<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1998
Registration No. 333-___________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
(As sponsor of the trusts described herein)
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<S> <C> <C>
-------------------------
Delaware 16875 West Bernardo Drive 23-2723382
(Jurisdiction) San Diego, California 92127 (I.R.S. Employee
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Identification No.)
-------------------------
ADVANTA CONDUIT RECEIVABLES INC.
(As transferor)
Delaware c/o Griffin Corporate Services 88-0360305
(Jurisdiction) 1325 Airmotive Way, Suite 130 (I.R.S. Employee
Reno, Nevada 89502 Identification No.)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
-------------------------
</TABLE>
ANNETTE AGUIRRE, ESQ.
16875 WEST BERNARDO DRIVE
SAN DIEGO, CALIFORNIA 92127
(619) 674-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
CHRIS DIANGELO, ESQ.
DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering. [ ]
If this Form is filed as a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Title of Securities Amount Proposed Proposed Amount of
Being Registered To be Maximum Maximum Registration
Registered Aggregate Price Aggregate Fee (2)
Per Unit(1) Offering Price(1)
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Mortgage Loan Asset-Backed Certificates $1,000,000 100% $1,000,000 $303.03
==================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The filing fee of $303.03 was paid on May 11. 1998.
-------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS FILED
AS PART OF THIS REGISTRATION STATEMENT MAY BE USED IN CONNECTION WITH THE
SECURITIES COVERED BY REGISTRATION STATEMENT NO. 333-37107.
===============================================================================
<PAGE> 2
CROSS REFERENCE SHEET
TO FORM S-3
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ITEM AND CAPTION IN FORM S-3 CAPTION OR LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside Forepart of Registration Statement; Outside Front
Front Cover Page of Prospectus . . . . . . . . . . . . Cover Page**
2. Inside Front and Outside Back Cover Page of Prospectus Inside Front and Outside Back Cover Page**
3. Summary Information, Risk Factors and Ratio of Earnings Summary of Prospectus**; Risk Factors**;
to Fixed Charges . . . . . . . . . . . . . . . . . . .
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price *
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . *
7. Selling Security Holders . . . . . . . . . . . . . . . *
8. Plan of Distribution . . . . . . . . . . . . . . . . . Methods of Distribution**
9. Description of Securities to be Registered . . . . . . Outside Front Cover Page**;
Summary of Prospectus**;
Description of the Securities**;
Certain Federal Income Tax Consequences**
10. Interests of Named Experts and Counsel . . . . . . . . *
11. Material Changes . . . . . . . . . . . . . . . . . . . *
12. Incorporation by Reference . . . . . . . . . . . . . . See Page II-3
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . See Page II-4
</TABLE>
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* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
<PAGE> 3
PROSPECTUS
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
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<S> <C>
[Logo] [Logo]
Sponsor of the Trust Master Servicer
</TABLE>
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 Conduit
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 14 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, THE TRUSTEE, ANY SUB-SERVICER, ANY ORIGINATOR
OR ANY OF THEIR RESPECTIVE 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.
SEE ALSO "RISK FACTORS" PAGE 14.
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 May __, 1998.
<PAGE> 4
(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 SUB-SERVICERS (THE "SUB-SERVICER(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
2
<PAGE> 5
made, such information must not be relied upon as having been authorized by the
Company or any dealer, salesman, 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
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CAPTION PAGE
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<S> <C>
Summary Of Prospectus..................................................5
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...................................58
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
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
Enforcement of the Note.......................................67
Deeds of Trust or Mortgages...................................68
Cooperative Loans.............................................69
Foreclosure...................................................69
Foreclosure on Shares of Cooperatives.........................70
Rights of Redemption..........................................71
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......................................74
REMIC Securities..............................................76
Special Tax Attributes........................................76
Debt Securities...............................................82
Discount and Premium..........................................82
Backup Withholding............................................85
Foreign Investors.............................................86
Erisa Considerations..................................................86
General.......................................................86
Certificates..................................................87
Notes.........................................................88
Consultation With Counsel.....................................88
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>
3
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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.
