,601,199.89 3.00
Massachusetts ................ 28 736,963.83 0.85
Michigan ..................... 229 6,228,236.34 7.17
Minnesota .................... 52 1,575,819.89 1.81
Missouri ..................... 72 2,275,250.22 2.62
Nevada ....................... 29 934,358.14 1.08
New Jersey ................... 175 6,819,850.24 7.85
New York ..................... 320 11,826,160.17 13.62
North Carolina ............... 77 2,038,021.24 2.35
Ohio ......................... 143 4,045,814.80 4.66
Oregon ....................... 98 3,117,901.91 3.59
Pennsylvania ................. 266 7,642,863.49 8.80
Tennessee .................... 51 1,611,577.83 1.86
Utah ......................... 47 1,304,496.87 1.50
Vermont ...................... 1 71,980.00 0.08
Virginia ..................... 103 2,961,932.41 3.41
Washington ................... 95 3,268,527.18 3.76
Wisconsin .................... 61 1,979,485.83 2.28
----- -------------- ------
TOTAL ............... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
- ----------
(1) Geographic location is determined by the address of the Mortgaged
Property securing the related Mortgage Loan.
S-27
<PAGE> 28
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
RANGE OF COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
0.01 - 10.00%.......................... 2 $ 52,866.30 0.06%
10.01 - 20.00.......................... 26 579,101.99 0.67
20.01 - 30.00.......................... 31 788,546.58 0.91
30.01 - 40.00.......................... 64 2,095,075.14 2.41
40.01 - 50.00.......................... 96 2,956,580.46 3.40
50.01 - 60.00.......................... 166 5,267,733.65 6.07
60.01 - 70.00.......................... 238 8,007,908.41 9.22
70.01 - 80.00.......................... 553 19,981,353.13 23.01
80.01 - 90.00.......................... 1,021 35,520,731.20 40.91
90.01 -100.00.......................... 523 11,585,676.85 13.34
----- -------------- ------
TOTAL......................... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
- ----------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit
Limit of the Mortgage Loans and (ii) any outstanding principal balances
of mortgage loans senior to the Mortgage Loans (calculated at the date
of origination of the Mortgage Loans) to (B) the lesser of (i) the
appraised value of the related Mortgaged Property as set forth in loan
files at such date of origination or (ii) in the case of a Mortgaged
Property purchased within one year of the origination of the related
Mortgage Loan, the purchase price of such Mortgaged Property.
PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
SF Detached/De Min PUD .......... 2,606 $82,901,058.37 95.47%
SF RowHouse/Townhouse/Condo ..... 43 1,181,066.82 1.36
Two to Four Family Homes ........ 50 2,144,693.00 2.47
Prefabricated SF ................ 21 608,755.52 0.70
----- -------------- ------
TOTAL .................. 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
First Lien ................... 520 $26,783,856.35 30.84%
Junior Lien .................. 2,200 60,051,717.36 69.16
----- -------------- ------
TOTAL ............... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
S-28
<PAGE> 29
LOAN RATES
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
RANGE OF LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
8.001 - 8.500% ............. 5 $ 687,162.67 0.79%
8.501 - 9.000 .............. 20 2,328,706.14 2.68
9.001 - 9.500 .............. 62 4,085,190.96 4.70
9.501 - 10.000 ............... 197 7,299,361.48 8.41
10.001 - 10.500 .............. 145 6,777,599.58 7.81
10.501 - 11.000 .............. 217 8,223,521.10 9.47
11.001 - 11.500 .............. 257 9,787,917.42 11.27
11.501 - 12.000 .............. 461 14,487,864.61 16.68
12.001 - 12.500 .............. 238 8,097,994.74 9.33
12.501 - 13.000 .............. 286 7,745,797.07 8.92
13.001 - 13.500 .............. 194 4,101,677.46 4.72
13.501 - 14.000 .............. 203 4,336,563.24 4.99
14.001 - 14.500 .............. 217 4,398,452.38 5.07
14.501 - 15.000 .............. 172 3,626,495.63 4.18
15.001 - 15.500 .............. 43 816,869.23 0.94
15.501 - 16.000 .............. 1 10,000.00 0.01
16.001 - 16.500 .............. 2 24,400.00 0.03
----- -------------- ------
TOTAL ............... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
CREDIT LIMITS
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
RANGE OF CREDIT LIMITS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00 .............. 1,238 $21,007,917.98 24.19%
$ 25,000.01 - 50,000.00 ......... 1,114 36,690,734.87 42.26
$ 50,000.01 - 75,000.00 ......... 224 13,310,731.97 15.33
$ 75,000.01 - 100,000.00 ........ 77 6,607,370.00 7.61
$ 100,000.01 - 125,000.00 ....... 33 3,670,853.61 4.23
$ 125,000.01 - 150,000.00 ....... 17 2,251,056.57 2.59
$ 150,000.01 - 175,000.00 ....... 10 1,625,254.16 1.87
$ 175,000.01 - 200,000.00 ....... 1 177,585.78 0.20
$ 225,000.01 - 250,000.00 ....... 1 210,000.00 0.24
$ 250,000.01 - 275,000.00 ....... 3 737,428.68 0.85
$ 275,000.01 - 300,000.00 ....... 2 546,640.09 0.63
----- -------------- ------
TOTAL .................. 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
S-29
<PAGE> 30
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
RANGE OF MAXIMUM MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
15.501 - 16.000% ............. 4 $ 78,306.55 0.09%
16.001 - 16.500 .............. 9 1,270,066.30 1.46
16.501 - 17.000 .............. 16 1,745,802.51 2.01
17.001 - 17.500 .............. 79 4,872,093.50 5.61
17.501 - 18.000 .............. 191 6,955,737.04 8.01
18.001 - 18.500 .............. 177 7,979,389.57 9.19
18.501 - 19.000 .............. 227 8,278,273.31 9.53
19.001 - 19.500 .............. 273 9,911,880.62 11.41
19.501 - 20.000 .............. 336 10,663,646.56 12.29
20.001 - 20.500 .............. 231 7,095,134.32 8.17
20.501 - 21.000 .............. 183 4,895,993.34 5.64
21.001 - 21.500 .............. 395 10,629,054.76 12.24
21.501 - 22.000 .............. 171 3,674,096.68 4.23
22.001 - 22.500 .............. 217 4,437,415.99 5.11
22.501 - 23.000 .............. 165 3,497,413.43 4.03
23.001 - 23.500 .............. 43 816,869.23 0.94
23.501 - 24.000 .............. 1 10,000.00 0.01
24.001 - 24.500 .............. 2 24,400.00 0.03
----- -------------- ------
TOTAL ............... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
MARGIN
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
RANGE OF MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
No Margin ....................... 5 $ 687,162.67 0.79%
0.001 - 0.500 ................... 20 2,328,706.14 2.68
0.501 - 1.000 ................... 62 4,085,190.96 4.70
1.001 - 1.500 ................... 197 7,299,361.48 8.41
1.501 - 2.000 ................... 145 6,777,599.58 7.81
2.001 - 2.500 ................... 217 8,223,521.10 9.47
2.501 - 3.000 ................... 257 9,787,917.42 11.27
3.001 - 3.500 ................... 461 14,487,864.61 16.69
3.501 - 4.000 ................... 237 8,068,094.74 9.29
4.001 - 4.500 ................... 287 7,775,697.07 8.95
4.501 - 5.000 ................... 195 4,130,798.68 4.76
5.001 - 5.500 ................... 203 4,336,563.24 4.99
5.501 - 6.000 ................... 216 4,369,331.16 5.03
6.001 - 6.500 ................... 172 3,626,495.63 4.18
6.501 - 7.000 ................... 43 816,869.23 0.94
7.001 - 7.500 ................... 1 10,000.00 0.01
7.501 - 8.000 ................... 2 24,400.00 0.03
----- -------------- ------
TOTAL .................. 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
S-30
<PAGE> 31
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
RANGE OF CREDIT LIMIT NUMBER OF INITIAL PERCENT OF POOL BY
UTILIZATION RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
0.001 - 10.000% ............... 22 $ 23,821.06 0.03%
10.001 - 20.000 ................ 9 34,654.12 0.04
20.001 - 30.000 ................ 15 106,018.50 0.12
30.001 - 40.000 ................ 31 294,460.78 0.34
40.001 - 50.000 ................ 28 397,536.16 0.46
50.001 - 60.000 ................ 27 397,279.48 0.46
60.001 - 70.000 ................ 45 872,581.77 1.00
70.001 - 80.000 ................ 85 2,014,358.55 2.32
80.001 - 90.000 ................ 103 3,235,518.09 3.73
90.001 -100.000 ................ 2,274 76,065,876.19 87.59
100.001 -110.000 ................ 81 3,393,469.01 3.91
----- -------------- ------
TOTAL .................. 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
RANGE OF MONTHS REMAINING NUMBER OF INITIAL PERCENT OF POOL BY
TO SCHEDULED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
61 - 66 ........................ 5 $ 93,120.37 0.11%
67 - 72 ........................ 35 1,056,753.28 1.22
73 - 78 ........................ 82 2,593,447.02 2.99
79 - 84 ........................ 110 3,563,016.09 4.10
85 - 90 ........................ 30 1,005,744.34 1.16
211 - 216 ....................... 1 50,000.00 0.06
253 - 258 ....................... 3 94,817.18 0.11
259 - 264 ....................... 10 364,665.03 0.42
265 - 270 ....................... 753 26,497,562.15 30.51
271 - 276 ....................... 1,644 50,287,165.97 57.90
289 - 294 ....................... 6 117,891.64 0.14
295 - 300 ....................... 41 1,111,390.64 1.28
----- -------------- ------
TOTAL ................... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
ORIGINATION YEAR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
1995 ......................... 2 $ 53,217.44 0.06%
1996 ......................... 100 3,166,441.37 3.65
1997 ......................... 2,618 83,615,914.90 96.29
----- -------------- ------
TOTAL ............... 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
S-31
<PAGE> 32
OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Owner occupied .................. 2,675 $85,098,653.14 98.00%
Non-owner occupied .............. 45 1,736,920.57 2.00
----- -------------- ------
TOTAL .................. 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF INITIAL PERCENT OF POOL BY
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
0 ...................... 117 $ 3,561,553.74 4.10%
1 - 6 ...................... 1,888 58,387,389.28 67.24
7 -12 ...................... 663 23,401,327.25 26.95
13 - 18 ...................... 41 1,257,580.35 1.45
19 - 24 ...................... 10 177,723.09 0.20
85 - 90 ...................... 1 50,000.00 0.06
----- -------------- ------
TOTAL ................ 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
NUMBER OF INITIAL PERCENT OF POOL BY
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Current ......................... 2,530 $80,806,814.18 93.05%
1 - 29 days .................... 156 4,867,741.54 5.61
30 - 59 days .................... 34 1,161,017.99 1.34
----- -------------- ------
TOTAL .................. 2,720 $86,835,573.71 100.00%
===== ============== ======
</TABLE>
S-32
<PAGE> 33
MATURITY AND PREPAYMENT CONSIDERATIONS
The Indenture, except as otherwise described herein, provides that the
Holders of the Class A Notes will be entitled to receive on each Payment Date
payments of principal, in the amounts described herein, until the Class A
Principal Balance is reduced to zero.
The amortization period with respect to the Class A Notes will commence
on December 26, 1997. On each Payment Date, the Holders of the Class A Notes
will be entitled to receive the Scheduled Principal Distribution Amount for such
Payment Date.
The term of the Class A Notes has been divided into two periods, the
Managed Amortization Period and the Rapid Amortization Period. The "Managed
Amortization Period" is the period commencing on December 26, 1997, and ending
on the earlier to occur of (x) the December, 2000 Payment Date and (y) the
Payment Date which immediately precedes the occurrence of a Rapid Amortization
Event. The "Rapid Amortization Period" is the period which follows the end of
the Managed Amortization Period.
On any Payment Date during the Managed Amortization Period, the
Scheduled Principal Distribution Amount shall equal the excess (but in no event
less than zero) of (x) the lesser of (i) the Maximum Principal Payment and (ii)
the Net Principal Collections over (y) the Step-Down Amount, if any, with
respect to such Payment Date. With respect to any Payment Date, the "Maximum
Principal Payment" will equal 98% (the "Fixed Allocation Percentage") of the
Principal Collections relating to such Payment Date. With respect to any Payment
Date, the "Net Principal Collections" is the excess of (x) Principal Collections
with respect to the related Remittance Period over (y) the aggregate principal
amount of all Additional Balances arising during such related Remittance Period
provided that, in no event will Net Principal Collections be less than zero with
respect to any Payment Date. The aggregate distributions of principal to the
Holders of the Class A Notes will not exceed the Original Class A Principal
Balance.
On any Payment Date during the Rapid Amortization Period, the Scheduled
Principal Distribution Amount shall equal the excess of (x) the Maximum
Principal Payment over (y) the Step-Down Amount, if any, with respect to such
Payment Date.
Because prior payments of principal to Holders of the Class A Notes
serve to reduce the percentage of the Trust Collateral Value represented by the
Class A Principal Balance, payments of principal based on the Fixed Allocation
Percentage (which is fixed at 98%) may result in distributions of principal to
the Holders of the Class A Notes in amounts that are, in most cases, greater
relative to the declining balance of the Trust Collateral Value. This is
especially true during the Rapid Amortization Period. In addition, the Holders
of the Class A Notes may receive a payment of Excess Cashflow on any Payment
Date, as a payment of principal (any such payment, an "Accelerated Principal
Payment"), for the purpose of increasing the Overcollateralization Amount to the
Specified Overcollateralization Amount applicable to such Payment Date. The
level of losses may therefore affect the rate of payment of principal on the
Class A Notes.
To the extent obligors make more draws than principal payments, the
dollar amount of the Originators' Interest may grow. Because during the Rapid
Amortization Period the Holders share of Principal Collections is based upon the
Fixed Allocation Percentage (without reduction), an increase in the dollar
amount of the Originators' Interest due to additional draws may also result in
Holders receiving principal at a greater rate. The Sale and Servicing Agreement
permits each Originator, at its option, but subject to the satisfaction of
certain conditions specified in the Sale and Servicing Agreement, including the
conditions described below, and upon notice to the Rating Agencies and the
Insurer, to remove its respective Mortgage Loans from the Trust at any time
during the life of the Trust, so long as the dollar amount of the Originators'
Interest (after giving effect to such removal) is not less than the Minimum
Originators' Interest and the Overcollateralization Amount (after giving effect
to such removal) exceeds the then specified Overcollateralization Amount. Such
removals may affect the rate at which principal is distributed to the Holders of
the Class A Notes by reducing the overall Pool Balance and thus the amount of
Principal Collections. See "Description of the Class A Notes -- Optional
Transfers of Mortgage Loans to the Originator" herein.
All of the Mortgage Loans may be prepaid in full or in part at any
time. However, Mortgage Loans secured by Mortgaged Properties in certain
jurisdictions may be subject to Termination Fees to the extent permitted by law.
S-33
<PAGE> 34
In general, such Termination Fees do not exceed $500 and do not apply to
accounts terminated subsequent to a date designated in the related Credit Line
Agreement which, depending on the jurisdiction may be during the Draw Period.
Any such Termination Fees shall be retained by the Master Servicer. The
prepayment experience with respect to the Mortgage Loans will affect the
weighted average life of the Class A Notes.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Neither the Sponsor nor the Master Servicer is aware of any publicly available
studies or statistics on the rate of prepayment of such Mortgage Loans.
Generally, home equity revolving credit lines are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans amortize as described herein, rates of principal
payment on the Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. The prepayment experience of the Trust with respect to the Mortgage Loans
may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for federal
income tax purposes of interest payments on home equity revolving credit lines.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and,
with respect to the Mortgage Loans, the Master Servicer intends to enforce such
provisions, unless such enforcement is not permitted by applicable law. The
enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Mortgage Loan. See "Certain Legal Aspects Of Mortgage
Loans And Related Matters -- "Enforceability of Certain Provisions" in the
Prospectus.
In addition, the Class A Notes will be subject to optional redemption
on the Optional Redemption Date and all amounts due and owing to the Insurer and
unreimbursed draws on the Policy, together with interest thereon, have been
paid. Such redemption will only occur if the Trust Property is purchased for a
price at least equal to equal to the sum of the outstanding Class A Principal
Balance and accrued and unpaid interest thereon at the Class A Interest Rate
through the day preceding the final Payment Date, plus any Reimbursement
Amounts. See "The Pooling and Servicing Agreement -- Redemption; Retirement of
Securities" in the Prospectus.
The yield to an investor who purchases the Class A Notes in the
secondary market at a price other than par will vary from the anticipated yield
if the rate of prepayment on the Mortgage Loans is actually different than the
rate anticipated by such investor at the time such Class A Notes were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Indenture Trustee
will compute monthly expressing the Class A Principal Balance as of each Payment
Date (after giving effect to any distribution of principal on such Payment Date)
as a proportion of the Original Class A Principal Balance. On the Closing Date,
the Pool Factor will be 1.0000000. See "Description of the Class A Notes --
Distributions on the Class A Notes" herein. Thereafter, the Pool Factor will
decline to reflect reductions in the related Class A Principal Balance resulting
from distributions of principal to the Class A Notes.
Pursuant to the Sale and Servicing Agreement, monthly reports
concerning the Trust and the Class A Notes will be made available to the Holders
and the Insurer. In addition, within 60 days after the end of each calendar
year, beginning with the 1997 calendar year, information for tax reporting
purposes will be made available to each person who has been a Owner of record at
any time during the preceding calendar year. See "Description Of The Class A
Notes-Book-Entry Securities" and "-Reports to Holders" herein.
S-34
<PAGE> 35
DESCRIPTION OF THE CLASS A NOTES
The Class A Notes will be issued pursuant to the Indenture. The
following summaries describe certain provisions of the Indenture. 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 Indenture. Wherever
particular sections or defined terms of the Indenture are referred to, such
sections or defined terms are hereby incorporated herein by reference.
GENERAL
The Class A Notes will be issued in denominations of $1,000 and
multiples of $1 in excess thereof. Physical Notes, if issued, will be
transferable and exchangeable at the corporate trust office of the "Registrar,"
which is the Indenture Trustee, until the Indenture Trustee appoints a successor
thereto acceptable to the Insurer. See "Description Of The Securities -- Form of
Securities" in the Prospectus. No service charge will be made for any
registration of exchange or transfer of Class A Notes, but the Indenture Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge.
Each Originator has the right to sell or pledge their respective
proportion of the Originators' Interest at any time, provided (i) the Rating
Agencies have notified the related Originator, the Insurer and the Indenture
Trustee in writing that such action will not result in the reduction or
withdrawal of the ratings assigned to the Class A Notes, or adversely affect the
interest of the Insurer in any material manner, and (ii) certain other
conditions specified in the Sale and Servicing Agreement are satisfied.
AMENDMENTS TO CREDIT LINE AGREEMENTS
The Master Servicer and/or an Originator may agree to changes in the
terms of a Credit Line Agreement, provided that such changes (i) do not
adversely affect the interest of the Holders or the Insurer, and (ii) are
consistent with accepted servicing practices. There can be no assurance that
changes in applicable law or the marketplace for home equity revolving credit
line loans or prudent business practice will not result in changes in the terms
of the Mortgage Loans.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE ORIGINATORS
Subject to certain conditions, and upon notice to the Rating Agencies
and the Insurer, on any Payment Date an Originator may, but shall not be
obligated to (except upon a breach of a representation or warranty), remove from
the Trust its respective Mortgage Loans without notice to the Holders of the
Class A Notes. Each Originator is permitted to designate the Mortgage Loans to
be removed. Mortgage Loans so designated will only be removed upon satisfaction
of certain conditions specified in the Sale and Servicing Agreement, including:
(i) the Overcollateralization Amount as of such Payment Date (after giving
effect to such removal) equals or exceeds the then Specified
Overcollateralization Amount; (ii) the dollar amount of the Originators'
Interest as of such Payment Date (after giving effect to such removal) equals or
exceeds the Minimum Originators' Interest; (iii) the related Originator shall
have delivered to the Indenture Trustee, the Insurer and the Rating Agencies a
"Mortgage Loan Schedule" containing a list of all Mortgage Loans remaining in
the Trust after such removal; (iv) the related Originator shall represent and
warrant that random selection procedures were used in selecting the Mortgage
Loans and no other selection procedures which are adverse to the interests of
the Holders of the Class A Notes or the Insurer were used by such Originator in
selecting such Mortgage Loans; (v) no Rapid Amortization Event shall have
theretofore occurred or will occur as a result of such removal; and (vi) the
related Originator shall have delivered to the Indenture Trustee and the Insurer
an officer's certificate confirming the conditions set forth in clauses (i)
through (v) above.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO PRINCIPAL AND INTEREST ACCOUNT
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any Payment
Date, "Interest Collections" will be equal to the amounts collected during the
related Remittance Period, including such portion of Net Liquidation Proceeds
(as defined below), allocated to interest pursuant to the terms of the Credit
Line Agreements less Servicing Fees for the related Remittance Period.
S-35
<PAGE> 36
As to any Payment Date, "Principal Collections" will be equal to the
amounts collected during the related Remittance Period, including such portion
of Net Liquidation Proceeds, allocated to principal pursuant to the terms of the
Credit Line Agreements.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are equal to
the Liquidation Proceeds, reduced by related out-of-pocket expenses and
advances, but not including the portion, if any, of such amount that exceeds the
sum of (i) the Principal Balance of the Mortgage Loan and (ii) any accrued and
unpaid interest thereon to the end of the Remittance Period during which such
Mortgage Loan became a Liquidated Mortgage Loan.
"Liquidation Proceeds" are the proceeds (excluding any amounts drawn on
the Policy) received in connection with the liquidation of any Mortgage Loan,
whether through trustee's sale, foreclosure sale or otherwise.
The Master Servicer will deposit Interest Collections and Principal
Collections in respect of the Mortgage Loans in an account (the "Principal and
Interest Account") established for such purpose under the Sale and Servicing
Agreement.
The Indenture Trustee will deposit any amounts drawn under the Policy
into the Certificate Account.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
"Principal Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan)
on any date is equal to its Principal Balance as of the related Cut-Off Date
plus (i) any Additional Balances in respect of such Mortgage Loan minus (ii) all
collections credited against the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement prior to such day. The
"Principal Balance" of a Liquidated Mortgage Loan shall be zero.
CONVEYANCE OF THE SUBSEQUENT MORTGAGE LOANS
Subject to certain conditions, the Sponsor may, on certain dates (the
"Subsequent Transfer Dates") specified in certain transfer agreements entered
into after the Closing Date (the "Subsequent Transfer Agreements"), deliver to
the Trust loans eligible to become Subsequent Mortgage Loans on the next
following Payment Date, in exchange, on such Payment Date, for monies released
to the Sponsor as described below under "Flow of Funds".
Upon assignment of any Pre-Funded Mortgage Loan to the Trust, the
Indenture Trustee shall release to the Sponsor an amount equal to the Principal
Balance thereof as of the related Subsequent Cut-Off Date from amounts then on
deposit in the Pre-Funding Account.
OVERCOLLATERALIZATION FEATURE
The Insurer will require, based upon the terms and conditions
hereinafter described, that the Overcollateralization Amount be maintained at a
certain specified level, the "Specified Overcollateralization Amount."
The Overcollateralization Amount as of the Closing Date will be less
than the initial Specified Overcollateralization Amount, thus requiring an
increase in the Overcollateralization Amount on future Payment Dates until the
Overcollateralization Amount equals the Specified Overcollateralization Amount.
Certain excess cashflow (the "Excess Cashflow"), generally consisting
of the Floating Allocation Percentage of the sum of (i) excess interest (i.e.,
the excess of interest collections on the Mortgage Loans over Class A Note
interest payable, plus certain fees) together with (ii) Principal Collections
not required to be applied to Class A Note principal amortization or to
Reimbursement Amounts, will be applied on each Payment Date to maintain the
Overcollateralization Amount at, or to increase it to, the Specified
Overcollateralization Amount for such Payment Date. The requirement to maintain
the Overcollateralization Amount at the Specified Overcollateralization Amount,
or to increase it to the Specified Overcollateralization Amount, is not an
obligation of the Sponsor, the Originators, the Master Servicer, the Indenture
Trustee, the Owner Trustee or any other person, including the Insurer.
Since the Overcollateralization Amount will equal the subordinated
portion of the dollar amount of the Originators' Interest, which itself is equal
to all or a portion of the difference between the Trust Collateral Value and
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the Class A Principal Balance, the Overcollateralization Amount may be increased
to the Specified Overcollateralization Amount by amortizing the Class A
Principal Balance with Accelerated Principal Payments.
The Insurer may permit the Specified Overcollateralization Amount to
decrease over time, subject to certain floors and triggers. Since the
Overcollateralization Amount will equal the lesser of (x) the dollar amount of
the Originators' Interest as of such date and (y) the Specified
Overcollateralization Amount for such date, to the extent that clause (y)
controls (i.e., to the extent that the dollar amount of the Originators'
Interest is greater than the Specified Overcollateralization Amount), a
reduction in the Specified Overcollateralization Amount will result in an
automatic, corresponding increase in the dollar amount of the Non-Subordinated
Originators' Interest (the dollar amount of any such increase in the
Non-Subordinated Originators' Interest on any Payment Date, the
"Overcollateralization Release Amount"). Any such increases in the
Non-Subordinated Originators' Interest which result from such step-downs in the
Specified Overcollateralization Amount may be released to the Originators in
cash or as removed Mortgage Loans, as Step-Down Amounts (net of any amounts due
to the Insurer and any unreimbursed draws on the Policy, together with interest
thereon, the "Reimbursement Amounts"), or through the removal of Mortgage Loans
from the Trust on Payment Dates occurring after such step-downs take effect.
DISTRIBUTIONS ON THE CLASS A NOTES
Beginning with the first Payment Date (which will occur on December 26,
1997), distributions on the Class A Notes will be made by the Indenture Trustee
or the Paying Agent on each Payment Date to the persons in whose names such
Notes are registered at the close of business on the last Business Day of the
month preceding such Payment Date (the "Record Date"). The term "Payment Date"
means the twenty-fifth day of each month or, if such day is not a Business Day,
then the next succeeding Business Day. Distributions will be made by check or
money order mailed (or upon the request of a Owner owning Class A Notes having
denominations aggregating at least $1,000,000 and received by the Indenture
Trustee at least 5 Business Days prior to the related Record Date, by wire
transfer or otherwise) to the address of the person entitled thereto (which, in
the case of Book-Entry Securities, will be DTC or its nominee) as it appears on
the register of Holders of Class A Notes (the "Certificate Register") maintained
by the Registrar on the Record Date in amounts calculated as described below.
However, the final distribution in respect of the Class A Notes will be made
only upon presentation and surrender thereof at the office or the agency of the
Indenture Trustee specified in the notice to Holders of such final distribution.
For purposes hereof, a "Business Day" is any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the State of New York or
in the city in which the principal corporate trust office of the Indenture
Trustee is located, are authorized or obligated by law or executive order to be
closed.
FLOW OF FUNDS
The Indenture Trustee shall deposit to a certain account (the
"Certificate Account"), without duplication, upon receipt, (i) any Insured
Payments, (ii) the proceeds of any liquidation of the assets of the Trust, the
Principal Collections, Interest Collections (net of the Servicing Fee) and
certain other amounts remitted by the Master Servicer or any Sub-Servicer,
together with certain other specified amounts which may be delivered to the
Indenture Trustee in connection with retransfers of Mortgage Loans to an
Originator, (iii) the Pre-Funding Account earnings, (iv) the amounts, if any, to
be transferred from the Capitalized Interest Account, and (v) amounts, if any,
transferred from the Pre-Funding Account, pursuant to clause (vi) below.
With respect to the Certificate Account and to the extent of the funds
on deposit therein, on each Payment Date, the Indenture Trustee shall make the
following allocations, disbursements and transfers in the following order of
priority, and each such allocation, transfer and disbursement shall be treated
as having occurred only after all preceding allocations, transfers and
disbursements have occurred:
(i) first, any fees due to the Indenture Trustee and the
Owner Trustee;
(ii) second, to each Originator, each Originator's
proportionate interest in the Originators' Current
Amount, if any, for such Payment Date;
(iii) third, from amounts then on deposit in the
Certificate Account, the Premium Amount payable to
the Insurer;
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(iv) fourth, to the Holders of the Class A Notes, the
Class A Interest Distribution Amount for such Payment
Date;
(v) fifth, to the Holders of the Class A Notes, as a
distribution of principal, the Overcollateralization
Deficit for such Payment Date;
(vi) sixth, if such Payment Date is the first Payment Date
following the end of the Pre-Funding Period, to the
Holders of the Class A Notes as a distribution of
principal any amount remaining in the Pre-Funding
Account (after taking into account all transfers of
Subsequent Mortgage Loans on or prior to such Payment
Date);
(vii) seventh, to the Holders of the Class A Notes as a
distribution of principal, the Scheduled Principal
Distribution Amount for such Payment Date;
(viii) eighth, to the Insurer, the Reimbursement Amount, if
any, then due to it;
(ix) ninth, in satisfaction of the overcollateralization
requirements, the Excess Cashflow shall be applied as
an Accelerated Principal Payment;
(x) tenth, to the Master Servicer, reimbursement for
Servicing Advances to the extent not previously
reimbursed and reimbursement for Servicing Advances
which have become non-recoverable;
(xi) eleventh, to the Holders of the Class A Notes, the
amount of any Net Funds Cap Carry-Forward Amount then
due; and
(xii) twelfth, to the Certificateholders, which shall
initially be the Originators, any amount remaining on
deposit in the Certificate Account.