[Rest of page intentionally left blank.]
4
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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
5
<PAGE> 8
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. 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
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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 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.
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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 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
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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 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 or the
Master Servicer on behalf of 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 or the Master Servicer on
behalf of 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, the Trustee, any
Originator or any of their
respective 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
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<PAGE> 12
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).
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 Pools."
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-
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<PAGE> 13
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 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."
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<PAGE> 14
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
be recoverable by it. 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.
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<PAGE> 15
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 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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<PAGE> 16
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, the Trustee, any Originator or
any of their respective 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 generally 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 Sponsor 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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<PAGE> 17
RISKS OF THE MORTGAGE LOANS
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."
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.
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.
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 number of factors, including the level of available
mortgage rates at the time, the value of the related Mortgaged Property, the
15
<PAGE> 18
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.
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.
Pay-for-Performance Mortgage Loans. Certain of the Mortgage Loans may
constitute "Pay-for-Performance Mortgage Loans." Pay-for-Performance Mortgage
Loans are originated with a stated interest rate which may decrease if the
Mortgagor maintains a steady history of timely payments over a specified period
of time. Any such decrease in interest rate, although generally indicative of
good performance, may result in decreased cash received by the Securityholders.
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.
High LTV Loans. Certain of the Mortgage Loans may have combined
loan-to-value ratios at the time of origination in excess of 100%, generally up
to a maximum of 125% ("High LTV Loans"). As a result, the related Mortgaged
Properties may not provide adequate security for these Mortgage Loans.
Underwriting analysis with respect to High LTV Loans relies more heavily on the
Mortgagor's creditworthiness than on the protection afforded by the security
interest alone. Such loans are generally targeted as debt consolidation loans
for repeat or frequent borrowers with generally strong credit ratings. For a
more detailed discussion see "Mortgage Loan Program -- Underwriting Guidelines
- -- Sponsor Guidelines" and "Certain Legal Aspects of Mortgage Loans and Related
Matters -- Enforcement of the Note".
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 High LTV Loans 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. See "Mortgage Loans -- Underwriting Guidelines
- -- Sponsor's Guidelines."
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
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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 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.
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
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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.
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.
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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 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.
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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. Generally, 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 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:
(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
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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 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
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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;
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, multi-family 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 (as defined below) and the range of
CLTVs 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, if any, to be
maintained with respect to such Mortgage Pool, (xii) a description of any
standard hazard insurance required, if any, 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
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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 (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
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Mortgage Loans are not covered by Credit Enhancements, such losses will be
borne 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 or, with respect to Mortgage Loans,
interest shortfalls due to prepayments, in the amounts described herein under
"Description of the Securities--Advances." The obligations of a Master Servicer
to make advances will be limited to the extent, in its good faith business
judgment, such advances would be ultimately recoverable from the proceeds of
liquidation of the Mortgage Loans and further 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- 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 investment 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-
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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 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) 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 investment 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
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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) 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) 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
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(8) Pay-for-Performance mortgage loans
("Pay-for-Performance Loans"), which are mortgage loans having
original or modified terms to maturity of generally not more than 30
years for which the interest rate may decrease one or more times, but
not below a specified floor, if the Mortgagor maintains a steady
history of timely payments over a specified period or periods of time;
or
(9) Another type of mortgage loan described in the
related Prospectus Supplement.
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").
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
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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 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 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.
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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.
One of the Sponsor's programs specifically relates to Mortgage Loans
with combined loan-to-value ratios in excess of 100%, generally up to a maximum
of 125% (the "High LTV Program"). Under the High LTV Program, relatively more
emphasis in the underwriting analysis is placed on the borrower's payment
history and ability to repay debt, rather than on the collateral value of the
related Mortgaged Property. High LTV 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.
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 or a "multiple
comparable" 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,
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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. Where title insurance is not available
with respect to a Mortgage Loan, the Sponsor's Guidelines require a property
report and title search, instead, to evidence that the title or lien position
is 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 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
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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 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.
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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, 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
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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 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
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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-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
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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.
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
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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.
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, the Trustee, any Originator or any of their
respective 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
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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 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.
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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 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
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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 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.
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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.
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,
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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;
(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.
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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 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
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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.
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
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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.
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.
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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.
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
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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 be
recoverable by it. Each such amount so paid will constitute a "Servicing
Advance". Such Servicer may recover Servicing Advances to the extent permitted
by the Mortgage Loans or, if not theretofore recovered from the Mortgagor on
whose behalf such Servicing Advance was made, from 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;
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(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.
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.
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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, 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.
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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.
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."
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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
"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.
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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 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.
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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 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.
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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 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
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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.
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
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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.
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.
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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, except the High LTV Loans,
require each Mortgagor to maintain a hazard insurance policy for the Mortgage
Loan. The High LTV Program requires a hazard insurance policy for each
Mortgage Loan at the time of origination but does not track hazard insurance
after origination. Additionally, the Pooling and Servicing Agreement will
generally require the Master Servicer to cause to be maintained with respect to
each Mortgage Loan, except for certain High LTV Loans, 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
generally be 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.
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, Advanta Mortgage Corp.
Northeast and Advanta Finance Corp. The Sponsor was organized for the purpose
of the purchase and securitization of Mortgage Loans.
The Sponsor maintains its principal office at 16875 West Bernardo
Drive, San Diego, California 92127. Its telephone number is (619) 674-1800.
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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.
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 Advanta National
Bank, 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, 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.
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, modification 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
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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 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
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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.
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
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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.
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:
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(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.
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
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(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 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.
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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 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.
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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 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
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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 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.
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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 represented by a Note and an accompanying
Mortgage. Pursuant to the Note, the Mortgagor is personally liable to repay
the indebtedness evidenced by the Mortgage Loan; pursuant to the Mortgage, such
indebtedness is secured by a lien on the related Mortgaged Property.
ENFORCEMENT OF THE NOTE
Pursuant to the Note, the related Mortgagor is personally liable to
repay the indebtedness evidenced by the Mortgage Loan. In certain states, the
lender on a note secured by a lien on real property 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 related property
security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the property first rather than bringing a personal action against the
borrower on the Note.
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 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. 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
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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.
DEEDS OF TRUST OR MORTGAGES
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, 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.
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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.
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
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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 proprietary lease or occupancy
agreement usually will constitute a default under the security agreement
between the lender and the tenant-stockholder.
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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.
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 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
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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 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
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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.
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
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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)
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the related Grantor Trust Estate will be classified as a grantor trust and not
as a partnership or an association taxable as a 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
Ballantine, 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 income 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
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between 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.
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Similarly, income on the REMIC Regular Securities and REMIC Residual Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) of the Code, subject to
the 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--
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Original Issue Discount," below). The basis to a REMIC Trust in the qualified
mortgages is the aggregate 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
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Securities was 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
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reference to the rules 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 in 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
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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
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
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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.
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
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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.
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
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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 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
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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 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.
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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 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 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
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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
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:
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<PAGE> 90
(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, Mood''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.
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 effected 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
88
<PAGE> 91
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 are subject to investment, capital or other restrictions, and
whether SMMEA has been overridden in any jurisdiction applicable to such
investor.
89
<PAGE> 92
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 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.