As used in clause (ii) above, the "Originators' Current Amount" for a
Payment Date is equal to the sum of (I) the product of (x) 100% minus the
Floating Allocation Percentage for such Payment Date and (y) Interest
Collections for such Payment Date plus (II) the product of (x) the difference
between (i) during the Managed Amortization Period, the Net Principal
Collections on the Mortgage Loans received during the related Remittance Period,
and during the Rapid Amortization Period, the Principal Collections on the
Mortgage Loans received during the related Remittance Period, and (ii) during
the Managed Amortization Period, the lesser of the Net Principal Collections and
the Maximum Principal Payment for such Payment Date, and during the Rapid
Amortization Period, the Maximum Principal Payment for such Payment Date and (y)
a fraction, equal to the Non-Subordinated Originators' Interest divided by the
dollar amount of the Originators' Interest.
"Servicing Advances" means any "out-of-pocket" costs and expenses,
incurred by the Master Servicer in the performance of its servicing obligations,
including, but not limited to the advancement of funds to pay taxes and
insurance premiums provided, that, the Master Servicer is only required to pay
such costs and expenses to the extent that it reasonably believes such amounts
will increase the proceeds collected from the related Mortgage Loan.
Interest on the Class A Notes will be payable monthly on the
twenty-fifth day of each month or, if such day is not a Business Day, then the
next succeeding Business Day (each, a "Payment Date"), commencing on December
26, 1997, at the Class A Interest Rate for the related Interest Accrual Period
(as defined below). The "Class A Interest Rate" for an Interest Accrual Period
will generally equal the lesser of:
(i) (x) with respect to any Payment Date which occurs on or prior to
the Optional Redemption Date, the sum of (a) LIBOR prior to the first day of
such Interest Accrual Period (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Interest Accrual Period) and (b) 0.20%
and (y) for any Payment Date thereafter, the sum of (a) LIBOR and (b) 0.40% (the
rate described in this clause (i), the "Class A Formula Rate"); and
(ii)(x) the fraction, expressed as an annual percentage rate, equal to
twelve times the interest due on the Mortgage Loans during the prior Remittance
Period, minus the amount of Prepayment Interest Shortfalls and Relief Act
Shortfalls for the related Remittance Period (net of the Servicing Fee, the
Indenture Trustee's Fee, the Owner
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Trustee's Fee and the Premium Amount) divided by the Trust Collateral Value
immediately prior to the related Payment Date, less (y) commencing on the tenth
Payment Date, 0.50% (the rate described in this clause (ii), the "Net Funds Cap
Rate").
CALCULATION OF THE LIBOR RATE. With respect to each Payment Date, LIBOR
shall be established by the Indenture Trustee and as to any Interest Accrual
Period, LIBOR will equal the rate for United States dollar deposits for one
month which appears on the Telerate Screen Page 3750 as of 11:00 A.M., London
time, on the second LIBOR Business Day prior to the first day of such Interest
Accrual Period. "Telerate Screen Page 3750" means the display designated as page
3750 on the Telerate Service (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 Sponsor after consultation with the Indenture Trustee), 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 Sponsor after
consultation with the Indenture Trustee) as of 11:00 A.M., London time, on the
day that is two LIBOR Business Days prior to the immediately preceding Payment
Date to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the principal amount of the Class A Notes then
outstanding. The Indenture 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 Sponsor after consultation with the
Indenture Trustee, 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 of one month in amounts
approximately equal to the principal amount of the Class A Notes then
outstanding. If no such quotations can be obtained, the rate will be LIBOR for
the prior Payment Date. "LIBOR Business Day" means any day other than (i) a
Saturday or a Sunday or (ii) a day on which banking institutions in the State of
New York or in the city of London, England are required or authorized by law to
be closed.
DISTRIBUTIONS OF PRINCIPAL COLLECTIONS
The Holders of the Class A Notes will be entitled to receive the
Scheduled Principal Distribution Amount for such Payment Date.
The term of the Class A Notes has been divided into two periods, the
Managed Amortization Period and the Rapid Amortization Period. The "Managed
Amortization Period" is the period commencing on December 26, 1997 (i.e., the
initial Payment Date) and ending on the earlier to occur of (x) the December,
2000 Payment Date and (y) the Payment Date which immediately precedes the
occurrence of a Rapid Amortization Event. The "Rapid Amortization Period" is the
period which follows the end of the Managed Amortization Period.
On any Payment Date during the Managed Amortization Period, the
Scheduled Principal Distribution Amount shall equal the excess (but in no event
less than zero) of (x) the lesser of (i) the Maximum Principal Payment and (ii)
the Alternative Principal Payment over (y) the Step-Down Amount, if any, with
respect to such Payment Date. With respect to any Payment Date, the "Maximum
Principal Payment" will equal 98% (the "Fixed Allocation Percentage") of the
Principal Collections relating to such Payment Date. With respect to any Payment
Date, the "Net Principal Collections" is the excess of (x) Principal Collections
with respect to the related Remittance Period over (y) the aggregate principal
amount of all Additional Balances arising during such related Remittance Period
provided that, in no event will Net Principal Collections be less than zero with
respect to any Payment Date. The aggregate distributions of principal to the
Holders of the Class A Notes will not exceed the Original Class A Principal
Balance.
On any Payment Date during the Rapid Amortization Period, the Scheduled
Principal Distribution Amount shall equal the excess of (x) the Maximum
Principal Payment over (y) the Step-Down Amount, if any, with respect to such
Payment Date.
As of any Payment Date, the "Step-Down Amount" is the lesser of (x) the
Maximum Step-Down Amount for such Payment Date and (y) the Maximum Principal
Payment or the Net Principal Collections, as applicable to such Payment Date. As
of any Payment Date the "Maximum Step-Down Amount" is the excess of (i) the
aggregate, cumulative amount of Overcollateralization Release Amounts for such
current, and all prior, Payment Dates over (ii)
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the aggregate, cumulative amount of all payments made with respect to Step-Down
Amounts for all prior Payment Dates; provided, that for any Payment Date on
which the Specified Overcollateralization Amount exceeds the
Overcollateralization Amount, the Step-Down Amount will be reduced (but not
below zero) by the amount of any such excess.
In addition, to the extent funds are available therefor (including
funds available under the Policy), on the Payment Date in February, 2024, the
Holders of the Class A Notes will be entitled to receive a payment of principal
in an amount equal to the outstanding Class A Principal Balance.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue
through the Payment Date in December, 2000, unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence immediately. "Rapid Amortization Event" refers to any of the following
events:
(a) failure on the part of Sponsor (i) to make a payment or
deposit required under the Sale and Servicing Agreement within four
Business Days after the date such payment or deposit is required to be
made or (ii) to observe or perform in any material respect any other
covenants or agreements of the Sponsor set forth in the Sale and
Servicing Agreement, which failure continues unremedied for a period of
60 days after written notice;
(b) any representation or warranty made by the Sponsor in the
Sale and Servicing Agreement proves to have been incorrect in any
material respect when made and continues to be incorrect in any
material respect for a period of 60 days after written notice and as a
result of which the interests of the Holders or the Insurer are
materially and adversely affected: provided, however, that a Rapid
Amortization Event shall not be deemed to occur if the Sponsor has
purchased or made a substitution for the related Mortgage Loan or
Mortgage Loans if applicable during such period (or within an
additional 60 days with the consent of the Indenture Trustee and the
Insurer) in accordance with the provisions of the Sale and Servicing
Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency
or receivership relating to the Originators;
(d) the Trust becomes subject to regulation by the Securities
and Exchange Commission as an investment company within the meaning of
the Investment Company Act of 1940, as amended;
(e) the occurrence of an event permitting the removal of the
Master Servicer. See "Certain Matters Regarding the Master Servicer"
herein;
(f) default in the payment of any interest, principal or any
installment of principal on any Note when the same becomes due and
payable, and such default continues for a period of five days; and
(g) the aggregate of all draws under the Policy exceeds 1% of
the Cut-Off Date Pool Balance.
In the case of any event described in clause (a), (b), (e) or (g), a
Rapid Amortization Event will be deemed to have occurred only if, after the
applicable grace period, if any, described herein or in the Indenture or Sale
and Servicing Agreement either (i) the Indenture Trustee or Holders holding
Class A Notes evidencing more than 51% of the Class A Note Principal Balance
with the consent of the Insurer (so long as there is no continuing default by
the Insurer in the performance of its obligations under the Policy) or the
Insurer (so long as there is no continuing default by the Insurer in the
performance of its obligations under the Policy), by written notice to the
Insurer, the Sponsor, the Originators, the Rating Agencies, and the Master
Servicer (and to the Indenture Trustee, if given by the Holders or the Insurer)
declare that a Rapid Amortization Event has occurred as of the date of such
notice. In the case of any event described in clause (c), (d) or (f), a Rapid
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the Indenture Trustee, the Holders or the Insurer
immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if an Originator voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy
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trustee of the related Originator, on the day of any such filing or appointment
no further Additional Balances will be transferred to the Trust, and the related
Originator will promptly give notice to the Indenture Trustee and the Insurer of
any such filing or appointment. Within 15 days, the Indenture Trustee will
publish a notice of the liquidation or the filing or appointment relating to
such Originator. Unless otherwise instructed within a specified period by the
Insurer, or, with the consent of the Insurer, the Holders of the Class A Notes
evidencing at least 51% of the Class A Note Principal Balance, the Indenture
Trustee will sell, dispose of or otherwise liquidate the Mortgage Loans in a
commercially reasonable manner and on commercially reasonable terms. Any such
sale, disposal or liquidation and such sale, disposal or liquidation will be
"servicing retained" by the Master Servicer. The net proceeds of such sale will
first be paid to the Insurer to the extent of unreimbursed draws under the
Policy and other amounts owing to the Insurer. The lesser of (i) the amount
required to reduce the Class A Principal Balance, together with all accrued and
unpaid interest due thereon, to zero and (ii) the Floating Allocation Percentage
times such remaining amounts will be distributed to the Holders of the Class A
Notes; the Policy will cover any amount by which such remaining net proceeds are
insufficient to pay the Class A Principal Balance, together with all accrued and
unpaid interest due thereon in full.
THE INSURER AND THE POLICY
The information set forth in this section has been provided by Ambac
Assurance Corporation. No representation is made by the Underwriter, the
Sponsor, the Originators or any of their affiliates as to the accuracy or
completeness of any such information.
THE INSURER
The Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin, and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Insurer primarily insures
newly-issued municipal and structured finance obligations. The Insurer is a
wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly AMBAC Inc.), a
100% publicly-held company. Moody's, Standard & Poor's and Fitch Investors
Service, L.P. have each assigned a triple-A claims-paying ability rating to the
Insurer.
The consolidated financial statements of the Insurer and its
subsidiaries as of December 31, 1996 and December 31, 1995 and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC Inc.
(which was filed with the Securities and Exchange Commission (the "Commission")
on March 12, 1997; Commission File No. 1-10777) and the consolidated financial
statements of the Insurer and its subsidiaries as of September 30, 1997 and for
the periods ending September 30, 1997 and September 30, 1996, included in the
Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended September 30, 1997 (which was filed with the Commission on November 14,
1997) are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in documents
incorporated herein by reference shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a statement contained
herein by reference herein also modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Insurer and its subsidiaries included
in documents filed by Ambac Financial Group, Inc. with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Class A Notes shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
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The following table sets forth the capitalization of the Insurer as of
December 31, 1994, December 31, 1995, December 31, 1996 and September 30, 1997,
respectively, in conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 December 31, 1996 September 30, 1997
(unaudited)
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Unearned premiums ............ $ 840 $ 906 $ 995 $ 1,047
Other liabilities ............ 136 295 259 311
------- ------- ------- -------
Total Liabilities ............ 976 1,201 1,254 1,358
------- ------- ------- -------
Stockholder's equity:
Common stock .............. 82 82 82 82
Additional paid-in capital 444 481 515 521
Unrealized gains (losses)
on investments, net of tax (46) 87 66 89
Retained earnings ......... 782 907 992 1,130
------- ------- ------- -------
Total stockholder's equity ... 1,262 1,557 1,655 1,822
------- ------- ------- -------
Total liabilities and
stockholder's equity ...... $ 2,238 $ 2,758 $ 2,909 $ 3,180
======= ======= ======= =======
</TABLE>
For additional financial information concerning the Insurer, see the
audited financial statements of the Insurer incorporated by reference herein.
Copies of the financial statements of the Insurer incorporated herein by
reference and copies of the Insurer's annual statement for the year ended
December 31, 1996 prepared in accordance with statutory accounting standards are
available, without charge, from the Insurer. The address of the Insurer's
administrative offices and its telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Class A Notes or the
advisability of investing in the Class A Notes and makes no representations
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Insurer and presented
under this heading "The Policy and the Insurer" and in the financial statements
incorporated herein by reference.
THE POLICY
The Insurer will issue its Guaranty Insurance Policy for the Class A
Notes (the "Policy"). The Policy unconditionally guarantees the payment of
Insured Payments on the Class A Notes. The Insurer will make each required
Insured Payment to the Indenture Trustee on the later of (i) the Payment Date on
which such Insured Payment is distributable to the Holders pursuant to the Sale
and Servicing Agreement; and (ii) the Business Day next following the day on
which the Insurer shall have received telephonic or telegraphic notice,
subsequently confirmed in writing, or written notice by registered or certified
mail, from the Indenture Trustee, specifying that an Insured Payment is due in
accordance with the terms of the Policy.
The Insurer's obligation under the Policy will be discharged to the
extent that funds are received by the Indenture Trustee for distribution to the
Holders, whether or not such funds are properly distributed by the Indenture
Trustee.
For purposes of the Policy, "Holder" as to a particular Class A Note,
does not and may not include the Trust, the Master Servicer, the Sponsor or the
Originators.
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The Insurer only insures the timely receipt of interest on the Class A
Notes (calculated at the Class A Interest Rate) and the receipt of the
Overcollateralization Deficiency, if any, payable on each Payment Date on the
Class A Notes. The Policy will not cover the Net Funds Cap Carry-Forward Amount,
Prepayment Interest Shortfalls or Relief Act Shortfalls, nor does the Policy
guarantee to the Holders of the Class A Notes any particular rate of principal
payment. The Policy expires and terminates without any action on the part of the
Insurer or any other person on the date that is one year and one day following
the date on which the Class A Notes have been paid in full.
In the absence of payments under the Policy, Holders will directly bear
the credit risks associated with their Class A Notes.
The Policy is non-cancelable.
The Policy is issued under and pursuant to and shall be construed
under, the laws of the State of California, without giving effect to the
conflict of laws principles thereof.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
DRAWINGS UNDER THE POLICY
On each Determination Date the Indenture Trustee shall determine, with
respect to the immediately following Payment Date, the amount (the "Available
Funds") to be on deposit in the Certificate Account on such Payment Date
(excluding the amounts of any Insured Payments, the Indenture Trustee's Fee, the
Owner Trustee's Fee, the Servicing Fee, the Originators' Current Amount and the
Premium Amount). With respect to each Payment Date, the "Determination Date" is
the third Business Day next preceding such Payment Date or such earlier day as
shall be agreed to by the Insurer and the Indenture Trustee.
If the Insured Payment for any Payment Date exceeds the Available Funds
for such Payment Date (such event being an "Available Funds Shortfall"), the
Indenture Trustee shall complete a Notice in the form of Exhibit A to the Policy
and submit such notice to the Insurer no later than 12:00 noon New York City
time on the second Business Day preceding such Payment Date as a claim for an
Insured Payment in an amount equal to such Available Funds Shortfall.
CERTAIN PROVISIONS OF THE INDENTURE AND
THE SALE AND SERVICING AGREEMENT
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the Sale
and Servicing Agreement, follow such collection procedures as it follows from
time to time with respect to the home equity revolving credit line loans in its
servicing portfolio comparable to the Mortgage Loans. Consistent with the above,
the Master Servicer may in its discretion waive any late payment charge or any
assumption or other fee or charge that may be collected in the ordinary course
of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to the home equity revolving credit line loans
it owns or services. In accordance with the terms of the Sale and Servicing
Agreement, the Master Servicer or the Originators may consent under certain
circumstances to the placing of a subsequent senior lien in respect of a
Mortgage Loan.
HAZARD INSURANCE
The Sale and Servicing Agreement provides that the Master Servicer
maintain certain hazard insurance on the Mortgaged Properties relating to the
Mortgage Loans. The terms of the related Credit Line Agreements generally
require borrowers to maintain certain hazard insurance.
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The Sale and Servicing Agreement requires the Master Servicer to
maintain for any Mortgaged Property relating to a Mortgage Loan acquired upon
foreclosure of a Mortgage Loan, or by deed in lieu of such foreclosure, hazard
insurance with extended coverage in an amount equal to the lesser of (a) the
maximum insurable value of such Mortgaged Property or (b) the Credit Limit of
such Mortgage Loan. The Sale and Servicing Agreement provides that the Master
Servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Mortgaged
Properties. If such blanket policy contains a deductible clause, the Master
Servicer will be obligated to deposit in the Principal and Interest Account the
sums which would have been deposited therein but for such clause. The Master
Servicer will initially satisfy these requirements by maintaining a blanket
policy. As set forth above, all amounts collected by the Master Servicer (net of
any reimbursements to the Master Servicer) under any hazard policy (except for
amounts to be applied to the restoration or repair of the Mortgaged Property)
will ultimately be deposited in the Principal and Interest Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state laws and
most of such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures under the
Sale and Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Master Servicer will follow such practices as it deems necessary
or advisable and as are in keeping with its general subordinate mortgage
servicing activities, provided the Master Servicer will not be required to
expend its own funds in connection with foreclosure or other conversion,
correction of default on a related senior mortgage loan or restoration of any
property unless, in its sole judgment, such foreclosure, correction or
restoration will increase Net Liquidation Proceeds. The Master Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Holders of the Class A Notes or the Originators.
OPTIONAL REASSIGNMENT OF DEFAULTED LOANS
The Master Servicer may, at its option, purchase from the Trust any
Mortgage Loan which is delinquent in payment by 90 days or more. Any such
purchase shall be at a price equal to 100% of the Principal Balance of such
Mortgage Loan plus accrued interest thereon at the applicable Coupon Rate from
the date through which interest was last paid by the related mortgagor to the
first day of the month in which such amount is to be distributed to Holders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Remittance Period, the Master Servicer will
receive from interest collections in respect of the Mortgage Loans a portion of
such interest collections as a monthly Servicing Fee in the amount equal to
0.50% per annum ("Servicing Fee Rate") on the aggregate Principal Balances of
the Mortgage Loans as of the first day of the related Remittance Period (or as
of the Initial Cut-Off Date for the first Remittance Period). All Termination
Fees, assumption fees, late payment charges and other fees and charges, to the
extent collected from borrowers, will be retained by the Master Servicer as
additional servicing compensation.
The Master Servicer will pay certain ongoing expenses associated with
the Trust and incurred by it in connection with its responsibilities under the
Sale and Servicing Agreement. In addition, the Master Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties; such right of reimbursement (i) shall be prior to the rights
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of the Holders of the Class A Notes to receive any related Net Liquidation
Proceeds and (ii) shall not be limited to recoveries from the related Mortgage
Loan.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery on or before
April 15 in each year, beginning on April 15, 1998, to the Indenture Trustee an
annual statement signed by an officer of the Master Servicer to the effect that
the Master Servicer has fulfilled its material obligations under the Sale and
Servicing Agreement throughout the preceding fiscal year, except as specified in
such statement.
On or before April 15 of each year, beginning April 15, 1998, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer or the Originators) to the Indenture Trustee, the Insurer
and the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Mortgage Loans under the
Sale and Servicing Agreement and that, on the basis of such examination, such
firm believes that such servicing was conducted in compliance with the Sale and
Servicing Agreement except for (a) such exceptions as such firm believes to be
immaterial and (b) such other exceptions as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Sale and Servicing Agreement provides that the Master Servicer may
not resign from its obligations and duties thereunder, except in connection with
a permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it as evidenced by an opinion of counsel delivered to the Indenture
Trustee and the Insurer. No such resignation will become effective until the
Indenture Trustee or appointed successor Master Servicer has assumed the Master
Servicer's obligations and duties under the Sale and Servicing Agreement. The
Indenture Trustee, the Holders of the Class A Notes (each with the consent of
the Insurer) or the Insurer (so long as no Insurer default is continuing), have
the right, to remove the Master Servicer upon the occurrence of any of (a)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; (b) the failure of the Master Servicer to perform any one or more
of its material obligations under the Sale and Servicing Agreement as to which
the Master Servicer shall continue in default with respect thereto for a
specified period, generally of sixty (60) days, after notice by the Indenture
Trustee or the Insurer (if required by the Sale and Servicing Agreement) of said
failure; or (c) the failure of the Master Servicer to cure any breach of any of
its representations and warranties set forth in the Sale and Servicing Agreement
which materially and adversely affects the interests of the Holders or the
Insurer, for a specified period, generally of thirty (30) days after the Master
Servicer's discovery or receipt of notice thereof.
The Insurer may also remove the Master Servicer upon the occurrence of
any of certain events, including:
(i) the failure by the Master Servicer to make any required Servicing
Advance which failure continues for thirty (30) days or more after written
notice from the Insurer; or
(ii) the failure of the Master Servicer to perform one or more of its
material obligations under the Sale and Servicing Agreement, which failure
continues for sixty (60) days or more after written notice from the Insurer; or
(iii) certain other events described in the Sale and Servicing
Agreement; or
(iv) failure on the part of the Master Servicer to make a payment or
deposit required under the Sale and Servicing Agreement within three Business
Days after the date such payment or deposit is required to be made.
provided, however, that prior to any removal of the Master Servicer by the
Insurer pursuant to clause (i) or (ii) above the Master Servicer shall not have
remedied, or shall not have taken action satisfactory to such Insurer to remedy,
such event or events within a specified period, generally within 30 days (60
days in respect of clause (ii)) after the Master Servicer's receipt of notice
thereof.
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AMENDMENTS
The Indenture and the Sale and Servicing Agreement may each be amended
as the parties thereto by the Indenture Trustee, the Sponsor and the Master
Servicer, with the prior approval of the Insurer, but without the giving of
notice or the receipt of the consent of the Holders of the Class A Notes, for
the purposes of (x)(i) curing any ambiguity or correcting or supplementing any
provision thereof which may be inconsistent with any other provision thereof, or
(ii) complying with the requirements of the Code and the regulations proposed or
promulgated thereunder; provided, however, that such action shall not, as
evidenced by an opinion of counsel delivered to the Indenture Trustee and the
Insurer, materially and adversely affect the interests of any Holders (without
its written consent) or (y) certain other limited purposes set forth therein.
The Indenture and the Sale and Servicing Agreement may also be amended
by the Indenture Trustee, the Sponsor and the Master Servicer at any time and
from time to time, with the prior written approval of the Insurer, Holders of
the Class A Notes evidencing not less than 51% of the Class A Note Principal
Balance, for the purpose of adding any provisions or changing in any matter or
eliminating any of the provisions thereof or of modifying in any manner the
rights of the Holders of the Class A Notes thereunder; provided, however, that
no such amendment shall (a) change in any manner the amount of, or delay the
timing of, payments which are required to be distributed to any Holders without
the consent of such Holders or (b) change the aforesaid percentage of the Class
A Principal Balance which is required to consent to any such amendments, without
the consent of all of the Holders affected.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A., a national banking
association with its principal place of business in Irvine, California, has been
named Indenture Trustee pursuant to the Indenture.
The commercial bank or trust company serving as Indenture Trustee may
own Class A Notes and have normal banking relationships with the Sponsor, the
Master Servicer, the Originators and the Insurer and/or their affiliates.
The Indenture Trustee may resign at any time, in which event the
Sponsor will be obligated to appoint a successor Indenture Trustee, as approved
by the Insurer. The Sponsor (with the prior written consent of the Insurer) may
also remove the Indenture Trustee if the Indenture Trustee ceases to be eligible
to continue as such under the Indenture or if the Indenture Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Sponsor will be
obligated to appoint a successor Indenture Trustee, as approved by the Insurer.
Any resignation or removal of the Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee acceptable to the Insurer. If the
Sponsor fails to fulfill its obligations to appoint a successor Indenture
Trustee, the Insurer will have the right to do so.
No Holder of the Class A Notes will have any right under the Indenture
to institute any proceeding with respect to the Indenture unless the Insurer has
given its prior written consent, such Holder previously has given to the
Indenture Trustee written notice of default and unless Holders evidencing at
least 51% of the Class A Principal Balance have made written requests upon the
Indenture Trustee to institute such proceeding in its own name as Indenture
Trustee thereunder and have offered to the Indenture Trustee reasonable
indemnity and the Indenture Trustee for 60 days has neglected or refused to
institute any such proceeding. The Indenture Trustee will be under no obligation
to exercise any of the trusts or powers vested in it by the Indenture or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Holders, unless such Holders have offered to the
Indenture Trustee reasonable security or indemnity against the cost, expenses
and liabilities which may be incurred therein or thereby.
REPRESENTATIONS AND WARRANTIES
The Sponsor will represent and warrant to the Indenture Trustee and the
Insurer that, among other things, as of the Closing Date, it is duly organized
and in good standing and that it has the authority to consummate the
transactions contemplated by the Sale and Servicing Agreement. The Sponsor will
also represent and warrant to the Indenture Trustee that, among other things,
immediately prior to the assignment of the Mortgage Loans to the Trust, such
Sponsor was the sole owner and holder of such Mortgage Loans free and clear of
any and all liens and security interests.
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USE OF PROCEEDS
The net proceeds from the sale of the Class A Notes will be paid over
by the Sponsor to the Originators in consideration of the transfer of the
Mortgage Loans. Such amount will be determined as a result of the pricing of the
Class A Notes through the offering described in this Prospectus Supplement. The
net proceeds to be received from the sale of the Mortgage Loans will be added to
the Originators' general funds and will be available for general corporate
purposes, including the repayment of debt and the purchase of new mortgage
loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income
tax aspects of the purchase, ownership and disposition of the Class A Notes, is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations thereunder, and published rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to Holders in light of their
personal investment circumstances or to certain types of Holders subject to
special treatment under the U.S. federal income tax laws (for example, banks and
life insurance companies). Accordingly, investors should consult their tax
advisors regarding U.S. federal, state, local, foreign and any other tax
consequences to them of investing in the Class A Notes.
CHARACTERIZATION OF THE CLASS A NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Indenture and other relevant documents and assuming compliance with the
terms of the Indenture as in effect on the date of issuance of the Class A
Notes, Dewey Ballantine LLP, special tax counsel to the Sponsor ("Tax Counsel"),
is of the opinion that based on the application of existing law to the facts as
set forth in the Indenture and other relevant documents and such investigations
as it deemed appropriate, the Class A Notes will be treated as debt instruments
for federal income tax purposes as of such date. Accordingly, upon issuance, the
Class A Notes will be treated as "Debt Securities" as described in the
Prospectus. See "Certain Federal Income Tax Consequences" in the Prospectus.
The Trust and the Holders of the Class A Notes express in the Indenture
their intent that, for applicable tax purposes, the Class A Notes will be
indebtedness secured by the Mortgage Loans. The Originators, the Sponsor and the
Holders of the Class A Notes, by accepting the Class A Notes, and each Owner by
its acquisition of a beneficial interest in a Note, have agreed to treat the
Class A Notes as indebtedness for federal, state and local income and franchise
tax purposes. Investors should be aware that no transaction closely comparable
to that contemplated herein has been the subject of any Treasury Regulation,
revenue ruling or judicial decision, and therefore the matter is subject to
interpretation. Because different criteria are used to determine the non-tax
accounting characterization of the transaction, the Originators intend to treat
this transaction as a sale of an interest in the Principal Balances of the
Mortgage Loans for financial accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Originators and has not been transferred to the Holders of the Class A Notes.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Class A Notes as debt or otherwise
makes the rationale of those cases inapplicable to this situation.
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TAXATION OF INTEREST INCOME OF HOLDERS
Interest Income on the Notes. As a general rule, interest paid or
accrued on the Notes will be treated as ordinary income to the holders thereof.
A Holder of the Class A Notes using the accrual method of accounting for federal
income tax purposes is required to include interest paid or accrued on the Notes
in ordinary income as such interest accrues, while a Holder using the cash
receipts and disbursements method of accounting for federal income tax purposes
must include such interest in ordinary income when payments are received (or
made available for receipt) by such holder. The following discussion is based in
part on the rules governing "original issue discount" ("OID") which are set
forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended on June 11, 1996 (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 Notes.
It is anticipated that the Class A Notes will not be issued with OID
within the meaning of Section 1273 of the Code, and that the Trust will not take
any OID deduction with respect thereto. If the Class A Notes were issued at more
than a de minimis discount, however, such Notes would be treated as issued with
OID for federal income tax purposes. The amount of OID on a Class A Note will be
considered to be zero if it is less than a de minimis amount determined under
the Code.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Note and its issue price. The issue price of a
Note is the first price at which a substantial amount of Notes is sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). The issue
price of a Note also includes the amount paid by an initial Holder for accrued
interest that relates to a period prior to the issue date of the Note. The
stated redemption price at maturity of a Class A Note includes the original
principal amount of the Note, but generally will not include distributions of
interest if such distributions constitute qualified stated interest.
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate provided that
such interest payments are unconditionally payable at intervals of one year or
less during the entire term of the Note. The OID Regulations state that interest
payments are unconditionally payable only if a late payment or nonpayment is
expected to be penalized or reasonable remedies exist to compel payment. Because
the Class A Notes will not be entitled to penalty payments of interest on
interest deficiencies other than interest at the coupon rate on the amount of
such deficiencies and do not provide for default or acceleration rights in the
event of interest shortfalls, the interest payments on the Class A Notes may not
be treated by the IRS as qualified stated interest, and in such event, the
interest payments would be taxed as OID. Holders of Class A Notes should consult
their own tax advisors to determine the issue price and stated redemption price
at maturity of a Class A Note. While the tax treatment of interest on the Class
A Notes is not entirely clear, the Trust intends to treat the stated interest on
the Class A Notes as qualified stated interest for OID purposes.