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<PAGE> 93
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, 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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<PAGE> 94
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 43
Accrual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
Advanta Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 58
Affiliated Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5, 10, 26
Approved Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10, 29
APR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 22
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 18
Balloon Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 27
Balloon Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15, 27
balloon payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Bankruptcy Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Bankruptcy Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 52
Bankruptcy Loss Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 51
Base Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 58
Book-Entry Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 38
Bulk Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 10
Bulk Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 29
Bulk Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 29
Buydown Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Buydown Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 44
Buydown Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Buydown Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Buydown Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 41
CLTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 23
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, 52
Credit Enhancer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 19
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 22
D&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 87
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13, 74
Debt Service Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 15
Deficient Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Deleted Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 34
Delinquency Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 46
Designated Depository Institution . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 43
Detailed Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 46
Direct or Indirect Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 19
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 43
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 42
</TABLE>
92
<PAGE> 95
<TABLE>
<S> <C>
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 43
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 12
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
Extraordinary Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 52
FASIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 2
FASIT High-Yield Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
FASIT Regular Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 32
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 25
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 15
Financial Guaranty Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Financial Guaranty Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Fixed-Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 15
Forward Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10, 41
Fraud Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 52
Fraud Loss Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 51
Funding Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 41
graduated payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Grantor Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 74
Grantor Trust Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13, 74
Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 74
Home Improvement Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 25
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 27
Indirect Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 38
Insurance Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 42
insured payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 9
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 76
Junior Lien Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 23
Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 53
Letter of Credit Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 53
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 17
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17, 42
Loan Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 34
lockout periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 21
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 22
Manufactured Homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 25
Master Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 31
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 2
Master Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 58
Modified Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 27
monthly pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Mortgage Asset Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 20
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 19
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 5, 26
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 26
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 1, 5
Mortgage Pool Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 53
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 20, 26
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10, 26
</TABLE>
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<TABLE>
<S> <C>
Mortgagor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 15
Multi-family Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 24
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 42
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 64
Note Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 27
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 5, 26
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 38
Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 45
Pay-for-Performance Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 28
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 45
Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 8
Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 37
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 45
Physical Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 38, 39
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 12, 86
Plan Assets Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 86
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 89
Pool Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 48
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 44
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 11, 41
Premium Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 85
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 77, 83
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 42
PTCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 88
PUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 33
Purchase Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 14
Qualified Replacement Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 34
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 51
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 8, 37
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19, 73
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 2
REMIC Regular Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 76
REMIC Residual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 13
REMIC Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 74
Remittance Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 43
Remittance Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 8, 37
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 50
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 54
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 88
Revolving Credit Line Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 21
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 1
Security Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 38
Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 1
Senior Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 23
Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 58
Servicing Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 47
Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Settlement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 77
Single Family Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 24
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 12, 89
Special Hazard Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 51
</TABLE>
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<PAGE> 97
<TABLE>
<S> <C>
Special Hazard Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 53
Special Hazard Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 53
Special Hazard Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 52
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 1
Statistic Calculation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 22
Strip Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
Subordinate Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 52
Subordinate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 7, 36
Subsequent Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10, 41
Subservicer(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 2
Sub-Servicing Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 41
Sub-Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 33
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 73
Title VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 73
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 1, 5
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 6
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 1, 6
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 5
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 86, 4
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 38
Unaffiliated Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5, 10, 26
</TABLE>
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<PAGE> 98
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Securities (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, CEDEL or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading 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 Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities 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 Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in
such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the Relevant Depository to the DTC Participant's account
against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the CEDEL or Euroclear cash debt will be valued instead as of the
actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their 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 Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although 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 Global
Securities 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 Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective 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 Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of 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.
A-2
<PAGE> 100
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action 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 Global Securities in the U.S. from a
DTC Participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be reflected in
their CEDEL or Euroclear account in order to settle the sale side of
the trade; or
(c) staggering the value dates for the buy and sell sides
of the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale
to the CEDEL Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (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 Owners
of Global Securities 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 Owners 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
Global Security or, in the case of a Form 1001 or a Form 4224 filer,
his agent, files by submitting the appropriate form to the person
through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
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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.
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, (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) 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.
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 Global Securities. Investors
are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
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<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in
connection with the issuance and distribution of the Offered Certificates.
<TABLE>
<S> <C>
SEC Filing Fee . . . . . . . . . . . . . . . . . . . . . . . $303
Trustee's Fees and Expenses* . . . . . . . . . . . . . . . . 75,000
Legal Fees and Expenses* . . . . . . . . . . . . . . . . . . 300,000
Accounting Fees and Expenses* . . . . . . . . . . . . . . . . 105,000
Printing and Engraving Expenses* . . . . . . . . . . . . . . 120,000
Blue Sky Qualification and Legal 30,000
Investment Fees and Expenses* . . . . . . . . . . . . . . . .