A Holder of a Note treated as issued with OID is required to include in
gross income, for all days during its taxable year on which it holds such Note,
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. Generally, 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 Note and the adjusted issue price of the Note at
the beginning of the accrual period, reduced by any payments of qualified stated
interest during such accrual period. The adjusted issue price at the beginning
of an accrual period is the sum of its issue price plus prior-accruals or OID,
reduced by the total payments made with respect to such Note in all prior
periods, other than qualified stated interest payments.
The amount of OID to be included in income by Holders 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 for such Notes is the excess (if any) of the sum
of (a) the present value of all payments remaining to be made on the Notes 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 Notes, over the
adjusted issue price of the Notes 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 Note (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
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required to be included in income by a Holder to take into account prepayments
with respect to the Mortgage Loans at a rate that exceeds the Prepayment
Assumption, and to decrease (but not below zero for any period) the portions of
original issue discount required to be included in income by a Holder to take
into account prepayments with respect to the Mortgage Loans at a rate that is
slower than the Prepayment Assumption. Although original issue discount will be
reported to Holders based on the Prepayment Assumption, no representation is
made to Holders that Mortgage Loans will be prepaid at that rate or at any other
rate.
A subsequent holder of a Note will also be required to include OID in
gross income, but such a holder who purchases such Note for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder who
pays more than a Note's issue price) to offset such OID by comparable economic
accruals of portions of such excess.
Variable Rate Notes. Because the Class A Notes bear interest at a rate
that varies directly, according to a fixed formula, with an objective index, it
appears that the present value of all payments remaining to be made on such
Notes should be calculated as if the interest index remained at its value as of
the issue date of such Notes. Because the proper method of adjusting accruals of
OID on a variable rate Note is uncertain, holders of variable rate Notes should
consult their own tax advisors regarding the appropriate treatment of such Notes
for federal income tax purposes.
Market Discount. Holders should be aware that the resale of a Note may
be affected by the market discount rules of the Code. These rules generally
provide that, subject to a de minimis exception, if a holder acquires a Note at
a market discount (i.e., at a price below its "adjusted issue price") and
thereafter recognizes gain upon a disposition of the Note, the lesser of such
gain or the portion of the market discount that accrued while the Note was held
by such holder will be treated as ordinary interest income realized at the time
of the disposition. A taxpayer may instead elect to include market discount
currently in gross income in taxable years to which it is attributable, computed
using either a ratable accrual or a yield to maturity method.
Premium. A Holder who purchases a Note for more than its stated
redemption price at maturity will be subject to the premium amortization rules
of the Code. Under those rules, the Holder may elect to amortize such premium on
a constant yield method. Amortizable premium reduces interest income on the
Note. If the Holder does not make such an election, the premium paid for the
Note generally will be included in the tax basis of the Note in determining the
gain or loss on its disposition.
Election to Treat all Interest as Original Issue Discount. The OID
Regulations permit a holder of a Note to elect to accrue all interest, discount
(including de minimis market or original issue discount) in income (as adjusted
by any amortizable premium) as interest, based on a constant yield method. If
such an election were to be made with respect to a Note with market discount,
the holder of the Note 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 acquires during the year of the election
or thereafter. Similarly, a holder of a Note that makes this election for a Note
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
and discount on a constant yield method with respect to a Note is irrevocable.
Each Holder should consult his own tax advisor regarding the impact of
the original issue discount, market discount, and premium amortization rules.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
Although, as described above, it is the opinion of Tax Counsel that the
Class A Notes are properly characterized as debt for federal income tax
purposes, the opinion of Tax Counsel is not binding on the courts or the IRS and
no assurance can be given that this characterization will prevail. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the Notes
constitutes a sale of the Mortgage Loans (or an interest therein) to the Holders
of the Class A Notes and that the proper classification of the legal
relationship between the Sponsor, the Originators and the Holders of the Class A
Notes resulting from this transaction is that of a partnership (including a
publicly traded partnership), a publicly traded partnership treated as a
corporation, or an association taxable as a corporation.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable as
a corporation), the Trust would be subject to U.S. federal income tax at
corporate
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income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for distribution to the Holders of the Notes. Cash
distributions to the Note Holders generally would be treated as dividends for
tax purposes to the extent of such corporation's earnings and profits. If the
transaction were treated as creating a partnership between the Holders of the
Class A Notes and the holders of the Certificates, the partnership itself would
not be subject to U.S. federal income tax (unless it were to be characterized as
a publicly traded partnership taxable as a corporation); rather, each holder of
a Certificate and each Holder of the Class A Notes would be taxed individually
on their respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deductions
of the Holders of the Class A Notes and the holder of the Certificates could
differ if the Class A Notes were held to constitute partnership interests rather
than indebtedness.
The Sponsor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Notes were not treated as indebtedness.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID)
paid on a Class A Note to a nonresident alien individual, foreign corporation or
other non-United States person is not subject to U.S. federal income tax,
provided that such interest is not effectively connected with a trade or
business of the recipient in the United States and the Holder of the Class A
Notes provides the required foreign person information certification.
If the Class A Notes were deemed to be partnership interests, the
partnership would be required, on a quarterly basis, to pay withholding tax
equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, such foreign partner also would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
The Small Business Job Protection Act of 1996 changed the definition of
a "foreign" trust. Under prior law, the definition was based on whether a
trust's foreign source income would be subject to U.S. tax. The new definition
contains two objective requirements which, if satisfied, will cause a trust to
be treated as a U.S. trust. It looks first to whether the trust's administration
is subject to a U.S. court's "primary supervision" and second to whether U.S.
fiduciaries control all substantial decisions of the trust. If both these
requirements are met, the trust is a U.S. trust. All other trusts are "foreign"
trusts.
BACKUP WITHHOLDING
Certain Holders of Class A Notes may be subject to backup withholding
at the rate of 31% with respect to interest paid on the Class A Notes if the
Holders, upon issuance, failed to supply the Indenture Trustee or his broker
with his taxpayer identification number, furnish an incorrect taxpayer
identification number, failed to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, failed to provide the Indenture Trustee or his broker with a
certified statement, under penalty of perjury, that he is not subject to backup
withholding.
The Indenture 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 Class A Notes (and the amount of interest withheld for U.S. 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, Holders and the IRS will receive tax and other information including the
amount of interest paid on the Class A Notes owned from Participants and
Indirect Participants rather than from the Indenture Trustee. (The Indenture
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 Note 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
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a statement that he or she is not subject to backup withholding. Should a
nonexempt Note 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 payment with respect to OID (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.
STATE TAXES
The Sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Notes under the tax laws of
any state. Investors considering an investment in the Class A Notes should
consult their own tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CLASS A NOTES.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibits a
pension, profit-sharing or other employee benefit plan, as well as individual
retirement accounts and certain types of Keogh Plans (each a "Benefit Plan")
from engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons under the Code with respect to
such Benefit Plan. A violation of these "prohibited transaction" rules may
result in an excise tax or other penalties and liabilities under ERISA and the
Code for such persons. Title I of ERISA also requires that fiduciaries of a
Benefit Plan subject to ERISA make investments that are prudent, diversified
(except if prudent not to do so) and in accordance with governing plan
documents.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Trust were
deemed to be assets of a Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of the
Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit 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 law and which has no substantial equity features. Although
there is little guidance on the subject, the Sponsor believes that the Class A
Notes should be treated as 'indebtedness without substantial equity features'
for purposes of the Plan Assets Regulation. This determination is based in part
upon the traditional debt features of the Class A Notes, including the
reasonable expectation of purchasers of Class A Notes that the Class A Notes
will be repaid when due, as well as the absence of conversion rights, warrants
and other typical equity features. The debt treatment of the Class A Notes for
ERISA purposes could change if the Trust incurred losses. However, even if the
Class A Notes are treated as 'indebtedness without substantial equity features',
the acquisition or holding of Class A Notes by or on behalf of a Benefit Plan
could be considered to give rise to a prohibited transaction if the Issuer, or
any of its affiliates is or becomes a party in interest or a disqualified person
with respect to such Benefit 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 Class A
Note. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 90-l, regarding investments by insurance company pooled
separate accounts; PTCE 95-60, regarding investments by insurance company
general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers." Each investor using the assets of a Benefit Plan
which acquires the Class A Notes, or to whom the Class A Notes are transferred,
will be deemed to have represented that the acquisition and continued holding of
the Class A Notes will be covered by one of the exemptions listed above or by
another Department of Labor Class Exemption.
Employee benefit plans that are 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 requirements, however, such plans may be subject
to comparable state law restrictions.
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A plan fiduciary considering the purchase of Class A 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 CONSIDERATIONS
Although, as a condition to their issuance, the Class A Notes will be
rated in the highest rating category of the Rating Agencies, the Class A Notes
will not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all of the
mortgages securing the Mortgage Loans are first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to invest in the Class A
Notes, which because they evidence interests in a pool that includes junior
mortgage loans are not "mortgage related securities" under SMMEA. See "Legal
Investment Matters" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated November 14, 1997 (the "Underwriting Agreement"), among the
Sponsor, the Originators and the Underwriter, the Sponsor and the Originators
have agreed to cause the Trust to sell to the Underwriter, and the Underwriter
has agreed to purchase the Class A Notes from the Trust.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the Class A Notes
offered hereby if any of the Class A Notes are purchased.
The Sponsor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the 1933 Act.
In connection with this offering and in compliance with applicable law
and industry practice, the Underwriter may overallot or effect transactions
which stabilize, maintain or otherwise affect the market price of the Class A
Notes at a level above that which might otherwise prevail in the open market,
including stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits the Underwriter to reclaim a selling
concession from a syndicate member in connection with the offering when Class A
Notes originally sold by the syndicate member are purchased in syndicate
covering transactions. The Underwriter not required to engage in any of these
activities. Any such activities, if commenced, may be discontinued at any time.
The Sponsor has been advised by the Underwriter that the Underwriter
presently intends to make a market in the Class A Notes, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Class A Notes and such market-making may be discontinued at
any time at the sole discretion of the Underwriter. Accordingly, no assurance
can be given as to the liquidity of any trading markets for the Class A Notes.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Class A Notes
will be passed upon by Dewey Ballantine LLP, New York, New York.
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EXPERTS
The consolidated financial statements of Ambac Assurance Corporation as
of December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996, have been incorporated by reference herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, and incorporated by reference herein upon the authority of said
firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Class A Notes be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Holders
of distributions on the Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural, legal and tax aspects
associated with the Class A Notes. The ratings on the Class A Notes do not,
however, constitute statements regarding the likelihood or frequency of
prepayments on the Mortgage Loans or the possibility that Holders might realize
a lower than anticipated yield nor the likelihood of the payment of any Net
Funds Cap Carry-Forward Amount.
The ratings assigned to the Class A Notes will depend primarily upon
the creditworthiness of the Insurer. Any reduction in a rating assigned to the
claims-paying ability of the Insurer below the ratings initially assigned to the
Class A Notes may result in a reduction of one or more of the ratings assigned
to the Class A Notes.
A securities 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 securities rating should be evaluated
independently of similar ratings on different securities.
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INDEX OF DEFINED TERMS
1933 Act.......................................................................2
Accelerated Principal Payment.............................................11, 33
Advanta Parent............................................................15, 18
Available Funds...............................................................43
Available Funds Shortfall.....................................................43
Benefit Plan..............................................................13, 51
Book-Entry Securities.........................................................12
Business Day..................................................................37
Capitalized Interest Account...................................................6
CEBA..........................................................................20
Cede..........................................................................12
CEDEL......................................................................1, 12
Certificate Register..........................................................37
Citibank......................................................................12
Class A Formula Rate.......................................................9, 38
Class A Interest Distribution Amount...........................................9
Class A Interest Rate...................................................3, 9, 38
Class A Notes..................................................................1
Class A Principal Balance......................................................4
Closing Date...................................................................1
Code..........................................................................47
Combined Loan-to-Value Ratio..................................................24
Commission.................................................................2, 41
Coupon Rate...................................................................25
Credit Limit..................................................................24
Credit Limit Utilization Rate.................................................24
Credit Line Agreements.....................................................3, 24
Cut-Off Date Pool Balance......................................................5
Determination Date............................................................43
Draw Period...............................................................17, 25
Draws..........................................................................3
DTC........................................................................1, 12
Equity Interest...............................................................51
Euroclear..................................................................1, 12
European Depositaries.........................................................12
Excess Cashflow............................................................7, 36
FDIC..........................................................................19
FHLMC.........................................................................21
Final Scheduled Payment Date..................................................10
Fixed Allocation Percentage...........................................10, 33, 39
Fleet.........................................................................15
Floating Allocation Percentage.................................................6
FNMA..........................................................................21
Holder........................................................................42
Holders........................................................................1
Indenture......................................................................1
Indenture Trustee...........................................................1, 4
Indenture Trustee's Fee........................................................9
Index Rate....................................................................25
Initial Cut-Off Date...........................................................4
Initial Mortgage Loans......................................................3, 5
Insured Payment...............................................................11
Insurer........................................................................4
Interest Accrual Period........................................................9
Interest Collections.......................................................8, 35
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IRS..........................................................................47
Issuer........................................................................1
LIBOR........................................................................15
LIBOR Business Day...........................................................39
Liquidated Mortgage Loan......................................................5
Liquidation Proceeds.........................................................36
Managed Amortization Period..........................................10, 33, 39
Margin.......................................................................25
Master Servicer...............................................................4
Maximum Principal Payment............................................10, 33, 39
Maximum Rate.................................................................25
Maximum Step-Down Amount.................................................10, 39
Minimum Originators' Interest.................................................6
Moody's......................................................................13
Morgan.......................................................................12
Mortgage Loan Schedule....................................................8, 35
Mortgage Loans................................................................1
Mortgaged Properties.........................................................24
Net Funds Cap Carry-Forward Amount............................................9
Net Funds Cap Rate........................................................9, 39
Net Liquidation Proceeds..................................................8, 36
Net Principal Collections............................................10, 33, 39
Non-Subordinated Originators' Interest........................................6
Original Class A Principal Balance............................................4
Original Pre-Funded Amount..............................................1, 3, 5
Originators...................................................................4
Overcollateralization Amount..................................................6
Overcollateralization Deficit................................................11
Overcollateralization Release Amount......................................7, 37
Owner Trustee..............................................................1, 4
Payment Date.......................................................1, 9, 37, 38
Physical Note................................................................12
Plan Assets Regulation.......................................................51
Policy....................................................................1, 42
Pool Balance.................................................................36
Pool Factor..................................................................34
Pre-Funding Account........................................................1, 3
Pre-Funding Period......................................................1, 3, 5
Premium Amount................................................................9
Prepayment Assumption........................................................48
Prepayment Interest Shortfalls...............................................11
Prime........................................................................15
Principal and Interest Account............................................8, 36
Principal Balance.........................................................5, 36
Principal Collections.....................................................8, 36
PTCE.........................................................................51
Purchase Agreements...........................................................4
Rapid Amortization Event.....................................................40
Rapid Amortization Period............................................10, 33, 39
Rating Agencies..............................................................13
Rating Agency................................................................13
Record Date..................................................................37
Reference Bank Rate..........................................................39
Reimbursement Amounts.....................................................7, 37
Relief Act Shortfalls........................................................11
Remittance Date..............................................................12
Remittance Period.............................................................9
Repayment Period.........................................................17, 25
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Sale and Servicing Agreement..................................................4
Scheduled Principal Distribution Amount......................................10
Servicing Fee................................................................12
Servicing Fee Rate.......................................................12, 44
SMMEA....................................................................13, 52
Specified Overcollateralization Amount........................................7
Sponsor....................................................................1, 4
Standard & Poor's............................................................13
Step-Down Amount.........................................................10, 39
Subsequent Cut-Off Date.......................................................4
Subsequent Mortgage Loans..................................................1, 5
Subsequent Transfer Agreements...............................................36
Subsequent Transfer Dates....................................................36
Tax Counsel..................................................................47
Telerate Screen Page 3750....................................................39
Termination Fees.............................................................15
Transaction..................................................................20
Trust.........................................................................1
Trust Agreement...............................................................1
Trust Collateral Value........................................................6
Trust Property................................................................3
Underwriting Agreement.......................................................52
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the offered Advanta Revolving
Home Equity Loan Trust 1997-A Class A Notes (the "Class A Notes") will be
available only in book-entry form. Investors in the Class A Notes may hold such
Class A Notes through any of DTC, CEDEL or Euroclear. The Class A Notes will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Class A Notes 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 Class A Notes will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Class A Notes 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 relevant depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Class A Notes through DTC will follow
DTC settlement practices. 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 Class A Notes 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. Class A Notes 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 revolving credit line loan asset-backed certificates issues in same-day
funds.
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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, Originator and CEDEL or Euroclear Participants.
When Class A Notes 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 Relevant Depository, as the case may be, to receive
the Class A Notes against payment. Payment will include interest accrued on the
Class A Notes from and including the last coupon payment date to and excluding
the settlement date, on the basis of the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the Relevant
Depository to the DTC Participant's account against delivery of the Class A
Notes. After settlement has been completed, the Class A Notes 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 Class A Notes 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 Class
A Notes are credited to their account 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 to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Class A Notes would incur overdraft charges for one day, assuming
they cleared the overdraft when the Class A Notes were credited to their
accounts. However, interest on the Class A Notes would accrue from the value
date. Therefore, in many cases the investment income on the Class A Notes earned
during that one-day period may substantially reduce or offset the amount of such
overdraft charges, although the 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 crediting Class A Notes
to the respective European Depository 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 Originator 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
Class A Notes are to be transferred by the respective clearing system, through
the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Class A Notes to the DTC Participant's account against payment. Payment will
include interest accrued on the Class A Notes from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of 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). In the event
that the CEDEL Participant or Euroclear Participant has a line of credit with
its respective clearing system and elects 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.
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Finally, day traders that use CEDEL or Euroclear and that purchase
Class A Notes from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is 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 trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Class A Notes in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Class A Notes
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 Class A Notes 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 (as defined below), 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 Holders of Class
A Notes that are Non-U.S. Persons (as defined below) 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 (as defined below), 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 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 Certificate Holders or their 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 Class A
Notes 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.
On April 22, 1996, the IRS proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify certain reliance standards. The regulations are
proposed to be effective for payments made after December 31, 1997 but provide
that certificates issued on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
Proposed regulations, however, are subject to change prior to their adoption in
final form.
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The term "U.S. Person" means (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 political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Class A Notes.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Class A Notes.
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PROSPECTUS
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
[Logo] [Logo]
Sponsor of the Trust Master Servicer
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the "Securities") that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (a "Mortgage Pool") of conventional one- to four-family
residential mortgage loans, multi-family residential mortgage loans, mixed use
mortgage loans, revolving home equity loans or certain balances thereof secured
by mortgages primarily on one- to four-family residential properties, or
certificates of interest or participation therein (collectively, the "Mortgage
Loans"), to be acquired by such Trust from Advanta Mortgage Conduit Services,
Inc. (the "Sponsor"). The Sponsor will acquire the Mortgage Loans from one or
more affiliated or unaffiliated institutions (the "Originators"). In connection
with the establishment of certain Trusts the Sponsor may first transfer the
related Trust Estate to Advanta Mortgage Receivables Inc. (the "Transferor") and
the Transferor will then transfer such Trust Estate to the related Trust. The
use of the Transferor will not affect the obligations of the Sponsor with
respect to the related Trust or the related Securities. If the Transferor is to
be involved in a particular offering the related Prospectus Supplement will
describe its role in such offering; for purposes of this Prospectus the role of
the Transferor is subsumed in the role of the Sponsor. See "The Mortgage Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets
described herein and in the related Prospectus Supplement (collectively with
respect to each Trust, the "Trust Estate") and in the related Prospectus
Supplement will be held by the related Trust for the benefit of the holders of
the related series of Securities (the "Securityholders") pursuant to a Pooling
and Servicing Agreement to the extent and as more fully described herein and in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Pool will consist of one or more of the
various types of Mortgage Loans described under "The Mortgage Pools."
See "Risk Factors" at page 13 for a discussion of certain risk factors which
should be considered by prospective investors in the securities offered hereby.
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE MASTER
SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related Prospectus Supplement. There will
be no secondary market for any series of Securities prior to the offering
thereof. There can be no assurance that a secondary market for any of the
Securities will develop or, if it does develop, that it will offer sufficient
liquidity of investment or will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is October 30, 1997.
<PAGE> 62
(Cover continued from previous page)
Each series of Securities will include one or more classes. The
Securities of any particular class may represent beneficial ownership interests
in the related Mortgage Loans held by the related Trust, or may represent debt
secured by such Mortgage Loans, as described herein and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. The rights of one or more classes of
Securities of any series may be senior or subordinate to the rights of one or
more of the other classes of Securities. A series may include two or more
classes of Securities which differ as to the timing, sequential order, priority
of payment, interest rate or amount of distributions of principal or interest or
both. Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
THE SPONSOR'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS WITH
RESPECT TO A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING REQUIREMENTS
RELATING THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY
THE SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS OTHERWISE DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES
WILL NAME ADVANTA MORTGAGE CORP. USA AS MASTER SERVICER (THE "MASTER SERVICER")
WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR MORE SUBSERVICERS (THE
"SUBSERVICER(S)"). THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE A LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO PREPAYMENT OF MORTGAGE LOANS).
SEE "DESCRIPTION OF THE SECURITIES."
If so specified in the related Prospectus Supplement, the Trust Estate
for a series of Securities may include any combination of a mortgage pool
insurance policy, letter of credit, financial guaranty insurance policy,
bankruptcy bond, special hazard insurance policy, reserve fund or other form of
Credit Enhancement. In addition to or in lieu of the foregoing, Credit
Enhancement with respect to certain classes of Securities of any series may be
provided by means of subordination, cross-support among Mortgage Assets, as
defined herein, or over-collateralization. See "Description of Credit
Enhancement."
The rate of payment of principal of each class of Securities entitled
to principal payments will depend on the priority of payment of such class and
the rate of payment (including prepayments, defaults, liquidations and
repurchases of Mortgage Loans) of the related Mortgage Loans. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Securities in the manner described herein and in the related
Prospectus Supplement. The various types of Securities, the different classes of
such Securities and certain types of Mortgage Loans in a given Mortgage Pool may
have different prepayment risks and credit risks. The Prospectus Supplement for
a series of Securities or the related Current Report on Form 8-K will contain
information as to (i) types, maturities and certain statistical information
relating to credit risks of the Mortgage Loans in the related Mortgage Pool,
(ii) the effect of certain rates of prepayment, based upon certain specified
assumptions for a series of Securities and (iii) priority of payment and
maturity dates of the Securities. AN INVESTOR SHOULD CAREFULLY REVIEW THE
INFORMATION IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT
CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF
SECURITIES. See "Yield Considerations." A Trust may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or
more segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") or a Financial Asset Securitization Investment
Trust ("FASIT") for federal income tax purposes. If applicable, the Prospectus
Supplement for a series of Securities will specify which class or classes of the
related series of Securities will be considered to be regular interests in a
REMIC or FASIT and which classes of Securities or other interests will be
designated as the residual interest in a REMIC or as high-yield interests or the
ownership interest in a FASIT. Alternatively, a Trust may be treated as a
grantor trust or as a partnership for federal income tax purposes, or may be
treated for federal income tax purposes as a mere security device which
constitutes a collateral arrangement for the issuance of secured debt. See
"Certain Federal Income Tax Consequences" herein.
No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement, and, if given or made,
such information must not be relied upon as having been authorized by the
Company or any dealer, salesman,
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or any other person. Neither the delivery of this Prospectus or the related
Prospectus Supplement nor any sale made hereunder or thereunder shall under any
circumstances create an implication that there has been no change in the
information herein or therein since the date hereof. This Prospectus and the
related Prospectus Supplement are not an offer to sell or a solicitation of an
offer to buy any security in any jurisdiction in which it is unlawful to make
such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary of Prospectus........................ 4
Risk Factors................................. 14
Risks of the Mortgage Loans............. 15
The Trusts................................... 19
The Mortgage Pools........................... 26
General................................. 26
The Mortgage Pools...................... 26
Mortgage Loan Program........................ 28
Underwriting Guidelines................. 29
Qualifications of Originators........... 32
Sub-Servicers........................... 33
Representations by Originators.......... 33
Sub-Servicing by Originators............ 34
Description of the Securities................ 36
General................................. 36
Form of Securities...................... 38
Assignment of Mortgage Loans............ 39
Forward Commitments; Pre-Funding........ 41
Payments on Mortgage Loans; Deposits to
Distribution Account.................. 41
Withdrawals from the Principal and
Interest Account...................... 44
Distributions........................... 45
Principal and Interest on the Securities 45
Advances................................ 46
Reports to Securityholders.............. 47
Collection and Other Servicing
Procedures............................ 48
Realization Upon Defaulted Mortgage
Loans................................. 50
Subordination................................ 51
Description of Credit Enhancement............ 52
Hazard Insurance; Claims Thereunder.......... 57
Hazard Insurance Policies............... 57
The Sponsor and the Transferor............... 57
The Master Servicer.......................... 58
The Pooling and Servicing Agreement..........
Servicing and Other Compensation and
Payment of Expenses; Originator's
Retained Yield........................ 58
Evidence as to Compliance............... 59
Removal and Resignation of the Master
Servicer.............................. 59
Amendments.............................. 60
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Termination; Retirement of Securities... 61
The Trustee............................. 61
Yield Considerations......................... 63
Maturity and Prepayment
Considerations............................. 65
Certain Legal Aspects of Mortgage Loans
and Related Matters........................ 67
General................................. 67
Cooperative Loans....................... 67
Foreclosure............................. 68
Foreclosure on Shares of Cooperatives... 69
Rights of Redemption.................... 70
Anti-Deficiency Legislation and Other
Limitations on Lenders................ 70
Environmental Legislation............... 71
Enforceability of Certain Provisions.... 72
Certain Provisions of California Deeds
of Trust.............................. 72
Applicability of Usury Laws............. 73
Alternative Mortgage Instruments........ 73
Soldiers' and Sailors' Civil Relief
Act of 1940........................... 73
Certain Federal Income Tax Consequences...... 74
General................................. 74
Grantor Trust Securities................ 75
REMIC Securities........................ 76
Special Tax Attributes.................. 77
Debt Securities......................... 82
Discount and Premium.................... 83
Backup Withholding...................... 86
Foreign Investors....................... 86
ERISA Considerations......................... 86
General................................. 84
Certificates............................ 85
Notes................................... 88
Consultation With Counsel............... 89
Legal Investment Matters..................... 89
Use of Proceeds.............................. 90
Methods of Distribution...................... 90
Legal Matters................................ 91
Financial Information........................ 91
Additional Information....................... 91
Index of Principal Definitions............... 92
Annex I...................................... A-1
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. Capitalized terms used
in this summary that are not otherwise defined shall have the meanings ascribed
thereto in this Prospectus. An index indicating where certain terms used herein
are defined appears at the end of this Prospectus.
Securities Offered
Mortgage Loan Asset-Backed Securities.
Sponsor
Advanta Mortgage Conduit Services, Inc. See "The Sponsor and The Transferor."
Originators
The Sponsor will acquire the Mortgage Loans from one or more institutions
affiliated with the Sponsor ("Affiliated Originators") or institutions
unaffiliated with the Sponsor ("Unaffiliated Originators") (the Affiliated
Originators and the Unaffiliated Originators are collectively referred to as the
"Originators"). The Sponsor will transfer the related Trust Estate to the
related Trust. In connection with the establishment of certain Trusts the
Sponsor may first transfer the related Trust Estate to the Transferor and the
Transferor will then transfer such Trust Estate to the related Trust. The use of
the Transferor will not affect the obligations of the Sponsor with respect to
the related Trust or the related Securities. If the Transferor is to be involved
in a particular offering the related Prospectus Supplement will describe its
role in such offering; for purposes of this Prospectus the role of the
Transferor is subsumed in the role of the Sponsor.
Master Servicer
Advanta Mortgage Corp. USA. See "The Master Servicer" and "The Pooling and
Servicing Agreement--Removal and Resignation of the Master Servicer."
Sub-Servicers
Originators may act as Sub-Servicers for Mortgage Loans acquired by the Sponsor
from such Originators unless all servicing duties relating to such Mortgage
Loans have been transferred to the Master Servicer or to a third-party,
unaffiliated contract servicer approved by the Master Servicer. See "Mortgage
Loan Program--Sub-Servicers."
Trustee
The trustee (the "Trustee") for each series of Securities will be specified in
the related Prospectus Supplement.
The Securities
Issuance of Securities.
Each series of Securities will be issued at the direction of the Sponsor by a
separate Trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (each, a "Mortgage Pool") of conventional, one- to
four-family residential mortgage loans or multi- family residential mortgage
loans (the "Mortgage Loans") or certificates of interest or participation
therein, acquired by such Trust from the Sponsor. The Sponsor will acquire the
Mortgage Loans from one or more of the Originators. The Securities issued by any
Trust may represent beneficial ownership interests in the related Mortgage Loans
held by the related Trust, or may represent debt secured by such Mortgage Loans,
as described herein and in the related
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Prospectus Supplement. Securities which represent beneficial ownership interests
in the related Trust will be referred to as "Certificates" in the related
Prospectus Supplement; Securities which represent debt issued by the related
Trust will be referred to as "Notes" in the related Prospectus Supplement.
Each Trust will be established pursuant to an agreement (each, a "Trust
Agreement") by and between the Sponsor and the Trustee named therein. Each Trust
Agreement will describe the related pool of assets to be held in trust (each
such asset pool, the "Trust Estate"), which will include the related Mortgage
Loans and, if so specified in the related Prospectus Supplement, may include any
combination of a mortgage pool insurance policy, letter of credit, financial
guaranty insurance policy, special hazard policy, reserve fund or other form of
Credit Enhancement.