Rating Agency Fees* . . . . . . . . . . . . . . . . . . . . . 300,000
Certificate Insurer's Fee* . . . . . . . . . . . . . . . . . 450,000
Miscellaneous* . . . . . . . . . . . . . . . . . . . . . . . 100,000
----------
TOTAL $1,480,303
==========
</TABLE>
- ---------
* Estimated in accordance with Item 511 of Regulation S-K.
ITEM 15. Indemnification of Directors and Officers.
Indemnification. Under the laws which govern the organization
of each of the registrants, each registrant has the power and in some instances
may be required to provide an agent, including an officer or director, who was
or is a party or is threatened to be made a party to certain proceedings, with
indemnification against certain expenses, judgments, fines, settlements and
other amounts under certain circumstances.
Article VII of the By-Laws of Advanta Mortgage Conduit
Services, Inc. provides that the corporation shall indemnify any director,
officer, employee or agent of the corporation against expenses (including legal
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him, to the fullest extent now, or, if greater, hereafter permitted
under applicable law in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, brought or threatened to be brought against him by reason of his
performance as a director, officer, employee or agent of the corporation, its
parent or any of its subsidiaries, or in any other capacity on behalf of the
corporation, its parent or any of its subsidiaries.
Article XI of the By-Laws of Advanta Conduit Receivables Inc.
provides that the corporation shall indemnify any person (or the estate of any
person) against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, to the fullest extent permitted under applicable
law in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, brought
or threatened to be brought against him by reason of the fact that he is or was
a director, officer, employee or agent of the corporation or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise.
The forms of the Underwriting Agreement, incorporated by
reference as Exhibit 1.1 and Exhibit 1.2 to this Registration Statement,
provide that Advanta Mortgage Conduit Services, Inc. will indemnify and
reimburse the underwriter(s) and each director, officer and controlling person
of the underwriter(s) with respect to certain expenses and liabilities,
including liabilities under the 1933 Act or other federal or state regulations
or under the common law, which arise out of or are based on certain material
misstatements or omissions in the Registration Statement. In addition, the
Underwriting Agreements provide that the underwriter(s) will similarly
indemnify and reimburse Advanta Mortgage Conduit Services, Inc. and each
director, officer and controlling person of Advanta Mortgage Conduit Services,
Inc. with respect to certain material misstatements or omission in the
Registration
II-1
<PAGE> 103
Statement which are based on certain written information furnished by the
underwriter(s) for use in connection with the preparation of the Registration
Statement.
Insurance. As permitted under the laws which govern the
organization of the Sponsor, the Sponsor has adopted by-laws which permit the
board of directors to purchase and maintain insurance on behalf of the
Sponsor's agents, including its officers and directors, against any liability
asserted against them in such capacity or arising out of such agents' status as
such, whether or not the Sponsor would have the power to indemnify them against
such liability under applicable law. Advanta Mortgage Conduit Services, Inc.
has a general liability policy which insures its agents, including directors
and officers, for general liability exposures.
As permitted by the Employee Retirement Security Act of 1974,
Advanta Mortgage Conduit Services, Inc. has obtained insurance covering all
employees entrusted with fiduciary responsibilities under certain of its
employee welfare or benefit plans. The maximum coverage provided by this
policy is an aggregate of $5,000,000 per year, subject to a maximum $100,000
deductible amount with respect to each claim.
As permitted under the laws which govern the organization of
the Transferor, the Transferor has adopted by-laws which permit the board of
directors to purchase and maintain insurance on behalf of any person
indemnified under Article XI of the Transferor's by-laws against any liability
which may be asserted against such person.
Limitation of Liability. Article Tenth of the Certificate of
Incorporation of Advanta Mortgage Conduit Services, Inc. and Article Fifth of
the Certificate of Incorporation of Advanta Conduit Receivables Inc. limit the
personal liability of directors to Advanta Mortgage Conduit Services, Inc. and
Advanta Conduit Receivables Inc., respectively, and their respective
stockholders for monetary damages resulting from breaches of fiduciary duty.
Such provisions do not eliminate or limit a director's liability for (i)
breaches of fiduciary duty of loyalty, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
any unlawful payment of dividends, stock repurchase or redemption or (iv) any
transaction from which the director derived an improper personal benefit.
II-2
<PAGE> 104
ITEM 16. EXHIBITS.
<TABLE>
<S> <C> <C>
1.1 - Form of Underwriting Agreement (single class) (incorporated by reference to
Exhibit 1.1 to the Registrant's Registration Statement on Form S-3 (Reg. No.
33-78642)).
1.2 - Form of Underwriting Agreement (multi class) (incorporated by reference to
Exhibit 1.2 to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
1.3 - Form of Purchase Agreement (incorporated by reference to Exhibit 1.3 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
3.1 - -Certificate of Incorporation of the Sponsor (incorporated by reference to
Exhibit 3.1 to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
3.2 - By-Laws of the Sponsor (incorporated by reference to Exhibit 3.2 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
3.3 - Certificate of Incorporation of the Transferor (incorporated by reference to
Exhibit 3.3 to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
3.4 - By-Laws of the Transferor (incorporated by reference to Exhibit 3.4 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
4.1 - Form of Pooling and Servicing Agreement (senior and subordinated certificate
classes) among the Master Servicer and the Trustee (incorporated by reference to
Exhibit 4.1 to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
4.2 - Form of Pooling and Servicing Agreement (single or multi class) (credit support)
among the Sponsor, the Master Servicer and the Trustee (incorporated by reference
to Exhibit 4.2 to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
4.3 - Form of Advanta Mortgage Holding Company Guaranty is included in the Form of
Underwriting Agreement (single class) incorporated by reference as Exhibit 1.1
hereto.
5.1* - Opinion of Dewey Ballantine LLP with respect to validity.
8.1* - Opinion of Dewey Ballantine LLP with respect to tax matters.
10.1 - Form of Special Hazard Insurance Policy (incorporated by reference to Exhibit
10.1 to the Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
10.2 - Form of Letter of Credit (incorporated by reference to Exhibit 10.2 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
10.3 - Form of Bankruptcy Surety Bond (incorporated by reference to Exhibit 10.3 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
10.4 - Form of Contribution Agreement between the Sponsor and the Transferor
(incorporated by reference to Exhibit 10.4 to the Registrants' Registration
Statement on Form S-3 (Reg. No. 33-78642)).
24.1* - Consents of Dewey Ballantine LLP are included in its opinions filed as Exhibit
5.1 and 8.1 hereof.
99.1 - The registrants hereby incorporate by reference all of the forms of the
Prospectus Supplement previously filed in the registrants' Registration Statement
on Form S-3 (Reg. No. 33-78642).
</TABLE>
- --------------------
* Filed herewith.
II-3
<PAGE> 105
ITEM 17. UNDERTAKINGS.
A. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers or persons controlling either
registrant pursuant to the foregoing provisions in Item 15, or otherwise, each
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a
registrant of expenses incurred or paid by a director, officer or controlling
person of such registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, each registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by such registrant is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
B. Undertaking pursuant to Rule 415.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement;
(iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change of such information in the Registration
Statement; provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Issuer pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
C. Undertaking pursuant to Rule 430a.
The Registrants hereby undertake:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in Reliance upon rule 430a and
contained in the form of prospectus filed by the Registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
securities act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of
the registrants certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Fort Washington, State of Pennsylvania on May
11, 1998.
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
By: /s/ Milton Riseman
-------------------------------------
Milton Riseman
President
ADVANTA CONDUIT RECEIVABLES INC.