The Mortgage Loans held by each Trust will be master serviced by the Master
Servicer pursuant to a servicing agreement (each, a "Servicing Agreement") by
and between the Master Servicer and the related Trustee.
With respect to Securities that represent debt issued by the related Trust, the
related Trust will enter into an indenture (each, an "Indenture") by and between
such Trust and the trustee named on such Indenture (the "Indenture Trustee"), as
set forth in the related Prospectus Supplement. Securities that represent
beneficial ownership interests in the related Trust will be issued pursuant to
the related Trust Agreement.
In the case of any individual Trust, the contractual arrangements relating to
the establishment of the Trust, the servicing of the related Mortgage Loans and
the issuance of the related Securities may be contained in a single agreement,
or in several agreements which combine certain aspects of the Trust Agreement,
the Servicing Agreement and the Indenture described above (for example, a
pooling and servicing agreement, or a servicing and collateral management
agreement). For purposes of this Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust means, collectively, and except as
otherwise specified, any and all agreements relating to the establishment of the
related Trust, the servicing of the related Mortgage Loans and the issuance of
the related Securities.
Securities Will Be Recourse to the Assets of the Related Trust Only.
The sole source of payment for any series of Securities will be the assets of
the related Trust (i.e., the related Trust Estate). The Securities will not be
obligations, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, any Sub-Servicer, any Originator or any Person other than
the related Trust. In the case of Securities that represent beneficial ownership
interest in the related Trust Estate, such Securities will represent the
ownership of such Trust Estate; with respect to Securities that represent debt
issued by the related Trust, such Securities will be secured by the related
Trust Estate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain
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<PAGE> 66
types of Credit Enhancement, such as a financial guaranty insurance policy or a
letter of credit, may constitute a full recourse obligation of the issuer of
such Credit Enhancement.
General Nature of the Securities as Investments.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities will generally be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ("Strip
Securities") entitled (i) to principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) to interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance, in
the case of Accrual Securities which are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities may
include one or more other classes of Fixed-Income Securities (collectively, the
"Senior Securities") that are senior to one or more other classes of
Fixed-Income Securities (collectively, the "Subordinate Securities") in respect
of certain distributions of principal and interest and allocations of losses on
Mortgage Loans.
In addition, certain classes of Senior (or Subordinate) Securities may be senior
to other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior
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<PAGE> 67
Securities and Subordinate Securities), and following any required deposits to
any reserve account which may be established for the benefit of the Fixed-Income
Securities. Equity Securities may constitute what are commonly referred to as
the "residual interest," "seller's interest" or the "general partnership
interest," depending upon the treatment of the related Trust for federal income
tax purposes. As distinguished from the Fixed-Income Securities, the Equity
Securities will not be styled as having principal and interest components. Any
losses suffered by the related Trust will first be absorbed by the related class
of Equity Securities, as described herein and in the related Prospectus
Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus or any
Prospectus Supplement related hereto. Equity Securities may be offered on a
private placement basis or pursuant to a separate Registration Statement to be
filed by the Sponsor. In addition, the Sponsor and its affiliates may initially
or permanently hold any Equity Securities issued by any Trust.
General Payment Terms of Securities.
As provided in the related Pooling and Servicing Agreement and as described in
the related Prospectus Supplement, Securityholders will be entitled to receive
payments on their Securities on specified dates (each, a "Payment Date").
Payment Dates with respect to Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the related Prospectus Supplement;
Payment Dates with respect to Equity Securities will occur as described in the
related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record Date")
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. Unless otherwise described in the related
Prospectus Supplement, the Payment Date will be the twenty-fifth day of each
month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and in the case of semi-annual pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Pooling and Servicing Agreement will describe a period (each, a "Remittance
Period") antecedent to each Payment Date (for example, in the case of
monthly-pay Securities, the calendar month preceding the month in which a
Payment Date occurs or such other specified period). Unless otherwise provided
in the related Prospectus Supplement, collections received on or with respect to
the related Mortgage Loans during a Remittance Period will be required to be
remitted by the Master Servicer to the related Trustee prior to the related
Payment Date and will be used to fund payments to Securityholders on such
Payment Date. As may be described in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by
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<PAGE> 68
the related Trustee to the acquisition of additional Mortgage Loans during a
specified period (rather than be used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of such
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current
distribution of principal payments to the specified Securityholders and an
acceleration of the amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither the
Securities nor the underlying Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality or the Sponsor, the Master Servicer,
any Sub-Servicer, any Originator or any of their affiliates.
No Investment
Companies
Neither the Sponsor nor any Trust will register as an "investment company" under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
Cross-Collateralization
Unless otherwise provided in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement, the source of payment for
Securities of each series will be the assets of the related Trust Estate only.
However, as may be described in the related Prospectus Supplement, a Trust
Estate may include the right to receive monies from a common pool of Credit
Enhancement which may be available for more than one series of Securities, such
as a master reserve account or a master insurance policy. Notwithstanding the
foregoing, unless specifically described otherwise in the related Prospectus
Supplement, no collections on any Mortgage Loans held by any Trust may be
applied to the payment of Securities issued by any other Trust (except to the
limited extent that certain collections in excess of amounts needed to pay the
related Securities may be deposited in a common, master reserve account that
provides Credit Enhancement for more than one series of Securities).
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The Mortgage Pools
Unless otherwise specified in the related Prospectus Supplement, each Trust
Estate will consist primarily of Mortgage Loans secured by liens on one- to
four-family residential or multi-family properties ("Mortgages"), located in any
one of the fifty states, the District of Columbia, Puerto Rico or any other
Territories of the United States. All Mortgage Loans will have been acquired by
the related Trust from the Sponsor. All Mortgage Loans will have been originated
either by (x) one or more institutions affiliated with the Sponsor (such
affiliated institutions, the "Affiliated Originators") or (y) one or more
institutions not affiliated with the Sponsor (such unaffiliated institutions,
the "Unaffiliated Originators"). The Mortgage Loans originated by the Affiliated
Originators generally will have been originated pursuant to the standard
underwriting guidelines (the "Sponsor's Guidelines") set forth in the Sponsor's
guide for originators (the "Sponsor's Originator Guide"), as modified from time
to time. The Mortgage Loans originated by the Unaffiliated Originators may be
originated either (i) generally pursuant to the Sponsor's Guidelines; (ii)
generally pursuant to such Unaffiliated Originators' underwriting guidelines as
approved by the Sponsor ("Approved Guidelines"); or (iii) generally pursuant to
such Originators' underwriting guidelines and purchased by the Sponsor in a bulk
acquisition ("Bulk Acquisition"). See "Mortgage Loan Program." For a description
of the types of Mortgage Loans that may be included in the Mortgage Pools, see
"The Mortgage Pools--The Mortgage Loans."
A Current Report on Form 8-K will be available to purchasers or underwriters of
the related series of Securities and will generally be filed, together with the
related Pooling and Servicing Agreement, with the Securities and Exchange
Commission within fifteen days after the initial issuance of such series.
Forward Commitments;
Pre-Funding
A Trust may enter into an agreement (each, a "Forward Purchase Agreement") with
the Sponsor whereby the Sponsor will agree to transfer additional Mortgage Loans
(the "Subsequent Mortgage Loans") to such Trust following the date on which such
Trust is established and the related Securities are issued. Any Forward Purchase
Agreement will require that any Mortgage Loans so transferred to a Trust conform
to the requirements specified in such Forward Purchase Agreement. In addition,
the Forward Purchase Agreement states that the Depositor shall only transfer the
Subsequent Mortgage Loans upon the satisfaction of certain conditions including
that the Depositor shall have delivered to the Certificate Insurer, the Rating
Agencies and the Trustee opinions of counsel (including bankruptcy, corporate
and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") all
or a portion of the proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; subsequently, the
additional Mortgage Loans will be transferred to the related Trust in exchange
for money released to the Sponsor from the related Pre- Funding Account in one
or more transfers. Each Forward Purchase
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Agreement will set a specified period during which any such transfers must
occur. The Forward Purchase Agreement or the related Pooling and Servicing
Agreement will require that, if all monies originally deposited to such
Pre-Funding Account are not so used by the end of such specified period, then
any remaining monies will be applied as a mandatory prepayment of the related
class or classes of Securities as specified in the related Prospectus
Supplement.
Credit Enhancement
If so specified in the Prospectus Supplement, the Trust Estate with respect to
any series of Securities may include any one or any combination of a letter of
credit, mortgage pool insurance policy, special hazard insurance policy,
bankruptcy bond, financial guaranty insurance policy, reserve fund or other type
of Credit Enhancement to provide full or partial coverage for certain defaults
and losses relating to the Mortgage Loans. Credit support also may be provided
in the form of the related class of Equity Securities, and/or by subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among groups of Mortgage Assets or overcollateralization. Unless otherwise
specified in the related Prospectus Supplement, any mortgage pool insurance
policy will have certain exclusions from coverage thereunder, which will be
described in the related Prospectus Supplement, which may be accompanied by one
or more separate Credit Enhancements that may be obtained to cover certain of
such exclusions. To the extent not set forth herein, the amount and types of
coverage, the identification of any entity providing the coverage, the terms of
any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
Advances
As to be described in the related Prospectus Supplement, the Master Servicer may
be obligated to make certain advances with respect to payments of delinquent
scheduled interest and/or principal on the Mortgage Loans, but only to the
extent that the Master Servicer believes that such amounts will be recoverable
by it. Any such advance made by the Master Servicer with respect to a Mortgage
Loan is recoverable by it as provided herein under "Description of the
Securities--Advances" either from recoveries on the specific Mortgage Loan or,
with respect to any such advance subsequently determined to be nonrecoverable,
out of funds otherwise distributable to the holders of the related series of
Securities, which may include the holders of any Senior Securities of such
series.
As to be described in the related Prospectus Supplement, the Master Servicer may
be required to pay Compensating Interest as defined hereafter under "Description
of the Securities--Advances."
In addition, unless otherwise specified in the related Prospectus Supplement,
the Master Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that the Master Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on
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the related Mortgage Loan. See "Description of the Securities--Advances."
Optional Termination
The Master Servicer, the Sponsor, or, if specified in the related Prospectus
Supplement, the holders of the related class of Equity Securities or the Credit
Enhancer may at their respective option effect early retirement of a series of
Securities through the purchase of the Mortgage Loans and other assets in the
related Trust Estate under the circumstances and in the manner set forth herein
under "The Pooling and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus Supplement.
Mandatory Termination
The Trustee, the Master Servicer or certain other entities specified in the
related Prospectus Supplement may be required to effect early retirement of a
series of Securities by soliciting competitive bids for the purchase of the
related Trust Estate or otherwise, under other circumstances and in the manner
specified in "The Pooling and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus Supplement.
Legal Investment
Not all of the Mortgage Loans in a particular Mortgage Pool may 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 to
what extent a class of Securities constitutes legal investments for such
investors. See "Legal Investment" herein.
ERISA Considerations
A fiduciary of an employee benefit plan and certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds and separate accounts in which such
plans, accounts, annuities or arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each such entity, a "Plan") should carefully review
with its legal advisors whether the purchase or holding of Securities could give
rise to a transaction that is prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. Investors are advised to consult their
counsel and to review "ERISA Considerations" herein.
Certain Federal Income
Tax Consequences
Securities of each series offered hereby will, for federal income tax purposes,
constitute either (i) interests ("Grantor Trust Securities") in a Trust treated
as a grantor trust under applicable provisions of the Code, (ii) "regular
interests" ("REMIC Regular Securities") or "residual interests" ("REMIC Residual
Securities") in a Trust treated as a REMIC (or, in certain instances, containing
one or more
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REMIC's) under Sections 860A through 860G of the Code, (iii) debt issued by a
Trust ("Debt Securities") (iv) interests in a Trust which is treated as a
partnership ("Partnership Interests"), or, on or after September 1, 1997, (v)
"regular interests" ("FASIT Regular Securities"), "high-yield interests" ("FASIT
High-Yield Securities") or an ownership interest in a Trust treated as a FASIT
(or, in certain circumstances containing one or more FASITs under Sections 860H
through 860L of the Code.
Investors are advised to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
Registration of Securities
Securities may be represented by global securities registered in the name of
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC"), or
another nominee. In such case, Securityholders will not be entitled to receive
definitive securities representing such Holders' interests, except in certain
circumstances described in the related Prospectus Supplement. See "Description
of the Securities-- Form of Securities" herein.
Ratings
Each class of Fixed-Income Securities offered pursuant to the related Prospectus
Supplement will be rated in one of the four highest rating categories by one or
more "national statistical rating organizations," as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and commonly referred to
as "Rating Agencies." Such ratings will address, in the opinion of such Rating
Agencies, the likelihood that the related Trust will be able to make timely
payment of all amounts due on the related Fixed-Income Securities in accordance
with the terms thereof. Such ratings will neither address any prepayment or
yield considerations applicable to any Securities nor constitute a
recommendation to buy, sell or hold any Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect to any Securities will be set
forth in the related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market
for the Securities of any series or class will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or that it
will continue for the life of the Securities of any series. The Prospectus
Supplement for any series of Securities may indicate that an underwriter
specified therein intends to establish a secondary market in such Securities;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
Limited Obligations. The Securities will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, any Originator (as defined herein) or any person other than
the related Trust. The only obligations of the foregoing entities with respect
to the Securities or the Mortgage Loans will be the obligations (if any) of the
Sponsor, the related Originators and the Master Servicer pursuant to certain
limited representations and warranties made with respect to the Mortgage Loans,
the Master Servicer's servicing obligations under the related Pooling and
Servicing Agreement (including its limited obligation, if any, to make certain
advances in the event of delinquencies on the Mortgage Loans, but only to the
extent deemed recoverable) and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Sponsor,
Master Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ("Purchase Obligation") or an agreement to purchase or act
as remarketing agent with respect to a Convertible Mortgage Loan upon conversion
to a fixed rate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter of credit, may constitute a full
recourse obligation of the issuer of such Credit Enhancement. Except as
described in the related Prospectus Supplement, neither the Securities nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Sponsor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Estate for each series of Securities (including the Mortgage Loans
and any form of Credit Enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Sponsor or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Equity Securities, subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among Mortgage Assets and/or overcollateralization. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of Credit
Enhancement provided, the coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or a
portion of the Credit Enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will not
be adversely affected. To the extent not set forth herein, the amount and types
of coverage, the identification of any entity providing the coverage, the terms
of any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, 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 default thereunder. In servicing junior lien loans in its portfolio, it
has generally been the practice of the Master Servicer to satisfy each such
senior mortgage at or prior to the foreclosure sale but only to the extent that
it determines any amounts so paid will be recoverable from future payments and
collections on such junior lien loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. 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 balances of any senior liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Securities of the series evidencing interests in
the related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming Credit and
Non-Traditional Loans. The Sponsor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Sponsor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. For purposes hereof,
"non-conforming credit" means a mortgage loan which, based upon standard
underwriting guidelines, is ineligible for purchase by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. Certain of the types of loans that may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the Mortgage
Loan (the "Mortgagor"), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances the Mortgagors' income
may not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase.
Additionally, certain Mortgage Loans may have combined loan-to-value ratios in
excess of 100%, which may result in inadequate security for the Mortgage Loans.
For a more detailed discussion, see "Mortgage Loan Program."
Risk of Losses Associated with 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. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that 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 borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a
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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 Securityholders 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 Sponsor,
the Originators, the Master Servicer, any Sub-Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten
on the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. 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 thereby 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.
Risk of Losses Associated with Mortgaged Properties. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions 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) ("Liquidation Proceeds") 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 ("Liquidated
Mortgage Loan") and not yet repaid, including payments to prior lienholders,
accrued Servicing Fees, Delinquency Advances, Servicing Advances, 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 and insufficient funds are available
from any applicable Credit Enhancement, Securityholders 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 loan at the time of
default. Therefore, assuming that a servicer takes 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 less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
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 Pooling and
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Servicing Agreement, is not required to take an active role in operating the
Mortgaged Properties. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Environmental Legislation."
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be noninvestor owned. It is possible that the rate of delinquencies,
foreclosures and losses on Mortgage Loans secured by noninvestor owned
properties could be higher than for loans secured by the primary residence of
the borrower.
Certain Mortgage Loans may have combined loan-to-value ratios in excess
of 100%. As a result, the Mortgage Properties may not provide adequate security
for the Mortgage Loans. Additionally, there is also the risk that if the related
Mortgagors relocate, such Mortgagors will be unable to discharge the Mortgage
Loans in full from the sale proceeds of the related Mortgaged Properties and any
other funds available to these borrowers. As a result, the costs incurred in the
collection and liquidation of Mortgage Loans with combined loan-to-value ratios
at the time of origination in excess of 100% may be higher than with respect to
Mortgage Loans with combined loan-to-value ratios of 100% or less because the
Servicer may be required to pursue collection solely against the Mortgagor. The
Master Servicer may, in accordance with accepted servicing procedures, pursue
alternative methods to maximize proceeds therefrom, including, without
limitation, the modification of defaulted Mortgage Loans, which may include the
abatement of accrued interest or the reduction of a portion of the outstanding
Principal Balance of such defaulted Mortgage Loan. Consequently, the losses on
such defaulted Mortgage Loans may be more severe as there is no assurance that
any proceeds will be recovered.
Litigation. Any material litigation relating to the Sponsor or the
Master Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related Current Report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators and the Master Servicer and Sub-Servicers. 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
that 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
Mortgage Loans and Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity 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 rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. If the Master Servicer is unable to collect all or part of the
principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Investors.
Furthermore, depending upon whether damages and sanctions are assessed against
the Master Servicer or an Originator, such violations may materially impact the
financial ability of the Sponsor to continue to act as Master Servicer or the
ability of an Originator to repurchase or replace Mortgage Loans if such
violation breaches a representation or warranty contained in a Pooling and
Servicing Agreement.
Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ("ARM Loans") to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans, the
combined loan-to-value ratios of the Mortgage Loans, and the price paid by
Securityholders. Such yield may be adversely affected by a higher or lower than
anticipated rate of prepayments on the related Mortgage Loans. The yield to
maturity on Strip Securities or Securities purchased at premiums or discounted
to par will be extremely sensitive to the rate of prepayments on the related
Mortgage Loans. In addition, the yield to maturity on certain other types of
classes of Securities, including Accrual Securities or certain other classes in
a series including more than one class of Securities, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Securities.
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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 be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in Pre-Funding Accounts, if any, 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 or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain "due-on-sale" provisions, and the
Master Servicer will be required to enforce such provisions unless (i) the
"due-on-sale" clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law or (ii) the Master Servicer reasonably believes
that to permit an assumption of the Mortgage Loan would not materially and
adversely affect the interests of the Securityholders or of the related Credit
Enhancer, if any. See "The Pooling and Servicing Agreement" in the related
Prospectus Supplement.
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 borrowers.
Book-Entry Registration. Issuance of the Securities in book-entry form
may reduce the liquidity of such Securities in the secondary trading market
since investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder 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 security representing the
Securities.
Securityholders 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 Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Form of Securities."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Sponsor or an Originator. In the event of the bankruptcy of the Sponsor or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Sponsor, an Originator, or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), 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 have an effect, for an indeterminate period of time, on the ability of the
Master Servicer to collect full
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amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations that 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.
Security Rating. The rating of Securities credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Securities would likely result in a reduction in the rating of the Securities.
See "Ratings" in the Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Multi-family Loans, (iii) Cooperative Loans, (iv)
Contracts, (v) Home Improvement Loans, or (vi) other loans or (B) certificates
of interest or participation in the items described in clause (A) or in pools of
such items, in each case, as specified in the related Prospectus Supplement,
together with payments in respect of such primary Mortgage Assets and certain
other accounts, obligations or agreements, in each case as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to
be included in the related Trusts. If specific information respecting the
primary Mortgage Assets is not known at the time the related series of
Securities initially is offered, 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 Pooling and Servicing Agreement with respect to each Series of
Securities will be attached to the Form 8-K and 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 (the
"Mortgage Asset Schedule") will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General. The real properties and Manufactured
Homes, as the case may be, that secure repayment of the Mortgage Loans and
Contracts (the "Mortgaged Properties") may be located in any one of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States. Unless otherwise specified in the related Prospectus Supplement,
the Mortgage Loans or Contracts will be "Conventional Loans" (i.e., loans that
are not insured or guaranteed by any governmental agency). If specified in the
related Prospectus Supplement, Mortgage Loans with certain loan-to-value ratios
and/or certain principal balances may be covered wholly or partially by primary
mortgage insurance policies. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered by standard
hazard insurance policies (which may be in the form of a blanket or forced
placed hazard insurance policy). The existence, extent and duration of any such
coverage will be described in the applicable Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the Mortgage Loans
will not be guaranteed or insured by any government agency or other insurer.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly ("monthly pay") or bi-weekly. 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:
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(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time and under certain
circumstances 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. If provided for in the Prospectus Supplement, certain
Mortgage Loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan (the "Buydown
Period") will be less than the scheduled monthly payments on the
Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon,
being hereinafter referred to as "Buydown Funds") funded by the
originator of the Mortgage Loan or another source (including the Master
Servicer or the related Originator and the builder of the Mortgaged
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(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 or decrease 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 provide for deferred payment of
a portion of the interest due monthly during a specified period, and
recoup the deferred interest through negative amortization during such
period whereby the difference between the interest paid during such
period and interest accrued during such period 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
therewith. 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 transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the related Originator.
(e) As more fully described in the related Prospectus
Supplement, the Mortgage Loans may consist, in whole or in part, of
revolving home equity loans or certain balances thereof ("Revolving
Credit Line Loans"). Interest on each Revolving Credit Line Loan,
excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line Loan may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid. If specified in the related
Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate
balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Estate and
principal payments are applied to such balances and such
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amounts will usually differ each day, as more specifically described in
the related Prospectus Supplement. Under certain circumstances, under a
Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the
borrower is obligated to pay only the amount of interest which accrues
on the loan during the billing cycle, and may also elect to pay all or
a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the
borrower must begin paying at least a minimum monthly portion of the
average outstanding principal balance of the loan.
Except as otherwise described in the related Prospectus Supplement or
in the related Current Report on Form 8-K, interest will be calculated on each
Mortgage Loan pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that
interest is charged to the Mortgagor at the applicable Mortgage Rate on
the outstanding principal balance of such Note and calculated based on
the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payment. Such
interest is deducted from the Mortgagor's payment amount and the
remainder, if any, of the payment is applied as a reduction to the
outstanding principal balance of such Note. Although the Mortgagor is
required to remit equal monthly payments on a specified monthly payment
date that would reduce the outstanding principal balance of such Note
to zero at such Note's maturity date, payments that are made by the
Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero. In such a
case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. On the other hand, if a
Mortgagor makes a payment (other than a prepayment) before the due date
therefor, the reduction in the outstanding principal balance of such
Note would occur over a shorter period of time than it would have
occurred had it been based on the original amortization schedule of
such Note.
Actuarial Loans. Actuarial Loans provide that interest is
charged to the Mortgagor thereunder, and payments are due from such
Mortgagor, as of a scheduled day of each month which is fixed at the
time of origination. Scheduled monthly payments made by the Mortgagors
on the Actuarial Loans either earlier or later than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the
payment by the related Mortgagor of a specified total amount of
payments, payable in equal monthly installments on each due date, which
total represents the principal amount financed and add-on interest in
an amount calculated on the basis of the stated Mortgage Rate for the
term of the Loan. The rate at which such amount of add-on interest is
earned and, correspondingly, the amount of each fixed monthly payment
allocated to reduction of the outstanding principal are calculated in
accordance with the "Rule of 78's." Under a Rule of 78's Loan, the
amount of a payment allocable to interest is determined by multiplying
the total amount of add-on interest payable over the term of the loan
by a fraction derived as described below.
The fraction used in the calculation of add-on interest earned each
month under a Rule of 78's Loan has as its denominator a number equal to the sum
of a series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the numerator for the first payment is
12, for the second payment, 11, for the third payment, 10, and so on through the
final payment, for which the numerator is 1. The applicable fraction is then
multiplied by the total add-on interest payable over the entire term of the
loan, and the resulting amount is the amount of add-on interest "earned" that
month. The difference between the amount of the monthly payment by the obligor
and the amount of earned add-on interest calculated for the month is applied to
principal reduction. Rule of 78's Loans are non-level yield instruments. The
yield in the initial months of a Rule of 78's Loan is somewhat higher than the
stated Mortgage Rate (computed on an actuarial basis) and the yield in the later
months of the loan is somewhat less than such stated Mortgage Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool;
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such information, insofar as it may relate to statistical information relating
to such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") which may also be the related cut-off date (the "Cut-Off
Date"). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, Manufactured Homes, multifamily apartments or
other real property), (iv) the original terms to stated maturity of the Mortgage
Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans
and the range of the remaining terms to maturity; (vi) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vii) the weighted
average CLTV and the range of CLTV's of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the "APR") and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) a description of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided
with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the
geographical distribution of the Mortgage Loans on a state-by-state basis. In
addition, preliminary or more general information of the nature described above
may be provided in the Prospectus Supplement, and specific or final information
may be set forth in a Current Report on Form 8-K, together with the related
Pooling and Servicing Agreement, which will be filed with the Securities and
Exchange Commission and will be made available to holders of the related series
of Securities within fifteen days after the initial issuance of such Securities.
The loan-to-value ratio (the "LTV") of a Mortgage Loan is equal to the
ratio (expressed as a percentage) of the original principal balance of such
Mortgage Loan to appraised value of the related Mortgaged Property (unless
otherwise disclosed in the related Prospectus Supplement or in the related
Current Report on Form 8-K), at the time of origination of the Mortgage Loan.
Generally, in the case where the Mortgage represents a purchase money
instrument, the lesser of (a) the appraised value or (b) the purchase price is
used to calculate the LTV. The combined loan-to-value ratio (the "CLTV") of a
Mortgage Loan at any given time is the ratio, expressed as a percentage,
determined by dividing (x) the sum of the original principal balance of such
Mortgage Loan (unless otherwise disclosed in the related Prospectus Supplement
or in the related Current Report on Form 8-K) plus the then-current principal
balance of all mortgage loans (each, a "Senior Lien") secured by liens on the
related Mortgaged Property having priorities senior to that of the lien which
secures such Mortgage Loan, by (y) the value of the related Mortgaged Property,
based upon the appraisal or valuation (which may in certain instances include
estimated increases in value as a result of certain home improvements to be
financed with the proceeds of such Mortgage Loan) made at the time of
origination of the Mortgage Loan. If the related Mortgagor will use the proceeds
of the Mortgage Loan to refinance an existing Mortgage Loan which is being
serviced directly or indirectly by the Master Servicer, the requirement of an
appraisal or other valuation at the time the new Mortgage Loan is made may be
waived. Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the CLTV of a Contract relating to a new Manufactured
Home, the value of such Manufactured Home will be no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified herein or in the related Prospectus
Supplement, the value of a used Manufactured Home will be either (x) the
appraised value, and National Automobile Dealer's Association book value plus
prepaid taxes and hazard insurance premiums or (y) the sum of (i) the appraised
value of the land to which the Manufactured Home is attached and (ii) the
appraised value of the Manufactured Home. The appraised value of a Manufactured
Home will be based upon the age and condition of the manufactured housing unit
and the quality and condition of the mobile home park in which it is situated,
if applicable.
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
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(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, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the
non-conforming credit mortgage lending industry. 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 additional liens on the Mortgaged Properties, equal or exceed the value
of the Mortgaged Properties. Under such circumstances, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the non-conforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ("Junior Lien
Loans") subordinate to the rights of the mortgagee under any related senior
mortgage(s). The proceeds from any liquidation, insurance or condemnation of
Mortgaged Properties relating to Junior Lien Loans in a Mortgage Pool will be
available to satisfy the principal balance of such Junior Lien Loans only to the
extent that the claims, if any, of all related senior mortgagees, including any
related foreclosure costs, are satisfied in full. In addition, the Master
Servicer may not foreclose on a Mortgaged Property relating to a Junior Lien
Loan unless it forecloses subject to the related senior mortgage or mortgages,
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 default
thereunder. Generally, in servicing Junior Lien Loans in its loan portfolios, it
has been the Master Servicer's practice to satisfy each senior mortgage at or
prior to a foreclosure sale but only to the extent that it determines any
amounts so paid will be recoverable from future payments and collections on the
Mortgage Loans or otherwise. The Trusts will not have any source of funds to
satisfy any such senior mortgage or make payments due to any senior mortgagee.
See "Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure."
Other factors affecting mortgagors' ability to repay Mortgage Loans
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 losses
on the Mortgage Loans are not covered by Credit Enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, pursuant to the Pooling and Servicing Agreement and will receive
a fee for such services. See "Mortgage Loan Program" and "The Pooling and
Servicing Agreement." With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Sponsor and the Originators with respect to a series of
Securities will be to provide (or, where the Sponsor or an 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 Sponsor's or Originator's rights
with respect to such representations and warranties. See "The Pooling and
Servicing Agreement." The obligations of the Master Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing obligations
under the related Pooling and Servicing Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Originators as more fully
described herein under "Mortgage Loan Program--Qualifications of Originators"
and "The Pooling and Servicing Agreement") and its obligation, as described in
the related Prospectus Supplement, to make certain cash advances in the event of
delinquencies in payments on, or prepayments received with respect to, the
Mortgage Loans in the amounts described herein under "Description of the
Securities--Advances." The obligations of a Master Servicer to make advances may
be subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
Prospectus Supplement, single family loans will consist of mortgage loans, deeds
of trust or participation or other beneficial interests therein, secured by
first or junior liens on one- to four-family residential properties ("Single
Family Loans"). The Mortgaged Properties relating to Single Family Loans will
consist of detached or semi-detached one-family dwelling units, two-
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to four-family dwelling units, townhouses, rowhouses, individual condominium
units in condominium developments, individual units in planned unit
developments, and certain mixed use and other dwelling units. Such Mortgaged
Properties may include noninvestor owned (which includes vacation and second
homes) and investor owned properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans will
be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
Multi-family Loans. Multi-family loans will consist of mortgage loans,
deeds of trust or participation or other beneficial interests therein, secured
by first or junior liens on rental apartment buildings or projects containing
five or more residential units ("Multi-family Loans").
Mortgaged Properties that secure Multi-family Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multi-family 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 that 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 Multi-family 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.
Home Improvement Loans. Unless otherwise specified in the Prospectus
Supplement, loans to make home improvements may be secured by first or junior
liens on conventional one- to four-family residential properties and
multi-family residential properties ("Home Improvement Loans"). Home Improvement
Loans may be conventional, or may be partially insured by the Federal Housing
Administration ("FHA") or another federal or state agency, as specified in the
related Prospectus Supplement. The loan proceeds from such Home Improvement
Loans are typically disbursed to an escrow agent which, according to guidelines
established by the Originators, releases such proceeds to the contractor upon
completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Mortgagor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts. Contracts will consist of manufactured housing conditional
sales contracts and installment sales or loan agreements each secured by a
Manufactured Home ("Contracts"). Contracts may be conventional, insured
partially by the FHA or partially guaranteed by the Veterans Administration, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Contract will be fully amortizing and
will bear interest at its APR.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air
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conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust, among other things, the date of origination of
the Contracts; the Mortgage Rates or the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balances as
of the Statistic Calculation Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the related
Trust; and the original maturities of the Contracts and the last maturity date
of any Contract.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any stripped portion of the interest payments due under the related Mortgage
Note that may have been retained by any Originator or broker ("Originator's
Retained Yield"), or any other interest retained by the Sponsor or any affiliate
of the Sponsor, evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on single-family (i.e., one- to four-family) residential, multi-family
properties or mixed use properties, or (ii) certificates of interest or
participations in such Mortgage Notes. The Mortgaged Properties will consist
primarily of attached or detached one-family dwelling units, two- to four-family
dwelling units, condominiums, townhouses, row houses, individual units in
planned-unit developments and certain other dwelling units, mixed use properties
and the fee, leasehold or other interests in the underlying real property. The
Mortgaged Properties may be noninvestor owned (which includes second and
vacation homes) and investor owned properties. If specified in the related
Prospectus Supplement relating to a series of Securities, a Mortgage Pool may
contain cooperative apartment loans ("Cooperative Loans") evidenced by
promissory notes ("Cooperative Notes") secured by security interests in shares
issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. In certain cases a Mortgage Loan may also be secured by the
pledge of a limited amount of collateral which is not real estate, such as
fixtures or personal property that includes, but is not limited to, furniture
and appliances. As used herein, unless the context indicates otherwise,
"Mortgage Loans" include Cooperative Loans, "Mortgaged Properties" include
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, "Mortgage Notes" include
Cooperative Notes and "Mortgages" include security agreements with respect to
Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by one or more institutions
affiliated with the Sponsor (such affiliated institutions, the "Affiliated
Originators"), or from banks, savings and loan associations, mortgage bankers,
mortgage brokers, investment banking firms, the RTC, the FDIC and other mortgage
loan originators or purchasers not affiliated with the Sponsor (such
unaffiliated institutions, the "Unaffiliated Originators" and, collectively with
the Affiliated Originators, the "Originators"), all as described below under
"Mortgage Loan Program." The characteristics of the Mortgage Loans will be
described in the related Prospectus Supplement. Other mortgage loans available
for acquisition by a Trust may have characteristics that would make them
eligible for inclusion in a Mortgage Pool but may not be selected by the Sponsor
for inclusion in such Mortgage Pool.
Each Security will evidence an interest in only the related Mortgage
Pool and corresponding Trust Estate, and not in any other Mortgage Pool or any
other Trust Estate (except in those limited situations whereby certain
collections on any Mortgage Loans in a related Mortgage Pool in excess of
amounts needed to pay the related securities may be deposited in a common,
master reserve account that provides Credit Enhancement for more than one series
of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus
Supplement, all of the Mortgage Loans in a Mortgage Pool will (i) have payments
that are due monthly or bi-weekly, (ii) be secured by Mortgaged Properties
located in any of the fifty states, the District of Columbia, Puerto Rico or any
other Territories of the United States and (iii) consist of one or more of the
following types of mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of generally not
more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that
adjusts periodically, at the intervals described in the related
Prospectus Supplement (which may have adjustments in the amount of
monthly payments at periodic intervals) over the term of the mortgage
loan to equal the sum of a fixed percentage set forth in the related
Mortgage Note (the "Note Margin") and an index (the "Index") to be
specified in the related Prospectus Supplement, such as, by way of
example: (i) U.S. Treasury securities of a specified constant maturity,
(ii)
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weekly auction average investment yield of U.S. Treasury bills of
specified maturities, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board or as quoted by one or more
specified lending institutions, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, or (v)
the interbank offered rates for U.S. dollar deposits in the London
Markets, each calculated as of a date prior to each scheduled interest
rate adjustment date that will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will set forth the
relevant Index, and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the
related Mortgage Pool. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
some point during the term of such ARM Loan subsequent to the initial
payment date;
(3) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments during the first year calculated on the
basis of an assumed interest rate that will be lower than the Mortgage
Rate applicable to such mortgage loan in subsequent years. Deferred
Interest, if any, will be added to the principal balance of such
mortgage loans;
(4) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments in subsequent years that are calculated on
the basis of an assumed interest rate that will be lower than the
Mortgage Rate applicable to such loan in the first year or first two
years, provided that the Mortgagor qualifies under certain positive
criteria, including, but not limited to, a good payment history.
(5) Balloon mortgage loans ("Balloon Loans"), which are
mortgage loans having original or modified terms to maturity of
generally 5 to 15 years as described in the related Prospectus
Supplement, which may have level monthly payments of principal and
interest based generally on a 10- to 30-year amortization schedule. The
amount of the monthly payment may remain constant until the maturity
date, upon which date the full outstanding principal balance on such
Balloon Loan will be due and payable (such amount, the "Balloon
Amount");
(6) Modified mortgage loans ("Modified Loans"), which are
fixed or adjustable-rate mortgage loans providing for terms at the time
of modification of generally not more than 30 years. Modified Loans may
be mortgage loans which have been consolidated and/or have had various
terms changed, mortgage loans which have been converted from adjustable
rate mortgage loans to fixed rate mortgage loans, or construction loans
which have been converted to permanent mortgage loans;
(7) Another type of mortgage loan described in the related
Prospectus Supplement; or
(8) As more fully described in the related Prospectus
Supplement, the Mortgage Loans may consist, in whole or in part, of
Revolving Credit Line Loans. Interest on each Revolving Credit Line
Loan, excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line Loan may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid. If specified in the related
Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate
balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Estate and
principal payments are applied to such balances and such amounts will
usually differ each day, as more specifically described in the related
Prospectus Supplement. Under certain circumstances, under a Revolving
Credit Line Loan, a borrower may, during the related draw period,
choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest which accrues on the loan
during the billing cycle, and may also elect to pay all or a portion of
the principal. An interest only payment option may terminate at the end
of the related draw period, after which the borrower must begin paying
at least a minimum monthly portion of the average outstanding principal
balance of the loan.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain either or both of the following types of mortgage loans (i) ARM
Loans which allow the Mortgagors to convert the adjustable rates on such
Mortgage Loans to a fixed rate at some point during the life of such Mortgage
Loans and (ii) fixed rate mortgage loans which allow the Mortgagors to convert
the fixed rates on such Mortgage Loans to an adjustable rate at some point
during the life of such Mortgage Loans (each such Mortgage Loan described in (i)
and (ii) above, a "Convertible Mortgage Loan").
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If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the Master Servicer or the related
Originator) and placed in the Buydown Account and (ii) if the Buydown Funds are
contributed on a present value basis, investment earnings on such Buydown Funds.
See "Description of the Securities--Payments on Mortgage Loans; Deposits to
Distribution Account." The terms of the Buydown Mortgage Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Sponsor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned to the Trustee named in the related Prospectus Supplement,
for the benefit of the holders of all of the Securities of a series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions
(Sub-Servicers), pursuant to a Pooling and Servicing Agreement and will receive
a fee for such services. See "Mortgage Loan Program" and "Description of the
Securities." With respect to those Mortgage Loans serviced by the Master
Servicer through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling and Servicing Agreement as if
the Master Servicer alone were servicing such Mortgage Loans, unless otherwise
described in the related Prospectus Supplement.
The Sponsor and/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but its assignment of the Mortgage
Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Mortgage Loans." The Master Servicer's obligations
with respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under "Mortgage
Loan Program--Representations by Originators," "--Sub-Servicing by Originators"
and "Description of the Securities--Assignment of Mortgage Loans," and its
obligation, if any, to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans and interest shortfalls due
to prepayment of Mortgage Loans, in amounts described herein under "Description
of the Securities--Advances"). The obligation of the Master Servicer to make
delinquency advances will be limited to the extent, in its good faith business
judgment such delinquency advances would be ultimately recoverable from the
proceeds of liquidation of the Mortgage Loans. See "Description of the
Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Sponsor's Mortgage Loan program will consist
of the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, "non-conforming credit" means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. However, certain of the Mortgage Loans will relate to
FNMA or FHLMC conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans
for one or more of four reasons: (i) to purchase the related Mortgaged Property,
(ii) to refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property; the Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly
referred to as home equity loans.
It is the Sponsor's practice to solicit existing Mortgagors with
respect to the possible refinancing of their existing Mortgages.
UNDERWRITING GUIDELINES
As more fully described below under "Qualifications of Originators" and
as may also be described in greater detail in the related Prospectus Supplement,
there are various types of Originators that may participate in the Sponsor's
Mortgage Loan Program. Under the Sponsor's Mortgage Loan Program, the Sponsor
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Sponsor's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ("Sponsor's Guidelines"), (2) underwriting
guidelines utilized by certain Unaffiliated
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Originators and approved by the Sponsor ("Approved Guidelines"), and (3)
underwriting guidelines ("Bulk Guidelines") used by Unaffiliated Originators of
portfolios of Mortgage Loans subsequently purchased in whole or part by the
Sponsor as bulk acquisitions ("Bulk Acquisitions"). The respective underwriting
guidelines are described below.
Sponsor's Guidelines. The Sponsor's Guidelines are set forth in the
Sponsor's Originator Guide. The Sponsor's Guidelines are revised continuously
based on opportunities and prevailing conditions in the nonconforming credit
residential mortgage market, as well as the expected market for the resulting
Securities.
Mortgage Loans originated by Affiliated Originators generally will, and
Mortgage Loans originated by Unaffiliated Originators may have been, originated
in accordance with the Sponsor's Guidelines as set forth in the Sponsor's
Originator Guide. However, certain of the Mortgage Loans may be employee or
preferred customer loans with respect to which, in accordance with such
Affiliate's mortgage loan programs, no income or asset verifications were
required. In addition, certain Originators may originate Mortgage Loans in
satisfaction of specified requirements of federal or state law applicable to
certain Originators, such as, by way of illustration, the federal Community
Reinvestment Act of 1977, which is applicable to banks; such Mortgage Loans
generally will not have been originated pursuant to the Sponsor's standard
underwriting guidelines applicable to nonconforming loans but may have been
originated pursuant to alternative guidelines applicable to such loans. The
Sponsor will not review any Affiliated Originator mortgage loans for conformity
with the Sponsor's Guidelines set forth in the Sponsor's Originator Guide. The
Sponsor generally will review or cause to be reviewed only a limited portion of
the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated
Originators for conformity with the Sponsor's Originator Guide.
The following is a brief description of the Sponsor's Guidelines set
forth in the Sponsor's Originator Guide customarily and currently employed by
the Sponsor. The Sponsor believes that these standards are consistent with those
generally used by lenders in the business of making mortgage loans based on
non-conforming credits. The underwriting process is intended to assess both the
prospective borrower's ability to repay and the adequacy of the real property as
collateral for the loan granted. The general appreciation in value of real
estate experienced in the past has been a factor in limiting the Master
Servicer's loss experience on its portfolio of one- to four-family residential
mortgage loans. However, the past pattern of appreciation in value of the real
property securing such loans has not continued, and a depreciation in value has
occurred and may continue to occur in some market areas, and may occur in
others.
The Sponsor's Guidelines permit the origination and purchase of
mortgage loans with multi-tiered credit characteristics tailored to individual
credit profiles. In general, the Sponsor's Guidelines require an analysis of the
equity in the collateral, the payment history of the borrower, the borrower's
ability to repay debt, the property type, and the characteristics of the
underlying first mortgage, if any. A lower maximum CLTV is required for lower
gradations of credit quality and higher property values.
The Sponsor's Guidelines permit the origination or purchase of fixed or
adjustable rate loans that either fully amortize over a period generally not to
exceed 30 years or, in the case of a balloon mortgage, generally amortize based
on a 30-year or less amortization schedule with a due date and a "balloon"
payment due prior to the 30 year period.
The homes used for collateral to secure the loans generally may be
either noninvestor owned (which includes second and vacation homes) or investor
owned properties which, in either case are single-family residences (which may
be detached, part of a two- to four-family dwelling, a condominium unit or a
unit in a planned unit development). The Sponsor's Guidelines generally require
that the CLTV of a Mortgage Loan not exceed 100%, after taking into account the
amount of any primary mortgage insurance applicable to such Mortgage Loan. The
Sponsor, however, may originate or purchase Mortgage Loans that have a maximum
combined loan-to-value ratio of 125%. These Mortgage Loans are generally
targeted as debt consolidation loans for repeat or frequent borrowers with
generally strong credit ratings. Lending decisions for these loans are based on
an analysis of the prospective Mortgagor's documented cash flow and credit
history supplemented by a collateral evaluation deemed appropriate by the
Sponsor.
If a senior mortgage exists, the Sponsor may first review the senior
mortgage documentation. If it contains open end advance or negative amortization
provisions, the maximum potential senior mortgage balance may be used, although
for certain of the Sponsor's products the current balance may be used in
calculating the CLTV which determines the maximum loan amount. The Sponsor's
Guidelines do not permit the origination or purchase of loans where the senior
mortgage contains a provision pursuant to which the senior mortgagee may share
in any appreciation of the Mortgaged Property.
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In most cases, the value of each property proposed as security for a
mortgage loan is required to be determined by a full appraisal. A limited
appraisal of a property, conducted on a drive-by basis, may be utilized. Two
full appraisals are generally required for properties valued over $500,000.
Appraisals are required to be completed by qualified professional
appraisers. The Sponsor evaluates the performance of appraisers and maintains a
current disapproved appraiser list.
The Sponsor's Guidelines have provided for the origination of loans
under three general loan programs: (i) a full verification program for salaried
or self-employed borrowers, (ii) a "lite" documentation program for borrowers
who may have income which cannot be verified by traditional methods and (iii) a
non-income verification program for salaried and self-employed borrowers.
However, the Sponsor's Guidelines allow for certain borrowers with existing
loans to refinance such loans with either limited, or no, verification of
income. The Sponsor may also purchase pools of loans which may include some
loans originated under a non-income verification program. For the Sponsor's full
verification process, each mortgage applicant is required to provide, and the
Sponsor or its designee is required to verify, personal financial information.
The applicant's total monthly obligations (including principal and interest on
each mortgage, tax assessments, other loans, charge accounts and all other
scheduled indebtedness) generally (in the absence of countervailing
considerations, such as a lower Combined Loan-to-Value Ratio or a price
adjustment) should not exceed the applicant's ability to pay. Applicants who are
salaried employees must provide current employment information in addition to
recent employment history. The Sponsor or its designee verify this information
for salaried borrowers based on written confirmation from employers or a
combination of the most recent pay stub, the most recent W-2 tax form and
telephone confirmation from the employer. Self-employed applicants are generally
required to be self-employed in the same field for a minimum of two years. The
self-employed applicant is generally required to provide personal and business
financial statements and signed copies of complete federal income tax returns
(including schedules) filed for the most recent two years. For the Sponsor's
"lite" documentation program the borrower must establish proof of cash flow
trends to support the borrower's income. Such proof can include business bank
statements or personal bank statements. For the Sponsor's non-income verifier
program, proof of two year's history of employment plus proof of current
employment status is required. The applicant's debt-to-income ratio is
calculated based on income as certified by the borrower on the application and
must be reasonable.
A credit report by an independent, nationally recognized credit
reporting agency is required reflecting the applicant's complete credit history.
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 senior mortgage balance,
if any, the 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.
In connection with purchase-money loans, the Sponsor's Guidelines
generally require (x) (i) an acceptable source of downpayment funds, (ii)
verification of the source of the downpayment funds and (iii) adequate cash
reserves or (y) adequate equity in the collateral property.
Certain laws protect loan applicants by offering them a time frame
after loan documents are signed, termed 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.
Unless otherwise disclosed in the related Prospectus Supplement, the
Sponsor's Guidelines generally require title insurance coverage issued by an
approved ALTA or CLTA title insurance company on each Mortgage Loan it
purchases. The Sponsor, the related Originator and/or their assignees generally
are named as the insured. Title insurance policies indicate the lien position of
the mortgage loan and protect the insured against loss if the title or lien
position is not as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any senior mortgage. If the sum of the
outstanding first mortgage, if any, and the related mortgage loan exceeds
replacement value (the cost of rebuilding the subject property, which generally
does not include land value), insurance equal to replacement value may be
accepted. The Sponsor or its designee is required to ensure that its name
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and address is properly added to the "Mortgagee Clause" of the insurance policy.
In the event the Sponsor or the related 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.
Approved Guidelines. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. Certain of
the Mortgage Loans will be acquired in negotiated transactions, and such
negotiated transactions may be governed by agreements ("Master Commitments")
relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from
Originators who will represent that the Mortgage Loans have been originated in
accordance with underwriting guidelines agreed to by the Sponsor. Certain other
Mortgage Loans will be acquired from Originators that will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept
a certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence of a Mortgage
Loan conforming to applicable underwriting standards. Such certifications likely
will have been issued before the purchase of the Mortgage Loan by the Sponsor.
The Sponsor only will perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards of insurance companies may
vary substantially from the Sponsor's Guidelines. All of the underwriting
guidelines will provide an underwriter with information to evaluate either the
security for the related Mortgage Loan, which security consists primarily of the
borrower's repayment ability or the adequacy of the Mortgaged Property as
collateral, or a combination of both. Due to the variety of underwriting
guidelines and review procedures that may be applicable to the Mortgage Loans
included in any Mortgage Pool, the related Prospectus Supplement will not
distinguish among the various underwriting guidelines applicable to the Mortgage
Loans nor describe any review for compliance with applicable underwriting
guidelines performed by the Sponsor. Moreover, there can be no assurance that
every Mortgage Loan was originated in conformity with the Approved Guidelines in
all material respects, or that the quality or performance of Mortgage Loans
underwritten pursuant to varying guidelines as described above will be
equivalent under all circumstances.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by
a variety of Originators under several different underwriting guidelines. For
bulk portfolios which are seasoned for a period of time, the Sponsor's
underwriting review of bulk portfolios of Mortgage Loans focuses primarily on
payment histories and estimated current values based on estimated property
appreciation or depreciation and loan amortization. Mortgage Loans that conform
to the related Bulk Guidelines may not conform to the requirements of either the
Sponsor's Guidelines or the Approved Guidelines. For example, the Sponsor may
purchase Mortgage Loans in bulk portfolios with Combined Loan-to-Value Ratios in
excess of that required under the Sponsor's Guidelines, without title insurance,
or with nonconforming appraisal methods such as tax assessments. Bulk
Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Originator must meet certain minimum requirements, as
modified from time to time, by the Sponsor. The Sponsor generally will cause the
Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten on a sample
basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer
or by a third party acting at the direction of the Sponsor.
Quality Control. The Master Servicer maintains a quality control
department which generally reviews loans originated by Affiliated Originators.
The quality control department randomly selects a portion of the files for
underwriting review. The Sponsor or its Affiliated Originators also cause
appraisal reviews to be performed on a random sample of loan production.
A periodic report is distributed to senior management and the
production offices describing material exceptions to underwriting and appraisal
guidelines, legal and regulatory requirements and variances based on the
reverification process. Appraisers demonstrating chronic errors, omissions or
large valuation errors are removed from the approved appraiser list. Training
programs, additional audits and performance evaluations for underwriting
personnel and management are influenced by the results of the quality control
review.
The Sponsor generally will cause Mortgage Loans acquired from
Unaffiliated Originators to be (i) reunderwritten for the purpose of determining
whether such Mortgage Loans were originated in accordance with the applicable
underwriting guidelines, (ii) reviewed to assess the accuracy of the appraised
values, and (iii) audited to
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determine the accuracy of the loan computer system as compared to the loan
files. Such process may consist of a review of all such Mortgage Loans or may be
performed on a sample basis. Such reunderwriting may be performed by the
Sponsor, the Master Servicer or a third party acting at the direction of the
Sponsor.
QUALIFICATIONS OF ORIGINATORS
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Sponsor for participation in the Sponsor's mortgage loan
program. Certain Unaffiliated Originators ("Conduit Participants") may be
qualified to enter into agreements to sell mortgage loans to the Sponsor
pursuant to Master Commitments which provide for the periodic purchase and sale
of loans meeting certain specified requirements.
Loans acquired from Unaffiliated Originators other than Conduit
Participants will be acquired on a "spot" basis, or in connection with a Bulk
Acquisition. Unless otherwise described in the related Prospectus Supplement
with respect to certain specified Unaffiliated Originators (in which case any
remedies for breach will lie only against such Unaffiliated Originator), the
Sponsor will make directly, or will guarantee compliance with, any
representations and warranties made by any Unaffiliated Originator, with respect
to the Mortgage Loans originated by it and acquired by a Trust.
All Conduit Participants must have received a satisfactory review by
the Sponsor of its operating procedures. All Unaffiliated Originators will have
delinquency and foreclosure rates monitored and maintained at levels acceptable
to the Sponsor. All Unaffiliated Originators are required to originate mortgage
loans in accordance with the applicable underwriting standards. However, with
respect to any Originator, some of the generally applicable underwriting
standards described herein and in the Sponsor's Originator Guide may be modified
or waived with respect to certain Mortgage Loans originated by such Originators.
The Federal Deposit Insurance Corporation (the "FDIC") (either in its
corporate capacity or as receiver or conservator for a depository institution)
may also be an Originator of the Mortgage Loans. The FDIC is an independent
executive agency originally established by the Banking Act of 1933 to insure the
deposits of all banks entitled to federal deposit insurance under the Federal
Reserve Act and Federal Deposit Insurance Act. The FDIC administers the system
of nationwide deposit insurance (mutual guaranty of deposits) for United States
Banks and, together with the United States Comptroller of the Currency,
regulates in areas related to the maintenance of reserves for certain types of
deposits, the maintenance of certain financial ratios, transactions with
affiliates and a broad range of other banking practices.
The Sponsor monitors the Originators and the Sub-Servicers under the
control of a Federal Corporation, as well as those Originators and Sub-Servicers
that are insolvent or in receivership or conservatorship or otherwise
financially distressed. Such Originators may not be able or permitted to
repurchase Mortgage Loans for which there has been a breach of representation
and warranty. Moreover, any such Originator may make no representations and
warranties with respect to Mortgage Loans sold by it. The Federal Corporations
(either in their respective corporate capacities or as receiver for a depository
institution) may also originate Mortgage Loans, in which event neither the
related Federal Corporation nor the depository institution for which such
Federal Corporation is acting as receiver may make representations and
warranties with respect to the Mortgage Loans that such Federal Corporation
sells, or such Federal Corporation may make only limited representations and
warranties (for example, that the related legal documents are enforceable). A
Federal Corporation may have no obligation to repurchase any Mortgage Loan for a
breach of a representation and warranty. If as a result of a breach of
representation and warranty an Originator is required to repurchase a Mortgage
Loan but is not permitted or otherwise fails to do so or if representations and
warranties are not made by an Originator, to the extent that neither the Sponsor
nor any other entity has assumed the representations and warranties or made
representations and warranties, neither the Sponsor nor that entity will be
required to repurchase such Mortgage Loan and, consequently such Mortgage Loan
will remain in the related Mortgage Pool and any related losses will be borne by
the Securityholders or by the related Credit Enhancement,
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if any. In addition, loans which are purchased either directly or indirectly
from a Federal Corporation may be subject to a contract right of such Federal
Corporation to repurchase such loans under certain limited circumstances.
SUB-SERVICERS
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Master Servicer and the
Sub-Servicer (a "Sub-Servicing Agreement") unless the servicing obligations are
released to the Master Servicer or transferred to a servicer approved by the
Master Servicer. An Affiliated Originator of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. An Unaffiliated Originator acting as a
Sub-Servicer for the Mortgage Loans will be required to meet certain additional
standards with respect to its mortgage loan servicing portfolio, GAAP tangible
net worth and other specified qualifications.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a
qualified mortgage under the REMIC provisions of the Code and is a Mortgage;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling or a multi-family structure, which may include condominiums
and townhouses, units in a "planned unit development" ("PUD") complex or a
manufactured home; (iv) each Mortgage Loan had, at the time of origination,
either an attorney's certification of title or a title search or title policy;
(v) as of the related Cut-Off Date each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Schedule of Mortgage Loans subject in all cases to
exceptions to title set forth in the title insurance policy, if any, with
respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by
such Originator; and (vii) each Mortgage Loan was originated in accordance with
law and is the valid, legal and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement, all of
the representations and warranties of an Originator in respect of a Mortgage
Loan will be made as of the date on which such Originator sells the Mortgage
Loan to the Sponsor; the date as of which such representations and warranties
are made thus may be a date prior to the date of the issuance of the related
series of Securities. A substantial period of time may elapse between the date
as of which the representations and warranties are made and the later date of
issuance of the related series of Securities.
The Sponsor will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the "Loan
Purchase Price") set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or subservicing compensation, as applicable, and the Originator's
Retained Yield, if any, together with, without duplication, the aggregate amount
of all delinquent interest, if any, net of Servicing Advances.
Unless otherwise specified in the related Prospectus Supplement, as to
any such Mortgage Loan required to be purchased by an Originator and/or the
Sponsor, as provided above, rather than repurchase the Mortgage Loan, the Master
Servicer may, at its sole option, remove such Mortgage Loan (a "Deleted Mortgage
Loan") from the related Trust and cause the Sponsor to substitute in its place
another Mortgage Loan of like kind (a "Qualified
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Replacement Mortgage" as such term is defined in the related Pooling and
Servicing Agreement). With respect to a Trust for which a REMIC election is to
be made, except as otherwise provided in the Prospectus Supplement relating to a
series of Securities, such substitution of a defective Mortgage Loan must be
effected within two years of the date of the initial issuance of the Securities,
and may not be made if such substitution would cause the Trust to not qualify as
a REMIC or result in a prohibited transaction tax under the Code. Unless
otherwise specified in the related Prospectus Supplement or Pooling and
Servicing Agreement, an Unaffiliated Originator generally will have no option to
substitute for a Mortgage Loan that it is obligated to repurchase in connection
with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Master Servicer in the event the Originator
fails to honor such obligation. If the Originator fails to repurchase or
substitute a loan and no breach of the Sponsor's representations has occurred,
the Originator's purchase obligation will in no event become an obligation of
the Sponsor. Unless otherwise specified in the related Prospectus Supplement,
the foregoing will constitute the sole remedy available to Securityholders or
the Trustee for a breach of representation by an Originator in its capacity as a
seller of Mortgage Loans to the Sponsor.
Unless otherwise described in the related Prospectus Supplement with
respect to certain Unaffiliated Originators (in which case any remedies for
breach will lie only against such Unaffiliated Originator), the Sponsor will
make directly, or will guarantee compliance with, any representations and
warranties made by any Unaffiliated Originator with respect to the Mortgage
Loans originated or purchased by it and acquired by a Trust.
Notwithstanding the foregoing with respect to any Originator that
requests the Master Servicer's consent to the transfer of sub-servicing rights
relating to any Mortgage Loans to a successor servicer, the Master Servicer may
release such Originator from liability, under its representations and warranties
described above, upon the assumption by such successor servicer of the
Originator's liability for such representations and warranties as of the date
they were made. In that event, the Master Servicer's rights under the instrument
by which such successor servicer assumes the Originator's liability will be
assigned to the Trustee, and such successor servicer shall be deemed to be the
"Originator" for purposes of the foregoing provisions.
SUB-SERVICING BY ORIGINATORS
Each Originator of a Mortgage Loan will act as the Sub-Servicer for
such Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is
released to the Master Servicer or has been transferred to a servicer approved
by the Master Servicer. The Master Servicer may, in turn, assign such
sub-servicing to designated sub-servicers that will be qualified Originators and
may include affiliates of the Sponsor. While such a Sub-Servicing Agreement will
be a contract solely between the Master Servicer and the Sub-Servicer, the
Pooling and Servicing Agreement pursuant to which a series of Securities is
issued will provide that, if for any reason the Master Servicer for such series
of Securities is no longer the master servicer of the related Mortgage Loans,
the Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, with
the approval of the Master Servicer, a Sub-Servicer may delegate its servicing
obligations to third-party servicers, but such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer, including collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of hazard insurance (to the extent, if any, required by
the related Pooling and Servicing Agreement) and filing and settlement of claims
thereunder, subject in certain cases to the right of the Master Servicer to
approve in advance any such settlement; maintenance of escrow or impound
accounts of Mortgagors for payment of taxes, insurance and other items required
to be paid by the Mortgagor pursuant to the Mortgage Loan; processing of
assumptions or substitutions; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Mortgage
Loans. A Sub-Servicer also may be obligated to make advances to the Master
Servicer in respect of delinquent installments of principal and/or interest (net
of any sub-servicing or other compensation) on Mortgage Loans, as described more
fully under "Description of the Securities--Advances," and in respect of certain
taxes and insurance premiums not paid on a timely basis by Mortgagors. A Sub-
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Servicer may also be obligated to deposit amounts in respect of Compensating
Interest to the related Principal and Interest Account in connection with
prepayments of principal received and applied to reduce the outstanding
principal balance of a Mortgage Loan. No assurance can be given that the
Sub-Servicers will carry out their advance or payment obligations, if any, with
respect to the Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, a Sub-Servicer may transfer its servicing obligations to
another entity that has been approved for participation in the Sponsor's loan
purchase programs, but only with the prior written approval of the Master
Servicer.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a Base Servicing Fee. The Sub-Servicer may also be entitled to
collect and retain, as part of its servicing compensation, any late charges or
prepayment penalties provided in the Mortgage Note or related instruments. The
Sub-Servicer will be entitled to reimbursement for certain expenditures that it
makes, generally to the same extent that the Master Servicer would be reimbursed
under the applicable Pooling and Servicing Agreement. See "The Pooling and
Servicing Agreement--Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield."