By: /s/ Milton Riseman
-------------------------------------
Milton Riseman
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on May
11, 1998 in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Milton Riseman President (Principal Executive
------------------
Milton Riseman Officer) and the Sole Director of
Advanta Mortgage Conduit Services,
Inc. and Advanta Conduit
Receivables Inc.
/s/ Mark T. Dunsheath Vice President and Treasurer
- ---------------------
Mark T. Dunsheath (Principal Financial Officer and
Principal Accounting Officer) of
Advanta Mortgage Conduit Services,
Inc. and Advanta Conduit
Receivables Inc.
</TABLE>
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
==============================================================================================================
Ex.
No. Description of Document
--- -----------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (single class) (incorporated by reference to Exhibit 1.1 to the
Registrant's Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
1.2 Form of Underwriting Agreement (multi class) (incorporated by reference to Exhibit 1.2 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
1.3 Form of Purchase Agreement (incorporated by reference to Exhibit 1.3 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Sponsor (incorporated by reference to Exhibit 3.1 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
3.2 By-Laws of the Sponsor (incorporated by reference to Exhibit 3.2 to the Registrants' Registration
Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
3.3 Certificate of Incorporation of the Transferor.
- --------------------------------------------------------------------------------------------------------------
3.4 By-Laws of the Transferor.
- --------------------------------------------------------------------------------------------------------------
4.1 Form of Pooling and Servicing Agreement (senior and subordinated certificate classes) among the
Master Servicer and the Trustee (incorporated by reference to Exhibit 4.1 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
4.2 Form of Pooling and Servicing Agreement (single or multi class) (credit support) among the
Sponsor, the Master Servicer and the Trustee (incorporated by reference to Exhibit 4.2 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
4.3 Form of Advanta Mortgage Holding Company Guaranty is included in the Form of Underwriting
Agreement (single class) incorporated by reference as Exhibit 1.1 hereto.
- --------------------------------------------------------------------------------------------------------------
5.1* Opinion of Dewey Ballantine LLP with respect to validity.
- --------------------------------------------------------------------------------------------------------------
8.1* Opinion of Dewey Ballantine LLP with respect to tax matters.
- --------------------------------------------------------------------------------------------------------------
10.1 Form of Special Hazard Insurance Policy (incorporated by reference to Exhibit 10.1 to the
Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
10.2 Form of Letter of Credit (incorporated by reference to Exhibit 10.2 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
10.3 Form of Bankruptcy Surety Bond (incorporated by reference to Exhibit 10.3 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
10.4 Form of Contribution Agreement between the Sponsor and the Transferor (incorporated by reference
to Exhibit 10.4 to the Registrants' Registration Statement on Form S-3 (Reg. No. 33-78642)).
- --------------------------------------------------------------------------------------------------------------
24.1* Consents of Dewey Ballantine LLP are included in its opinions filed as Exhibit 5.1 and 8.1
hereof.
- --------------------------------------------------------------------------------------------------------------
99.1 The registrants hereby incorporate by reference all of the forms of the Prospectus Supplement
previously filed in the registrants' Registration Statement on Form S-3 (Reg. No. 33-78642).
==============================================================================================================
</TABLE>
* Filed herewith.
<PAGE> 1
May 11, 1998
Advanta Mortgage Conduit
Services, Inc.
16875 West Bernardo Drive
San Diego, CA 92127
Advanta Conduit Receivables Inc.
c/o Griffin Corporate Services
1325 Airmotive Way, Suite 130
Reno, NV 89502
Re: Advanta Mortgage Conduit Services, Inc. and Advanta
Conduit Receivables Inc., Mortgage Loan Asset-Backed Securities
----------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Advanta Mortgage Conduit Services, Inc.