Each Sub-Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer is required to maintain a fidelity bond and an
errors and omission policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is terminated earlier by the
Master Servicer or unless servicing is released to the Master Servicer. The
Master Servicer generally may terminate a Sub-Servicing Agreement immediately
upon the giving of notice upon certain stated events, including the violation of
such Sub-Servicing Agreement by the Sub-Servicer, or following a specified
period after notice to the Sub-Servicer without cause upon payment of an amount
equal to a specified termination fee calculated as a specified percentage of the
aggregate outstanding principal balance of all mortgage loans, including the
Mortgage Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing
Agreement and certain transfer fees.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement. Upon termination of a Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
one or more new Sub-Servicing Agreements. If the Master Servicer acts as
servicer, it will not assume liability for the representations and warranties of
the Sub-Servicer that it replaces. If the Master Servicer enters into a new
Sub-Servicing Agreement, each new Sub-Servicer either must be an Originator,
meet the standards for becoming an Originator or have such servicing experience
that is otherwise satisfactory to the Master Servicer. The Master Servicer may
make reasonable efforts to have the new Sub-Servicer assume liability for the
representations and warranties of the terminated Sub-Servicer, but no assurance
can be given that such an assumption will occur and, in any event, if the new
Sub-Servicer is an affiliate of the Master Servicer, the liability for such
representations and warranties will not be assumed by such new Sub-Servicer. In
the event of such an assumption, the Master Servicer may in the exercise of its
business judgment release the terminated Sub-Servicer from liability in respect
of such representations and warranties. Any amendments to a Sub-Servicing
Agreement or to a new Sub-Servicing Agreement may contain provisions different
from those described above that are in effect in the original Sub-Servicing
Agreements. However, the Pooling and Servicing Agreement for each Trust Estate
will provide that any such amendment or new agreement may not be inconsistent
with such Pooling and Servicing Agreement to the extent that it would materially
and adversely affect the interests of the Securityholders.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under "The Pooling and Servicing Agreement" below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
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The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a series may include two or more classes of Fixed-Income Securities
that differ as to timing, sequential order, priority of payment, Interest Rate
or amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or formula, or on
the basis of collections from designated portions of the related Mortgage Pool,
which series may include one or more classes of Fixed-Income Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
principal balance in the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as hereinafter defined and in the
manner described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Sponsor. In addition, the Sponsor and its
affiliates may initially or permanently hold any Equity Securities issued by any
Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their Securities on
specified dates ("Payment Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or semi-annually, as described in the
related Prospectus Supplement; Payment Dates with respect to Equity Securities
will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. Unless otherwise described in the
related Prospectus Supplement, the Payment Date will be the twenty-fifth day of
each month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and, in the case of semi-annually-pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
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The related Prospectus Supplement and the Pooling and Servicing
Agreement will describe a period (a "Remittance Period") antecedent to each
Payment Date (for example, in the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment Date occurs or such other specified
period). Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans during a
Remittance Period will be required to be remitted by the Master Servicer to the
related Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather than
used to distribute payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to distribute payments of principal to
Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement,
neither the Securities nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interest in a
separate Trust Estate created pursuant to such Pooling and Servicing Agreement.
A Trust Estate will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage
documents) or certificates of interest or participations therein underlying a
particular series of Securities as from time to time are subject to the Pooling
and Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation,
payments and collections in respect of the Mortgage Loans due, accrued or
received, as described in the related Prospectus Supplement, on and after the
related Cut-Off Date, as from time to time are identified as deposited in
respect thereof in the Principal and Interest Account and in the related
Distribution Account; (iii) property acquired by foreclosure of the Mortgage
Loans or deed in lieu of foreclosure; (iv) hazard insurance policies and primary
insurance policies, if any, and certain proceeds thereof; and (v) any
combination, as specified in the related Prospectus Supplement, of a letter of
credit, financial guaranty insurance policy, purchase obligation, mortgage pool
insurance policy, special hazard insurance policy, bankruptcy bond, reserve fund
or other type of Credit Enhancement as described under "Description of Credit
Enhancement." To the extent that any Trust Estate includes certificates of
interest or participations in Mortgage Loans, the related Prospectus Supplement
will describe the material terms and conditions of such certificates or
participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ("Physical
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar
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of the Securities (the "Security Registrar") named in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities, but the Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting
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actions with respect to other current principal amounts of outstanding
Securities to the extent that such actions are taken on behalf of Participants
whose holdings include such current principal amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Certificates"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
None of the Company, the Originators, the Master Servicer or the
Trustee will have any liability for any actions taken by DTC or its nominee or
Cedel or Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Securities held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will
cause the Mortgage Loans being included in the related Trust Estate to be
assigned to the Trustee together with, unless otherwise specified in the related
Prospectus Supplement, all payments and collections in respect of the Mortgage
Loans due, accrued or received, as described in the related Prospectus
Supplement on or after the related Cut-Off Date. If specified in the related
Prospectus Supplement, the Sponsor or any of its affiliates may retain the
Originator's Retained Yield, if any, for itself or transfer the same to others.
The Trustee will, concurrently with such assignment, deliver a series of
Securities to the Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the related Pooling
and Servicing Agreement. Such schedule will include, among other things,
information as to the principal balance of each Mortgage Loan as of the Cut-Off
Date, as well as information regarding the Mortgage Rate, the currently
scheduled monthly payment of principal and interest and the maturity of the
Mortgage Note.
In connection with the establishment of certain Trusts the Sponsor may
first transfer the related Trust Estate to the Transferor and the Transferor
will then transfer such Trust Estate to the related Trust. The use of the
Transferor will not affect the obligations of the Sponsor with respect to the
related Trust or the related Securities. If the Transferor is to be involved in
a particular offering the related Prospectus Supplement will describe its role
in such offering; for purposes of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
The related Prospectus Supplement will describe any applicable
requirements relating to the delivery of documents, such as the related Notes,
and the preparation and/or filing of transfer documentation, such as assignments
of Mortgage, in connection with the establishment of the related Trust. To the
extent that the ratings, if any, then assigned to the unsecured debt of the
Sponsor or of the Sponsor's ultimate corporate parent are satisfactory to the
Rating Agencies, all or any portion of such document delivery requirements
and/or transfer document preparation and filing requirements may be waived, all
as to be described in the related Prospectus Supplement.
A typical provision relating to document delivery requirements would
provide that the Sponsor deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed by the Originator thereof
in blank or to the order of the holder, (ii) originals of all intervening
assignments, showing a complete chain of title from origination to the
applicable Originators, if any, including warehousing assignments, with evidence
of recording thereon, (iii) originals of all assumption and modification
agreements, if any, and, unless such Mortgage Loan is covered by a counsel's
opinion as described in the next paragraph, (iv) either: (a) the original
Mortgage, with
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evidence of recording thereon, (b) a true and accurate copy of the Mortgage
where the original has been transmitted for recording, until such time as the
original is returned by the public recording office or (c) a copy of the
Mortgage certified by the public recording office in those instances where the
original recorded Mortgage has been lost. To the extent that such a file
containing all or a portion of such items has been delivered to the Trustee, the
Trustee will generally be required, for the benefit of the Securityholders, to
review each such file within a specified period, generally not exceeding 90
days, to ascertain that all required documents (or certified copies of
documents) have been executed and received.
A typical provision relating to the preparation and filing of transfer
documentation would require the Originators to cause to be prepared and
recorded, within a specified period, generally not exceeding 75 business days of
the execution and delivery of the applicable Pooling and Servicing Agreement
(or, if original recording information is unavailable, within such later period
as is permitted by the Pooling and Servicing Agreement) assignments of the
Mortgages from the Originators to the Trustee, in the appropriate jurisdictions
in which such recordation is necessary to perfect the lien thereof as against
creditors of or purchasers from the Originators, to the Trustee; provided,
however, that if the Originators furnish to the Trustee and to the Certificate
Insurer an opinion of counsel to the effect that no such recording is necessary
to perfect the Trustee's interests in the Mortgages with respect to any of the
jurisdictions in which the related Mortgaged Properties are located, then such
recording will not be required with respect to such jurisdictions or at the
election of the Certificate Insurer, any jurisdiction.
Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall promptly so notify the Sponsor, which shall
notify the related Sub-Servicer or Originator, as the case may be. If the
Sub-Servicer or Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Sponsor, the Sub-Servicer or Originator, as the case may be, will be obligated
to purchase on the next succeeding Remittance Date the related Mortgage Loan
from the Trustee at its Loan Purchase Price (or, if specified in the related
Prospectus Supplement, will be permitted to substitute for such Mortgage Loan
under the conditions specified in the related Prospectus Supplement). The Master
Servicer will be obligated to enforce this obligation of the Sub-Servicer or
Originator, as the case may be, to the extent described above under "Mortgage
Loan Program--Representations by Originators." Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor the Sponsor will,
however, be obligated to purchase or substitute for such Mortgage Loan if the
Sub-Servicer or Originator, as the case may be, defaults on its obligation to do
so, and there can be no assurance that a Sub-Servicer or Originator, as the case
may be, will carry out any such obligation. Unless otherwise specified in the
related Prospectus Supplement, such purchase obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized at any time 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 the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Securities will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Sub-Servicers, will service and administer the
Mortgage Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a "Forward Purchase
Agreement") with the Sponsor whereby the Sponsor will agree to transfer
additional Mortgage Loans to such Trust following the date on which such Trust
is established and the related Securities are issued. The Trust may enter into
Forward Purchase Agreements to permit the acquisition of additional Mortgage
Loans (the "Subsequent Mortgage Loans") that could not be delivered by the
Sponsor or have not formally completed the origination process, in each case
prior to the date on which the Securities are delivered to the Securityholders
(the "Closing Date"). Any Forward Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Forward Purchase Agreement. In addition, the Forward Purchase Agreement
states that the Depositor shall only transfer the Subsequent Mortgage Loans upon
the satisfaction of certain conditions including that the Depositor shall have
delivered to the Certificate Insurer, the Rating Agencies and the Trustee
opinions of counsel (including bankruptcy, corporate and tax opinions) with
respect to the transfer of the Subsequent Mortgage Loans.
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If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released to the Sponsor from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the "Funding Period") during
which any such transfers must occur; for a Trust which elects federal income
treatment as a REMIC or as a grantor trust, the related Funding Period will be
limited to three months from the date such Trust is established; for a Trust
which is treated as a mere security device for federal income tax purposes, the
related Funding Period will be limited to nine months from the date such Trust
is established. The Forward Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all monies originally deposited to
such Pre-Funding Account are not so used by the end of the related Funding
Period, then any remaining monies will be applied as a mandatory prepayment of
the related class or classes of Securities as specified in the related
Prospectus Supplement.
During the Funding Period, the monies deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in
cash-equivalent investments that are rated in one of the four highest rating
categories by at least one nationally recognized statistical rating organization
and that will either mature prior to the end of the Funding Period, or will be
drawable on demand and in any event, will not constitute the type of investment
that would require registration of the related Trust as an "investment company"
under the Investment Company Act of 1940, as amended. On payment dates that
occur during the Funding Period, the Trustee will transfer any earnings on the
monies in the Pre-Funding Account to the Certificate Account for distribution to
the Certificateholders.
The Pre-Funding Account will be maintained by the Trustee, which must
be a bank having combined capital and surplus, generally, of at least
$100,000,000, long-term, unsecured debt rated at least investment grade and a
long-term deposit rating of at least investment grade.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the "Sub-Servicing Account")
which generally meets the requirements set forth in the Sponsor's Originator
Guide from time to time, and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or with
a depository institution (including the Sub-Servicer itself) whose accounts are
insured by the National Credit Union Share Insurance Fund or the FDIC, provided
that any such depository institution must meet certain minimum rating criteria
set forth in the Sponsor's Originator Guide. Except as otherwise permitted by
the applicable Rating Agencies, a Sub-Servicing Account must be segregated and
may not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on
a daily basis all amounts described above under "Mortgage Loan
Program--Sub-Servicing by Originators" that are received by it in respect of the
Mortgage Loans, less its servicing or other compensation. On or before the date
specified in the Sub-Servicing Agreement (which date may be no later than the
business day prior to the Determination Date referred to below or, if such day
is not a business day, the preceding business day), the Sub-Servicer must remit
or cause to be remitted to the Master Servicer all funds held in the
Sub-Servicing Account with respect to Mortgage Loans that are required to be so
remitted. A Sub-Servicer may also be required to make such Servicing Advances
and Delinquency Advances and to pay Compensating Interest as set forth in the
related Sub-Servicing Agreement.
The Master Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due and accrued on or after the Cut-Off Date or received and accrued on or
after the Cut-Off Date, as described in the related Prospectus Supplement and,
as specifically set forth in the related Pooling and Servicing Agreement, such
as the following except as otherwise provided therein:
(i) all payments on account of principal, including principal
payments received in advance of the date on which the related monthly
payment is due (the "Due Date") ("Principal Prepayments"), on the
Mortgage Loans comprising a Trust Estate;
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(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment
thereof retained by the Sub-Servicer, if any, as its servicing or other
compensation;
(iii) all amounts received and retained, if any, in connection
with the liquidation of any defaulted Mortgage Loan, by foreclosure,
deed in lieu of foreclosure or otherwise ("Liquidation Proceeds"),
including all proceeds of any special hazard insurance policy,
bankruptcy bond, mortgage pool insurance policy, financial guaranty
insurance policy and any title, hazard or other insurance policy
covering any Mortgage Loan in such Mortgage Pool (together with any
payments under any letter of credit, "Insurance Proceeds") or proceeds
from any alternative arrangements established in lieu of any such
insurance and described in the applicable Prospectus Supplement, other
than proceeds to be applied to the restoration of the related property
or released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures (such amounts, net of related unreimbursed
liquidation expenses and insured expenses incurred and unreimbursed
advances of the Master Servicer or by the related Sub-Servicer, "Net
Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Securityholders, as described
below;
(v) all proceeds of any Mortgage Loan in such Trust Estate
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Sponsor, any Sub-Servicer or Originator or any other person pursuant to
the terms of the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Representations by Originators," "--Assignment of Mortgage
Loans" above;
(vi) any amounts required to be deposited by the Master Servicer
in connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with
the liquidation of the related Trust; and
(viii) any amounts required to be transferred from the
Distribution Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Sponsor shall
cause to be established and the Trustee will maintain, at the corporate trust
office of the Trustee, in the name of the Trust for the benefit of the holders
of each series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the "Distribution
Account"). The Principal and Interest Account and the Distribution Account each
must be maintained with a Designated Depository Institution. A "Designated
Depository Institution" is an institution whose deposits are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, the
long-term deposits of which have a rating satisfactory to the Rating Agencies
and the related Credit Enhancer, if any, and which is any of the following: (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the related
Credit Enhancer, if any, each Rating Agency and, in each case acting or
designated by the Master Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
association will generally be required to have combined capital, surplus and
undivided profits of at least $50,000,000. Notwithstanding the foregoing, the
Principal and Interest Account may be held by an institution otherwise meeting
the preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof shall
be rated at a level satisfactory to one or more Rating Agencies if such
institution has trust powers and the Principal and Interest Account is held by
such institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account and other accounts
described in the related Prospectus Supplement are collectively referred to as
"Accounts." All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the Securityholders and the related
Credit Enhancer, if any, as directed by the Master Servicer, in
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certain defined obligations set forth in the related Pooling and Servicing
Agreement ("Eligible Investments"). The Principal and Interest Account may
contain funds relating to more than one series of Securities as well as payments
received on other mortgage loans serviced or master serviced by it that have
been deposited into the Principal and Interest Account. All funds in the
Principal and Interest Account will be required to be held (i) uninvested, up to
limits insured by the FDIC or (ii) invested in Eligible Investments. The Master
Servicer will be entitled to any interest or other income or gain realized with
respect to the funds on deposit in the Principal and Interest Account.
To the extent that the ratings, if any, then assigned to the unsecured
debt of the Master Servicer or of the Master Servicer's corporate parent and
satisfactory to the Rating Agencies, the Master Servicer may be permitted to
co-mingle Mortgage Loan payments and collections with the Master Servicer's
general funds rather than required to deposit such amounts into a segregated
Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, on the
day seven days preceding each Payment Date (the "Remittance Date"), the Master
Servicer will withdraw from the Principal and Interest Account and remit to the
Trustee for deposit in the applicable Distribution Account, in immediately
available funds, the amount to be distributed therefrom to Securityholders on
such Payment Date. The Master Servicer will remit to the Trustee for deposit
into the Distribution Account the amount of any advances made by the Master
Servicer as described herein under "--Advances," any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
"Credit Enhancement" below, any amounts required to be paid by the Master
Servicer out of its own funds due to the operation of a deductible clause in any
blanket policy maintained by the Master Servicer to cover hazard losses on the
Mortgage Loans as described under "Hazard Insurance; Claims Thereunder--Hazard
Insurance Policies" below and any other amounts as specifically set forth in the
related Pooling and Servicing Agreement. The Trustee will cause all payments
received by it from any Credit Enhancer to be deposited in the Distribution
Account not later than the related Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the
portion of any payment received by the Master Servicer in respect of a Mortgage
Loan that is allocable to the Originator's Retained Yield generally will not be
deposited into the Principal and Interest Account, but will not be paid over to
the parties entitled thereto as provided in the related Pooling and Servicing
Agreement.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer. Funds on deposit in the related Distribution
Account may be invested in Eligible Investments maturing, in general, no later
than the business day preceding the next Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will
deposit the related Buydown Funds provided to it in a Buydown Account that will
comply with the requirements set forth herein with respect to a Sub-Servicing
Account. Unless otherwise specified in the related Prospectus Supplement, the
terms of all Buydown Mortgage Loans provide for the contribution of Buydown
Funds in an amount equal to or exceeding either (i) the total payments to be
made from such funds pursuant to the related buydown plan or (ii) if such
Buydown Funds are to be deposited on a discounted basis, that amount of Buydown
Funds which, together with investment earnings thereon at a rate as set forth in
the Sponsor's Originator Guide from time to time, will support the scheduled
level of payments due under the Buydown Mortgage Loan. Neither the Master
Servicer nor the Sponsor will be obligated to add to any such discounted Buydown
Funds any of its own funds should investment earnings prove insufficient to
maintain the scheduled level of payments. To the extent that any such
insufficiency is not recoverable from the Mortgagor or, in an appropriate case,
from the related Originator or the related Sub-Servicer, distributions to
Securityholders may be affected. With respect to each Buydown Mortgage Loan, the
Sub-Servicer will withdraw from the Buydown Account and remit to the Master
Servicer on or before the date specified in the Sub-Servicing Agreement
described above the amount, if any, of the Buydown Funds (and, if applicable,
investment earnings thereon) for each Buydown Mortgage Loan that, when added to
the amount due from the Mortgagor on such Buydown Mortgage Loan, equals the full
monthly payment which would be due on the Buydown Mortgage Loan if it were not
subject to the buydown plan.
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If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Sub-Servicer will withdraw from
the Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown Mortgage
Loan, the Sub-Servicer will generally be required to withdraw from the Buydown
Account and remit to the Master Servicer the Buydown Funds and investment
earnings thereon, if any, which together with such prepayment will result in a
prepayment in full; provided that Buydown Funds may not be available to cover a
prepayment under certain Mortgage Loan programs. Any Buydown Funds so remitted
to the Master Servicer in connection with a prepayment described in the
preceding sentence will be deemed to reduce the amount that would be required to
be paid by the Mortgagor to repay fully the related Mortgage Loan if the
Mortgage Loan were not subject to the buydown plan. Any investment earnings
remaining in the Buydown Account after prepayment or after termination of the
Buydown Period will be remitted to the related Mortgagor or such other
designated party pursuant to the agreement relating to each Buydown Mortgage
Loan (the "Buydown Agreement"). If the Mortgagor defaults during the Buydown
Period with respect to a Buydown Mortgage Loan and the property securing such
Buydown Mortgage Loan is sold in liquidation (either by the Master Servicer, the
Primary Insurer, the insurer under the mortgage pool insurance policy (the "Pool
Insurer") or any other insurer), the Sub-Servicer will be required to withdraw
from the Buydown Account the Buydown Funds and all investment earnings thereon,
if any, and remit the same to the Master Servicer or, if instructed by the
Master Servicer, pay the same to the primary insurer or the Pool Insurer, as the
case may be, if the Mortgaged Property is transferred to such insurer and such
insurer pays all of the loss incurred in respect of such default.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit
to the Distribution Account in the amounts and in the manner provided
in the Pooling and Servicing Agreement and described in "--Payments on
Mortgage Loans; Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for any accrued and
unpaid Servicing Fees and for Delinquency Advances and Servicing
Advances as to any Mortgaged Property, out of late payments or
collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected
by the Master Servicer from the related Mortgagor or otherwise relating
to the Mortgage Loan with respect to which such Delinquency Advances or
Servicing Advances were made;
(iii) to reimburse itself for any Delinquency Advances or
Servicing Advances determined in good faith to have become
Non-Recoverable Advances, such reimbursement to be made from any funds
in the Principal and Interest Account;
(iv) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(v) to pay the Sponsor or its assignee all amounts allocable to
the Originator's Retained Yield out of collections or payments which
represent interest on each Mortgage Loan (including any Mortgage Loan
as to which title to the underlying Mortgaged Property was acquired);
(vi) to withdraw amounts that have been deposited in the
Principal and Interest Account in error;
(vii) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the
Pooling and Servicing Agreement, as described in "The Pooling and
Servicing Agreement--Termination, Retirement of Securities"; and
(viii) to invest in Eligible Investments.
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DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided percentage
interest (the "Percentage Interest") represented by a Security of a particular
class will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of such Security by the aggregate initial amount or
notional balance of all the Securities of such class. Distributions will be made
in immediately available funds (by wire transfer or otherwise) to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or the Paying
Agent, as the case may be, and the applicable Pooling and Servicing Agreement
provides for such form of payment, or by check mailed to the address of the
person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (other than
any Book-Entry Securities) will be made only upon presentation and surrender of
the Securities at the office or agency of the Trustee specified in the notice to
Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Securities will be described in the related
Prospectus Supplement. Each class of Securities (other than certain classes of
Strip Securities) may bear interest at a different interest rate (the
"Pass-Through Rate"), which may be a fixed or adjustable Pass-Through Rate. The
related Prospectus Supplement will specify the Pass-Through Rate for each class,
or in the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate
and the method for determining the Pass-Through Rate. Unless otherwise specified
in the related Prospectus Supplement, interest on the Securities will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
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In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes
of Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit Enhancer, if any,
and the Trustee) of the month of distribution (the "Determination Date"), the
Trustee will determine the amounts of principal and interest which will be
passed through to Securityholders on the immediately succeeding Payment Date. If
the amount in the Distribution Account is insufficient to cover the amount to be
passed through to Securityholders, the Trustee will be required to notify the
related Credit Enhancer, if any, pursuant to the related Pooling and Servicing
Agreement for the purpose of funding such deficiency.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will be required, not later than each Remittance Date, to deposit into
the Principal and Interest Account an amount equal to the sum of the interest
portions (net of the Servicing Fees and the Originators' Retained Yield) due,
but not collected, with respect to delinquent Mortgage Loans directly serviced
by such Servicer during the prior Remittance Period, but only if, in its good
faith business judgment, such Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. As may be described in the related
Prospectus Supplement, such Servicer may also be required so to advance
delinquent payments of principal. Any such amounts so advanced are "Delinquency
Advances". The Master Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period, and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto. A Sub-Servicer will be permitted to fund its payment of
Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Mortgage Loan is "delinquent" if any payment due thereon is not made
by the close of business on the day such payment is scheduled to be due plus
any applicable grace period.
Unless otherwise specified in the related Prospectus Supplement, on or
prior to each Remittance Date, each Servicer will be required to deposit in the
Principal and Interest Account with respect to any full prepayment received on a
Mortgage Loan directly serviced by such Servicer during the related Remittance
Period out of its own funds without any right of reimbursement therefor, an
amount equal to the difference between (x) 30 days' interest at the Mortgage
Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators'
Retained Yield, if any) on the principal balance of such Mortgage Loan as of the
first day of the related Remittance Period and (y) to the extent not previously
advanced, the interest (less the Servicing Fee and the Originators' Retained
Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by such Servicer, "Compensating
Interest"). No Servicer shall be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by such Servicer with respect to all Mortgage Loans
directly serviced by such Servicer for such Remittance Period.
Each Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that such Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related Mortgage Loan. Each such amount
so paid will constitute a "Servicing Advance". Such Servicer may recover
Servicing Advances to the extent permitted by the Mortgage Loans
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or, if not theretofore recovered from the Mortgagor on whose behalf such
Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Mortgage Loan or, in certain cases, from excess cash
flow otherwise payable to the holders of the related Equity Securities or prior
to any distributions being made to the related Securityholders.
Notwithstanding the foregoing, if the Master Servicer exercises its
option, if any, to purchase the assets of a Trust Estate as described under "The
Pooling and Servicing Agreement--Termination; Retirement of Securities" below,
the Master Servicer will net from the purchase price of such amounts for all
related advances previously made by it and not theretofore reimbursed to it. The
Master Servicer's obligation to make advances may be supported by Credit
Enhancement as described in the related Pooling and Servicing Agreement. In the
event that the provider of such support is downgraded by a Rating Agency rating
the related Securities or if the collateral supporting such obligation is not
performing or is removed pursuant to the terms of any agreement described in the
related Prospectus Supplement, the Securities may also be downgraded.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class
of Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage
Loans after giving effect to the distribution of principal on such
Payment Date;
(v) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Payment Date;
(vi) the amount of coverage under any letter of credit,
mortgage pool insurance policy or other form of Credit Enhancement
covering default risk as of the close of business on the applicable
Determination Date and a description of any Credit Enhancement
substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan
Purchase Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor")
computed by dividing the principal balance of all Securities in such
class (after giving effect to any distribution of principal to be made
on such Payment Date) by the original principal balance of the
Securities of such class on the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
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In addition, on each Payment Date the Trustee will forward or cause to
be forwarded additional information, as of the close of business on the last day
of the prior calendar month, as more specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate
principal balances thereof, together with the number, percentage (based
on the then-outstanding principal balances) and aggregate principal
balances of Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days
delinquent and (c) 90 or more days delinquent;
(ii) the number, percentage (based on the then-outstanding
principal balances), aggregate Mortgage Loan balances and status of all
Mortgage Loans in foreclosure proceedings (and whether any such
Mortgage Loans are also included in any of the statistics described in
the foregoing clause (i));
(iii) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all
Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and
whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all
Mortgage Loans relating to the status of any Mortgaged Properties as to
which title has been taken in the name of, or on behalf of the Trustee
(and whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i)); and
(v) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure.
COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Master Servicer, is required to
service and administer the Mortgage Loans in accordance with the Pooling and
Servicing Agreement and with reasonable care, and using that degree of skill and
attention that the Master Servicer exercises with respect to comparable mortgage
loans that it services for itself or others.
The duties of the Master Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances to the extent described in the
related Pooling and Servicing Agreement. The Master Servicer is required to
follow its customary standards, policies and procedures in performing its duties
as Master Servicer.
The Master Servicer (i) is authorized and empowered to execute and
deliver, on behalf of itself, the Securityholders and the Trustee or any of
them, 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 related Mortgaged Properties; (ii)
may consent to any modification of the terms of any Note not expressly
prohibited by the Pooling and Servicing Agreement if the effect of any such
modification (x) will not materially and adversely affect the security afforded
by the related Mortgaged Property or the timing of receipt of any payments
required thereunder (in each case other than as permitted by the related Pooling
and Servicing Agreement); and (y) will not cause a Trust which is a REMIC to
fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Master
Servicer to follow such collection procedures as it follows from time to time
with respect to mortgage loans in its servicing portfolio that are comparable to
the Mortgage Loans; provided that the Master Servicer is required always at
least to follow collection procedures that are consistent with or better than
standard industry practices. The Master Servicer may in its discretion (i) waive
any assumption fees, late payment charges, charges for checks returned for
insufficient funds,
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prepayment fees, if any, or the fees which may be collected in the ordinary
course of servicing the Mortgage Loans, (ii) if a Mortgagor is in default or
about to be in default because of a Mortgagor's financial condition, arrange
with the Mortgagor a schedule for the payment of delinquent payments due on the
related Mortgage Loan; provided, however, the Master Servicer shall generally
not be permitted to reschedule the payment of delinquent payments more than one
time in any twelve consecutive months with respect to any Mortgagor or (iii)
modify payments of monthly principal and interest on any Mortgage Loan becoming
subject to the terms of the Relief Act in accordance with the Master Servicer's
general policies of the comparable mortgage loans subject to such Relief Act.
When a Mortgaged Property (other than Mortgaged Property subject to an
ARM Loan) has been or is about to be conveyed by the Mortgagor, the Master
Servicer will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Master Servicer will not be
required to exercise any such right if (i) the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law or (ii) the Master Servicer reasonably believes that to permit an assumption
of the Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the related Credit Enhancer or jeopardize coverage under any
primary insurance policy or applicable Credit Enhancement arrangements. In such
event, the Master Servicer will be required to enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Note and, unless prohibited by applicable law or the related
documents, the Mortgagor remains liable thereon. If the foregoing is not
permitted under applicable law, the Master Servicer will be authorized 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 assumed loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable
and if, in the reasonable judgment of the Master Servicer or the Sub-Servicer,
the proposed transferee of the related Mortgaged Property establishes its
ability to repay the loan and the security for such ARM Loan would not be
impaired by the assumption. If a Mortgagor transfers the Mortgaged Property
subject to an ARM Loan without consent, such ARM Loan may be declared due and
payable. Any fee collected by the Master Servicer or Sub-Servicer for entering
into an assumption or substitution of liability agreement will be retained by
the Master Servicer or Sub-Servicer as additional servicing compensation unless
otherwise set forth in the related Prospectus Supplement. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Enforceability of Certain
Provisions" herein.
The Master Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Master Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the credit profile of the related
Mortgage Loan after any release is consistent with the Sponsor's Originator
Guide then applicable to such Mortgage Loan; and (iii) the lien priority of the
related Mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer shall foreclose upon or otherwise comparably effect
the ownership 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 the related
Pooling and Servicing Agreement (such Mortgage Loans, "REO Property"). In
connection with such foreclosure or other conversion, the Master Servicer shall
exercise such of the rights and powers vested in it, and use the same degree of
care and skill in their exercise or use, as prudent mortgage lenders would
exercise or use under the circumstances in the conduct of their own affairs,
including, but not limited to, making Servicing Advances for the payment of
taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
shall sell any REO Property within 23 months of its acquisition by the Trust.
The Pooling and Servicing Agreements generally will permit the Master Servicer
to cease further collection and foreclosure activity if the Master Servicer
reasonably determines that such further activity would not increase collections
or recoveries to be received by the related Trust with respect to the related
Mortgage Loan. In addition, any required advancing may be permitted to cease at
this point.
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Notwithstanding the generality of the foregoing provisions, the Master
Servicer will be required to manage, conserve, protect and operate each REO
Property for the Securityholders solely for the purpose of its prompt
disposition and sale as "foreclosure property" within the meaning of Section
860G(a)(8) of the Code or to prevent the receipt by the Trust of any "income
from non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the
Code or any "net income from foreclosure property" which is subject to taxation
under the REMIC Provisions. Pursuant to its efforts to sell such REO Property,
the Master Servicer shall either itself or through an agent selected by the
Master Servicer protect and conserve such REO Property in the same manner and to
such extent as is customary in the locality where such REO Property is located
and may, incident to its conservation and protection of the interests of the
Securityholders, rent the same, or any part thereof, as the Master Servicer
deems to be in the best interest of the Securityholders for the period prior to
the sale of such REO Property. The Master Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property.
The Master Servicer shall determine, with respect to each defaulted
Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts it expects to recover from or on
account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall
become a Liquidated Mortgage Loan. A Mortgage Loan which is "charged-off", i.e.,
as to which the Master Servicer ceases further collection and/or foreclosure
activity as a result of a determination that such further actions will not
increase collections or recoveries to be received by the related Trust is also a
"Liquidated Mortgage Loan."
If a loss is realized on a defaulted Mortgage Loan or REO Property upon
the final liquidation thereof that is not covered by any applicable form of
Credit Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Mortgagor, the Master Servicer
will be entitled to retain such gain as additional servicing compensation unless
the related Prospectus Supplement provides otherwise. For a description of the
Master Servicer's obligations to maintain and make claims under applicable forms
of Credit Enhancement and insurance relating to the Mortgage Loans, see
"Description of Credit Enhancement" and "Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies."68
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby. Subordination of the Subordinate Securities of any Senior/Subordinate
Series of Securities will be effected by the following method, unless an
alternative method is specified in the related Prospectus Supplement. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities, as specified in the related
Prospectus Supplement, in which case the following discussion is qualified in
its entirety by reference to the related Prospectus Supplement with respect to
the various priorities and other rights as among the various classes of Senior
Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage
Loans not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, "charged-off" or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a
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"Realized Loss"), will equal the portion of the stated principal balance
remaining, after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer for related advances and expenses) towards
interest and principal owing on the Mortgage Loan. With respect to a Mortgage
Loan the principal balance of which has been reduced in connection with
bankruptcy proceedings, the amount of such reduction will be treated as a
Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage
to Mortgaged Properties that are generally of the same type as are covered under
a special hazard insurance policy, the amount thereof that may be allocated to
the Subordinate Securities of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement--Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to
a Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
(referred to herein as "Credit Enhancement") comprised of one or more of the
following components. Each component will have a monetary limit and will provide
coverage with respect to Realized Losses that are (i) attributable to the
Mortgagor's failure to make any payment of principal or interest as required
under the Mortgage Note, but not including Special Hazard Losses, Extraordinary
Losses or other losses resulting from damage to a Mortgaged Property, Bankruptcy
Losses or Fraud Losses (any such loss, a "Defaulted Mortgage Loss"); (ii) of a
type generally covered by a special hazard insurance policy (as defined below)
(any such loss, a "Special Hazard Loss"); (iii) attributable to certain actions
which may be taken by a bankruptcy court in connection with a Mortgage Loan,
including a reduction by a bankruptcy court of the principal balance of or the
Mortgage Rate on a Mortgage Loan or an extension of its maturity (any such loss,
a "Bankruptcy Loss"); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any
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such loss, a "Fraud Loss"). Losses occasioned by war, civil insurrection,
certain governmental actions, nuclear reaction and certain other risks
("Extraordinary Losses") will not be covered unless otherwise specified. To the
extent that the Credit Enhancement for any series of Securities is exhausted,
the Securityholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
Enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of Credit Enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any Credit Enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur that exceed the amount covered by Credit Enhancement or
are not covered by the Credit Enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of Credit
Enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to the classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit. If any component of Credit Enhancement as to any
series of Securities is to be provided by a letter of credit (the "Letter of
Credit"), a bank (the "Letter of Credit Bank") will deliver to the Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the related Securities or, if specified in the related
Prospectus Supplement, support the Sponsor's or any other person's obligation
pursuant to a Purchase Obligation to make certain payments to the Trustee with
respect to one or more components of Credit Enhancement. The Letter of Credit
Bank, as well as the amount available under the Letter of Credit with respect to
each component of Credit Enhancement, will be specified in the applicable
Prospectus Supplement. The Letter of Credit will expire on the expiration date
set forth in the related Prospectus Supplement, unless earlier terminated or
extended in accordance with its terms. On or before each Payment Date, either
the Letter of Credit Bank or the Trustee (or other obligor under a Purchase
Obligation) will be required to make the payments specified in the related
Prospectus Supplement after notification from the Trustee, to be deposited in
the related Distribution Account, if and to the extent covered, under the
applicable Letter of Credit.
Mortgage Pool Insurance Policies. Any mortgage pool insurance policy
("Mortgage Pool Insurance Policy") obtained by the Sponsor for each related
Trust Estate will be issued by the Pool Insurer named in the related Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to limitations
specified in the related Prospectus Supplement described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the related
Prospectus Supplement (or in a Current Report on Form 8-K) of the aggregate
principal balance of the Mortgage Loans on the Cut-Off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the
Securityholders. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss (typically, such policies do not cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may only be
made respecting particular defaulted
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Mortgage Loans and only upon satisfaction of certain conditions precedent
described below due to a failure to pay irrespective of the reason therefor.
Special Hazard Insurance Policies. Any insurance policy covering
Special Hazard Losses (a "Special Hazard Insurance Policy") obtained by the
Sponsor for a Trust Estate will be issued by the insurer named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described in the related Prospectus Supplement, protect holders of
the related series of Securities from (i) losses due to direct physical damage
to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies. See "Hazard Insurance; Claims
Thereunder." A Special Hazard Insurance Policy will not cover Extraordinary
Losses. Aggregate claims under a Special Hazard Insurance Policy will be limited
to a maximum amount of coverage, as set forth in the related Prospectus
Supplement or in a Current Report on Form 8-K. A Special Hazard Insurance Policy
will provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, in general a Special Hazard
Insurance Policy will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the Mortgagor or the
Master Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) up on transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer or the
Sub-Servicer with respect to such property. If the property is transferred to a
third party in a sale approved by the issuer of the Special Hazard Insurance
Policy (the "Special Hazard Insurer"), the amount that the Special Hazard
Insurer will pay will be the amount under (ii) above reduced by the net proceeds
of the sale of the property.
As indicated under "Description of the Securities--Assignment of
Mortgage Loans" above and to the extent set forth in the related Prospectus
Supplement, coverage in respect of Special Hazard Losses for a series of
Securities may be provided, in whole or in part by a type of special hazard
instrument other than a Special Hazard Insurance Policy or by means of the
special hazard representation of the Sponsor.
Bankruptcy Bonds. In the event of a personal bankruptcy of a Mortgagor,
it is possible that the bankruptcy court may establish the value of the
Mortgaged Property of such Mortgagor at an amount less than the
then-outstanding, principal balance of the Mortgage Loan secured by such
Mortgaged Property (a "Deficient Valuation"). The amount of the secured debt
then could be reduced to such value, and, thus, the holder of such Mortgage Loan
would become an unsecured creditor to the extent the outstanding principal
balance of such Mortgage Loan exceeds the value assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Mortgage Loan can result from a bankruptcy proceeding, including
a reduction in the amount of the monthly payment on the related Mortgage Loan or
a reduction in the mortgage interest rate (a "Debt Service Reduction"; Debt
Service Reductions and Deficient Valuations, collectively referred to herein as
"Bankruptcy Losses"). See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders." Any
bankruptcy bond ("Bankruptcy Bond") to provide coverage for Bankruptcy Losses
for proceedings under the federal Bankruptcy Code obtained by the Sponsor for a
Trust Estate will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds. If so provided in the related Prospectus Supplement, the
Sponsor will deposit or cause to be deposited in an account (a "Reserve Fund")
any combination of cash, one or more irrevocable letters of credit or one or
more Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders or the owners of any Originator's Retained Yield,
or any other instrument satisfactory to the Rating Agency or Agencies, which
will be applied and maintained in the manner and under the conditions specified
in such Prospectus Supplement. In the alternate or in addition to such deposit
to the extent described in the related Prospectus Supplement, a Reserve Fund may
be funded through application of all or a portion of amounts otherwise payable
on any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
Credit Enhancement includes a Letter of Credit, if so specified in the related
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Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Master Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Mortgage
Assets.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement,
the Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Mortgage
Assets has a floating interest rate, the Trust may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
Cross Support. If specified in the Prospectus Supplement, the
beneficial ownership of separate groups of assets included in a Trust may be
evidenced by separate classes of the related series of Securities. In such case,
credit support may be provided by a cross-support feature which requires that
distributions be made with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
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Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof, over
collateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Securities. Such acceleration may continue for
the life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Sponsor will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
"Reduction or Substitution of Credit Enhancement."
In lieu of the Sponsor's obligation to maintain a particular form of
Credit Enhancement, the Sponsor may obtain a substitute or alternate form of
Credit Enhancement. If the Master Servicer obtains such a substitute form of
Credit Enhancement, it will maintain and keep such form of Credit Enhancement in
full force and effect as provided herein. Prior to its obtaining any substitute
or alternate form of Credit Enhancement, the Sponsor will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then-current ratings
assigned to such Securities by such Rating Agency or Agencies.
The Master Servicer, on behalf of itself, the Trustee and
Securityholders, will provide the Trustee information required for the Trustee
to draw under a Letter of Credit or Financial Guaranty Insurance Policy, will
present claims to each Pool Insurer, to the issuer of each Special Hazard
Insurance Policy or other special hazard instrument, to the issuer of each
Bankruptcy Bond and will take such reasonable steps as are necessary to permit
recovery under such Letter of Credit, Financial Guaranty Insurance Policy,
Purchase Obligation, insurance policies or comparable coverage respecting
defaulted Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by another
party of its Purchase Obligation. As set forth above, all collections by the
Master Servicer under any Purchase Obligation, any Mortgage Pool Insurance
Policy, or any Bankruptcy Bond and, where the related property has not been
restored, any Special Hazard Insurance Policy, are to be deposited initially in
the Principal and Interest Account and ultimately in the Distribution Account,
subject to withdrawal as described above. All draws under any Letter of Credit
or Financial Guaranty Insurance Policy will be deposited directly in the
Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any applicable form of Credit
Enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
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Reduction or Substitution of Credit Enhancement. Unless otherwise
specified in the related Prospectus Supplement, the amount of credit support
provided pursuant to any of the Credit Enhancements (including, without
limitation, a Mortgage Pool Insurance Policy, Financial Guaranty Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or
any alternative form of Credit Enhancement) may be reduced under certain
specified circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
Credit Enhancement will be subject to periodic reduction in accordance with a
schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Mortgage Loans declines. Additionally, in certain cases, such
credit support (and any replacements therefor) may be replaced, reduced or
terminated upon the written assurance from each applicable Rating Agency that
the then-current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable Credit Enhancement is downgraded, the credit rating
of the related Securities may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, the Sponsor
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will be permitted to replace
such credit support with other Credit Enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current, albeit downgraded, rating of the related series of Securities is
maintained. Where the credit support is in the form of a Reserve Fund, a
permitted reduction in the amount of Credit Enhancement will result in a release
of all or a portion of the assets in the Reserve Fund to the Sponsor, the Master
Servicer, one or more Originators or such other person that is entitled thereto.
Any assets so released will not be available to fund distribution obligations in
future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Trustee upon request.
HAZARD INSURANCE POLICIES
Generally, the terms of the Mortgage Loans require each Mortgagor to
maintain a hazard insurance policy for the Mortgage Loan. Additionally, the
Pooling and Servicing Agreement will generally require the Master Servicer to
cause to be maintained with respect to each Mortgage Loan a hazard insurance
policy with a generally acceptable carrier that provides for fire and extended
coverage relating to such Mortgage Loan in an amount not less than the least of
(i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis or
(iii) the full insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Master Servicer will be
generally required to maintain with respect thereto a flood insurance policy in
a form meeting the requirements of the then-current guidelines of the Federal
Insurance Administration with a generally acceptable carrier in an amount
representing coverage, and which provides for recovery by the Master Servicer on
behalf of the Trust of insurance proceeds relating to such Mortgage Loan of not
less than the least of (i) the outstanding principal balance of the Mortgage
Loan, (ii) the minimum amount required to compensate for damage or loss on a
replacement cost basis, (iii) the maximum amount of insurance that is available
under the Flood Disaster Protection Act of 1973. Pursuant to the related Pooling
and Servicing Agreement, the Master Servicer will be required to indemnify the
Trust out of the Master Servicer's own funds for any loss to the Trust resulting
from the Master Servicer's failure to maintain such flood insurance.
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In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the Mortgage Loans, then, to the extent such policy names the Master
Servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the Mortgage Loans without co-insurance, and
otherwise complies with the requirements of the Pooling and Servicing Agreement,
the Master Servicer shall be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage under the Pooling
and Servicing Agreement. Such blanket policy may contain a deductible clause, in
which case the Master Servicer will be required, in the event that there shall
not have been maintained on the related Mortgaged Property a policy complying
with the Pooling and Servicing Agreement, and there shall have been a loss that
would have been covered by such policy, to deposit in the Principal and Interest
Account from the Master Servicer's own funds the difference, if any, between the
amount that would have been payable under a policy complying with the Pooling
and Servicing Agreement and the amount paid under such blanket policy.
THE SPONSOR AND THE TRANSFEROR
The Sponsor, Advanta Mortgage Conduit Services, Inc., was incorporated
in the State of Delaware in April, 1993. It is a direct subsidiary of the Master
Servicer, Advanta Mortgage Corp. USA, in addition to Advanta Mortgage Corp.
Midatlantic, Advanta Mortgage Corp., Midatlantic II, Advanta Mortgage Corp.
Midwest, Advanta Mortgage Corp. of New Jersey and Advanta Mortgage Corp.
Northeast. The Sponsor was organized for the purpose of the purchase and
securitization of first and junior mortgage loans.
The Sponsor maintains its principal office at 16875 West Bernardo
Drive, San Diego, California 92127. Its telephone number is (619) 674-1800.
The Transferor, Advanta Conduit Receivables Inc., was incorporated in
the State of Delaware in March, 1994. It is a direct subsidiary of the
Sponsor, and was formed as a special purpose finance subsidiary to facilitate
certain issuances of Securities. The use of the Transferor will not affect the
obligations of the Sponsor with respect to the related Trust or the related
Securities. If the Transferor is to be involved in a particular offering the
related Prospectus Supplement will describe its role in such offering; for
purposes of this Prospectus the role of the Transferor is subsumed in the role
of the Sponsor.
The Transferor maintains its principal office at 16875 West Bernardo
Drive, San Diego, California 92127. Its telephone number is (619) 674-1800.
THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement,
Advanta Mortgage Corp. USA will act as the Master Servicer for a series of
Securities.
Advanta Mortgage Corp. USA was acquired by Advanta Corp., a Delaware
corporation ("Advanta Parent") in September, 1986 and is an indirect subsidiary
of Advanta Parent. The Master Servicer is an affiliate of Colonial National Bank
USA ("Colonial"), a national banking association domiciled in Delaware, and the
parent of Advanta Mortgage Corp. Midatlantic, Advanta Mortgage Corp. Midatlantic
II, Advanta Mortgage Corp. Midwest, Advanta Mortgage Corp. of New Jersey and
Advanta Mortgage Corp. Northeast and Advanta Finance Corp. Advanta Mortgage
Corp. USA is a Delaware corporation incorporated in 1983. It is a nationwide
servicer of first and junior mortgage loans. Advanta Mortgage Corp. USA has
centralized servicing functions located in San Diego, California. This provides
for economies of scale and a depth of appraisal, attorney and realtor contacts
throughout the country.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
Each servicer, whether the Master Servicer or any Sub-Servicer (either
the Master Servicer or any Sub- Servicer being a "Servicer"), will retain a fee
in connection with its servicing activities for each series of Securities equal
to the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K (the "Base Servicing Fee"), generally payable monthly
with respect to each Mortgage Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Mortgage Loan as of the first day of each calendar month. The Master
Servicer acting as master servicer with respect to Mortgage Loans being serviced
directly by a Sub-Servicer will retain a fee equal to the percentage per annum
specified in the related Prospectus Supplement or Current Report on Form 8-K
("Master Servicing Fee"), generally payable monthly on one-twelfth the annual
rate, of the then-outstanding principal amount of each such Mortgage Loan as of
the first day of each calendar month. The Base Servicing Fees and the Master
Servicing Fee are collectively referred to as the "Servicing Fee."
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, late payment charges, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to the Pooling and Servicing
Agreement, and similar items.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay or cause to be paid certain ongoing expenses associated
with each Trust Estate and incurred by it in connection with its
responsibilities under the Pooling and Servicing Agreement, including, without
limitation, payment of any fee or other amount payable in respect of any
alternative Credit Enhancement arrangements, payment of the fees and
disbursements of the Trustee or accountant, any custodian appointed by the
Trustee, the Security Registrar and any Paying Agent, and payment of expenses
incurred in enforcing the obligations of Sub-Servicers and Originators. The
Master Servicer may be entitled to reimbursement of expenses incurred in
enforcing the obligations of Sub-Servicers and Originators under certain limited
circumstances. In addition, as indicated in the preceding section, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if
there will be any Originator's Retained Yield retained. Any such Originator's
Retained Yield will be a specified portion of the interest payable on each
Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be
established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of a
Mortgage Loan will represent a specified portion of the interest payable thereon
and will not be part of the related Trust Estate. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Originator's Retained Yield and the holders of classes of Securities
entitled to payments of interest as provided in the Prospectus Supplement and
the applicable Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will require the Master Servicer
to deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Master Servicer during such preceding year and of performance
under the related Pooling and Servicing Agreement has been made under such
officers' supervision, and (ii) to the best of such officers' knowledge, based
on such review, the Master Servicer has fulfilled all its obligations under the
related Pooling and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligations, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Master Servicer to remedy such defaults.
Each Pooling and Servicing Agreement will require the Master Servicer
to cause to be delivered to the Trustee and any Credit Enhancer a letter or
letters of a firm of independent, nationally recognized certified public
accountants reasonably acceptable to the Credit Enhancer, if applicable, stating
that such firm has, with respect to
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the Master Servicer's overall servicing operations (i) performed applicable
tests in accordance with the compliance testing procedures as set forth in
Appendix 3 of the Audit Guide for Audits of HUD Approved Nonsupervised
Mortgagees or (ii) examined such operations in accordance with the requirements
of the Uniform Single Attestation Program for Mortgage Bankers, and in either
case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Master Servicer may be obtained by Securityholders without
charge upon written request to the Master Servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it. No such resignation will become effective until the Trustee has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement. The Trustee, the Securityholders or a Credit Enhancer, if
applicable, will have the right, pursuant to the related Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of any of (a)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; (b) the failure of the Master Servicer to perform any one or more
of its material obligations under the Pooling and Servicing Agreement as to
which the Master Servicer shall continue in default with respect thereto for a
specified period, generally of sixty (60) days, after notice by the Trustee or
any Credit Enhancer (if required by the Pooling and Servicing Agreement) of said
failure; or (c) the failure of the Master Servicer to cure any breach of any of
its representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely affects the interests of the
Securityholders or any Credit Enhancer, for a specified period, generally of
thirty (30) days after the Master Servicer's discovery or receipt of notice
thereof.
The Pooling and Servicing Agreement may also provide that the related
Credit Enhancer may remove the Master Servicer upon the occurrence of any of
certain events including:
(i) with respect to any Payment Date, if the total available
funds with respect to the Mortgage Loans Group will be less than the
related distribution amount on the class of credit-enhanced securities
in respect of such Payment Date; provided, however, that the Credit
Enhancer generally will have no right to remove the Master Servicer
pursuant to the provision described in this clause (i) if the Master
Servicer can demonstrate to the reasonable satisfaction of the Credit
Enhancer that such event was due to circumstances beyond the control of
the Master Servicer;
(ii) the failure by the Master Servicer to make any required
Servicing Advance;
(iii) the failure of the Master Servicer to perform one or
more of its material obligations under the Pooling and Servicing
Agreement; or
(iv) the failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest;
provided, however, that prior to any removal of the Master Servicer by the
related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the Master
Servicer shall first have been given by the related Credit Enhancer notice of
the occurrence of one or more of the events set forth in clauses (i) or (ii)
above and the Master Servicer shall not have remedied, or shall not have taken
action satisfactory to such Credit Enhancer to remedy, such event or events
within a specified period, generally 30 days (60 days with respect to clause
(iii)) after the Master Servicer's receipt of such notice; and provided, further
that in the event of the refusal or inability of the Master Servicer to make any
required Delinquency Advance or to pay any Compensating Interest as described in
clause (iv) above, such removal shall be effective (without the requirement of
any action on the part of such Credit Enhancer or of the Trustee) not later than
a shorter specified period, generally not in excess of five business days,
following the day on which the Trustee notifies an authorized officer of the
Master Servicer that a required Delinquency Advance or to pay any Compensating
Interest has not been received by the Trustee.
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AMENDMENTS
The Trustee, the Sponsor and the Master Servicer may at any time and
from time to time, with the prior approval of the related Credit Enhancer, if
required, but without the giving of notice to or the receipt of the consent of
the Securityholders, amend a Pooling and Servicing Agreement, and the Trustee
will be required to consent to such amendment, for the purposes of (x) (i)
curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; 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 Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor
and the Master Servicer at any time and from time to time, with the prior
written approval of the related Credit Enhancer, if required, and not less than
a majority of the Percentage Interest represented by each related class of
Securities then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Securityholders thereunder; provided, however, that no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest 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.
TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, the
related Credit Enhancement of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate or (b) the disposition of all property acquired in respect
of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a
Qualified Liquidation (as defined in the Code) of the Trust Estate (if the
related Trust is a REMIC) is effected. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the Master Servicer, the Sponsor or, if applicable, the holder of the REMIC
Residual Securities at the price specified in the related Prospectus Supplement.
The exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Master Servicer, the Sponsor or,
if applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
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THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. Each Pooling and Servicing Agreement will
provide that the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Securityholders, unless such Securityholders
shall have 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 trusts or powers granted by each
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee will not be 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 each Pooling and Servicing Agreement, the Trustee will not
be 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 Pooling and Servicing Agreement.
Unless otherwise described in the related Prospectus Supplement, each
Pooling and Servicing Agreement will permit the removal of the Trustee upon the
occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the
Securityholders entitled thereto on any Payment Date amounts available
for distribution in accordance with the terms of the Pooling and
Servicing Agreement; or
(2) the Trustee shall default in the performance of, or
breach, any covenant or agreement of the Trustee in the Pooling and
Servicing Agreement, or if any representation or warranty of the
Trustee made in the Pooling and Servicing Agreement or in any
certificate or other writing delivered pursuant thereto or in
connection therewith shall prove to be incorrect in any material
respect as of the time when the same shall have been made, and such
default or breach shall continue or not be cured for the period then
specified in the related Pooling and Servicing Agreement after the
Trustee shall have received notice specifying such default or breach
and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Trustee, and such decree or order shall have remained in
force undischarged or unstayed for the period then specified in the
related Pooling and Servicing Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Trustee or relating to all
or substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, voluntarily suspend payment of its
obligations, or take corporate action for the purpose of any of the
foregoing.
If an event described above occurs and is continuing, then, and in
every such case (i) the Sponsor, (ii) the Securityholders (on the terms set
forth in the related Pooling and Servicing Agreement), or (iii) if there is a
Credit Enhancer, such Credit Enhancer may, whether or not the Trustee has
resigned, immediately, concurrently with the giving of notice to the Trustee,
and without delay, appoint a successor Trustee pursuant to the terms of the
Pooling and Servicing Agreement.
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No Securityholder will have any right to institute any proceeding,
judicial or otherwise, with respect to a Pooling and Servicing Agreement or any
Credit Enhancement, if applicable, or for the appointment of a receiver or
trustee, or for any other remedy under the Pooling and Servicing Agreement,
unless:
(1) such Securityholder has previously given written notice to
the Sponsor and the Trustee of such Securityholder's intention to
institute such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders 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 the period specified in the related
Pooling and Servicing Agreement, generally not in excess of 60 days
after receipt of such notice, request and offer of indemnity, has
failed to institute such proceeding;
(5) as long as such action affects any credit-enhanced class
of Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has
been given to the Trustee during such specified period by the
Securityholders of a majority of the Percentage Interests represented
by certain specified classes of Securities.
No one or more Securityholders will have any right in any manner
whatever by virtue of, or by availing themselves of, any provision of the
Pooling and Servicing Agreement to affect, disturb or prejudice the rights of
any other Securityholder of the same class or to obtain or to seek to obtain
priority or preference over any other Securityholder of the same class or to
enforce any right under the Pooling and Servicing Agreement, except in the
manner provided in the Pooling and Servicing Agreement and for the equal and
ratable benefit of all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests
and indemnity from two or more groups of Securityholders, 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, notwithstanding
any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing
Agreement, the Securityholder of any Security has the right, which is absolute
and unconditional, to receive distributions to the extent provided in the
Pooling and Servicing Agreement with respect to such Security or to institute
suit for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage
Interests represented by certain specified classes of Securities then
outstanding or (ii) if there is a Credit Enhancer, such Credit Enhancer may
direct the time, method and place of conducting any proceeding for any remedy
available to the Sponsor with respect to the Certificates or exercising any
trust or power conferred on the Trustee with respect to such Certificates;
provided that:
(1) such direction shall not be in conflict with any rule of
law or with a Pooling and Servicing Agreement;
(2) the Sponsor or the Trustee, as the case may be, shall have
been provided with indemnity satisfactory to them; and
(3) the Sponsor or the Trustee, as the case may be, may take
any other action deemed proper by the Trustee which is not inconsistent
with such direction; provided, however, that the Sponsor or the
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Trustee, as the case may be, need not take any action which they
determine might involve them in liability or may be unjustly
prejudicial to the Securityholders not so directing.
The Trustee will be liable under the Pooling and Servicing Agreement
only to the extent of the obligations specifically imposed upon and undertaken
by the Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Sponsor, the Master Servicer or any
Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the holder for such Security, the Pass- Through Rate on any such Security
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate of payment of
principal on such Security (or the rate at which the notional amount thereof is
reduced if such Security is not entitled to payments of principal) and other
factors.
Each month the interest payable on an actuarial type of Mortgage Loan
will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by
the principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class' specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twenty-fifth day of every third month, or,
in the case of semi-annual-pay Securities, the twenty-fifth day of every sixth
month) following the month of accrual.
A class of Securities may be entitled to payments of interest at a
fixed Pass-Through Rate specified in the related Prospectus Supplement, a
variable Pass-Through Rate or adjustable Pass-Through Rate calculated based on
the weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the
aggregate payments of interest on a class of Securities, and the yield to
maturity thereon, will be effected by the rate of payment of principal on the
Securities (or the rate of reduction in the notional balance of Securities
entitled only to payments of interest) and, in the case of Securities evidencing
interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans.
See "Maturity and Prepayment Considerations" below. The yield on the Securities
also will be effected by liquidations
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of Mortgage Loans following Mortgagor defaults and by purchases of Mortgage
Loans required by the Pooling and Servicing Agreement in the event of breaches
of representations made in respect of such Mortgage Loans by the Sponsor, the
Originators, the Master Servicer and others, or repurchases due to conversions
of ARM Loans to a fixed interest rate. See "Mortgage Loan
Program--Representations by Originators" and "Descriptions of the Securities--
Assignment of Mortgage Loans" above. In general, if a class of Securities is
purchased at initial issuance at a premium and payments of principal on the
related Mortgage Loans occur at a rate faster than anticipated at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a class of Securities is
purchased at initial issuance at a discount and payments of principal on the
related Mortgage Loans occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated. The effect of principal prepayments, liquidations and
purchases on yield will be particularly significant in the case of a series of
Securities having a class entitled to payments of interest only or to payments
of interest that are disproportionately high relative to the principal payments
to which such class is entitled. Such a class likely will be sold at a
substantial premium to its principal balance, if any, and any faster than
anticipated rate of prepayments will adversely affect the yield to holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such holders to recoup their original investment. In addition, the yield to
maturity on certain other types of classes of Securities, including Accrual
Securities or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, 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 payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The Mortgage Rates on certain ARM Loans subject to negative
amortization adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins) the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest that will be added to the principal balance thereof and
will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance will lengthen the weighted average
life of the Securities evidencing interests in such Mortgage Loans and may
adversely affect yield to holders thereof depending upon the price at which such
Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce such principal balance, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof depending upon
the price at which such Securities were purchased.