(the "Sponsor") and Advanta Conduit Receivables Inc., (the "Transferor,"
together with the Sponsor, the "Registrants") in connection with the
preparation and filing of the registration statement on Form S-3 (such
registration statement, the "Registration Statement") being filed today with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended (the "Act"), in respect of Mortgage Loan Asset-Backed Securities
("Securities") which the Registrants plan to offer in series, each series to be
issued under a separate pooling and servicing agreement (a "Pooling and
Servicing Agreement"), in substantially one of the forms incorporated by
reference as Exhibits to the Registration Statement, among the Registrants,
Advanta Mortgage Corp. USA as master servicer (the "Master Servicer") and a
trustee to be identified in the prospectus supplement for such series of
Securities (the "Trustee" for such series).
We have made investigations of law and have examined and relied on the
originals or copies certified or otherwise identified to our satisfaction of
all such documents and records of each of the Registrants and such other
instruments and other certificates of public officials, officers and
representatives of each of the Registrants and such other persons, as we have
deemed appropriate as a basis for the opinions expressed below.
The opinions expressed below are subject to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
We are admitted to the Bar of the State of New York and we express no
opinion as to the laws of any other jurisdiction except as to matters that are
governed by Federal law or the laws of the State of New York. All opinions
expressed herein are based on laws, regulations and policy guidelines currently
in force and may be affected by future regulations.
Based upon the foregoing, we are of the opinion that:
1. When, in respect of a series of Securities, a Pooling
and Servicing Agreement has been duly authorized by all necessary
action and duly executed and delivered by each of the Registrants, the
Master Servicer and the Trustee for such series, such Pooling and
Servicing Agreement will be a valid and legally binding obligation of
each of the Registrants; and
2. When a Pooling and Servicing Agreement for a series
of Securities has been duly authorized by all necessary action and
duly executed and delivered by each of the Registrants, the Master
Servicer and the Trustee for such series, and when the Securities of
such series have been duly executed and authenticated in accordance
with the provisions of the Pooling and Servicing Agreement, and issued
and sold as contemplated in the Registration Statement and the
prospectus, as amended or supplemented and delivered
<PAGE> 2
pursuant to Section 5 of the Act in connection therewith, such
Securities will be legally and validly issued, fully paid and
nonassessable, and the holders of such Securities will be entitled to
the benefits of such Pooling and Servicing Agreement.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Dewey Ballantine LLP in the
Registration Statement and the related prospectus under the heading "Legal
Matters."
This opinion is furnished by us as counsel to the Registrants and is
solely for the benefit of the addressees hereof. It may not be relied upon by
any other person or for any other purpose without our prior written consent.
Very truly yours,
/s/ DEWEY BALLANTINE LLP
------------------------
<PAGE> 1
May 11, 1998
Advanta Mortgage Conduit
Services, Inc.
16875 West Bernardo Drive
San Diego, CA 92127
Advanta Conduit Receivables Inc.
c/o Griffin Corporate Services
1325 Airmotive Way, Suite 130
Reno, NV 89502
Re: Advanta Mortgage Conduit Services, Inc. and
Advanta Conduit Receivables Inc., Mortgage Loan
Asset-Backed Securities
Gentlemen:
We have acted as counsel to Advanta Mortgage Conduit Services, Inc.
(the "Sponsor") and Advanta Conduit Receivables Inc. (the "Transferor,"
together with the Sponsor, the "Registrants") in connection with the
preparation and filing of a registration statement on Form S-3 (the
"Registration Statement") being filed today with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), in
respect of Mortgage Loan Asset-Backed Securities ("Securities") which the
Registrants plan to offer in series.
Our advice formed the basis for the description of federal income tax
consequences appearing under the heading "Certain Federal Income Tax
Consequences" in the prospectus contained in the Registration Statement. Such
description does not purport to discuss all possible federal income tax
consequences of an investment in Securities, but with respect to those tax
consequences which are discussed in our opinion, the description is accurate.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to Dewey Ballantine LLP in the
Registration Statement and related prospectus under the heading "Certain
Federal Income Tax Consequences."
Very truly yours,
/s/ DEWEY BALLANTINE LLP
------------------------