For each Mortgage Pool, if all necessary advances are made and if there
is no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer
is not in default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six months' interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Mortgage Loan. "Description of the Securities--Principal and Interest on
the Securities."
With respect to certain of the ARM Loans, the Mortgage Rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the Sponsor's underwriting
standards, the Mortgagor under each Mortgage Loan will be qualified on the basis
of the Mortgage Rate in effect
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at origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the Mortgagor to make larger level monthly payments following the
adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the maturity, average life and yield of the related series of
Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Master Servicer, nor any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans will
generally contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the Mortgage Loan upon sale or certain transfers by the
Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus
Supplement indicates otherwise, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. Certain ARM Loans may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Master Servicer
or the related Sub-Servicer, the security for the ARM Loan would not be impaired
or might be improved by the assumption. The extent to which ARM Loans are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the related series of Securities. See
"Description of the Securities--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Mortgage Loans and Related Matters--Enforceability
of Certain Provisions" for a description of certain provisions of the Pooling
and Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate
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mortgage loans. In certain rate environments, the prevailing rates on fixed-rate
mortgage loans may be sufficiently low in relation to the then-current Mortgage
Rates on ARM Loans that the rate of prepayment may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Master Servicer, the Sponsor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Securities or the Credit Enhancer may have the option to purchase the
Mortgage Loans in a Trust Estate. See "The Pooling and Servicing
Agreement--Termination; Retirement of Securities."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Mortgage Loan is located. In some states, a
mortgage creates a lien upon the real property encumbered by the mortgage. In
other states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower-homeowner called the
trustor (similar to a mortgagor), a lender (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,
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in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage, and, in some cases, the directions
of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure on Shares of
Cooperatives" below.
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FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the nonjudicial remedy, a deed of trust may be judicially foreclosed. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and within a certain period
of time send a copy to the borrower trustor and to any person who has recorded a
request for a copy of notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified period, 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 local 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 of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser to purchase the subject property at the sale. Rather, it is common for
the lender to purchase the property from the trustee or referee for a credit bid
less than or equal to the unpaid principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' fees, which may be recovered by a lender. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
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 and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the
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proprietary lease or occupancy agreement usually will constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
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 or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, including California, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the amount due to
the lender and the net amount realized upon the public sale of the real
property. In the case of a Mortgage Loan secured by a property owned by a trust
where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable
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law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other 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 collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, 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 state laws, such as the
California Fair Debt Collection Practices Act. These laws and regulations impose
specific statutory liabilities upon lenders who originate mortgage loans and
fail to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien will not
have
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priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust Estate was acquired by the Trust and cleanup costs were incurred
in respect of the Mortgaged Property, the holders of the related series of
Securities might realize a loss if such costs were required to be paid by the
Trust.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of
the Mortgage Loans contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers or
conveys the property. The enforceability of these clauses has been the subject
of legislation or litigation in many states including California, and in some
cases the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. 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, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on
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the property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, and, as a result thereof, the
beneficiary's security is impaired, the beneficiary under the underlying first
deed of trust will have the prior right to collect any insurance proceeds
payable under a hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the indebtedness secured by the
first deed of trust. Proceeds in excess of the amount of indebtedness secured by
a first deed of trust will, in most cases, be applied to the indebtedness of a
junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the deed
of trust, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations apply to any Mortgage Loan
which goes into default, there may be delays in payment and losses on the
related Securities in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the Mortgage Loans resulting from
similar legislation or regulations may result in delays in payments or losses to
Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
The following discussion addresses securities of three general types:
(i) securities ("Grantor Trust Securities") representing interests in a Trust
Estate (a "Grantor Trust Estate") which the Sponsor will covenant not to elect
to have treated as a real estate mortgage investment conduit (REMIC); (ii)
securities ("REMIC Securities") representing interests in a Trust Estate, or a
portion thereof, which the Sponsor will covenant to elect to have treated as a
REMIC under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests or interests in a FASIT. Such a discussion will be set
forth in the related Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC or FASIT
election (or elections) will be made for the related Trust Estate and, if a
REMIC or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" or "ownership interest" in the FASIT. Pursuant to the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
The Taxpayer Relief Act of 1997 adds provisions to the Code that require
the recognition of gain upon the "constructive sale of an appreciated financial
position." A constructive sale of an appreciated financial position occurs if a
taxpayer enters into certain transactions or series of such transactions with
respect to a financial instrument that have the effect of substantially
eliminating the taxpayer's risk of loss and opportunity for gain with respect
to the financial instrument. These provisions apply only to Classes of
Certificates that do not have a principal balance.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (unless otherwise limited in the related Prospectus Supplement) the
related Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a
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corporation. Accordingly, each Holder of a Grantor Trust Security will generally
be treated as the owner of an interest in the Mortgage Loans included in the
Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey B
llantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and (ii) "obligations
(including any participation or certificate of beneficial ownership therein)
which . . . are principally secured by an interest in real property" within the
meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust
Fractional Interest Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust
Strip Securities will be "obligations (including any participation or
certificate of beneficial ownership therein) . . . principally secured by an
interest in real property" within the meaning of section 860G(a)(3)(A) of the
Code.
The 1996 Act repeals the bad debt reserve method of accounting for
mutual savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will
be required to report on their federal i come tax returns their respective
shares of the income from the Mortgage Loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
Holders of any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between
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the outstanding principal balance on the Security and the amount paid for such
Security is less than 0.25% of such principal balance times the weighted average
remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer, the Trustee will furnish to each Holder during
such year such customary factual information as the Master Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be
made to treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC election
is made will be referred to herein as a "REMIC Trust." The Securities of each
class will be designated as "regular interests" in the REMIC Trust except that a
separate class will be designated as the "residual interest" in the REMIC Trust.
The Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "--Taxes on a REMIC Trust." Generally, the total income
from the Mortgage Loans in a REMIC Trust will be taxable to the Holders of the
Securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages" (within
the meaning of section 860G(a)(3) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those sections during such calendar year may be limited to the portion of
the assets of such REMIC Trust that are qualified mortgages. Similarly, income
on the REMIC Regular Securities and REMIC Residual Securities will be treated as
"interest on
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obligations secured by mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the Trust Estate will include, in addition to the Mortgage Loans,
payments on the Mortgage Loans held pending distribution on the REMIC Regular
Securities and REMIC Residual Securities and any reinvestment income thereon.
REMIC Regular Securities and REMIC Residual Securities held by a financial
institution to which section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
The 1996 Act repeals the bad debt reserve method of accounting for
mutual savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an accrual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "--Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report
its daily portion of the taxable income or net loss of the REMIC Trust will
continue until there are no Securities of any class outstanding, even though the
Holder of the REMIC Residual Security may have received full payment of the
stated interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of
each series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate
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of the issue prices of all the REMIC Regular Securities and REMIC Residual
Securities in the REMIC Trust on the Settlement Date. If, however, a substantial
amount of a class of REMIC Regular Securities or REMIC Residual Securities has
not been sold to the public, then the fair market value of all the REMIC Regular
Securities or REMIC Residual Securities in that class as of the date of the
Prospectus Supplement should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize
taxable income without being entitled to receive a corresponding amount of cash.
This could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security
has an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into
account any net loss for any calendar quarter to the extent such net loss
exceeds such Holder's adjusted basis in its REMIC Residual Security as of the
close of such calendar quarter (determined without regard to such net loss). Any
loss disallowed by reason of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
only to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC
Residual Security are subject to certain special tax rules. With respect to a
Holder of a REMIC Residual Security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during such quarter
that such REMIC Residual Security was held by such Holder. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the Settlement Date, based on quarterly
compounding, and properly adjusted for the length of such quarter. For this
purpose, the adjusted issue price of a REMIC Residual Security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
Residual Security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Security before the beginning of such quarter. The issue price of a
REMIC Residual Security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC Residual
Securities was
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sold. The federal long-term rate is a blend of current yields on Treasury
securities having a maturity of more than nine years, computed and published
monthly by the IRS.
In general, Holders of REMIC Residual Securities with excess inclusion
income cannot offset such income by losses from other activities. For Holders
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own REMIC Residual Securities, see
"--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules
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applicable to real estate investment trusts. Generally, foreclosure property
would be treated as such for a period of two years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual
Security is sold, the seller will recognize gain or loss equal to the difference
between the amount realized in the sale and its adjusted basis in the Security.
The adjusted basis of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included i the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Holders of REMIC Residual
Securities--Basis Rules and Distributions." Except as provided in the following
paragraph or under section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
If a Holder of a REMIC Residual Security sells its REMIC Residual
Security at a loss, the loss will not be recognized if, within six months before
or after the sale of the REMIC Residual Security, such Holder purchases another
residual interest in any REMIC or any interest in a taxable mortgage pool (as
defined in section 7701(i) of the Code) comparable to a residual interest in a
REMIC. Such disallowed loss would be allowed upon the sale of the other residual
interest (or comparable interest) if the rule referred to in the preceding
sentence does not apply to that sale. While this rule may be modified by
Treasury regulations, no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the Pooling and Servicing Agreement, and will be discussed more
fully in the related Prospectus Supplement relating to the offering of any REMIC
Residual Security. In addition, a pass-through entity (including a nominee) that
holds a REMIC Residual Security may be subject to
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additional taxes if a disqualified organization is a record-holder therein. A
transferor of a REMIC Residual Security (or an agent of a transferee of a REMIC
Residual Security, as the case may be) will be relieved of such tax liability if
(i) the transferee furnishes to the transferor (or the transferee's agent) an
affidavit that the transferee is not a disqualified organization, and (ii) the
transferor (or the transferee's agent) does not have actual knowledge that the
affidavit is false at the time of the transfer. Similarly, no such tax will be
imposed on a pass-through entity for a period with respect to an interest
therein owned by a disqualified organization if (i) the record-holder of such
interest furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (ii) during such period, the pass-through entity
has no actual knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership
holds a Residual Certificate, all interests in the electing large partnership
are treated as held by disqualified organizations for purposes of the tax
imposed upon a pass-through entity by section 860E(e) of the Code. An exception
to this tax, otherwise available to a pass-through entity that is furnished
certain affidavits by record holders of interests in the entity and that does
not know such affidavits are false, is not available to an electing large
partnership.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Holders of REMIC Residual Securities--Excess Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a 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
come 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 makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such REMIC Trust for each day during such
year. The Trustee will also act as the tax matters partner for each REMIC Trust,
either in its capacity as a Holder of a REMIC Residual Security or in a
fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance
of its REMIC Residual Security, agrees that the Trustee will act as its
fiduciary in the performance of any duties required of it in the event that it
is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on
its return consistently with the treatment on the return of the REMIC Trust,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Trust. The IRS may assert a deficiency resulting from a failure
to comply with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
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Termination
In general, no special tax consequences will apply to a Holder of a
REMIC Regular Security upon the termination of a REMIC Trust by virtue of the
final payment or liquidation of the last Mortgage Loan remaining in the Trust
Estate. If a Holder of a REMIC Residual Security's adjusted basis in its REMIC
Residual Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the related Prospectus Supplement) the Securities
will be classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the
Holder will recognize gain or loss equal to the difference, if any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
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Original Issue Discount
In general, a Security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities. The Taxpayer
Relief Act of 1997 extends application of Section 1272(a)(6) to the Grantor
Trust Securities for tax years beginning after August 5, 1997. Under these rules
(described in greater detail below), (i) the amount and rate of accrual of
original issue discount on each series of Securities will be based on (x) the
Prepayment Assumption, and (y) in the case of a Security calling for a variable
rate of interest, an assumption that the value of the index upon which such
variable rate is based remains equal to the value of that rate on the Settlement
Date, and (ii) adjustments will be made in the amount of discount accruing in
each taxable year in which the actual prepayment rate differs from the
Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security
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during the accrual period of amounts included in the stated redemption price at
maturity, over (ii) the adjusted issue price of such Security at the beginning
of the accrual period. The present value of the remaining distributions referred
to in the preceding sentence will be calculated based on (i) the yield to
maturity of the Security, calculated as of the Settlement Date, giving effect to
the Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, (iii) the Prepayment
Assumption, and (iv) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains the same as its value on the Settlement Date over the
entire life of such Security. The adjusted issue price of a Security at any time
will equal the issue price of such Security, increased by the aggregate amount
of previously accrued original issue discount with respect to such Security, and
reduced by the amount of any distributions made on such Security as of that time
of amounts included in the stated redemption price at maturity. The original
issue discount accruing during any accrual period will then be allocated ratably
to each day during the period to determine the daily portion of original issue
discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a
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purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under "-- Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect
to include in gross income all "interest" that accrues on the Security by using
a constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
FOREIGN INVESTORS
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular
Security to, or on behalf of a Holder that is not a U.S. Person generally will
be exempt from U.S. federal income and withholding taxes. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court within
the United States can exercise primary supervision over its administration and
at least one United States fiduciary has the authority to control all
substantial decisions of the trust. This exemption is applicable provided (a)
the Holder is not subject to
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U.S. tax as a result of a connection to the United States other than ownership
of the Security, (b) the Holder signs a statement under penalties of perjury
that certifies that such Holder is not a U.S. Person, and provides the name and
address of such Holder, and (c) the last U.S. Person in the chain of payment to
the Holder receives such statement from such Holder or a financial institution
holding on its behalf and does not have actual knowledge that such statement is
false. Holders should be aware that the IRS might take the position that this
exemption does not apply to a Holder that also owns 10% or more of the REMIC
Residual Securities of any REMIC trust, or to a Holder that is a "controlled
foreign corporation" described in section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a
not a U.S. Person generally will be treated as interest for purposes of applying
the 30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC Trust that issued the REMIC Residual Security
(e.g., Mortgage Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See "--REMIC Securities--Taxation of
Holders of REMIC Residual Securities--Excess Inclusions."
ERISA CONSIDERATIONS
GENERAL
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (a "Plan") and certain individual
retirement arrangements from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Plan, unless a
statutory or administrative exemption applies to the transaction. ERISA and the
Code also prohibit generally certain actions involving conflicts of interest by
persons who are fiduciaries of such Plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by Plans
are subject to ERISA's general fiduciary requirements, including the
requirement of
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investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as deemed in Section 3(33) of ERISA) are
not subject to ERISA requirements.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan
(including an individual retirement arrangement) that purchased Securities, if
the assets of the Trust were deemed to be assets of the Plan. Under a
regulation (the "Plan Assets Regulation") issued by the United States
Department of Labor (the "DOL"), 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
acquired an equity interest in the Trust and none of the exceptions contained
in the Plan Assets Regulation were 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 law and which has no
substantial equity features. In addition, in John Hancock Mutual Life Insurance
Co. v. Harris Trust and Savings Bank, 114 S.Ct. 517(1993), the United States
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Therefore, in the absence of an exemption, the purchase, sale or
holding of a Security by a Plan (including certain individual retirement
arrangements) subject to Section 406 of ERISA or Section 4975 of the Code might
result in prohibited transactions and the imposition of excise taxes and civil
penalties.
CERTIFICATES
The DOL has issued to various underwriters individual prohibited
transaction exemptions (the "Underwriter Exemptions"), which generally exempt
from the application of the prohibited transaction provisions of Section
406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and
the excise taxes imposed pursuant to Sections 4975(a) and (b) of the Code,
certain transactions with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of secured receivables, secured loans and other secured obligations that meet
the conditions and requirements of the Underwriter Exemptions. The Underwriter
Exemptions will only be available for Securities that are Certificates.
Among the conditions that must be satisfied in order for the
Underwriter Exemptions to apply to offered certificates are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's, Moody's, Duff & Phelps
Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
originators and the sponsor pursuant to the assignment of the loans
to the trust estate represents not more than the fair market value
of such loans; the sum of all payments made to and retained by any
servicer represents not more than reasonable compensation for such
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person's services under the pooling and servicing agreement and
reimbursement of such person's reasonable expenses in connection
therewith;
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act of 1933; and
(7) in the event that all of the obligations used to fund the trust
have not been transferred to the trust on the closing date,
additional obligations of the types specified in the prospectus
supplement and/or pooling and servicing agreement having an
aggregate value equal to no more than 25% of the total principal
amount of the certificates being offered by the trust may be
transferred to the trust, in exchange for amounts credited to the
account funding the additional obligations, within a funding period
of no longer than 90 days or 3 months following the closing date.
The trust estate must also meet the following requirements:
(i) the corpus of the trust estate must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the
Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at
least one year prior to the Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent of all of the certificates of
that class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Underwriter Exemptions do not apply to
Plans sponsored by the Sponsor, the Underwriters, the Trustee, the Master
Servicer, any other servicer, any obligor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
In addition to the Underwriter Exemptions, the DOL has issued
Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for certain transactions involving the sale or exchange of certain
residential mortgage pool pass-through certificates by Plans and for
transactions in connection with the servicing and operation of the mortgage
pool.
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NOTES
The Underwriter Exemptions will not be available for Securities
which are Notes. However, if the Notes are treated as indebtedness without
substantial equity features, the Trust's assets would not be deemed assets of a
Plan. If the Notes are treated as having substantial equity features, the
purchase, holding and resale of the Notes could result in a transaction that is
prohibited under ERISA or the Code. The acquisition or holding of the Notes by
or on behalf of a Plan could nevertheless give rise to a prohibited
transaction, if such acquisition and holding of Notes by or on behalf of a Plan
were deemed to be a prohibited loan to a party in interest with respect to such
Plan. Certain exemptions from such prohibited transaction rules could be
applicable to the purchase and holding of Notes by a Plan, depending on the
type and circumstances of the plan fiduciary making the decision to acquire
such Notes. Included among these exemptions are: PTCE 84-14, regarding certain
transactions effected by "qualified professional asset managers"; PTCE 90-1,
regarding certain transactions entered into by insurance company pooled
separate accounts; PTCE 91-38, regarding certain transactions entered into by
bank collective investment funds; PTCE 95-60, regarding certain transactions
entered into by insurance company general accounts; and PTCE 96-23, regarding
certain transactions by "in-house asset managers". Each purchaser and each
transferee of a Note that is treated as debt for purposes of the Plan Assets
Regulation may be required to represent and warrant that its purchase and
holding of such Note will be covered by one of the exemptions listed above or
by another Department of Labor Class Exemption.
CONSULTATION WITH COUNSEL
The Prospectus Supplement for each series of Securities will provide
further information which Plans should consider before purchasing the offered
Securities. A Plan fiduciary considering the purchase of Securities 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 ERISA issues and their potential
consequences. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related
Prospectus Supplement will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest rating category by any Rating
Agency, and as such may 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
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 on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
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 "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such 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.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Sponsor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute legal investments under SMMEA or
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are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Securities or will be used by the Sponsor for general corporate
purposes. The Sponsor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Sponsor, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers; and
3. By direct placements by the Sponsor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a
series of Securities may be offered in whole or in part in exchange for the
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Sponsor whose identities and relationships to
the Sponsor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Sponsor will indemnify the
several underwriters and the
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underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Sponsor and
purchasers of Securities of such series.
The Sponsor anticipates that the Securities offered hereby will be sold
primarily to institutional investors. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, 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 will be passed upon for the Sponsor by Dewey
Ballantine, LLP, New York, New York and by the office of the general counsel of
the Sponsor.
FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not
material to the offering made hereby. However, any prospective purchaser who
desires to review financial information concerning the Sponsor will be provided
by the Sponsor upon request with a copy of the most recent financial statements
of the Sponsor.
A Prospectus Supplement may contain the financial statements of the
related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each
series of Securities, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
Page
Accounts................................................................ 43
Accrual Securities...................................................... 6
Actuarial Loans......................................................... 21
ADVANTA Parent.......................................................... 58
Affiliated Originators.................................................. 4
Approved Guidelines..................................................... 9
APR..................................................................... 22
ARM Loans............................................................... 18
Balloon Amount.......................................................... 27
Balloon Loans........................................................... 15
Balloon payments........................................................ 20
Bankruptcy Bond......................................................... 54
Bankruptcy Loss......................................................... 52
Bankruptcy Loss Amount.................................................. 51
Base Servicing Fee...................................................... 58
Book-Entry Securities................................................... 38
Bulk Acquisition........................................................ 9
Bulk Guidelines......................................................... 29
Buydown Account......................................................... 20
Buydown Agreement....................................................... 44
Buydown Funds........................................................... 20
Buydown Mortgage Loans.................................................. 20
Buydown Period.......................................................... 20
Cede.................................................................... 12
Certificates............................................................ 5
Closing Date............................................................ 41
CLTV.................................................................... 22
Code.................................................................... 74
Compensating Interest................................................... 47
Conduit Participants.................................................... 32
Contracts............................................................... 25
Conventional Loans...................................................... 20
Convertible Mortgage Loan............................................... 28
Cooperative Loans....................................................... 26
Cooperative Notes....................................................... 26
Credit Enhancement...................................................... 43
Credit Enhancer......................................................... 19
Cut-Off Date............................................................ 22
D&P..................................................................... 87
Date of Payment Loans................................................... 21
Debt Securities......................................................... 12
Debt Service Reduction.................................................. 54
Defaulted Mortgage Loss................................................. 52
Deferred Interest....................................................... 15
Deficient Valuation..................................................... 54
Deleted Mortgage Loan................................................... 34
Delinquency Advances.................................................... 46
Designated Depository Institution....................................... 43
Detailed Description.................................................... 19
Determination Date...................................................... 46
Direct or Indirect Participants......................................... 18
Distribution Account.................................................... 43
DTC..................................................................... 12
Due Date................................................................ 42
Eligible Investments.................................................... 43
Equity Securities....................................................... 6
ERISA................................................................... 12
Exchange Act............................................................ 12
Exemptions.............................................................. 87
Extraordinary Losses.................................................... 52
FDIC.................................................................... 32
FHA..................................................................... 25
FHLMC................................................................... 15
Financial Guaranty Insurance Policy..................................... 54
Financial Guaranty Insurer.............................................. 54
Fixed-Income Securities................................................. 6
FNMA.................................................................... 15
Forward Purchase Agreement.............................................. 9
Fraud Loss.............................................................. 52
Fraud Loss Amount....................................................... 51
Funding Period.......................................................... 41
Garn-St. Germain Act.................................................... 72
Graduated payments...................................................... 20
Grantor Trust Estate.................................................... 74
Grantor Trust Fractional Interest Security.............................. 75
Grantor Trust Securities................................................ 12
Grantor Trust Strip Security............................................ 75
Holder.................................................................. 74
Home Improvement Loans.................................................. 25
Indenture............................................................... 5
Indenture Trustee....................................................... 5
Index................................................................... 27
Indirect Participant.................................................... 38
Insurance Paying Agent.................................................. 54
Insurance Proceeds...................................................... 42
Insured Payment......................................................... 54
Interest Rate........................................................... 6
Investment Company Act.................................................. 8
IRS..................................................................... 76
Junior Lien Loans....................................................... 23
Letter of Credit........................................................ 53
Letter of Credit Bank................................................... 53
Liquidated Mortgage Loan................................................ 16
Liquidation Proceeds.................................................... 16
Loan Purchase Price..................................................... 33
Lockout periods......................................................... 21
LTV..................................................................... 22
Manufactured Homes...................................................... 25
Manufacturer's Invoice Price............................................ 23
Master Commitments...................................................... 31
Master Servicer......................................................... 2
Master Servicing Fee.................................................... 58
Modified Loans.......................................................... 27
Monthly pay............................................................. 20
Mortgage Asset Schedule ................................................ 20
Mortgage Assets......................................................... 19
90
<PAGE> 151
Mortgage Loans.......................................................... 1
Mortgage Notes.......................................................... 26
Mortgage Pool........................................................... 1
Mortgage Pool Insurance Policy.......................................... 53
Mortgage Rate........................................................... 20
Mortgaged Properties.................................................... 20
Mortgages............................................................... 9
Mortgagor............................................................... 15
Multi-family Loans...................................................... 24
Net Liquidation Proceeds................................................ 42
Net Mortgage Rate....................................................... 64
Note Margin............................................................. 27
Notes................................................................... 5
Originator's Retained Yield............................................. 26
Originators............................................................. 1
Participants............................................................ 38
Partnership Interests................................................... 12
Pass-Through Rate....................................................... 45
Paying Agent............................................................ 45
Payment Date............................................................ 7
Percentage Interest..................................................... 45
Physical Certificates................................................... 38
Plan..................................................................12, 86
Plan Assets Regulation.................................................. 87
Policy Statement........................................................ 89
Pool Factor............................................................. 48
Pool Insurer............................................................ 44
Pooling and Servicing Agreement......................................... 5
Pre-Funding Account..................................................... 10
Premium Security........................................................ 85
Prepayment Assumption................................................... 78
Principal Prepayments................................................... 42
Purchase Obligation..................................................... 14
Qualified Replacement Mortgage.......................................... 34
Rating Agencies......................................................... 12
Realized Loss........................................................... 51
Record Date............................................................. 7
Relief Act.............................................................. 19
REMIC................................................................... 2
REMIC Regular Securities................................................ 12
REMIC Regulations....................................................... 76
REMIC Residual Securities............................................... 12
REMIC Securities........................................................ 74
REMIC Trust............................................................. 76
Remittance Date......................................................... 43
Remittance Period....................................................... 7
REO Property............................................................ 50
Reserve Fund............................................................ 54
Restricted Group........................................................ 88
Revolving Credit Line Loans............................................. 21
Rule of 78's............................................................ 22
Rule of 78's Loan....................................................... 21
Securities.............................................................. 1
Security Registrar...................................................... 38
Securityholders......................................................... 1
Senior Lien............................................................. 22
Senior Securities....................................................... 6
Servicer................................................................ 58
Servicing Advance....................................................... 47
Servicing Agreement..................................................... 5
Servicing Fee........................................................... 58
Settlement Date......................................................... 77
Single Family Loans..................................................... 24
SMMEA................................................................... 11
Special Hazard Amount................................................... 51
Special Hazard Insurance Policy......................................... 53
Special Hazard Insurer.................................................. 53
Special Hazard Loss..................................................... 52
Sponsor................................................................. 1
Sponsor's Guidelines.................................................... 9
Sponsor's Originator Guide.............................................. 9
Statistic Calculation Date.............................................. 22
Strip Securities........................................................ 6
Sub-Servicing Account................................................... 41
Sub-Servicing Agreement................................................. 33
Subordinate Amount...................................................... 52
Subordinate Securities.................................................. 6
Subsequent Mortgage Loans............................................... 9
Subservicer(s).......................................................... 2
Title V................................................................. 73
Title VIII.............................................................. 73
Trust................................................................... 1
Trust Agreement......................................................... 5
Trust Estate............................................................ 1
Trustee................................................................. 4
U.S. Person............................................................. 86
UCC..................................................................... 38
Unaffiliated Originators................................................ 4
91
<PAGE> 152
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been
authorized by the Sponsor or by the Underwriter. This
Prospectus Supplement and the Prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby to anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so to anyone to whom it is unlawful to make
any such offer or solicitation. Neither the delivery of this
Prospectus Supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
--------------------
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Available Information......................................S-2
Reports to the Holders.....................................S-2
Summary....................................................S-3
Risk Factors...............................................S-15
The Master Servicer........................................S-18
The Originator.............................................S-20
The Originator's Home Equity
Revolving Line of Credit Program.........................S-21
Description of the Mortgage Loans..........................S-24
Maturity and Prepayment Considerations.....................S-33
Pool Factor and Trading Information........................S-34
Description of the Class A Notes...........................S-35
Use of Proceeds............................................S-47
Certain Federal Income Tax Consequences....................S-47
State Taxes................................................S-51
ERISA Considerations.......................................S-51
Legal Investment Considerations............................S-52
Underwriting...............................................S-52
Legal Matters..............................................S-52
Experts....................................................S-53
Ratings....................................................S-53
Index of Defined Terms.....................................S-54
Global Clearance, Settlement and Tax
Documentation Procedures............................Annex I
PROSPECTUS
Summary of Prospectus........................................4
Risk Factors.................................................13
The Trusts...................................................18
The Mortgage Pools...........................................25
Mortgage Loan Program........................................27
Description of the Securities................................34
Subordination................................................49
Description of Credit Enhancement............................50
Hazard Insurance; Claims Thereunder..........................55
The Sponsor and the Transferor...............................56
The Master Servicer..........................................56
The Pooling and Servicing Agreement..........................56
Yield Considerations.........................................62
Maturity and Prepayment Considerations.......................64
Certain Legal Aspects of Mortgage Loans and Related
Matters....................................................65
Certain Federal Income Tax Consequences......................72
ERISA Considerations.........................................84
Legal Investment Matters.....................................87
Use of Proceeds..............................................88
Methods of Distribution......................................88
Legal Matters................................................89
Financial Information........................................89
Additional Information.......................................89
Index of Principal Definitions...............................90
ADVANTA REVOLVING HOME
EQUITY LOAN TRUST
1997-A
$100,000,000 CLASS A NOTES
REVOLVING HOME EQUITY LOAN
ASSET-BACKED NOTES
SERIES 1997-A
___________________
PROSPECTUS SUPPLEMENT
___________________
J.P. MORGAN & CO.
November 14, 1997
